Westport Fuel Systems Inc (WPRT) 2013 Q1 法說會逐字稿

Hello, this is the conference operator. Welcome to the Westport Innovations 2013 first quarter financial results conference call and webcast. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation there will be an opportunity to ask questions. (Operator Instructions). At this time I would like to turn the conference over to Darren Seed, Vice President of Investor Relations and Communications. Please go ahead, Mr. Seed.

Thank you. And good afternoon everyone. Welcome to our first quarter conference call for fiscal 2013. It is being held to coincide with the disclosure of our financial results earlier this afternoon. For those who haven't seen the release and financial statements yet, they can be found on Westport's website at www.westport.com.

Speaking on behalf of the Company will be Westport's Chief Executive Officer, David Demers, and Westport's Chief Financial Officer, Bill Larkin. Attendance at the call is open to the public and to media, but for the sake of brevity we are restricting questions to analysts. You are reminded that certain statements made in this conference call and our responses to various questions may constitute forward-looking statements within the meaning of US and applicable Canadian Securities law, and such forward-looking statements are made based on our current expectations and involve certain risks and uncertainties.

Actual results may differ materially from those projected in the forward-looking statements. Information contained in this conference call is subject to and qualified in its entirety by information contained in the Company's public filings, and except as required by applicable securities laws, we do not have any intention or obligation to update forward-looking information after this conference call. You are cautioned not to place undue reliance on any forward-looking statements. Now I will turn the call over to David Demers.

Thanks Darren, and good afternoon everyone. As expected our first quarter of 2013 was a transition period with some remnant effects from the soft market conditions at the end of 2012, and the impact on timing and the recognition of service revenue from our development projects, and the opportunities in our On-Road Systems business unit. We are expecting a step change in growth over the course of this year, and we remain confident the market for natural gas as a fuel in trucking in particular is here and now, not five or ten years down the road. With the launch of so many new truck models with the new Cummins Westport ISX 12G engine, we see strong customer demand going forward alongside the new Westport LNG tank system.

At the same time, the change in infrastructure availability year-over-year has been spectacular, and more is on the way. Just the public announcements of stations for trucks now stands at around 560 that will have LNG by the end of 2015, and if we presume a minimum of 40 trucks operating at each station, this would imply over 22,000 LNG trucks on the road in the United States by the end of 2015. Typically these stations could support 100 trucks each, maybe a bit more, and since we are also expecting a lot of CNG in the trucking business this should explain our comment on step change and demand.

Our Westport WiNG products have also established a market leading position for performance, quality and value. We are expanding that offering into the larger F-450 and F-550 models, and will be producing in Canada for the Canadian market in June. Internationally we continue to see excellent growth in China. Our joint venture with Weichai shipped more than 8,500 engines this quarter, which is up over 200% year-over-year. It is important to remember that we are also launching Westport products directly into the China market this year, and now that there is such a robust market established we expect that those products are going to find strong demand.

In Sweden uncertainty about the availability of government incentives slowed sales of our Volvo car business substantially in the quarter, but the recent announcement by the Swedish government that NGV credits will continue for three years has revived sales. Perhaps the most interesting news this quarter was the very public interest and discussion about the use of LNG in the rail industry. As you know, we have been working with Caterpillar to develop locomotives in mining applications that use the our HPDI technology for high performance and fuel economy that matches diesel in these demanding operations. These programs are going well. We have seen a high commitment to building out an LNG fuel distribution system that will be dedicated to the rail industry. We are reiterating strong growth for the full year in 2013, based on a strong build in our new products and sales of those new products particularly, in our On-Road Systems business, which will take Westport Direct revenue to $180 million to $200 million as we said last quarter.

Each of our joint ventures is also positioned for great growth this year, and we are in a position we think to capture our share of this emerging opportunity by leveraging our first mover advantage, our technologies and our asset light business model. Our balance sheet has enabled us to continuously invest in new products and innovative technologies. We think this will fundamentally transform the transportation sector as we see more and more penetration of natural gas.

We will be back to questions in a few minutes of course, but I will turn it over now to Bill to discuss the financial statements.

Thank you David, and good afternoon everyone. I will begin with a brief overview of our first quarter results, and then the highlights of each of our business units, including our joint ventures. For the quarter ended March 31, 2013 under the new financial presentation, we recorded consolidated revenue of $30.1 million, compared to $36 million in the prior year period, a decrease of $5.9 million, or 16%.

Segment revenue for the quarter was $23.3 million for applied technologies, $5.8 million for On-Road Systems business, $1 million for corporate and technology investments, and then our joint ventures, $44.7 million for CWI, and $105.9 million for Weichai Westport. The decrease in Westport revenue year-over-year is primarily due to timing of a small number of major fleet orders on the Westport 15 liter system, and uncertainty around the Swedish government incentives, which impacted the sale of the Westport bi-fuel system for the Volvo V70 cars. As David mentioned, however, we expect a step change in growth for revenue over the course of the year.

Consolidated gross margin and gross margin percentage for the quarter ended March 31, 2013 was $8.1 million, and 26.9%, compared with $8.9 million, and 24.7% respectively in the prior year period. Gross margin percentage improvement is primarily related to the service revenue recorded during the quarter 100% margin and mix of sales. Research and development expenses were $20.4 million for the quarter ended March 31, 2013 an increase of $6.2 million from $14.2 million in the same period last year. The increase is primarily due to our investments in new proprietary technologies and long-term product developments, in addition to our development agreements with Volvo, Tata, General Motors, and other OEMs, which are recorded in our corporate and technology investment segments.

General & Administrative expenses increased by $200,000 to $11.7 million for the quarter ended March 31, 2013. This is compared with $11.5 million in the prior year period. As we are closer to launching new products, we are advancing sales and marketing efforts to support our OEM partners. As a result, sales and marketing expenses were $7.4 million for the quarter ended March 31, 2013, an increase of $1.1 million from $6.3 million in the same period last year. The combination of lower revenue, a higher level investments, and a decrease of Westport's share of equity income from CWI, contributed to the increase in our net loss.

For the three months ended March 31, 2013 our net loss was $31.8 million, or a $0.57 loss per share. This compared with a net loss of $22.6 million, or $0.44 loss per share in the prior year are period. Included in our net loss for this year is a $3 million net foreign exchange gain, mainly attributed to the movement of the Canadian dollar relative to the US dollar which is unrealized. Excluding this impact, Westport Consolidated net loss per share for the quarter was $34.8 million, and $0.63 loss per share respectively.

Now I will walk through each of our business units starting with the On-Road Systems business unit. The On-Road Systems business unit revenues were $5.8 million, compared to $12.7 million in the prior year period, a decline of $6.9 million. During the quarter three Westport 15-liter units were delivered. This reduction in unit deliveries was impacted by the weak demand in North American and heavy duty truck market, and timing of orders from major fleets. Orders for the Westport bi-fuel system for the Volvo V70 cars were impacted by uncertainty around the Swedish government NGV credits, which caused a pause in orders for our products. Recently the Swedish government announced NGV credits would continue for three years, and we are seeing sales active et pick up in the second quarter.

The Ford 250/350 product has been well received, with a delivery of over 200 units during the quarter, and we expect to see increased sales in the US, from sales in Canada and from the F 450/500 products when launched. Gross margin and gross margin percentage for the quarter were $400,000 and 6.9%, compared to $2.3 million and 18.1% in the prior year period. This decrease in gross margin percentage is due to mix and sales. We are managing our operating expenses which declined by $3.1 million to $9.5 million in the first quarter of 2013. A 25% decrease when compared to the prior year period.

We expect sales in the On-Road Systems business unit to improve throughout the year while we manage our operating costs. We have many opportunities that will support our sales growth in the On-Road Systems business unit from the sale of Westport 15-liter systems, continuing the increase in WiNG Power Systems on Ford products as previously discussed, increase in sales at Westport bi-fuel Systems for the Volvo V70 cars, now that we have certainty on the NGV credits, and sales of LNG tank systems for natural gas trucks, which are expected to start delivery in the second half of this year.

Moving on to the Applied Technologies business unit. Their revenue for the quarter ended March 31, 2013 was $23.3 million, which is comparable to the same period last year. As discussed on previous earnings calls, the economic conditions in key geographic markets including the Euro Zone, and weaker Euro to US dollar exchange rate have impacted our revenue growth. Gross margin and gross margin percentage were $6.7 million and 28.8% during the quarter, compared to $6.6 million and 28.3% in the prior year period respectively.

Operating expenses increased $1 million to $4.8 million for the quarter ended March 31, 2013 compared to the prior year period, which was attributed to new product development programs and the acquisition of facilities and assets for AEC in Australia. The team in Perth is supporting new product initiatives for the Applied Technologies business unit. For the quarter ended March 31, 2013 Applied Technologies earned positive operating income of $1.9 million.

The Corporate and Technology Investments business unit earned $1 million in service revenue related to our development agreements during the quarter. Operating expenses which include our investments in new research and development programs and development programs with our OEM partners increased $8.6 million, to $22.5 million or 62% compared to the prior year period. Investments in new and existing development programs increased 136% compared to the prior year period, with corporate-related costs decreasing 10%.

Now I will briefly talk about our joint ventures, starting with Cummins Westport. CWI generated $44.7 million in revenues and shipped 1,313 units during the quarter, compared to $52.7 million and 1,943 engines in the prior year period. The decrease in revenues was driven by 65% decrease in international volumes. In the prior year period international sales included a large bus shipment to Yutong. In North America, sales declined 2%. We continue to see high interest and demand for the ISX 12 G engine, which began limited production in April, and will ramp-up to full production scheduled to start in August.. Operating expenses increased 130% to $10.8 million, which was driven by research and development expenses related to the ISX 12 G, ongoing product and reliability improvements for the ISL G and the commencement of development of the ISB 6.7 G which was announced in the fourth quarter of 2012. Our portion of CWI's net income was $800,000 for the quarter, and we expect our portion of income to increase as unit volumes increase, and we start seeing improvements in warranty experience.

Weichai Westport realized incredible growth again in the first quarter of 2013. The first quarter sales volume was at the same level as the full year 2011 sales volume at 8,500 engines, the JV tripled the sales in the first quarter of 2013 compared to the prior year period. Weichai Westport continues to penetrate new markets and build market share aggressively in China. Therefore margins still remain in the single digits. As of March 31, 2013 our cash, cash equivalents and short-term investments balance was $173.9 million compared to $215.9 million at December 31, 2012. Cash used in operations was $33.4 million. During the quarter we purchased fixed assets for a total of $8.2 million, primarily for our new facilities in Detroit and Kentucky. During the quarter we also paid $3.5 million in debt and interest payments, and we received $1.5 million in dividend payments from our joint ventures.

To wrap up here, we are in a position to capture our share of this emerging opportunity. We will leverage our technology, partnerships, and market position, and continue to prudently invest in new products and technologies that make sense and provide significant returns. Today Applied Technologies is generating positive cash flows, and we expect the consolidated operating business units to be generating positive cash flows by the end of 2014.

We expect the operating business units plus contributions from our joint venture interests to generate sufficient cash flow to cover our corporate and technology investments by the end of 2015. However, we do have a few paths that can accelerate this timeline by either managing the level of our investments in new products and technology, or increasing our revenues and contribution margin if we see acceleration in the adoption of natural gas as a transportation fuel. I will now pass the call back to the operator to open the call for questions. Thank you.

Thank you. We will now begin the question and answer session. (Operator Instructions). First question is from Laurence Alexander of Jefferies. Please go ahead.

Good afternoon.

Hi, Laurence.

Hi, Lawrence.

The question I have is about lumpiness. We have seen in prior years a certain amount of lumpiness around order patterns, and given your cash burn on the quarter was about one-quarter of your total cash remaining, what levers would you plan to pull and what kind of triggers would you have to pull those levers to ratchet down your cash burn, if there is any adverse lumpiness this summer that pushes back the ramp that you were expecting?

Well, when we look at it, first of all, just talk about cash flow is generated from our sales. We see a lot of opportunities and changes in the market in which we think we believe our sales are going to increase throughout the year, which will help provide cash flows through the contribution margins. On the expense side as we mentioned earlier, we are planning to invest roughly about $60 million in research and development throughout the year, and we have a process in place in which we review all of those investments, and we have the ability to dial down those investments if necessary.

Hi, Laurence. I will take a whack at it, too, just to jump in. I think that when we deconsolidate [CLEBY] we spent many years building up enough of a broad array of products that would go into revenue that some of this lumpiness would be muted. Now that we have deconsolidated unfortunately we have got a very few products, you will see a very disproportion impact on a few orders or a few customers, until we get that broad portfolio built up again, which is what you are going see over the course of the year. I think that the guidance we have given should give you some confidence that we are confident in a pretty serious ramp. Just simple arithmetic says we are going to have to averaging $50 million a quarter to hit the low end of that curve going forward. So we think the cash flow is pretty substantial, but as Bill said, we have a lot of levers to pull.

The only other factor I would mention is don't forget we do have service contracts for development, and we pay those expenses and recover them, so we have got a quarter of expenses built up that we will recover in the future. So this quarter just happened to be that coalition of a number of different factors that we think is quite obviously going to change over the course of the year, or we wouldn't be saying this. That gives you a sense is of where we are going.

And separately just as a very quick follow-up I guess one of my bug-a-bears, China. How can we extrapolate from the Weichai report, to a picture of your overall sales in China, because you also have other parts and so forth that you will be selling into China over time? If they are similar then just point us at Weichai, but if they are divergent, can you give us some flavor of what else you are doing in China?

What Weichai is doing is very similar to what Cummins Westport is doing, they are building natural gas engines and selling them, and we participate in the profit. They are growing very quickly as you can imagine, and you don't do 200% growth without changes in the plants and equipment and distribution, so they are investing for growth, and I think the growth is going to continue. But what has happened is we have now created a very substantial market for natural gas trucks in China, and as we start to introduce products like the Westport LNG tank system in China, as we start to introduce new engine technology, like our HPDI engine that goes into the joint venture, we will start to see direct Westport revenue, and you will see that this year hitting our revenue stream. Today none of that hits our Westport consolidated revenue. The market is now there. We think that there is a good shot of seeing rapid ramping of Westport revenue in China as we introduce these new products.

Thank you.

The next question is Vishal Shah with Deutsche Bank.

This is Susie Min for Vishal Shah, thanks for taking the question. Wanted to better understand the comment you made on the On-Road Systems and timing of some of the fleet orders, is this something where you expected orders in the first quarter and they are getting pushed to the second or third, or is that something we should expect soon? Any color would be helpful and I have a follow-up question.

It looks like Bill is leaning at me. I will take a first crack. I think obviously the HD 15 order flow has been very lumpy. If you just look back over the last few quarters, this is not a representative quarter. And it is just because there are so few major orders. We are constraining our sales don't forget to pretty large fleets, and we want large numbers. It is hard to get the infrastructure built for these large fleets, unless you see orders of 20 to 50 trucks, so that limits the population, and the 15 is also being directed at fleets that have got very heavy duty cycles, a lot of off-road high grade high load.

So those aren't the fleets that are going on the truck stops either. So this is a coordination effort. A big part of what we have done for example is work with Fortis and BC on their natural gas trucking program, which we had expected would start shipping fourth quarter last year. We are going to see those shipments. They have been delayed. They are coming we know that. There will be follow-on orders with our existing customers. It is just timing has been unfortunate this quarter, and we are as disappointed as everybody in the actual numbers. Don't think it changes the impact on what we are going to see over the course of the year, so it is just lumpiness.

Great. And then maybe just a broad picture of margins, as we are seeing kind of a degradation of margins in China, Weichai the products there and how you are pricing it, and as you continue to sell more products into China might see kind of a drag on margins, but kind of offset that with some of the newer better-priced products. So could you just kind of walk us through the margin profile over the next few quarters with the mix?

Well, as David mentioned within the current joint venture, it is a very competitive environment over there, and with the significant increase in sales of natural gas vehicles, Weichai has consciously reduced margins, sales price to go after and capture that market. Originally it was go after the bus markets. And so they continue that because there is a huge opportunity, and if you look at the results of those initiatives, we are seeing just phenomenal growth almost over 200% year-over-year in that business. And that is really setting up nicely for us, as we come in and launch our 12-liter product, and we will try to defend those margins. It is going to be a premium product compared to the existing SI business, and we will try to defend those margins. And then we think there are some other opportunities in selling components, Westport content into the SI markets. And we will try to defend those margins as well.

I am not going to provide any specifics because, there we still have quite a bit of work to do on that. But we think we will see higher margins as those products start delivering in that market.

And I think Susie, it is Darren. I think in addition to the Weichai, you mentioned general market margins overall. With the Cummings Westport 12-liter engine, naturally that is going to go out to a fairly conservative gross margin for the reasons of just warranty accrual, making sure we have the appropriate attention to warranty for those engines. It will be again as we have all mentioned, a big contributor to gross margin dollars, more income dollars, but on a percentage basis that may have a weighting effect, as that product continues to ramp-up its production over the course of the year and into early next.

Great. Thank you.

The next question is from Ann Duignan of JPMorgan. Please go ahead.

Hi, good afternoon.

Hey, Ann.

Walk us through quarter by quarter and segment by segment where exactly the increase in sales is going to come from, so we have some kind of assurance?

I think the biggest contributor is going to be from the On-Road Business systems, you look during the quarter, we only sold three Westport 15-liter systems. We think we will see big growth in that business. Also too, as we mentioned there is a pause in orders for Volvo V70 products. Now that we have certainty on the NGV credits in Sweden. We are already seeing initial orders here in the second quarter start to pick up versus the first quarter. And then you look at our existing Ford product the 250/350. That business has been growing, we expect it to grow, especially when we start when we are in a position to sell products in Canada.

And then also too later this year, we are going to be shipping 450/550 product on which we are already taking orders. And another opportunity which we are very excited about is our LNG tank system, which it doesn't matter what engine platform it can support a 9-liter or the 12-liter engine platform. But with the demand and interest that we see in the 12-liter we see significant opportunities for sales for this product.

And that is also --

Let's take a step back. For Q2, though, on the On-Road side you would have to have those orders in hand right now on the 15-liter. Do you have those orders, or are these orders you hope to get sometime that might get delivered later in the year?

I think we can reiterate our guidance for the year, Ann, which should give you some confidence that we think we are confident that those orders are there.

Ann, we have never given quarter by quarter guidance ever in our history. We do try to do our best to say, we are reiterating our guidance for the year of $180 million to $200 million, and as David pointed out earlier, that is a definite step change even if you just average in the quarter, it is obviously a big change from Q1. Just not a number that we can provide on a quarter by quarter basis, other than to say, clearly On-Road Systems for all will build, just ramp through whatever the biggest sales jumps, and I know you very aware that the 12-liter is not recorded in our sales of the On-Road Systems, but the income dollars towards Westport are expected to be markedly different than like just under $1 million we did in Q1. That will be a contributing factor on an overall performance basis.

Yes, and the reason for my question by quarter is that we started the year very weak. We have maintained guidance and yet we are chewing up cash, so I think investors are going to care and want assurance that these are not stretched goals.

No, I don't believe they are stretch goals. I think we obviously wouldn't make the comment if we didn't believe in the confidence in the business we expect and have on hand today.

I thinkmaybe another way to ask the question then is, how many on road 15-liter engines do you anticipate shipping this year then?

We haven't broken that down either, Ann. I think the simple answer to all these questions is, just look at that enthusiasm that we saw at the mid-America truck show. We got the suddenly for the first time we got every major trucking manufacturer launching natural gas products. They are all out selling natural gas, which in a soft truck market, I think says something. We are going to see shipments of that engine. That is no surprise. And we are going to see a whole bunch of new customers, and they are going to need help and support, and we are going to see a lot of new infrastructure being built, and those companies building that infrastructure are working with us to make the financial pitch for natural gas, and make that transition easy, so these factors are all there. So I think it is pretty straightforward looking out the next few quarters, we are going to see a lot of product on the road. Both trucks and pickup trucks, and passenger cars in Europe. Lots of challenges and obstacles, but we don't think there is much doubt that the market is coming.

I would point out too, the press releases from other companies. I am sure you have seen them where companies like UPS announced has their interest to buy up to 700 or 800 trucks over the course of next 12 to 18 months. Is that starting in Q2 of this year or Q3 or Q4. Unfortunately it is not an answer we can get into. I am just trying to answer your question about what level of confidence we have. Those orders are starting and expected to deliver this year, and again this is not Westport announcing those orders, it is other companies. That is just another anecdotal piece of evidence to provide some of that confidence.

Yes, and I guess what I am trying to get comfortable with is the 12-liter going to cannibalize both the 15-liter and the 8.9. I understand there is tremendous pent-up demand, but it could cannibalize some of the demand in these other sectors also.

I don't think cannibalization is the right word, Ann. As we have talked about before, neither the 8.9 or the 15 are really the right product for the mass market in on road trucking, and what we now have is a product that is going to make people a lot happier with mainstream trucking applications. They are going to stop at clean energy stations on their natural gas highway. 15 is not the right product for port haulers in Los Angeles, but they are buying it because that is all they have. The 8.9 is not the right product for long haul trucking, but people have been buying it and putting it in service, because they are keen to get their hands on the natural gas.

I think we will naturally see the 8.9 revert back to what it is good at, which is trucks, trucks in the refuse market and buses, and maybe some regional trucking, but the 12 is going to hit a sweet spot that is much, much bigger and less compromised than either what we have been doing with the 15 and the 8.9 in the past. The 15 is going to do really well as we start to see infrastructure built up, and as we see more and more of these fleets able to justify the refueling. I think that if anything the 12 is going to create more demand for the 8.9 and the 15, even if you might say that those customers might have bought something different a year ago. That is true. But that is because they had no choice. We really do believe that we are going to see the whole market grow as we see more product availability, and that is what we see happening this year.

Okay. Thank you. I didn't mean to drag on for so long. I appreciate it.

Okay, no problem, Ann.

The next question is from Eric Stine of Craig Hallum. Please go ahead.

Hi everyone, thanks for taking the questions. I guess you just touched on this a little bit, but I am just curious, do you think that the 12-liter potentially helps the 15-liter? And the reason I ask is, it sounds like a lot of fleets out there that are interested in natural gas, but they are waiting on that 12-liter before they do anything potentially. They get in start using it and realize they might need some 15-liters too?

Yes, there is no getting around the fact the 15 is only available in a few truck chassis, that is no secret, a couple of brands, Kenworth and Peterbilt. As a solution, the way it is priced and the way it is being marketed, it has been targeted at heavy haul and large fleets, and people that we can support in a concentrated way, with those Peterbilt and Kenworth dealers. Is the 12-liter going to help, of course, because it is being marketed at a very broad array of customers, with everybody who has trucks in the market. There is going to be a much wider array of customers, which will create customer support, which will create, enable dealers, it is going to enable the market for everything, which is why we have been spending so much time getting ready for it.

I think we are seeing that interest in the marketplace. Darren said we can't give you any definitive customer names or numbers or timings, but certainly we can tell you that there is a very large amount of industry interest in natural gas, which is being driven by the array of product that is coming this year. And obviously that is not the end. There is Volvo product coming in 2014. There will be other natural gas products coming in the future. Guarantee that. So I think the market is taking off. We will see it over the course of this year.

Okay. And that is helpful. Maybe just turning to light duty for my last question. What do you think the mix eventually looks like when you launch the Ford F-450 and F-550, and also the service upfit option? Just curious, do you think that those vehicles that is bigger, that is a bigger opportunity than what your current offering is, or how should we think about that going forward? Thank you.

We can pick on the F-350 and F-250. Bill is going to chime in a minute. That was really developed for our friends in the oil and gas industry. That product is designed and targeted at the customers that you have heard talking about it. Pioneer is a great example. That is who we expectedto buy the F-250. Now the service bodies go into lots of other fleets. These are commercial vehicles. Frankly I am a bit surprised we are seeing consumer orders. That is a big truck. There are consumer orders and people are buying one off, and they are getting their Ford dealer, and everybody is excited by it. We think that this is still a fleet marketplace, and that is why our growth has been into the larger platforms. I think there is going to be lots of volume. We want to create this customized solution that gives a combination of performance and value and serviceability, and I think that the team has achieved that, and that is why we are seeing order growth.

But eventually it sounds like you think those new models or new versions to come, that is a bigger opportunity than where you currently are?

I think that we started with a product which we thought was going to sell well which it is, and now we are expanding into adjacent products as quickly and efficiently as we can. The expansion to Canada is I think a good example of that. We are not doing it just because it is our home. There are lots of customers who want the product in Canada, and this is the easiest way to get it to them.

Okay. Thank you.

The next question is from Colin Rusch of Northland Capital Markets. Please go ahead.

Talk about some of the other longer-term opportunities with rail and marine, and really how well-positioned or what the real differentiation is for HPDI in those applications versus a spark ignited engine?

I honestly don't think we will see spark in these applications, just because you really start to see the challenge in getting the torque in particular out of that constant displacement. So this is going to be a rebuild engine as well. Hard to take a diesel engine and build it as a spark ignited engine. That is just not going to happen. So I think HPDI is really well-positioned, which is why there is so much enthusiasm. I think that what you can see from the rail industry in particular, they have all been public now, that they are looking seriously at gas, and because of the way the industry is set up with so much sharing of equipment, it really needs to be something that the whole industry adopts, and frankly that is what we are seeing, is I think everybody is quite excited about the opportunity to see this lower cost fuel. We have seeing a lot of industry-wide collaboration and cooperation.

To do that we are going to need to be rebuilding the existing engines, as well as shipping new. That means we will have to have diesel cycle. So you are going to see lots of things like dual fuel conversions. That product has been out there for years around the world. You are going to see people getting their feet wet with that, but ultimately we are going to need the energy density and the performance and the fuel economy of HPDI, which I think is why our friends at Caterpillar have made that choice, because that is what the industry is going to need to be successful.

So I think what has been exciting for us, is how quickly the idea has taken traction in these markets, and the volume of fuel that we are talking about in these industries is literally billions of gallons a year. It is a very powerful economic argument for rapid adoption. I think we are going to see very fast penetration in these high horsepower applications, as we get these products developed and out in the market.

Great. I have got a two-part one which is more of a technical question. How do you treat the Westport sales into the Weichai JV versus the overall JV sales? And how much do you think, out of the second half sales do you think will come specifically from Westport components?

Currently the engines that are sold through the joint venture we don't recognize any revenue. At the end of the period we just recognize our 35% of the profits of the joint venture, and that is what you see down below in the bottom line of the P&L. Now once we start selling products the HPDI components, that will hit our top line directly to revenue, and then fall down through gross margin or bottom line. Yes, and then also that will be captured within our new markets and off road business units going forward.

Okay, I will just follow up --

And we won't provide any additional color or guidance on what that is going to look like at this time.

Alright. Thanks, guys.

Thank you.

Next question is from Rob Brown of Lake Street Capital. Please go ahead.

Good afternoon. If you could give us a little bit more color and help us understand what the LNG tank business could be? I know you won't tell us directly, but maybe a sense on a per unit revenue, or maybe how much of a share do you think you can get, and are you sort of tied in with the trucking companies at this point?

Rob, you always ask the good ones. Just to remind everybody, what we have done with the LNG tank system which we announced last fall, is to take the LNG tank and pumps that we developed for our HPDI trucks, and adapt that for use with spark ignited engines for a bunch of reasons. The major one being that we can use cold fuel, reduce the complexity of the station, and increase the range and the amount of fuel that is going into the tank, and improve performance for high fuel use applications, like trucking.

As we launch 12-liter trucks we expect most of those trucks will be LNG fuel. There is going to be a lot of CNG, particularly for regional people, and there is a bit of an anomaly on pricing of CNG versus LNG for various reasons that I am sure that you all understand. There are going to be some 12-liter trucks that are operating on CNG, but in general we think that will be a relatively small portion of the market, because the penalty in both range and weight is so high to go CNG. So most of them will LNG, and I think most of them are going to want to be able to use the cold fuel, and therefore use the Westport tank, and because of our integration with the vehicle and with the OEMs today, we think we are going to see very good market share for that system.

Now tank is the most expensive part of the truck. It is just inevitable that the fuel system, we have always said the most expensive part is not the engine it is the fuel tanks. The revenue potential for us is very encouraging. That said we have also announced and told people that we want to bring down the price of natural gas vehicles. And the way to do that is by reducing the cost of components, and broadly speaking our global supply chains on LNG tanks and pumps are allowing us to have a really encouraging cost profile as we see volume from 12-liter applications in North America.

Same sort of approach as what we are talking about with the LNG tank products in China. We want to launch this in parallel with our HPDI products with Weichai, and make the tank and pump system available for SI trucks in China as well. You can see what we are trying to do is aggregate the volume across many markets and many technologies, which will bring down the component costs for everybody, and the component cost will bring down the price of the vehicle. The price of the vehicle will increase adoption. So what we are really trying to get going is a virtuous circle, and the momentum around cost reduction and volume increase. Does that make sense?

Yes, thank you. And then just in term its of timing do you start to see revenue for that product sort of at the same time as the engine ships, or do you sort are or are you ahead or behind of that just in terms of--?

Pretty much. It is not quite where, we both ship to the truck OEM so CWI will have an engine supply agreement and those engines will arrive and get put into a truck, and you will need a fuel tank to go along with the engine. I wouldn't say it is one for one, because they are hitting the line at slightly different times with slightly different inventory policies. In general, yes, you are going to see one tank system and one engine per truck.

Alright. Thank you.

The next question is from Aditya Satghare of Lazard Capital. Please go ahead.

Thank you. Two questions please. First one on Volvos. Can you give us an update on whether you are seeing any kind of initial feedback from the early pilot in shipping these 13-liter engines, and maybe update us again on launch dates, and when this product is expected to reach the market?

Sorry, can't give you much. The truck was at mid-America Truck Show, which I know caused some surprise to some people, which I mean the truck is there, and people are kicking tires, and yes, customers have had their hands on it, but can't give you much more than that.

Got it. Following up on the earlier question, LNG tanks, so the recent order from UPS for 700 incremental trucks, have they finalized the tanks, the recent provider, and if not, what do you think would be some of the competitive factors going into winning an order like that?

The fuel position hasn't been decided yet.

I was even going to go one step beyond that. I haven't seen an order from UPS, let's be clear. That is between UPS and their truck vendor. I am not sure they have announced that one either. So the way that works is yes, we are out talking to customers, and yes, we are working to create demand, but really it ends up going through the OEM distribution channel, and that is when we see finalized decisions on tank and pump. Now what is happening is we are seeing a transition from these early markets as we were working with people to build the 8.9 liter products, those are specialty products that are pretty much built to the specific fleet specifications.

As we get into much more generic product line that is built on the production line, we are going to see much more standardization on the tank package, which is why we think it is the right time to introduce our LNG system, because it has been fully validated by the OEMs that are taking it today. They know these components, they know how to install them. They have done the quality control. So I think it is going to be relatively straightforward to see our LNG solutions on to these vehicles. At the same time, we are working with CNG on our Ford products and packaging that in the production line, so we are working with people to develop standardized CNG packages, which some of you saw at our Louisville Open House. I think what we are going to see over the next year or so, is a very rapid increase in standardization and professionalism about producing natural gas trucks in every one of these vendors, and we are going to see all kinds of developments, movement in the next 12 months. Yes, we are in the middle of those discussions.

Thank you. That is all I have.

The next question from Rupert Merer from National Bank Financial. Please go ahead.

Thanks for taking the question.

Hi, Rupert.

Looking at Weichai and China, you talked about the opportunity to sell more Westport product into China going forward. If we focus on the joint venture alone, can you talk about how transfer is set into the JV, and how the business model for the JV can evolve over time, and maybe talk a little about how margins could evolve in the JV?

Well, don't forget that the way that the HPDI product is going to work, let's just start with that. Again it is an engine company, and so we will supply the on engine components, like fuel injectors and controllers, and some of the specific modules required for the engine. We will go with the joint venture. And so we will see revenue from Westport to the joint venture, and then of course, that will have to get managed out into how we share the income from those products.

You are going to see a bit of income from the joint venture, and you are going to see revenue and gross margin for the sales to the joint venture. The tank package goes to the truck manufacturer, and so we will see direct revenue for the tank package and direct gross margin, all of which is going to be in the On-Road Systems business. Darren, do you want to jump in?

The new markets the revenue for HPDI, for the 12-liter HPDI system components will actually be accounted and reported in the new markets and output systems.

Oh, yes. Of course, Weichai is part of the new markets group. Yes, sorry, my apologies.

Okay.

But that model applies to the other businesses as well.

Bill, do you want to address Rupert's question on gross margins and the JV. Is there an expected evolution of that?

There is a supply arrangement between the joint venture and Weichai, sense they supply the engines, but as I mentioned before, this is a rapidly growing market. There is a significant opportunity. It is extremely competitive, and the joint venture made a conscious decision to go after very specific markets. As you may know, Weichai they dominate the trucking market but they are not as strong in the bus segment, so they made a conscious decision to get aggressive with pricing, and go after the bus market, and that is why we have seen a degradation of margins over the last 18 months.

How long that policy is going to continue I can't comment on that point in time, because we are at the table in discussions with our joint venture partners. What is the strategy for approaching the markets. But looking at it from our perspective, they are actually doing us a huge favor going forward, as we start preparing to launch the HPDI version of the engine, because they are building up a market for their products.

So I think at the end of the day it could help us quite a bit as we launch our product, and also sell and integrate our tank packages into the market, because as you know, as we talked about with the low pressure tank system, it is not, very similar to what we see here in North America the opportunity, over there the joint venture last year they delivered over 20,000 engines, in the first quarter of this year they did 8,500 engines. All of those engines, that is an opportunity for us to sell this low pressure tank package, and that is a huge opportunity, and I think ultimately at end of the day, we have a good opportunity to sell a lot of these packages, and generate a lot of revenue and profit for the business.

I think I will weigh in a bit, too. It is great to have this problem, but I have to say, and I am sure any of you that know this automotive business, when you get 200% growth it is not an efficient system. The supply chain is not geared for that kind of growth. Your own production and distribution channels aren't all that efficient. So cost of goods may not be optimum let's say, and until things stabilize and get down to a little more manageable system, you are not really going to be able to optimize gross margins. But that is what we want.

We want to see the spectacular growth, because that gives us the opportunity to generate great margins in the future, and we think we will see good margins out of the joint venture. We have talked about double-digits. China is not going be a 30% gross margin business for sure. But we see a very strong possibility of improving margins in the joint venture. And of course, the Westport proprietary technology we should be able to get good margins on that even in China, as long as we can get local sourcing, and meet the price expectations, which is a challenge. That is a bit of a hand wave, but over the next 12 months let's say, we should see some of these trends become quite evident. And in any case we think that the growth is very encouraging.

Okay, thanks. Second question, if you look at the WiNG system can you talk a little about the competitiveness of the market? You mentioned you have a market leading position. Can you talk about your market share today, and where you think that could go?

In China?

In the WiNG system in North America, on the Ford? --

A good question. We haven't disclosed details. We think we are a market lead in the F-250 and F-350, there are other QVMs, of course, selling other product, and you don't need us to tell you who they are. But I think the market feedback on the WiNG product has been good, and we are seeing strong interest in the products we have just announced. So I think our challenge now is to push ahead on the path that we have talked about, and that means improving quality, and dropping price, and broadening the product offering with Ford. Pretty straightforward stuff.

Very good. Thanks.

The next question is from John Quealy with Canaccord Genuity. Please go ahead.

Thanks, it is Chip Moore for John. Just back to Caterpillar real quick. Maybe you could bring us up you to speed on the latest development efforts there, and then a little more detail on how you are thinking about retrofit opportunities in that marketplace?

I am looking at Darren. I am not sure we have comment on developments. Cat has been very active in the marketplace over the last few months talking to customers, I think that customer reaction has been very good. We are certainly very pleased with the reaction we are seeing, and the let's call it the energy that is being put into it from the LNG industry, because of course, these are very big potential customers who are going to sop up a lot of that excess natural gas. I think it has gone as well as any of us could have hoped.

That said, we have got a lot of development work to get a product that is going to be up to the expectations of our customers. So that is obvious, I hope. That said, I think that the opportunity in rail is very exciting. Rebuilding these engines is not a huge technical challenge. It is a marketing and logistics challenge. And a performance challenge, but there is quite a bit of confidence that this is going to be a project that is manageable, and makes sense for everyone, particularly in a climate when we are seeing increasing emissions control being introduced, and this is a way to bring the emissions profile of the whole industry down. So I think the plan is doable. The economics justify it. And we are all going to make a lot of money.

And Chip, we also did say that we expected to launch a product this year, so we are keeping our cards a bit close to our chest right now, until we announce exactly what that product is.

Fair enough. Thanks.

Next question comes from David Galison of CIBC. Please go ahead.

Hi, guys. Thanks for taking my question. First one I just want to touch on the guidance. So you have reiterated guidance for excluding CWI, but do you have the same level of confidence from the 430 to 460 guidance that was provided with CWI?

I have to do the math. You are quicker. I mean I think, clearly because you are just basically asking two different company questions, in terms of Westport and Cummins Westport. Cummins Westport I think has got some, frankly some phenomenally expected growth over the course of this year, because of course, it will recognize the revenue of the 12-liter sales. So I think there is quite a bit of growth expected on Cummins Westport, and in terms of Westport we can give you the 180 to 200. I think what is just hard whether it is not the having a calculator in the room David, exactly what and frankly it is tough for us to give guidance on Cummins Westport as a segment. It is not something we typically do. That is the challenge.

Nor have we said much about Weichai Westport. What I hope you have gathered is that we are pretty confident that CWI and Weichai are going to see very strong growth this year. Now it is not going to show up in our consolidated revenue, but we get benefit either through participation in the profits, or by creation in the market, and the market pull for our direct products. But the direct products, 180 to 200 as I said is something we are pretty confident in for the direct Westport sales.

And sorry, Dave, just remembering from the last quarterly conference call, I believe we did actually give a sort of Westport plus Cummins Westport outlook. And if we are going to be reiterating guidance, we just haven't expected any significant change to that, and that is again why we reiterated our guidance for the year.

The previous guidance including CWI was 430 to 460 provided last quarter.

And we haven't changed anything but again, I just need you to understand going forward we won't be in a position to provide segment guidance on CWI.

That is what it is. That is what it is.

It as bit awkward, because we just don't give guidance on that business anymore, but we do not want to step away from any kind of the expectation that we delivered at the beginning of the year, as we have just reiterated our own growth expectations.

You are not seeing anything happening in the market that would suggest that there would be a major difference from your view provided, when you reported--?

Yes. That is a fair assessment.

Okay. And then just, I am sure you are probably not going to be able to say much, but just wanted to touch on the two most recent development agreements that were announced in Q4. Can you talk a bit about how they are progressing, and maybe when we might be able to get some further color on those agreements?

I think we expect to be able to unveil at least one of them this year, perhaps even both. And it is again, very candid, Dave, really at the OEM's request. So we are a bit beholden to them at the moment. Not necessarily our --

And I will jump in again because I do want to make this clear. This is serious. We are not trying to play games here. People now are taking natural gas very seriously, and all of our OEM partners are scrambling to build their natural gas strategies. This is just not puffery. There is going be a lot of natural gas in the automotive industry, and it is just not something we can do to out anybody's product plans until they want to do that. We have got pretty strong insight as to what everyone is up to, but it is critical for us not to give anybody a strategic advantage. So sorry. I think that this will come out in time, but you will be seeing it from OEMs, are not from Westport probably.

Alright. Thank you very much.

Okay.

The next question is from Matt Gowing of Mackie Research Capital. Please go ahead.

Hello. Thanks for taking the question. Wondering if you could provide some background on the 15-liter that you sell. If you had to look at that product, and kind of break the value down in rough percentages between the value of the HPDI injector in one bucket, and then in the other bucket come some of the components that David was talking about, the tanks, the modules, the controllers in another bucket, and then any other sort of value that would be in that ASP. I know it has ranged from $45,000 to $50,000 per unit, but just wondering if you could provide some background on that?

Yes, we never really have broken down the bill materials in detail for obvious reasons. We going to be outed as you start to see product revenue from tank systems, but the short answer is no, don't want to break down the bill of materials. The clue we gave you though, just to give you something to mess with, is the tank package is the most expensive part on the truck. Now the tank package is not just the fuel tanks. It is tanks, lines, regulators, valves, controls, and any sort of architecture that you going to need to hang the tanks on the truck.

So the package itself is the most expensive component. The engine price and the advice we have given to people if they want to try to model it, is look at the revenue and ASPs for natural gas engines out of our joint ventures. They are not much different than the diesel engine and that is true. So typically the cost of a natural gas engine isn't that far off of a diesel engine, and as we get them produced in volume, and as tooling gets amortized, and supply chains get more mature, you are going to see the cost of natural gas engines migrate down even closer to the price of a diesel engine. So I think the only answer we can give you, is that the tank package is the biggest opportunity for pricing cost reduction, but also the biggest revenue opportunity in the near term for Westport.

Great, thanks. And just a quick follow-up one. You mentioned that kind of the growth acceleration in the remainder of the year is going to come from mainly the On-Road business, and then you mentioned a number of the buckets there. Would you agree with the assessment that is really is going to be the LNG tank systems that are kind of the number one driver of the growth in the On-Road business for the rest of the year?

I think that we have we said publicly that the Ford ASPs are in the $9,500 to $10,000 range. These are not insignificant sales either. The Volvo car product ASPs are in that range. Or not quite that high. The volume potential is very high with those products as well. I think it going to be very difficult for us to pick one favorite child over the other quite yet. The excitement around LNG in trucking is real, and this is a market that could move very quickly, and is dependent on the development of the LNG refueling infrastructure, which is coming over the next couple years but it is going to be paced by the availability of stations, and the management of those truck routes, and the stations are going to be opened in conjunction with truck fleets, who make the decisions.

This is quite a deliberate and long-term play, I think. But we think with a lot of momentum and a lot of volume. A lot easier these days for people to buy a Ford pickup truck, and get CNG at a local refueling station. So potentially the volume growth is not as constrained and the impediments to growth is not as high. And similarly in Europe, as we move the Volvo product out of just being sold in Sweden, which is the only place it is sold today, and as we develop other product, we also think that has the potential for step change in growth. Long winded answer that says I think we like all of the cards that we are playing, and they are all going to develop at a different pace, but we think they are all going to have very large potential.

Great. Thanks very much.

The next question is from Matthew Blair of Macquarie Capital. Please go ahead.

Hi. Good afternoon. The $1 million in engineering service revenue, can you say what partner that came from? And then can you also talk about your general expectations in 2013 for engineering service revenue, from both Volvo and if we should expect anything from Caterpillar? Thanks.

I think you can expect something from Caterpillar, because we have seen revenue from Caterpillar, and we are developing with them. But we are not going to break down who and for what, again for the obvious strategic reasons.

In terms of the outlook for the year, what we can say I guess in general is the Volvo products moving closer and closer to actual commercialization. We probably don't expect as much contribution to service revenues from the Volvo program as we have had in years gone by.

I think we want to see being rational management of our resources, so there are multiple development programs, and we are trying to do our best to make sure that people are not overbooked and then underworked, if you see my drift. So you are going to see service revenue business being paced by the availability of people and resource. This really is an engineering development project that depends on work and milestones. So all of these projects are structured in similar ways. We commit to milestones. We deliver the milestones, and we recover our expenses. It is not an hourly billing sort of process. But we are getting lots of work, and we are very busy, and so you should expect service revenue to be something that is a part of the P&L for some time to come anyway.

Sure, okay. That is helpful. And then also on the Cummins Westport 119, I know that you are going to fully ramp production in 2013, but how should we think about your production capacity for this engine in 2014 and 2015?I think it is being built at the Cummins Jamestown facility, which has capacity around 100,000 engines per year. So are you capped out on a certain percentage of that space, or could you build all of the engines that you get orders for? Can you help us think about your maximum production capacity there? Thanks.

I don't think we are in a position to talk about Cummins production capacity, because in essence they are the supplier of the engines, and they are supplying the labor to assemble all of the parts, test, and then ultimately deliver the engines. They have to plan their resources, their production capacities among other engines that are produced within their various facilities, and that has to get scheduled out. And so it goes through the normal Cummins sales process, and it has got to get scheduled through their production system and so, it is going to be through that demand, their production scheduling system will kind of dictate what their capacity and what resources they going to allocate to the production of that engine.

I am so happy to hear you ask if we were going to run out of capacity at Cummins though. It does my heart good. I think to be serious on this, it isn't just engine assembly, it is the whole supply chain, and there aren't all that many different parts on a natural gas engine from a diesel engine, but yes, we do need to go through and make sure that every supplier is coordinated. That is what the business is all about. We typically are able to rely on the volume and the experience of our engine production partners like Cummins and Weichai, and going forward as we launch with Volvo, these businesses are very sophisticated, and they manage their supply chains. But with that said, they have to manage the supply chains and we are going to be managing a very high growth product, we all believe. And so that is going to create shortages and problems that people have to jump on and sort out. Am I concerned about running out of engine capacity in North America? No, I don't think so. I think that there is lots of capacity in the truck supply channels, and from what we have seen from suppliers, people are quite anxious to get a piece of the natural gas business, so I think we will build that supply capacity as we see the demand.

Okay. Thanks.

The next question is from Jeff Osborne of Stifel Nicolaus. Please go ahead.

Great, good evening, and thanks for squeezing me in. Just had a couple of questions here. I know you don't want to get into linearity of guidance, but it was my understanding that the 400 horsepower version of the 12-liter comes out in August, I think that is what you said at your event in Kentucky, and that appeared to be the better seller at least from our checks on the floor versus the 350. So I guess with that and the infrastructure being built, largely being back end loaded, which I think was the rationale for the weakness in 15-liter last year, it seems like maybe not using your kind of divide by three to meet your guidance to get the run rate, but maybe the fourth quarter would really be where everything kind of hinges on?Maybe, A, if you could touch on why the 15-liter was so weak last year, and why you think it will get a lot better this year. And then also if you can just touch on the delays with the 400 horsepower, and why that is not out yet, and is there any type of pent-up demand, people waiting for that for August?

I will take a crack, and then Bill is going jump in. I have to start by saying I don't think we were disappointed in the 15 last year. We thought we built some good customers. It was a managed launch with some very key customers, and we provided support to those guys, and it has built the LNG business and built the LNG infrastructure. So that growth last year was good. Lumpy. A few customers, not thousands of customers, but we will see continued growth from those customers with that product, and that has paved the way for what we think will be a very successful product with 12-liter.

I thought you had said that starting 2012 you were expecting 800 units. Maybe I am mistaken and that was a different product. I thought you were actually well below your--?

I will be very candid, yes. That is not a number the Company ever issued.

It is a bit of like I am guilty of just now. I just said that we going to see or what the industry has announced is 500 or 600 LNG stations, and that implies there are going to be 40 to 100 trucks per station. That is a lot of volume, but there is a lot o of lumpiness between today and the end of 2015 to get to that number. It is just the path of light with low volumes. I wouldn't expect any sort of linear smooth curve, because it will be customer by customer, and region by region. We are in the early days, lots of work, but I think you can say the starting gun has gone off, and you will see very substantial penetration in these markets.

On the rating on the 400 horsepower rating on the CWI engine, again I don't expect it to be delayed beyond August. I think that is the production schedule.

I will step back and say we are sold out between now and August. There is no problem in selling the lower ratings. There is going to be lots of demand for the 400 rating. I think there will be lots of demand for the other ratings as well. The reason for having the 400 at August is we want to have a controlled release, a controlled launch, and we want to provide good customer support, and that is the plan. I think it is going to go well.

So there was no compression problems or any other issues that you experienced in the trial with the higher horsepower?

Nope, nope, nope.

Okay, thank you.

The next question is Alex Potter of Piper Jaffrey. Please go ahead.

Hi, guys. Thanks. I was just wondering you had mentioned earlier introducing the premium HPDI product into China, and attempting to maintain margins. Certainly looks like kind of a bloodbath with regard to margins on the existing products. Wondering what some of your strategies will be to try to maintain margins?Seems like expectations are being set at a level where people expect these natural gas trucks to be relatively cheap, so if you come in with a premium product on top of that, are you going to o be targeting specific segments of the market, or how do you expect to maintain margins? Thanks.

We are obviously going for a premium product. It is a high performance product that is very differentiated, and yes, we fully expect that we going to see a premium price for these trucks, and the customers that we expect to buy it are going to pay a premium price, there is no doubt. That said, it is not going to be a $75,000 or $80,000 premium either. So that also should give you a hand on how this is going to play out. I think the margin issue in the joint venture don't forget, is very different than our profile, joint venture margins are being driven by the engine price, and that is a very competitive business and Weichai like Cummins sells to people who make their own engines, too. So they have to be very competitive. We are going to be selling tank packages, for example, it is a different price point and different margin expectation.

As I said, it is proprietary technology. We are confident we will get good margins on that product. May not be the 30s that we have talked about in North America, but pretty good in China. I think that the challenge in any of these businesses is managing our costs and our supply chains, and we are developing local partners and local suppliers that we think can hit the price points and the quality that we want. But that said, it is much like the automobile market in China. There is a lot of different product between the top end of the market and the bottom end of the market, and we going to be going for the premium truck fleets that have high fuel consumption and high quality expectations, and as a result are able to pay for it.

Okay. Great. I was just wondering as a follow-on there, if you could give at least from my understanding, the majority of the trucks being purchased in China are owner operated, kind of one-off as opposed to fleet, bigger fleets with hundreds of thousands of trucks. Was just wondering if you have any specific areas of the truck market that you are going to be targeting? Who is it that you have identified that is willing to pay that premium? Thanks?

We are talking HPDI here I am assuming. Yes, it will be the fleets. When you say that the majority are owner operators, that is true, but it is 1 million truck a year market, too. There is still a big market for sophisticated fleets, and increasingly we are seeing the truck fleets get organized. So I think we will see a transition in China to more organized logistics fleets. The oil and gas industry, the resource industry, these guys are pretty big fleet operators, and are keen to reduce their operating costs, and that is where we would see a sophisticated life cycle cost sort of analysis that we can appeal to.

And just one add to that, Alex is we are able to travel through the first natural gas engine that is able to travel at a high altitude, so that is probably going to give you some of the piece of the puzzle of what kind of trucks are traveling at 15,000 feet through the mountain pass, because if you are going to use natural gas, the only choice actually is HPDI. There is a pretty concentrated audience and target group for that one example Alex, in terms of what resource company or what the names are. Just not information we have at the moment.

Okay. Fair enough. Thank you.

Thanks.

There are no more questions at this time. We will turn the call back over to Mr. Seed for concluding comments.

Thanks, Joe. Thank you very much everyone for the conference call. We look forward to seeing everybody in early August for the second quarter of fiscal 2013 conference call.

Ladies and gentlemen, this concludes today's conference call. You may disconnect your telephone. Thank you for joining, and have a pleasant day. Good bye.