Westport Fuel Systems Inc (WPRT) 2013 Q4 法說會逐字稿

Welcome to the Westport Innovations, Inc. FY13 Q4 and year-end financial results conference call. The conference is being recorded.

(Operator Instructions)

The conference is being recorded. At this time I would like to turn the conference over to Darren Seed, Vice President of Investor Relations and Communications. Please go ahead.

Welcome to our fourth-quarter and year-end conference call for FY13. 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 this 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. At the end of a fiscal year, I think it's useful to review the year and our progress against our strategic plans, and 2013 is an especially interesting one, as we went through considerable change, as we configured our business from its roots as an R&D and market creation venture, into what we now believe will be a high growth product phase in our development.

I want to start by reiterating the foundations for our strategic plan. First, transportation, energy, the world's two largest industries as we all know, are going through one of those once a century disruptions, where fundamental economic forces are driving change.

For transport, it's at the high price of oil, from which virtually 100% of our transportation fuels are derived, has opened up an opportunity for a new energy source. It's important to understand that this is an economic issue, not regulatory or environmental. Those are important factors affecting the market dynamics, but the force driving the change is the quest for a lower cost fuel.

Second, of course, energy is also going through a technology-driven disruption, in both oil and gas extraction and distribution. Again, here, we need to focus on the fact that the oil boom is about being able to extract oil from previously impossible or uneconomic resources, high prices are driving the innovation.

With gas, it's the opposite. We've created a breakthrough that's opened up staggering quantities of cheap natural gas. There's a tremendous global investment underway to bring that gas to market, and to make it a truly global energy source, like oil.

But put the two together and you have our fundamental thesis that we're going to see natural gas as a primary fuel for transportation applications. It's hard to believe, but as recently as 2012 we were still debating this concept. The question now is exactly where, and how fast, and how much.

In other words, where should investors and companies focus for the best returns in what we now all believe is going to be an inevitable change. It's a very challenging question, and frankly, it's been the origin of a lot of noise in 2013.

Accepting this foundation thesis at Westport, we have focused on where the market is going to be, not where it has been, or even where it is today. There are lots of companies doing very well, supplying goods and services to the niche markets that have already embraced fuels like propane and natural gas. That's great, and there's the usual business scrap going on around the world for market share in those traditional segments.

But we believe, and you should too, that the real prize is the emerging market, the coming market for fully developed, globally built, OEM supply chain based products, that are built and distributed to the same high quality that current products are, and using the traditional automotive industry channels. Again, there is some question, in fact, there's a lot of question about exactly where and how fast the breakthrough products will come.

We have a pragmatic strategy. Our plans are based on evidence in the markets that we're targeting, but we believe the market ahead of us is coming quickly.

We have concluded that the first priority should be markets where customers spend a lot of money on fuel, and where regulation or policy are encouraging a change, and where there is a full ecosystem of product distribution and service, fuel infrastructure, and customer awareness.

We have to develop that complete ecosystem before we can really see product sales. At Westport, we spent over a decade educating and encouraging and demonstrating, and proving out the necessary components of that ecosystem, in different markets around the world.

At the end of 2013, I think the situation is quite clear. We are able to survey the situation around the world and we can be satisfied with the proof that we are on the right track.

Just looking at our JVs alone, the product sales for our two joint ventures were directly from Westport sales, hit almost $900 million last year. Growth is obvious all over the world. The open markets we believe are everything from passenger cars in Russia or China to locomotives in the US.

We have global coverage emerging on the infrastructure side, and we have a small but highly capable and scalable supply chain developing. Infrastructure has hit critical cost and availability breakthroughs in many markets, and the model of investment success in that space is now clear.

Hence our talk of 2013 being a transition year for Westport, for market creation and technology demonstration, to a more traditional business that's focused on customers and profits. So these are exciting times for us.

If you just turn to the fourth quarter, as you can see, it was a strong quarter, with growth in both of our joint venture businesses, both in China and in North America, and in the Westport product business. Westport revenue was up 30% year-over-year for the quarter, and up 5% for the year over last year. For the year CWI revenue was up 57%, and Weichai Westport was up 71%.

We spent the last year reviewing our current product portfolio, all of our alliances and opportunities, and we made the appropriate shifts in business, based on what we think are the most important strategic opportunities, and getting an optimum mix of short and long-term products. Furthermore, we believe we have strong leads on competition, and that we can foresee considerable flexibility in our plans as the markets mature, in case things speed up, or slow down, anything in particular.

We are entering 2014 with some clear goals. We've been talking about this for years but we look at 2014 as the critical breakthrough year in heavy-duty trucks in North America.

We expect to see 3% to 5% market penetration in Class A trucks for natural gas this year, which is up from virtually zero in 2011. At that rate, we would have a total population on the road of about 12,000 trucks over the last couple of years, which consume on average about 18,000 of gallons of fuel per year each. This is becoming a material amount of energy that is being allocated to the Class A truck market.

If we're successful in getting that 3% to 5% market penetration, we think that the growth trajectory is pretty clear. That will be up from 1.7% in 2012, and we don't think there's anything to stop it from going much higher.

Westport has content in about 100% of those trucks this year, with Cummins Westport engines supplemented by sales of the Westport iCE PACK LNG system, and of course on the CNG side, we have the various specialized components that we manufacture, including tank valves, regulators and so on. We think 2014 is also going to be a breakthrough year in China for us.

Our joint venture hit 38,000 engines last year, and it will grow again in 2014. 70% or more of those sales are in the trucking application, as well.

Westport will begin supplying components and HPDI kits to the JV this year, as we shift our strategy from market creation to product sales through the joint venture. This is simply a spectacular opportunity, and we're excited at the opportunity to continue to work with Weichai to lead this energy transition in China. I should point out that the JV has announced another capacity expansion, so that by the end of the year, we will be in position to ship 100,000 natural gas engines annually, from the joint venture.

On the automotive side, we've got two paths to market. Our [ATG] business, which is well-positioned for growth, as our OEM customers expand their product offerings globally, and as sales develop, and through our complete vehicle systems, including our work with Volvo Car, and Ford. In both cases we've taken big steps to position ourselves for profitable growth, even at current sales levels, which are still relatively small.

For example, we agreed with our friends at Clean Energy Fuels last year to merge the BAF and Westport WiNG divisions last year, to create the single largest Ford QVM business. We have consolidated our operations now into the former BAF facility in Dallas. The combined business is the largest Ford QVM, and although this isn't really the long-term strategic and scalable business that we've talked about, we expect to see it develop very well, and we're going to make many this year and as the market develops.

Similarly with the launch of the new Volvo B60 model in Europe, and with the changes we made to that business, we expect to be in a position for profitable growth in 2014 and beyond. We are seeing surprisingly quick enthusiasm in the rail industry, and we're well-positioned to sell fuel tenders and engine systems in that market over the next few years. This is brand-new, our first fuel tender shipped right at the end of the year, but this is emerging as a very interesting business for Westport, and of course you will see the evidence of this develop in 2014.

I have to comment that we did stop selling the first generation of Westport HPDI at the end of 2013. Its mission in market creation and development has been accomplished. Our investment was essential in establishing the opportunity for natural gas heavy-duty trucks around the world.

Now, next generation HPDI products will be emerging, and the business model that we have developed with our OEM partners will be much more scalable and profitable for Westport shareholders. We will continue to support existing customers, of course, and we have allowed for that going forward, with a substantial provision on our balance sheet.

Now, all these products are in the market today and are going to form the basis for our stated goal of reaching operational positive adjusted EBITDA by the end of the year, excluding the income from our joint ventures. This is a big deal for us. Please understand, we are very serious about this goal.

The swing from the 2013 number of $97 million of adjusted EBITDA loss, to positive adjusted EBITDA on a consolidated basis within the next two years is a real challenge, but we believe we have the road map in front of us. And of course, the endgame is not just a breakeven business. We're continuing to invest heavily in technology and product development with our partners, and we believe we are developing a sustainable competitive position. As the market for natural gas vehicles emerges over the next few years, Westport will be the leading partner for OEMs as they launch new products.

I'm going to close, and turn the call over to Bill, but let me just reiterate our goals for 2014 -- number one, positive adjusted EBITDA from operations by Q4, and continued profitable growth in our joint ventures.

Second, we want to be careful and prudent managers of our investment programs, to ensure that we can hit the operational cash flow from Westport direct sale, plus our JV dividends, to cover our business in 2015, as we've said. We want to allow Westport to achieve overall consolidated positive adjusted EBITDA, but at the same time, maintain the right investment in the right priorities, to ensure our continued leadership of the industry.

Third, we want to deliver on contractual commitments to our strategic partners and key OEMs. We have several key milestones with those investment programs in 2014. At the same time, we are developing attractive new customer relationships, and we want to continue to help removing barriers to the rapid adoption of natural gas vehicles around the world.

So those three dimensions give you some sense of the strategic challenges in front of us, but I think 2014 is going to be a great year for us. We've laid the trajectory out, we have identified a meaningful scorecard that tracks our path to profitability, the industry is still growing beyond many expectations, and I firmly believe that Westport and our shareholders are in the right place to take advantage of this new opportunity. So thanks for your support and interest, and I will turn the call over to Bill to run through the financial highlights.

Thanks, David, and good afternoon, everyone. I'll begin with a brief overview of our fourth-quarter results.

For the quarter ended December 31, 2013, we recorded consolidated revenue, excluding our revenue from joint ventures, of $52.6 million, compared to $39.9 million in the prior-year period. This is a 32% increase.

The breakdown of revenue by segment is $24.3 million for applied technologies, $26 million for on-road systems, $500,000 for off-road systems, and $1.8 million for corporate and technology investments. For the full year, our revenue was $164 million. CWI had a record quarter, with revenues of $110.5 million on the delivery of over 3,800 units, and Weichai Westport, WWI, generated $93.6 million in revenues on delivery of over 8,100 units.

For 2013, CWI's revenues were $310.7 million, a 57% year-over-year increase, and delivered over 10,300 engines. WWI revenues were $466.6 million, a 71% year-over-year increase, and delivered over 38,000 engines.

During the fourth quarter, we made the decision to cease production of our first-generation Westport HPDI system. We accrued the estimated costs to fulfill our warranty obligations, and our commitments to supporting the first-generation HPDI customers. This decision ultimately will save us money, and going forward, we expect the annual cost savings to be in excess of $5 million.

Also, US GAAP requires us at least annually, which is November 30 for us, to review our goodwill for impairments. Based on historical experience, financial forecasts, and industry trends and conditions, we recorded non-cash goodwill impairment charges in the fourth quarter relating to our Volvo Cars business and Italian operations.

However, our Italian operations are generating positive-adjusted EBITDA. We are still expecting to grow and diversify our revenues through expanding sales of our products in other markets, including China. Finally, we recorded other write-downs, primarily relating to consolidating our Ford business, as David mentioned, into our Dallas facilities, where we expect to realize operational efficiencies, beginning in 2014.

So during the quarter, total adjustments recorded were $67.8 million. Of this amount, $26.3 million was recorded in cost of goods sold.

Our consolidated gross margin and gross margin percentage for the fourth quarter were impacted by the Q4 adjustments. Excluding these adjustments, our gross margin and gross margin percentage for the quarter were $9.3 million and 17.7% respectively.

Research and development expenses for the quarter were $23.3 million, a slight reduction from $24.4 million in the same period last year. Selling, general and administrative expenses were $15.9 million for the fourth quarter. This was a reduction of $9 million from $24.9 million the prior year period, as a result of our efforts to reduce costs.

For the fourth quarter of 2013, our net loss was $89.5 million, or $1.42 loss per share, compared with a net loss of $37.6 million, or $0.68 loss per share in the prior-year period. Excluding the impact of the adjustments I've discussed, and these are partially reduced by $10.1 million in unrealized foreign exchange gains, our consolidated net loss, the net loss per share for the fourth quarter, were $31.8 million and $0.51 loss per share respectively.

As of December 31, 2013, our cash, cash equivalents, and short-term investments balance was $210.6 million. Our cash burden is down.

During the fourth quarter, we used $26.9 million in cash, which is a sequential decrease of $19.1 million. For the fourth quarter, our consolidated adjusted EBITDA loss was $23.2 million.

We have been describing the Westport financial plan and our path from a heavy investment phase to overall cash flow and profitability. We believe our business model can and will deliver great value to our shareholders, as this market shift plays out.

In the near term, we communicated specific metrics and milestones, so you can measure our progress. The path won't be a straight line, of course, but our progress should be very visible.

To be clear, we have discussed two milestones. First, operating unit adjusted EBITDA, and this will shift from approximately $9 million negative per quarter in 2013 to breakeven and positive by the end of 2014. We have, and we are reducing our operating costs, and we will defer or eliminate product lines where we do not see a clear path to generating profits.

We are also investing in long-term product development at the corporate level, and we have corporate and public Company expenses to cover. We report these in the corporate and technology investment segments, and you can watch our progress here, too. We had averaged about $16 million per quarter adjusted EBITDA loss this year, in this segment.

We are reviewing every project, where we are investing money, and among other things, we have established criteria to rank and evaluate the returns on our projects. Projects that do not make the cuts will be deferred. We will continue to evaluate our investment portfolio on an ongoing basis.

By the end of 2015, our corporate investment portfolio and our other expenses, including long-term capital investments, will be covered by three things -- one, internal operating income; two, income from our joint ventures; and three, expense recovery from our development partners.

Obviously, we expect that our investment portfolio will contribute to our income stream. As these investments roll off into production, we have options on the pace of new investments, to ensure we can manage to this goal. Therefore, we expect by the end of 2015, Westport consolidated will be a positive adjusted EBITDA, and we believe the path forward to strong financial returns is clear.

To wrap it up here, we expect our revenue for the year ended December 31, 2014 to be between $175 million and $185 million. We are starting the year in a $25 million hole, without the contributions from the first generation Westport HPDI system.

We expect the revenue in our core businesses to increase up to 30% out of this hole, which will deliver a 2014 revenue increase of 7% to 13%. 2014 is going to be an exciting year.

I will now pass the call back to the operator to open the call for questions. Operator?

(Operator Instructions)

Laurence Alexander, Jefferies & Company.

Three questions. First, on the operating efficiencies and the curtailment of the first gen HPDI, what is the net savings that you have realized on that? And then, do you expect your operating expenses to track down further into 2014?

Yes, Laurence. We are going to have realized net savings. I think they will be in excess of about CAD5 million. We do -- we have redeployed those individuals to the other programs to focus on those programs, but we will realize those efficiencies and cost reductions on a go-forward basis.

Okay, and then secondly on the cash burn, should the cash burn decline sequentially from here? Or if it's going to be lumpy, what are the factors that would drive the lumpiness?

It could be lumpy. It could be driven by top line revenue. We do have debt payments that we make about every six months.

So there are many factors that could impact our cash burn. Also, we are making capital investments, as well, throughout the year, and the timing of those investments could impact our quarterly cash flows.

And then, just lastly, do you have any incremental visibility that you can give us on when HPDI will start selling in China?

I'm looking at Darren, and Darren is looking at me. We have said Weichai's got test trucks on the road with customers. There is a stock answer we have to give you, Laurence, on all of these programs, as we've been saying for about a year.

We have moved into a lot more serious business, where people are looking at natural gas as being a serious product and not just an environmental demonstration or some sort of niche project. These are very strategically important issues for our OEM partners, and we can't steal the thunder from our friends at Weichai, on what they're up to. What we can say is that there are trucks on the road with customers, and we expect that to grow in 2014.

And I think in accordance with our previous disclosure, Laurence, we've been in negotiation with Weichai and the supply agreement. I think at this point, we'd just say we are confident we are able to resolve that supply agreement, and get underway at some point this year.

Thanks. I will hop back in the queue.

Rob Brown, Lake Street Capital Markets.

To follow that up, in general, your guidance for the year, could you give us sort of broad buckets of how that gets built up? Or maybe some color on how you get to that number, realizing you're not going to give us the full fine detail?

I think by nature, most of that is going to be in our applied technologies group, because it is a mature business. And we expect as they execute their strategy and try to diversify geographically and penetrate new markets, that's where we're going to expect growth in our business.

Also this year, we plan on delivering tenders within our off road business and that's going to drive growth in our business. As we launched iCE PACK in the fourth quarter, and we expect to see some nice contributions from that product, throughout the year.

I think I will just add to it, Rob, I think the real focus this year for all of us, I assume for you too, is going to be the success of the Cummins Westport 12 liter leader in trucking. Which unfortunately doesn't count to Westport revenue anymore. We will see an impact if that is more successful or less successful, we expect there will be some direct implication for iCE PACK sales, which will show up as Westport revenue. But of course that's going to be impacted by the famous CNG LNG mix question which we may as well raise now, too.

We see 2014 getting to positive cash flow. The real growth will be as our investment programs start to roll off, and we see these global programs, and particularly the HPDI 2.0 generation products hitting the market over the next few years is what is really going to accelerate Westport direct revenue.

For 2014, we think we have got a product mix that is going to make us money, and we'll wind through each of these markets. And we'll see good growth, but the overall story next year is going to be North American trucks, and growth in China.

And then could you update us on the Volvo heavy-duty truck engine and product? I think that's coming up, could you give us some color on when to think about that impacting your business?

I'm going to repeat my answer to Laurence, Rob. We have to let our OEM partners manage their product introductions. That's been beaten into us, and we just have to defer to them.

I think we can say, because it's quite public, there are test trucks in customer hands. And we want to see that product do very well around the world, for obvious reasons. But we have to allow Volvo develop the products to their standards, to their schedules, and they are going to launch and price the product the way they decide they want to do it.

So we are there to support them. Not to try and run the show. So you're just going to have to wait and see.

Okay. Great. Thank you.

Ann Duignan, JPMorgan.

Can you talk a little bit more about the review you're doing of your projects, in terms of ROI? And a little bit more about what return on invested capital you're looking for, what is your threshold, what is your timeframe?

And then how confident are you in your forecast, given everything we've seen in the last two or three years? The changes in outlook for penetration in different regions?

Yes. I can -- we have done as part of our annual review, and even before we started to get into that annual review, we took a comprehensive look at our portfolio of projects. Because we have a limited amount of capital, we have a limited amount of resources, and we defined very specific criteria in terms of how do we rank our projects, and it is just not financially driven.

We have customer commitments, specifically Volvo. We are looking at new opportunities in the markets, where we expect to see significant returns. I'm not going to give you specific internal hurdle rates, but we do have those hurdle rates defined internally.

Also we are looking at time to market. How quickly will that investment project turn into revenues for the business.

So there's many different metrics that we look at, when evaluating our projects, and as I mentioned, we did a comprehensive review of every project within our company. And so based on that, we're are going to have to make tough decisions going forward, and those projects that don't make the cut, they will get deferred going forward.

Can you give us any confidence on what is the underlying analysis? Is it a DCF? Is it based on end markets that you're forecasting, and then you're penetration of those end markets, and some kind of growth rate into perpetuity? Just some sense of what kind of analysis you're doing?

They're basic financial analyses. I'm not going to get into specific details, but we're looking at many different factors. Could be DCF, we could be looking at growth rates, we can be looking at payback periods. So there's many different -- we just don't focus in on one financial metric, we're looking at different financial metrics for each and every project.

I will jump in, Ann. It's not just the direct financials, because as we've rightly pointed out, this is really difficult, to predict the future. Nobody can predict how this market is going to play out.

I think we can all be confident, 10 years from now, there's going to be a lot more gas than there is today, but where and when and how and who is going to have the biggest market share is impossible to predict. What we can do is rank things. And so we spent most of our time ranking them, things that we are more certain of and less certain of, and apply a factor to the investment risk factor, as you can probably figure out, and put a cut-off, and say anything below this is too risky.

But then, we also have to weigh that against the strength of our partnerships. And if we have a really enthusiastic partner who is moving the earth to make a successful product, or there is a very strong regulatory driver that we can see, obviously that's going to apply some weight to this, too. It's not just the financial, it's the likelihood of success, the likelihood of market penetration. And so you can imagine, we are looking for what is -- in the worst-case, are we going to get our money back, and then have an option on how the market grows.

Or in the best case, is this something that delivers us real strategic advantage. It is primarily a ranking exercise, as how it's played out, and then we can clearly allocate 100% of the resources that are requested to the top priority projects. And then we can go down and do more of a -- give people a short-term leash to go and test out certain assumptions on some the less important projects. And as Bill said, we have deferred a few, and we will probably continue to evaluate new ideas with a pretty tough lens.

I hope that makes sense, but no, you're absolutely right. We can even predict in six months which of our products are going to do better or worse. What we're trying to do is position ourselves for upside growth, but make money even if markets stay choppy.

I guess, that just raises the question of, if you get to a project that you have a strategic partner with, somebody like Weichai or even Cummins, are you going to be willing to walk away from projects that do not deliver the returns, even if it's something that you could leave for competitors to step into?

Yes. Of course we would.

Okay.

It's in partnership with our partner, but our partners are not shy, either. They're going to be looking for evidence that they're going to make a return. Typically, they are not -- how do we put this -- they are very disciplined investors of their capital, and they've got a lot of demands on it.

They are not in the natural gas business. They are in an automotive business, and there's lots of regulatory challenges over the next few years that are demanding investment in R&D.

I think it is typically a mutual discussion and we are all in this, looking at where we are going to each get the best return. Of course we want to be aligned on that.

We don't want to have a partner that's highly motivated where we are not, or vice versa. This has been a collaborative process with our partners.

Okay. That's helpful and I'm thankful for that.

When you, I think you said during the commentary that core sales are expected to be up 30% in 2014, but I'm assuming that includes BAF. Could you give us that core growth without the incremental BAF sales?

Yes, that's part of it, Ann, and that's one of the reasons we incorporated BAF revenue in the 2013 figure. What we've done is basically say, without the first generation of HPDI, which equated to about $25 million in revenue last year, we're starting a bit of behind the eight ball. And to come out of that gap is going to take us to grow at least 30%, or even 20% just to get back to even.

But we are not only doing that, I think we expect to grow, as Bill pointed out earlier, somewhere between 7% and 13% over and above the $164 million we did in calendar 2013. And that's inclusive of starting from this gap. Going forward, of course, the Ford business all under one roof in Dallas, under the WiNG brand, is expected to make money this year.

But, organic growth? Are you going to take a swag that for year-over-year?

We don't give individual product guidance, Ann. That's the tough part. We do expect organic growth, maybe that's to answer your question directly, but we don't break down individual units or guidance by sector or segment.

Okay. I'll leave it there and get back in line. Thanks.

Jerry Revich, Goldman Sachs.

Can you just talk about outlook for the Ford WiNG business? You mentioned it's going to be profitable for you this year at the EBIT line.

Can you just provide some more context around your top line expectations, and how that program is tracking? I know you don't love to give segment color, but since you are looking for profit at the segment, I'm wondering if you would share with us the underlying assumptions?

Yes, actually, Jerry, part of it was what we had mentioned in the press release about consolidating under one facility and calling some obvious points out. There's some cost reduction. I think you've asked a fair question, and it's not just a straight line increase of revenue and related sales margin -- gross margin. It's also a function of reducing some expenses on that business by consolidating under one facility, and cutting some overhead expenses.

They are -- it's a bit of a mix between increased, as Ann had asked, organic growth, in addition to reduction in expenses. And I think that's why it's tough for give any more specificity around what numbers that entails, whether what the number is in reduction, or the organic growth percentage? We've given you as much color as we could specifically on the Ford business.

Okay. In terms of growth outlook by business, relative to that 30% number you mentioned, maybe you could just rank order for us which businesses are going to be at the high end of the growth profile? Presumably that's iCE PACK and CWI, if you want to think about it in that context, but I'm wondering if you'd just flesh that out for us from that standpoint?

Actually, you got it, Jerry, which really is the -- Cummins Westport, of course, we don't get to recognize the revenue on our P&L but it's definitely expected to be a big chunk of growth, regardless this year. iCE PACK, of course, that will be reflected in the on road systems group this year, Jerry, so that's an area of core growth.

And LNG tender cars, I think it's the surprise, don't call it the dark horse, but I think this is an area that we have been, as David pointed out, quickly and enthusiastically moving, while our HPDI commercialization agreement with Caterpillar is not expected to be in full production until roughly 2017 for EMD and locomotives.

Between now and then, we are seeing a number of rail operators run things like dual fuel or other natural gas related systems, where we are happy to provide the LNG tender. And with an average selling price of literally CAD600,000 to CAD1 million per tender, it doesn't take much to move the dial on that. It's another area where it's easy to say we could say logarithmic growth because we had very little in that business last year. That's another area, Jerry that we expect a lot of growth.

Okay. And along your comments of deferring or discontinuing low ROI investments, can you just talk about the charge in applied technologies? Are you stepping way from any products or regions? Can you give us more context behind what the write-down represents?

No. Jerry, that is strictly a goodwill impairment. We've got to go through our annual analysis.

It was somewhat of a surprise to us because that business, we had year-over-year growth, it's generating positive adjusted EBITDA. However when we look back historically and going forward, now we've got two multiple data points and based on that analysis, we end up writing down a portion of that goodwill.

Okay. And lastly, can you just frame out the major improvements in HPDI 2.0 from a reliability standpoint? You mentioned the warranty provisions that you are taking of $21 million, under HPDI 1.0 can you just talk about the structural improvements that you expect to deliver out of 2.0?

I will do a quick one. There's a fair amount of detail in the press release and we are happy to take you through that in more detail if you like. But the simple fact is that every component has been redeveloped and redesigned.

We've got new suppliers for every component, they've been developed in conjunction with partners like Volvo and Delphi. And so there's a completely different profile, both from a cost, scalability, reliability, durability factor. And we think that's why there's been so much interest in the platform.

Okay and David, is it possible to quantify the common components between 1.0 and 2.0, or just frame for us how much the durability or the reliability has improved? Any way to quantify those factors?

No. It's tough, Jerry, because there's there some information we haven't disclosed. We are working with some of the OEM channel to develop some of these new components and systems.

I think some of the highlights of course, in terms of improving the combustion, it's really a comparison versus other technologies out there, like spark ignition engines. That's where the combustion efficiency is going to improve. We've been doing some work in the background, obviously R&D related to the injector.

If you remember back in September, and our use of proceeds from our financing, we've identified some areas of strength to increase and invest in would be along the injector plant, in terms of getting a closer relationship with that channel and developing some new injectors. That's one specific area, Jerry, that we do expect to see some improvements on.

In terms of things like -- I mean again the press release, Jerry, probably if you don't mind, just to refer everybody, because there is an entire laundry list. On December 10, the press release, that goes through every specific feature in detail. But in trying to answer your question directly, again, the combustion, the injector, that work will get done, and it's a lot of it to make it sort of a cross-platform friendly system, as well.

I think the compatibility component will be noticeable, and allow us -- to be candid, allow us to save some investment dollars, R&D dollars, and have that system applicable to a number of these OEMs we disclosed in the same press release. Where we have seven OEMs working with us today. Three of which have not been publicly disclosed as to their name, but they are at various stages. And by focusing a lot on those core injector and components, it allows us A, to have the system applicable to those other OEMs, and B, save us some R&D bucks.

All right, thanks.

Vishal Shah, Deutsche Bank.

I just wanted to ask you about your guidance EBITDA. Can you talk about some of the risks and the key puts and takes in achieving that EBITDA break even guidance for the year. And then, curious on your thoughts on the mix of LNG versus CNG is in the field right now, and how you think about the iCE PACK sales this year relative to the volume sales.

I will talk about the road map to getting to adjusted EBITDA positive. I think David already talked about some of those risks.

It's hard to predict the future, so in any plan there is risks. Of course, we plan on growing our top line revenue. We are focusing on pulling costs -- operating costs out.

If you saw in the last quarter, we reduced our operating cost by about $10 million. I think those are the two biggest factors. There's growing the top line, protecting our gross margins, and managing our operating costs, which will help drive us to positive adjusted EBITDA in our consolidated operating businesses, by the end of 2014.

Okay. And in the mix of LNG versus CNG, how do you think about that this year?

It could be 50/50, 60/40, I think the market will end up shorting out what that mix is going to be, over time.

I will weigh in on that too, and you've heard me say this before. It's a question I am really puzzled by, because natural gas is natural gas, the delivery mechanism is irrelevant to the engine. The engine gets gaseous methane, so it's all about what the customer wants, and a big part of that customer decision is going to be where they get the fuel.

I'm not sure it's really useful to look at either what the mix has been up until now, or even speculative of what the mix is going forward. Obviously, it's going to impact us.

If people are buying LNG, we want to sell them an iCE PACK, and if they're buying CNG we want to make sure they get CNG components in the CNG system. Obviously, we don't make C&D tanks.

Where we come down to this position, we are trying to be a bit agnostic, because I realize that people are really getting worked up about this mix question. But our view is that long haul is going to be mostly LNG. CNG obstacles for long haul are likely just going to be too difficult to overcome.

Not to say that there is not going to be some long haul talks on some routes where some fleets decide that makes sense. And that's likely going to be where they get really cheap CNG for some reason, because they got a great deal with a supplier, or they're in an area like Oklahoma, that has lots of really cheap gas. There's always going to be exceptions to a broad rule like that.

Internally within cities, it's going to be mostly CNG, and whether you're running a Class A truck or a bus, or a garbage truck, return to base, you're likely going to get fleets going more to CNG. It's going to be a mix that is determined by the customers, and who goes to gas first. And also, how the pricing of fuel and the terms around pricing and long-term pricing in particular, are translated to that fleet.

It's really hard for me to give you a specific mix vision. Our sense, talking to fleets, frankly, is that in 2014 with the 12-liter in North America, it's likely going to be 60/40, 50/50. It's not going to be 90/10, the way some people are talking.

In China, a lot more LNG, and in Europe, we are expecting it to be largely LNG, as that market develops. We will see how this plays out next year, and honestly, we don't think it's going to have a huge impact on our results. We're going to do well either way.

Okay. And just one other question. When do you expect to sign in OEM agreement on HPDI 2.0? Is it going to be -- how should we think about the signing on that, it takes a couple quarters for that, or should we see something soon?

Sure. We signed a few. That's what we said.

We -- there's four public, being Weichai, EMD, Caterpillar and Volvo. And so there is three names I think, Vishal, that these parties, they always want to hold their cards close to their chest.

What I can share you is that there's very little interest on their part to disclose their entire development plan. I suspect it's for competitive reasons, and that makes a bunch of sense.

The part we just want to keep reassuring people is that we are developing, we have started work with a large number of these OEMs. Three of which have signed up to start initial work on HPDI's. This is not just sitting on the back of an AutoCAD drawing, there some actual work underway.

I think it's a function that seems more pertinent for the industry, Vishal, that these parties will probably announce something. And I'll feel more comfortable announcing something when they are much closer to product launch. It just seems to be the trend, of course, we will see if they will be willing to communicate prior to that. But we always want to make sure people understand, we are working with these OEMs and there is progress and work going forward, but in terms of identifying them, that might -- it's tough to say.

It's up to them. I think the reason we said earlier that this year is going to be important, right, if we hit the 3% to 5% penetration in North America, there really are a lot of eyes globally on that number, as evidence that the market is going to develop. And that's going to determine the pace of investment and the urgency, and it's also going to determine the level of customer inquiry that the OEMs are going to see.

That's no question that fleets are talking to their suppliers about the range of natural gas product that they're going to have to choose from, and should they buy now or should they wait. Those are all happening conversations every day. I think that you will inevitably see more information about product plans coming out over the course of the year, and that should give you some insight into what is going on.

Okay. Thank you.

Eric Stine, Craig-Hallum.

Maybe just touch -- and you touched on urgency at the OEM level, I'm just curious, the reaction out there to discontinuation of 1.0. I have heard that there were some heavy haul fleets that were pretty disappointed, that engine was discontinued.

And just wondering, has that forced the OEM hand a little bit? Have you noticed anything, and maybe you are limited as to what you can say with these three unnamed OEMs, but just curious how that is factoring in to the development decision.

Well, I think you've answered it, Eric. There's nothing like having the customer saying we want a product that looks like this, to convince the industry that they need to build a product that looks like what customers want to buy.

I think we actually haven't had a lot of surprise on the decision. We had no illusions. We told customers all along, we only worked with Peterbilt and Kenworth on that engine. It's no surprise that we didn't have an ambition to become a full-blown engine supplier.

That was a demonstration engine, a technology demonstration engine, where we did what we had to do to get the product into the market. And people bought it and validated that there was a need for high-performance, high fuel economy natural gas engine, and I think that is what's given us confidence going forward with HPDI 2.0. But yes, I think there is room, and the OEMs are keen to develop differentiated products that meet their customers' needs. And there is certainly a trend, as you have heard, to go to higher fuel economy, lower displacement engines, higher power.

Those are all factors that support the development of HPDI. So yes, we think having that fleet out there is very encouraging for people to develop high-performance natural gas vehicles, going forward.

Okay. Maybe just sticking with HPDI 2.0 and thinking about Europe. A lot of this is been about North America and China.

Just wondering, given that market has lower displacement engines, that the OEMs are vertically integrated. Just how you think Europe develops going forward, in addition to the Volvo engine launch.

There's two issues. There certainly a lot different political situation around energy and LNG in particular. But I think from some comments we've been getting in North America, people are underestimating how much LNG is already part of the energy mix in Europe, and the relative pricing between LNG and diesel fuel in Europe is actually better than it is in North America.

There is a strong economic driver. There's a very dense transportation system, and there is pent-up demand for LNG trucks to reduce fuel costs. I think Europe is going to be a very productive market for us, as it gets going.

That said, we have seen a very weak market in Europe the last couple of years, just because of their economic conditions. We've seen a lot of political and energy turbulence in Europe. No surprises there.

And certainly the last market for us to develop on the trucking side. So again, we are trying to walk a line between recognizing the opportunity, and then rushing and being too quick to market.

We are letting our partners pace that one, and I think it's going to emerge as a really great opportunity for us, but is it 2014 or 2017? It's really hard to predict when everything is going to be right for LNG trucks in Europe.

Okay. That's helpful. Last thing, maybe just turning to the recent Tata announcement. Just curious there, are you unseating an existing supplier, or is this Tata realizing it's a big market, and they're turning the EMS over to you, given your capabilities?

This is new product, and I think that's the simple answer. I think what we're expecting to see from all of the automotive OEMs, particularly in markets where there's a very clear preference for natural gas, Russia, China, we have government policy triggers making this shift.

You're going to see a very broad array of products into the market. Right now, we can put dots on the map that there is a product, or a vehicle with a partner, but really, we need to see hundreds of different models to give the market the choice it needs.

So I think this is just an example of Tata expanding its product line. We're happy to be the supplier they picked and that we're partnered with, and we don't think this will be the last new product you're going to see from that market.

Got it with Tata, and this is the same product that is the basis with GAZ Group, right?

WP580 controller with Tata, as part of a whole system with gas.

And timing, is that?

The 3.8-liter, Eric, is expected to launch this year, and they're also actually looking to launch a 5.7-liter later this year. That their current plan our WP580 controller. With GAZ in Russia, that's a whole system, and that will, at the moment I believe, still is planned for this year -- ramping up.

That's what I was looking for. Okay. Thanks a lot.

Aditya Satghare, FBR Capital Markets.

Two questions. First is, when you go through an internal capital allocation process, how does that translate into essentially the rationalizing of the R&D expenses, and how should we think about R&D efficiency going forward?

This is Bill. In terms of R&D efficiency, I think the capital rationalization, Aditya, for Westport, we tried to cover it as best earlier, in terms of we have criteria. The shortlist in the criteria is economic return, timing, in terms of how quick this product would get to market, as well as strategic value to the Company and to the market.

But also we have limited resources currently that we can allocate these programs. We have to deliver on our current commitments, and so it's a very comprehensive review, and typically, when we are evaluating a new program, we are not going to give them a blank checkbook. We will give them a little bit of money, go prove out these assumptions, and come back, and we will discuss it again, and take the next step.

I think the main thing we can tell you is that we have obviously new criteria, and new management focused on this. A lot of what we're doing a couple of years ago, we were looking for new markets, demonstration of technology, were looking for support of the partner.

There is very different approval protocols around those demonstration projects, than if we're investing money for a product that's going to go into serial production. It's just a completely different exercise and analysis. What we can tell you now is that we have centralized this, we have operating divisions, the different segments, the global markets, the different joint ventures.

There is one central investment bucket now and we make all those decisions here in the corporate strategic group. So there is no difference of an investment by the group in China or Italy, versus a new market opportunity, or an advanced technology. We are waiting all of these, trying to move with the real time data flows, so we may accelerate priorities or slow things down. But certainly all new programs are going through this screening process, where we are trying to assess just some sort of absolute return, risk reward mechanism. I don't know if that's what you're asking but that's --

That's helpful. My second question is on the Weichai capacity expansion. How we think about the potential for returns to increase in that business? Obviously volumes come out of a rapidly growing market, but how should we think about the potential plans going forward there?

You can see margins are creeping up. Some of this is product mix, some of it is competitive pricing and positioning, and some if it is, as we've talked about over the year, has just been production inefficiencies, as we have seen such a huge growth.

I think just because of the scale of the business, growth rates are going to inevitably slow down. It's hard to grow at 150% into -- for a decade. So I think that growth rates are going to moderate slightly over the next few years, and that's going to allow much more managed efficiencies, and that's going to help margins.

But the second piece, which I think is more important, and I think, more relevant to what we've been talking to, is we wanted the joint venture to create a strong market for natural gas vehicles in China. And I think that it has succeeded spectacularly at that. And now as we start to deliver differentiated product on both of the spark ignition front and with HPDI, we think we can really start to differentiate the joint venture's products and give them a premium product in this very large market.

We also think that's going to help support better margins at the joint venture. And at the same time, deliver incremental revenue and margin to Westport, as we sell the components to the joint venture. I think that the story on Weichai Westport is just getting going, and hopefully you will start to see the impact of that in 2014.

Okay. Thank you. That's all I have.

Colin Rusch, Northland Capital Markets.

Can you talk a little bit about the pacing of deals with fleets at this point? If you're seeing that deal flow get any faster, and if you could talk a little bit about the size? Are folks starting to sign larger deals, or you're still bumping along at the same level?

It's bumping along pretty well if you see the realized numbers. It's no secret that the growth in CWI has been driven by the enthusiasm in the trucking business last year.

There were some good international sales, but the delivery of the high horsepower ratings in August is why the Q4 numbers are so strong. And honestly, 2014, we don't see any sign that's going to slow down at all.

I think you'll see a full year of delivery of the 12. We see lots of demand and lots of interest, pretty much across the country, too. It's not in pockets. I think you're going to see a strong year for natural gas trucks, which is why we said 3% to 5% penetration is realistic.

And when you think we can feel fully confident that the warranty expenses are going to be done, and we would start to see some of them potentially get reversed?

Gee, I wish I could tell you. Bill?

I'm looking at you. It's unfortunate, we took some very large incremental accruals during the quarter. It's a historical looking process, and it's a very mechanical process. And so we hope, or we expect over time as these fixes roll out and we start seeing improvements in the product reliability, that over time that estimated warranty on a per-engine basis will start coming down. And if that is the case, you will start seeing some net accrual coming back into income, but we can't be confident sitting here today, and saying yes, that's it.

Until it's a done, I think that we're confident that we shot bugs, we are confident that we have a much more robust product leaving the plant today. But the cost of the population that's out in the field is what is really hurting us on this, and we've been caught more than we would like last year, on particularly the 9-liter product in trucking applications. It's been very visible and painful expense, which really dampened the profitability of the joint venture last year.

That said, we learned a lot and we've gotten a lot of very direct experience now on the duty cycle for natural gas engines of this class in the trucking industry. And that's why you've seen the warranty accruals jump up so high. Have we nailed it? I sure hope so.

Okay. Great. Thanks a lot.

Matthew Blair, Macquarie Capital.

Thanks for taking my question. Just to clarify, does the 2014 revenue guidance of $175 million to $185 million include anything for the Chinese HPDI system or the Volvo HPDI system?

Yes. That kind of fits into Darren's can't give you numbers. Of course there's going to be some revenue, we see some revenue from the Volvo program, as you've seen. And as we ship hardware to Weichai, or to Volvo in those programs, you're going to see some revenue.

I don't expect at this point a material addition this year, Matthew.

Okay, thanks. And then on CWI, I think the 9-liter was launched in 2007. Is there a refresh coming up soon, and if so, how much would that cost?

Not planned. The only program that we've approved at CWI is the 6.7-liter, which is launching in 2015.

Okay. Thanks.

And then with your HPDI 2.0, we noticed that it can handbook CNG as well as LNG, whereas the first-generation could only handle LNG. Can you talk about why you added that capability? Thanks.

Ironically the very first HPDI engines were in buses and they were CNG, believe it or not. A lot of people, this is really going back into the dark prehistory of Westport. But yes, there is no reason why the technology can't run on CNG tanks.

We just designed what we called HPDI 1.0, it was going into trucks at the port, and we wanted to demonstrate LNG. At the time, LNG was the big hot news, and the first LNG station at the port built by clean energy was to support that demonstration of LNG.

So there's nothing in the technology that says we can't do CNG or LNG. Frankly, we think HPDI is going to be going into high fuel use applications, and they're going to be dominated by LNG.

We've had some requests for CNG, and so the technology is capable of it. If you translate that into will the we seek commercial product from any specific OEM? That is where we have to kind of put the lid down, and say wait and see.

Very helpful, thanks.

John Quealy, Canaccord Genuity.

It's Chip for John. For off road, I know it's still very early, but can you talk a little bit about progress you are seeing for HPDI and locomotive and marine markets? And then how that ties in with some of the new investment criteria you're looking at?

Yes. The question that I could go on and on and Darren is already telling me that we're going too long, so I'll try to keep it short. But you will see a lot more on this, this year.

I think that the enthusiasm for natural gas in all of those markets is really sincere, and we're going to see this globally. Any high fuel-use has now got it in their head that they can save a lot of money by going to natural gas. Just for packaging reasons, that's likely going to be LNG because they need so much fuel, and these are space constrained.

Some possible exceptions, just so people won't yell at me, around oil and gas we may see some use of well gas and stuff like that rather than LNG. But there's a lot of enthusiasm.

Now, it depends on the specific product that you use in that industry, big ships, little ships, big locomotives versus mine haul trucks. There is a lot of moving variables, and this is a much more kind of high-priced low-volume business that low-volume business than we're used to in the automotive side. So things are going to move, depending on the enthusiasm of specific customers.

I think that what we're seeing is the North American real business has been very quick off the mark. The marine business worldwide is quick off the mark although there's going to be lots of work to get that sorted out from a regulatory viewpoint.

The oil and gas industry, I would say, is mixed. There's lots of interest but people are moving fast anyway. So how product gets into the market and exactly where Westport fits into that ecosystem is what you will see emerge over the next couple of years. But right now I would say you've seen the most kind of instant take-up in rail and marine worldwide.

All right. Thanks.

Pavel Molchanov, Raymond James.

Does your guidance for consolidated revenue incorporate any particular scenario, as far as the fuel tax credit goes in Washington?

No. I think that you should assume that any time we give guidance, it is based on the current regulatory environment. We can't bet on a change. It would be nice to see a change in fuel credits and incentives and things like that, but this is based on what we think is reasonably likely during the course of the year.

So just to clarify, you are assuming that the tax credit will not be in place for the entire year?

And if it changes, that should be good.

It's upside.

Okay. Thank you very much.

Jeff Osborne, Stifel.

Just two quick ones. It implies that you're taking a hard look at that OpEx. Can you give us a cadence on when you would expect the trajectory of OpEx or this review process, with the unknown variables to play out? Is it more second-half weighted, or how should we think about expense level or trajectory here?

I think the fourth quarter is a good example. We pulled out quite a bit of our operating costs in the fourth quarter, compared to previous quarters in 2013, and we will continue to look at our operating costs going forward.

Yes. If it wasn't clear, we have completed this process, and we made the changes and that's why you have seen the restructuring charges and the write-downs and things like that. That's because that's the outcome of the process. We're starting the year with expense run rate that we think it's going to get us to that breakeven point.

Got you. I was thinking there was an additional step, so I apologize. Just a question on the adjusted EBITDA guidance, a two-parter here.

One is, Bill, would you be excluding any additional warranty reserves as it relates to your calculation of hitting that, was part one. And part two is Management's compensation aligned with hitting those targets for 2014 and 2015? And if not, if you could just tell us the key variables as the Board looks to determine your bonus for this year?

Okay, to answer your first question warranty will not be part of the adjustment to adjusted EBITDA. And second, yes, our compensation is dependent upon the outcome of achieving those goals.

Excellent. Thanks, much.

Laurence Alexander, Jefferies and Company.

Just two quick ones, both on Weichai. First, if Weichai doesn't move on HPDI by June, what is your priorities for proceeding in China?

And, secondly, that capacity expansion that you flagged to about 100,000 units, is that going to be funded just out of ongoing operations, and if so, how does that impact the margin profile for the JV? Or will there need to be a new capital contribution?

No. The terms of the JV are much like Cummings Westport, frankly, Laurence. The parent company, Weichai provides the facility and the joint venture operates the facility.

The joint venture isn't required to make capital contributions to that new facility, so I think that's the good news. The bad news of course is they charge us for that use of the facility, so that gets into the negotiation on price and margin transfer prices.

So I think that we are in a good position to see the expansion in the scalability, and what we need to do now, of course, is work on the return to Westport, and that is what we are talking about. Does that answer the question, or do you have another nuance wanted?

That's the one question, and the other one. Just quickly, if they don't proceed on the launch by June, I believe they lose exclusivity, so what is your priority for the back half the year?

Let's just say you are quite right that they have an incentive to make that clause not get triggered.

I think our business in China, Laurence, there's a lot of different avenues for us to generate revenue in China. Things like our components for examples from our applied technologies group, HPDI's just one the revenue streams we would expect to generate on the back of solving the agreements with Weichai.

There's multiple ways for Westport to generate revenue in China. This is clearly the most important, and again, our comment is again we are confident we're going to resolve the supply agreement shortly.

I think again, to be clear, just so we are not creating undue speculation about creating competition for the joint venture. I think the relationship with Weichai is really good, and we have built a great business, and it far has exceeded anybody's expectation, including ours and Weichai. This is now big business, and if we get it to 100,000 engines a year, that's a spectacular story.

So we are not about to go and idly mess that up. If we can optimize for both of our returns by creating differentiated product in this very competitive Chinese market, that's great.

We do have some exceptions, just for the benefit of the people who haven't read the JV agreements in detail. Volvo can come in with their HPDI product into China through their joint ventures, and sell directly.

That doesn't breach this exclusivity. It was designed to give Weichai a lead in the market around the Chinese domestic industry, with this technology, to reward them for taking the early mover risk. So I think that things are going really well, and all the lights are green to create a very interesting and proprietary product line in this high-growth market in China, with the joint venture. And that's what both parent companies want to see.

Thank you.

There are no more questions at this time. I will now hand the call back over to Mr. Seed for closing comments.

Thank you very much, everyone, for your attendance on the call. And we look forward to seeing everyone for first quarter of calendar 2014 conference call, expected to be sometime in early May.

This concludes today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.