Westport Fuel Systems Inc (WPRT) 2014 Q1 法說會逐字稿

Thank you for standing by. This is the Chorus Call conference operator. Welcome to the Westport Innovations FY14 financial results conference call. 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'd like to turn the conference over to Darren Seed, Vice President of Investor Relations and Communications. Please go ahead, sir.

Thank you and good afternoon. Welcome to our First Quarter conference call for fiscal year 2014. 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 Chief Executive Officer, David Demers and Westport's Chief Financial Officer, Bill Larkin and Westport's President, Nancy Gougarty. Attendance at this call is open to the public and the 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 that 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 Companies' public filings. 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. Good afternoon everyone. Q1 saw excellent progress in our business with some key milestones in both our operational transition and our long-term investment programs.

As I said last quarter, 2013 was a significant transition year as Westport shifted from a focus on market creation to a product and profit growth, now that OEMs around the world are shifting to include natural gas products in their offerings. We told you that we had completed our transition work and that we had laid out three primary goals for 2014. Let me reiterate those for you and I'll focus my remarks on those topics before Bill gets into the actual numbers.

First, we laid out that we would see positive adjusted EBITDA from our operations by Q4 2014 and of course continued profitable growth in our joint ventures. Number two, careful management of our investment programs to ensure that operational cash flow from our direct sales from Westport as well as our JV dividends will cover investment in 2015 and allow us to achieve overall consolidated positive adjusted EBITDA next year. Third, we want to deliver of course on our contractual commitments to our strategic partners and to our key OEMs. We want to develop attractive new customer relationships. We want to continue to remove barriers to rapid adoption of natural gas around the world.

But as you can see, on the operational slide, taking a look at the bar chart on adjusted EBITDA, on our operational side the work to reset our cost structure and to rebalance the product portfolio has delivered a step change in our current operating performance. As you know, we consistently seen an adjusted EBITDA loss of around $9 million per quarter over the last 8 quarters. You can see from the bars. And just last quarter I think we were at around $8.6 million. So at a $1.6 million adjusted EBITDA loss from operations in Q1, we're well on our way to achieving the target of breakeven adjusted EBITDA by Q4 of this year.

Let me remind you that our guidance calls for revenue of $175 million to $185 million this year, so it will only take an additional $5 million or $6 million in quarterly revenue at our current gross margin levels and our current expense run rate to reach this financial goal.

We believe this is a realistic and achievable path, and given that we're forecasting roughly 30% year-over-year growth from our current product portfolio, Q1 of course we saw 39% year-over-year, we think this business is now set up to deliver first enough cash from sales to cover expenses, and then second, traditional earnings growth.

New products such as the WP580 engine management system, the ice pack LNG systems, and LNG tenders in the rail business are going to deliver platforms for future growth in the operating business starting this year.

In looking at the current business, the changes we've made over the past 6 months have eliminated unnecessary costs and they've allowed individual businesses to emerge successfully. So for example, our Ford truck business, after the acquisition and integration of BAF last year, has been consolidated into the former BAF facility in Dallas. Now we are by far the largest player in the Ford QVM program with over 70% market share and we have the product portfolio and scale that we need to be able to operate this business profitably.

Similarly, the Volvo car business in Sweden has improved dramatically with commitment from Volvo to work with us to deliver volumes through their traditional dealer channels in Europe. This business is now profitable after three years of investment.

Our On-road Business Unit revenue was up 277% to $17.7 million, compared to $4.7 million in the same period last year. This is great. It's a sign of where we believe the market is growing. The majority of revenue comes from the sales growth of our existing products.

The Applied Technologies group continues to see growth in sales to China and Russia and we continue to diversify our products and markets outside Europe. Revenues are down slightly overall primarily due to a decrease in sales in Italy, with the struggling European economy. With our relationship with Fiat and a broad distribution network in Italy we believe we're well positioned to take advantage when the market recovers.

Moreover, after officially launching the WP580 system with Tata in February for Boston truck applications we're now working with universal LNG to use this controller system for industrial applications such as water pumps. Both of these products and markets provide potential growth and offset for specific markets that are affected by local economic situations.

I believe it's important to note that HEG's gross margins are very healthy. Therefore as new products and markets emerge this business should quickly get back on track to positive adjusted EBITDA growth.

Turning to our next slide on corporate and strategic investments. As you know, Westport is co-investing with several OEM partners to develop a portfolio of new natural gas vehicle products and the technologies and related systems and components to do that.

Since 2012, we've invested roughly $215 million into various development programs of this class. There's three major application areas; Global Trucking which I believe is the green wedge you see on the pie chart, Automotive and third, Off-Road Applications such as rail and large mine trucks.

We also have a portion of this investment allocated to advanced engineering and capital expenditures but for the most part, these investments are for specific products and with specific partners, and they have a 3 to 5 year development cycle from the start of development to product sales.

We're carefully managing these programs and we allocate capital to products and technologies that we expect can deliver high returns in the future. Our strategic investments are of course, what we believe are going to be significant game changing products. From the same segmented reporting R&D alone in corporate and technology investment was $14 million this quarter. I hope it's obvious why we can't disclose exactly what we're up to or much of the detail of these programs, but from previous disclosure we can confirm that the following breakdown, as shown on the slide, is about 35% has gone to HPDI 2.0 programs, with various OEMs including Volvo and Weichai, and our Delphi alliance, and 10% has been allocated to Offroad products with Caterpillar and EMD and 45% represents other product programs and advanced technology.

For example, the announcement recently of GEM DI technology with Tata in March would fall into that last category. I should point out that not all R&D is considered a strategic investment and the investment programs aren't just categorized as R&D in the financial statements. The operating business needs to develop and support their current product portfolio in their current markets and we need for this R&D to be coming from cash flow from current product sales. So that's the way we are currently structured. The operating business is paying its way. R&D is going to be a critical element in our business going forward.

If you look at the statements you can see that operating units reported R&D of around $5.5 million this quarter, which would be about 13% of revenue. We think this is a reasonable ratio and a healthy allocation for a technology leader like Westport. My point here is we expect current operations to pay for their R&D on an ongoing basis and our teams are already doing that and our breakeven metric includes a sustainable level of R&D.

Which means that these programs except Advanced Engineering are going to deliver specific products with our specific partners and we also think that these are going to have broad application with other markets and other partners in the future. Westport retains the IP rights. Typically with some territory or market restrictions to allow our launch partners first commercial opportunities.

We disclosed some significant milestones under the investment portfolio this quarter. For example, the joint development relationship with Delphi for HPDI 2.0 fuel injection systems, and the announcement earlier this week that we had reached agreement with Weichai on both the launch of their 12-liter HPDI engine product this year and a newly announced 10-liter HPDI program.

Turning back to Delphi. As we disclosed in early March, together we developed a joint strategy for developing second generation fuel injection components for our HPDI systems. They'll be made in Delphi facilities under an agreement giving Westport control of key production equipment and tooling. This will deliver dramatically lower costs, which we expect we'll be able to pass onto our OEM customers, and in turn this will accelerate the adoption of natural gas trucks around the world.

Initial production capacity that we planned with Delphi is targeting 100,000 injectors per year so if you think of 6 injectors per engine per truck, that would imply a capacity of 16,000 trucks annually. This will be scalable and capital efficient as these markets develop.

With Weichai we're launching the 12-liter engine product now with 30 customer trucks being built now with the expectation that we'll be in a position to begin volume production of trucks in China in 2015. With the newly announced development of the 10-liter engine platform, we will be tapping into approximately 75% of the joint venture's current sales volume.

HPDI will remain what premium product in China but with the HPDI 2.0 components the notional price differential should come down dramatically and we hope to see strong growth in this market.

As I wrap up, 2014 is the beginning of our next phase in development of our long-term vision of high performance natural gas vehicles in markets around the world. We've laid out our plan. We believe Q1 demonstrates that the plan is achievable and will deliver global market leadership of what is emerging as a very large potential business. 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'll turn the call over to Bill now to run through the financial highlights.

Thanks, David and good afternoon everyone. I'll begin with a brief overview of our first quarter results. For the quarter ended March 31, 2014, we recorded consolidated revenue, this is excluding our joint venture revenue, of $41.9 million, compared to $30.1 million in the prior-year period. This is a 39% increase quarter-over-quarter.

Breakdown of revenue by segment is $21.9 million for Applied Technologies, $17.7 million for On-road Systems, $1.3 million for Off-road Systems, and $1 million for corporate and technology investments.

CWI earned $80.1 million in revenues, a 79% quarter-over-quarter increase in revenues. This is on the delivery of 2,480 units which is an 89% increase over the prior-year period. Weichai Westport earned $113.4 million in revenue, this is a 7% quarter-over-quarter increase in revenues, on the delivery of over 9,100 units which is an 8% increase over the prior-year period.

Our consolidated gross margin and gross margin percentage for the first quarter were $12.3 million and 29.4%, compared to $8.1 million and 26.9% in the prior year period. This increase in gross margin percentage for the quarter is due primarily to sales of higher margin product, such as the Westport WiNG product and service revenue.

Research and development expense were $21 million for the first quarter compared to $20.4 million in the prior-year period. Selling, general and administrative expenses were $18.3 million for the first quarter, compared to $19.1 million in the prior-year period, as a result of our cost reduction efforts.

For the first quarter of 2014, our net loss was $23.9 million, or a $0.38 loss per share compared with a net loss of $31.8 million or $0.57 loss per share in the prior year period. Included in our net loss for the first quarter 2014 is our portion of CWI's net loss of approximately $800,000. In the first quarter CWI's operating performance was impacted by $15 million in warranty-related adjustments primarily related to the 8.9-liter ISLG engine, which reduced our overall EPS by $0.08 per share. Excluding this warranty impact, our portion of CWI's income would have been approximately $4.1 million.

The ISLG Engine has generated good cash flows for the joint venture partners. To put things into perspective, The total contribution margin from sales of the ISLG engine has been approximately $340 million, of which CWI has spent an accrued warranty-related cost totaling approximately $165 million. Even with the increase in warranty, this product is still generating cash.

We are confident the CWI team will get the warranty-related items fixed and gross margin and cash flows will improve.

As of March 31, 2014, our cash, cash equivalents, and short-term investments balance was $183.9 million. During the first quarter we used $26.7 million in cash which includes a one-time payment of $5 million for a previously announced joint marketing and sales program related to the acquisition of BAF in 2013.

And the CWI warranty adjustments recorded in the fourth quarter of 2013, this last quarter, reduced the first quarter cash distributions to us by approximately $7 million.

As noted on slide 3, our adjusted EBITDA loss from operations was $1.6 million, compared to a loss of $8.6 million in the prior-year period. Which was an 81% sequential and quarter-over-quarter improvement. This reduction in adjusted EBITDA loss from operations is a direct result of our cost reduction initiatives such as consolidating our 4QVM program in our Dallas facility and our decision to move to the second generation of Westport HPDI.

Our consolidated adjusted EBITDA loss for the first quarter was $22.1 million, compared to a loss of $26.3 million in the prior-year period.

We've been describing the Westport financial plan and our path from a heavy investment phase to overall cash flow and profitability as the shift from petroleum-based fuels to natural gas continues. In the near term, we have communicated specific metrics and milestones so you can measure our progress on adjusted EBITDA. While the path won't be in a straight line, of course, our progress should be very visible.

In that vein I wanted to walk everyone through the way we are looking at the next two years and these financial milestones and how it impacts our cash. We want to make sure it is very clear how these pieces fit and where we have enough cash now to achieve our goals in the future. The key pieces are, on slide 3, you can see we are well on our path to positive adjusted EBITDA through significant organizational efficiencies, product portfolio optimization, and cost reductions in our operating businesses, and with an additional $5 million to $6 million revenue with existing margins and costs we believe we can achieve our stated goal.

Also we have products launching in 2014 and 2015 such as Weichai's12-liter with Westport HPDI, and Tata with WP580 technology that will drive new sales and gross margins. To help the Company drive to its second financial milestone in 2015, with positive consolidated adjusted EBITDA, our corporate investment portfolio and our other expenses including long-term capital investments will be covered by three things. Internal operating income, improvements in the cash contribution from our joint ventures, and three, expense recovery from our development partners.

Obviously we expect that our investment portfolio will continue to contribute to our income stream. And as these investments roll off into production, we have options on the pace of new investments to ensure we can manage to this goal.

As noted on slide 4 we are also investing in new product development at the corporate level. And we have corporate and public Company expenses to cover. We report these in corporate and technology investment segments and you can watch our progress here too. Westport is co-investing with OEMs to develop a portfolio of new natural gas vehicle technologies and related systems and components. We are carefully managing our investment programs and allocating capital to products and technologies designed to deliver high returns in the future.

We are reviewing every project where we are investing money. In the mix of short and long-term product development projects in our portfolio. This is a new path for Westport along a very disciplined steps. We believe our business model can and will deliver great value to our shareholders as this market shift plays out, and we believe the path forward to strong financial returns is now clear.

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

Thank you. We will now begin the question-and-answer session.

(Operator Instructions)

The first question today is from Laurence Alexander of Jefferies & Company. Please go ahead.

Good afternoon. Two quick ones if I may. First, can you give a little bit more detail on what you did to achieve the cost-cutting results that you've done so far? And then, can you also give some perspective on how sustainable that will be and what you can do on the corporate expense line? And then, secondly, on CWI, if the warranty accruals do reverse, does that have any impact on your cash flows?

Nancy, if you want to take on the first question on what we did on --

Sure. In terms of cost cutting and the sustainability of it, Laurence, let me start out by indicating to you there's a cute joke going on in the Company that a new sheriff's in town and guns are blazing. So, understand that we've got the full attention of the organization and we've got the whole organization understanding that calendar year 2014 is critical. I would say our single focus really is on creation of shareholder value and making sure that we're getting full value out of every dollar that we're spending.

So what are we doing? I would say we're doing lots of different things. Some things that are catching low-hanging fruit and other things that are really deep diving. But to give you some idea, and David mentioned this in his opening remarks, for instance, that after the acquisition of BAF we have done such things as consolidated facilities.

So, at this point in time, where we had folks that were in Detroit, folks in Louisville, and folks that were in Dallas, that now has now been thinned down. So, all in all, between last year and this year, we have now closed five -- or we're in the process of closing five different facilities and consolidating that. Now, that came out of also a new process that we'd put in place that helps us with capacity planning -- understanding where we need capacity and how we need to generate that capacity around the world.

So that's -- so I think in those regards you can see that kind of savings will have ongoing effect as we move forward. I would tell you that there are lots of heavy-lifting items such as pricing, policies, and programs, and making tough decisions with the employees, and making sure that we're focused on those events that are going to create value from a shareholder perspective and satisfy our OEMs' need for the natural gas and their quest to participate in this market.

I would tell you, at this point in time, that we have clear expectations relative to each employee in the Company of how they are contributors to the positive profit of this Company. And continuing communication, whether it be through town halls, other events with employees to make sure that everybody is fully focused on creating value and making good decisions and raising decisions so that we can make them in a swift, fast fashion. Okay?

I think I'll take on the second part of the question regarding if there is a reversal. The way the warranty process works, it's more of a historical perspective and trying to project forward. If they start seeing improvements in the warranty history, that would naturally result in a lower future projection of our warranty cost and would most likely result in a reversal of a portion of that accrual. And that would ultimately trickle down to the bottom line. And then, the way the joint venture agreement's written, the Board looks at declaring -- potentially declaring dividends on a quarterly basis, and so that would naturally transition in the cash flow to Westport, if that was reversed.

Just can you specify how much potential dividend is currently bottlenecked at the JV level?

Say again?

Can you just quantify how much of a --

I think we've got about $90 million.

Of potential dividends? Okay. Thank you.

Well, that's what's hanging up on the balance sheet right now.

Right.

The next question is from Vishal Shah of Deutsche Bank. Please go ahead.

Hi. This is Susie Min for Vishal Shah. Thanks for taking my question. I wanted to dig in a little bit on applied technologies. I know you had mentioned Italy was weak, but this is typically a steadier business. So, one, I guess I wanted you to elaborate a little bit more on how you see the year for applied technologies and is the lower margins a reflection of the China mix that you talked about. And then I have a follow-up question.

Well, let's see. Let's talk about ATG. The automotive component, as you know, Fiat, if you look at the European market, you know that Fiat's had a relatively weak first quarter. One of our biggest customers, obviously being an Italian company, living in Italy, and that market is Fiat. What we have there is, they have gotten a bit cold. We got cold with them.

Now, the interesting thing is that we are seeing a real good, sizable uptick in the China market, and also in Russia, as David mentioned in his opening comments. I think from the ATG it's all, again, about making sure that we're getting new products out. We're serving the market from a global perspective, so we're now reaching into the US and other markets with our components. And we're finding that we're getting success.

Now, a lot of that is that we are priming the pump at this point in time and those sales will be coming down the road. But, as we talked about with Tata, we've now got the 580 controller on that. That's a positive step, and we're seeing similar steps along the way. But, at this point in time, unfortunately we don't have any real giant steps at the moment. But it's a continuation of real strong small steps and success with multiple OEMs.

Okay. And, in terms of China revenue contribution to applied, can you just maybe give context whether it'd be a percentage or how much growth you're seeing maybe quarter over quarter?

I don't know that I have that number. I could tell you that, as I look over the Italian operations, year over year we're seeing something in plus 50% growth, but I don't have specific numbers that I could give you in terms of where -- what it specifically looks like. We have a variety of different customers and certainly China's one of the markets that is fully embraced on this natural gas technology. But I don't have that number at hand here.

Okay. So, I just want to make sure, we shouldn't interpret the fact that the margins have declined due to just greater exposure to China and potentially lower profit margins.

I guess I wouldn't say that. I would say that there's -- the product mix is changing, as we talked -- we got controllers and we got other components. So, with the product portfolio of mix I think that, that's part of what you're seeing in Quarter 1. But I wouldn't say it's a regional remix of volumes.

In fact, I would say, in the China market with the customer base, there is real high focus on high-quality parts and making sure that we have good manufacturing systems and those kinds of things. So, the criteria in China actually -- as we were working with one of our OEM customers, actually really set a threshold higher than that, that we had for some customers that were in Europe.

Okay. Great. Thanks for taking my questions.

The next question is from Jerry Revich of Goldman Sachs. Please go ahead.

Good afternoon.

Hey, Jerry.

I'm wondering if you could talk about what proportion of current Weichai Westport sales are for LNG versus CNG applications. And then, if you could help us get a sense for the product that you're launching -- are you going to be using SER to meet the NS4 standards? Just more color there would be helpful.

I don't know that I could do that NSR4 standards for you. But, let me try to see if I can answer the LNG, CNG. As you know, what we're finding in the China market, LNG is really, at this point in time, on the rise and I think that what you see in major metropolitan areas is still CNG. But, with the complex rule outlay within the China market, LNG certainly plays a very, very strong position in that market. And so, a lot of the growth that we're seeing in terms of infrastructure, as well as customer demand, happens to be on the LNG side.

So, at this point in time, I would say that the fulcrum on the teeter-totter is now leaning a bit towards the LNG side. But, in major metropolitan areas, just because of fueling infrastructure, we're still seeing CNG being the preferred technology. So, on busses and applications like that, it's still on the CNG. But, as we get into the trucking out into the third- and fourth-tier cities, we're certainly seeing a strong pull for LNG.

Okay. And, I apologize, second part of the question -- are you going to be using SER systems on HPDI engines in that market or are you meeting the engine regulations?

(multiple speakers) The short answer is, no, for the Weichai systems. They're certified to Euro 4 and we don't need SER.

I think that right now, for the HPDI, we're going for Euro 5.

China 5.

Is it China 5?

It's China 5.

Okay. And, at this point in time, our goal would not to have to use that, out of cost and performance, and we think that we can achieve those without that. But we have to get through all the certifications, I think, before we declare a victory on that.

Okay. And then, in on-road systems, can you talk about how much of the 900-unit iCE PACK order that you achieved you shipped in the quarter and just touch on additional order prospects there, if you could?

I would say the answer is, no, I won't comment on how many. I would tell you that our number of customers is climbing. We're getting quite interesting feedback from the market. And we're finding that -- quite a bit of interest from a variety of different constituents: truck owners and, I'll say fleets, all the way to OEMs. So we're now not just seeing individual people buying it, but we are seeing a lot of interest from a fleet perspective. And, because of that strong fleet perspective, we now have the OEMs asking about how we could create collaboration.

Okay. But, maybe you could touch on if bookings were in line with shipments this quarter or ahead, below, just give us a rough sense?

I would say that for a product that's out of the gate, we're pleased with where we are.

All right. Thank you.

What we've said in the past, Jerry, is the 900 was split over two years with universal LNG. And it was a pretty even spread, so the 450 this year -- I don't think -- you get a bumpy shipment level by quarter, it's not a straight line, but it is more or less spread throughout the year.

Thanks, Darren.

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

Hi, everyone. Just wanted to start with Weichai and the commitment to HPDI. Just thoughts -- I guess thoughts on your end but also thoughts if Weichai has expressed kind of how they see the mix between HPDI and Spark as the market develops going forward.

I would say that it's interesting, because you can see, based on the volumes that David discussed that obviously the Spark Ignited is a big seller in the market. And the numbers -- as I talk to many people, people continue to be quite surprised with how robust the China market is for this particular product. At this point in time, because we're right now in the initial phases of getting customers into the truck and getting performance characteristics and getting their feedback on the performance and it's -- how it performs relative to torque and power compared to diesel and that kind of thing, we're getting, I'll say feedback now, that's indicating that it does have great potential in the market.

Giving you an exact split is tough for us, at this point in time, because we're working with several OEM partners as we move this engine into their fleets. And so it would be really inappropriate for me now to try to delineate what their specific plans are.

Understood. I guess I was just looking for your thoughts, but that was helpful. Maybe another way to look at it, just to frame the overall opportunity -- can you just remind me of what the diesel sales are of that -- of the WP12?

I have the report. I've got the Weichai after the earning call. I don't know that I'd know that right off the top of my head. I can take a look at it. But --

I think, Eric, in the past, they sold several hundred thousand, in the neighborhood of about 400,000 heavy-duty truck engines. And I think the data point we've been using is that, roughly 70% -- 75% of the engine sales of 10- and 12-liter in the joint venture are natural gas, and the 10- and 12-liter which is where HPDIs aim. I think you probably -- instead of maybe looking at the whole diesel market, you can probably get a way more accurate proxy for natural gas adoption for HPDI on that level, given, again, just the 70% of the track record right now running this year on 10- and 12-liter sales of natural gas. It's going to be whatever HPDI can add to that.

In their first-quarter announcement, there isn't anything that I could provide further clarity on, and that's not a number that I'm normally served with on that side.

Okay. Fair enough. Maybe just one last one on Weichai. Just to clarify. It sounds like it, but the Delphi agreement, with Weichai coming on, going forward, there's -- the agreement's in place that it can be more than 100,000 injectors a year.

Yes. Obviously, Eric, we published a number because we're, let's say reasonably confident that we've got that kind of demand profile and so that's what we plan for. And, it's not just Weichai, obviously we're launching HPDI engines with Volvo and working with other (multiple speakers) --

That's my point. That's 100,000, but that's a number that we could see move up and you could do that fairly quickly in response to Volvo, Weichai, and other HPDI 2.0.

The whole point of the alliance with Delphi is to take advantage of their global scalability and their ability to deliver those volumes. Obviously, we need some notice. Doesn't happen overnight. But this gives you an idea of the scale we're planning. It's sizable. We think it's a material -- it's a very interesting number to the industry.

It says that natural gas, and HPDI in particular, I think, is coming. And there's plans to actually deliver it rather than just do the market demonstration stuff that we've been doing the last few years. So, yes, it's a start. Certainly neither of us -- neither Delphi or Westport -- want to throttle the market at 100,000 injectors a year.

As demand rises, and as new products hit the market, we'll want to build that supply chain. But we can build it intelligently, and with some certainty of the volume that we need, and with reasonable allocation of capital.

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

The next question is from Rob Brown of Lake Street Capital Markets. Please go ahead.

Good afternoon. Could you give us a little more color on the 12-liter demand ramp, kind of where you're at? I know you won't give us units, but maybe a sense of how that's ramping relative to sort of when it started last fall. And, do you see that on track to kind of hit that 4% to 5% penetration rate this year?

Hi, Rob. So, Darren's waving his hands. I think that it doesn't take a lot of arithmetic to look at CWI's sales performance this quarter. We're quite happy that the demand is high, a big part of that demand is the growth in the 12-liter. 12-liter demand is right on track for what we've said. We said last year trucking sales were about 1.7% of the market. Around 3% to 5% is our expectation for this year.

We aren't subscribers to some of the crazy numbers we've been hearing from some people, but we think 3%, or on kind of the same scale as last year -- we'd be looking, say, 6,000 engines, between the 9-liter in trucking and the 12-liter. Some 6,000 to 10,000 is kind of the path we've been suggesting is realistic, given the pace of infrastructure, the pace of adoption in fleets, the demand that we're seeing. So, we think that's quite credible, and product's doing quite well.

Okay. Good. Thank you. And, on your new development programs that you've sort of been working on but haven't given us color or announced them, when do you see products entering the market in that group of projects? What's the next key product launches in that group, roughly?

As we said, it's a bit of a portfolio. We've actually uncovered a lot of this, as you've seen. The Weichai 12-liter engine is going to be in production this year. Volumes next year. The WP580 automotive product that started with Tata is in production this year. LNG tenders for the rail business, we're starting to sell those and deliver those now. So, a lot of these investments were early on in 2012. I think, as we look back the last couple of years, the 2012 announcements started with Volvo and Caterpillar. We have specific dates for those products hitting the market, and then a sequence of others.

I think you're starting to see the product delivery coming out of that heavy investment cycle that we've been under for the last two years. But the bulk of them are going to be 2015, 2016, 2017. Locomotives, it's gone very well, actually. The industry interest has been surprisingly high. The first locomotive, though, on test is going to be going to CM this summer. So, this is still fairly early stages, and I think EMD is still looking at a 2017 launch for that product. But there's still development to be done and a lot of work to deliver.

That said, we think it's a very promising opportunity and, obviously, a great partner, and a financially viable path, where a lot of the costs have been paid for by others. So, you can run through that pie chart and I think come up pretty quickly with how we've allocated these and get a sense of how we expect the returns to play out. But these are large markets, with global partners. I think we're going to do quite well.

I think, Rob, we've taken a lot of heat for -- in the end of last year, when our HPDI 2.0 release, we've named four of the partners we're working with and three of which were unnamed. And I definitely understand people are very interested to find out the names of these parties. But I do want to communicate how important it is that these programs are moving forward through their development process. So, despite the fact we -- frankly, at our OEM partners' request -- have not disclosed their name, these programs are moving forward.

And so, by the time these OEMs are comfortable with disclosing the nature of their development and product, it will be that much closer to what might be an actual product available. So, that just might be one point of clarification around some of these investments and OEMs' programs we're doing.

Okay. Great. That's good color. Thank you.

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

This is Winnie asking a question on behalf of Alex. In terms of pricing, how much does the HPDI 2.0 engine cost compared to the other engines? In the Weichai and (inaudible) joint venture? Presumably it's more expensive, but I was just interested in the size of the pricing premium for the engines.

I'm not sure why you'd say it'd be more expensive. Actually, we've dropped costs pretty substantially. Again, for OEM confidentiality purposes, we've never given out prices. What we have said is that ASPs are going to be $20,000 to $40,000 for the HPDI system, obviously that applies to the HPDI 2.0 systems with LNG tanks and pumps and all the on-engine systems. So, the price to the OEM, which is the revenue we would see, is between $20,000 and $40,000. And, no difference, really, in the parts that are going to Weichai or Volvo, frankly. There's very high level of overlap. Some localization may change some pricing, and shipping costs, and things like that. But, in general, you should use that $20,000 to $40,000 range, which I realize is a big range, but we can't disclose exactly what's going on for obvious reasons.

Okay. Great. Thank you. And then, just a follow-up. Can you comment on the uptake for the 12-liter engine produced by the Cummins Westport joint venture? How would you say volume is tracking there versus expectation?

I think we just --

Answered that.

Answered that one. The numbers that we've given out publicly around trucking -- we don't break it down by individual engine product. But we have said, in the trucking business, it was about 0.7% two years ago, it was 1.7% of the market last year, and we're expecting it to be 3% to 5% this year. I think the infrastructure development has been very encouraging, and the fleet response to 12-liter has been very good, and early customer feedback is good. So, we don't see any need to change that outlook at this point.

It's going as we expected, Winnie. I think, as David made the opening -- or one of the remarks to another analyst, that there's been some pretty wild expectations out there, but it's, so far, going to our expectation.

Okay. Great. Thank you.

The next question is from Carter Driscoll of Ascendiant Capital Markets. Please go ahead.

Maybe just a follow-up on the [DSD] question. Could you maybe share with us what you expect, maybe percentage-wise, to sell into the JV versus outside of it?

Fair enough, Carter. If you're talking about HPDI with Weichai, the system is basically broken down where a lot of the on-engine system pieces are going to the Weichai Westport joint venture, and a number of the off-engine systems, like tanks and some pumps, may go, in some cases, directly to the truck OEMs.

We can't break down, because in essence the question would be: What's the breakdown between on- and off-engine system? And, unfortunately, today, for competitive reasons, what we can provide is this $20,000 to $40,000 for a one-tank system average. And just, unfortunately, today, what we can say is, some is going to the JV and some is going to the truck OEM -- and that's the answer we have to give you today, Carter. Sorry.

Fair enough. You talk about maybe some of the factors that would push forward or push back the production in 2015, the same types of things you faced with the 12-liter engine in the US, could you qualify what [movement] in the quarter for the back order?

I think that I'll add one thing and Dave will add in too, Carter. The one thing about China that gives it a tremendous advantage over the North America market is infrastructure. I think right now there's several thousand LNG stations available in China versus a much smaller number in North America. So, the first point being is there's lots of places to fill up -- and I'll hand it over to Dave for any other challenges or potential impediments we might run into.

Darren said it. Remember, we're building on an existing market already. The JV did -- I'm looking at Bill -- 38,000 engines last year?

Yes.

40,000 -- just round it up -- and they've just announced -- the JVs announced that they're increasing capacity to 100,000 engines a year. Typically 70% of that is going into the truck business. So, you can get that sense, last year, there was probably 30,000 natural gas truck engines shipped, just out of the JV. So, there's a lot of existing customers. There's a lot of existing infrastructure. And the take-up for HPDI, therefore, should be that much easier.

The obstacles around building customer satisfaction, with shifting from diesel to gas, all the questions about where we refuel, all of those things are much more straightforward now in China. We want to get the US market and the European market to that same state. That's going to take some time, which is why we're trying to mute some of the wilder expectations on market adoption, but we do think this is an inevitable trend, and growing the truck business 100% this year is not unrealistic. That's the low end of what we see. So, over the next few years, this will all develop. We just think that the work that's been done by the JV in China is creating a ready-made market for HPDI and we should see rapid take-up for that.

Okay. And then, maybe just if I could shifting gears a little bit, the WiNG program -- I know you're not going to be giving out units anymore, but is the expectation consistent with what you had hoped into this year? And then, I'm assuming it's still heavily dominated in bi-fuel, that's the majority of your offerings, but is there any update for the CNG-only products?

I think a big part of what we've done is to build that product portfolio and combine the two businesses for the last few months. So, I'd say that's been the overwhelming focus. Volumes are up. The businesses are profitable -- the two businesses together are profitable, which is good. I think we just saw an announcement on the F150 availability and certification in California. These are new products that I think are going to do well. So, I don't think, again, this is something that we can say is going to be a billion-dollar business. It's all about building the demand so that we can start to see production on the line with a Ford and others as we see the fleet demand for natural gas develop. So, slow and steady, but the idea is to build a profitable base that we can grow from, and I think we've done that.

I think, Carter, also, next week at the ACT conference in California, I think there might be something to see there. So, if there's -- if you're interested, you should come by the ACT conference in Long Beach, California, next week.

Thanks, Darren. I'll pass it along, guys. I appreciate your time.

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

Can you just walk us through the current debt? It looks like you've got about $53 million, some of that's a revolver, but your plans for refinancing that and when we should expect timing on that.

We are thinking about refinancing the current debentures, which are slated to mature in mid-September. So we are in the process of evaluating our refinancing options.

Okay.

(multiple speakers) remainder of the debt, Colin, is largely at our subsidiary level, but I think that's just going along and being serviced. It's got a very low interest rate, but it's also in Italian banks. So I think we're focused, as Bill said, on the refinancing of the current debentures that (multiple speakers) --

All right. So, we're just looking at that $32.5 million is really what you guys are working on now.

CAD36 million, which is, US, is it $32 million?

It's about $34 million, yes, (multiple speakers) --

Okay. We're in the range there. Okay. And then, just in terms of cash from operations, it looks like you're mining the balance sheet a little bit in terms of paying down receivables and payables. How much more of that can you do, do you think? Is there some additional cash you guys can start pulling out of the balance sheet over the next few quarters?

I would say that, from an operations side, I think it's a large focus and a project that we've kicked off on lean manufacturing. And, as you know, one of the elements of lean is to look at material needs and making sure you're ordering what you need and only have on hand what you need. So, I think that, from that perspective, in Italy and elsewhere, in our larger operations, lean is a focus and it is now formal projects kicked off in that sense. I'll leave it from an operations sense there, and hand it to Bill, from a --

I think it's just becoming -- focusing on more efficient working capital, looking at days sales outstanding for receivables, looking at our payables, of course as Nancy said, looking at our inventory and more effectively managing that. So, we're focusing on more effectively managing our working capital throughout the entire Company.

And how big an opportunity do you think that is for you guys? Is that a $10-million opportunity? $20 million? More than that, once you (multiple speakers) --?

I can't quantify that for you right now, because, as our business continues to grow, those ratios are going to change.

Okay. And then, just one final one. You set some very clear EBITDA targets and are making steady progress towards those. How much optionality do you have in terms of gross margin increasing or reducing SG&A relative to sales, if we see slower or faster adoption on the technologies, for reaching those EBITDA targets? Is there much toggling that you can do or should we be thinking about a target model all-in as we go forward?

I would say that, certainly, as you know, gross margin and profit is obviously the focus and, as I mentioned earlier, as we look at shareholder value, those are obviously key metrics for us. So, I would say, looking all the way through the chain relative to understanding what we need to do from the supply side, what we need to do from our own manufacturing side. And then, of course, what kind of overhead do we need in order to support the businesses.

And I think what we are finding is, is that by using our operations around the world, we're getting some global synergies by breaking down some businesses and allowing those businesses to support other businesses globally. So, I would say that, from my perspective, part of our issue is, as we introduce some new products, depending on where they are in their life cycle -- some have very high margins than others -- so, some of what you're seeing, in some cases, on gross margins, is a mix issue and those kinds of things. But, I would say, we're working hard at it and our expectation is to make sure that we're getting the best margin out of the business as we possibly can.

Okay. I've got some follow-ups, but I'll take them offline. Thanks so much.

Next question's from Matthew Blair of Macquarie Capital. Please go ahead.

Hi. Good afternoon. I wanted to touch on the very good gross margins of 31% in the on-road segment. Can you walk us through where the uplift is coming from? And also, the wording in the release makes it sound like it's pretty sustainable. Is that a good number to use going forward? Thanks.

I would say that the gross margins that we have there, on the on-road business, obviously, is coming from a combination of a variety of our different business portfolios. I would say that, yes, we continue to look at our gross margin and that's one of the areas that we have very, very laser-focused actions on in order for us to maintain and to grow that.

I can't, at this point in time, pick out one or two items that I would -- I could contribute to it. I think it's a whole bunch of things that we're doing that is contributing on that front.

I think, at least it's reasonable, Matthew, for example on iCE PACK, because it is a new product. As you know, with pretty much every product we ever launch, you do typically take a reasonably conservative warranty accrual margin on the product you launch.

So that -- what might come into play as that product sells, it's a simple mix on percentage, right? You're selling more iCE PACKs at a lower percentage. That may have an impact. But, otherwise, the other products, they're businesses which are more mature.

15-liter and --

Yes. And then, 15-liter, there's definitely -- the first generation of HPDI, by, frankly, not having that in the mix, it allows the rest of the business to show a very good gross margin.

So I think, other than product mix, Matthew, I think it's most of these products. Frankly, between ServoTech, BAF, Volvo, a lot of those are fairly mature products, actually. There's a number of them out there. The only possible impediment to sustainability would just be a simple mix of newer products with a conservative margin. That's all.

Great. Thanks. And then, I also want to clarify something on the HPDI 2.0 systems for Weichai and Volvo. The ASPs of $20,000 to $40,000, that includes the fuel tanks, right, the off-engine components.

One-tank system.

A one tank.

One-tank system average.

So, if the truck OEM goes through a competitor for the LNG tank system, then the potential revenue and profitability to Westport might be a little bit lower than that $20,000 to $40,000 number?

Honestly, we work with lots of people who manufacture LNG tanks. Let's be clear on that. But it is a Westport system spec and a design that has to take the LNG pump that we also spec. We'll work with anybody who will manufacture to our spec.

Clearly, we want to localize LNG tanks in China to avoid shipping costs and to take advantage of lower costs. But it's still going to have to be our spec. And so, how it gets sold and how the margin gets shown, we would expect to be the same, no matter where it comes from and no matter who makes it. Whether the OEM has a preference or not, in China, again, that's something we're happy to work with.

We want to work with a supply chain that can deliver the volume and deliver the quality that we need for the system. But it does have to be an HPDI tank and supply the engine with the fuel-flow rates that we need. So, as it stands, we would expect all the systems in China to be in that $20,000 to $40,000 ASP no matter who the supplier is.

Okay. Thanks.

Next question's from Pavel Molchanov of Raymond James. Please go ahead.

Thanks for taking the question, guys. Want to go back to gross margin, but in relation to Weichai specifically. So, you're now shipping almost 10,000 units a quarter and yet your gross margin seems stuck in the mid-single digits. Is there anything that, realistically, that can change that? Because it seems like sort of a profitless prosperity scenario.

As we all know, China's a very, very competitive market. A lot of it's over pricing. And we support Weichai's competitive pricing because we look at the benefits of eventually being a supplier to the joint venture for our technology, whether it's HPDI or being a component supplier to their existing SI systems. We don't get overly excited by the low margins because we look at where, really, the value and the opportunity is for Westport as being a supplier. Because they are creating the market and, ultimately, creating the market for us to be able to sell our technology and components. And that's where we're going to make our returns.

Okay. When you guys gave guidance for your consolidated revenue at the beginning of the year, I think you were very prescient, in retrospect, saying that you don't expect the Vtech to come back at any point until the end of the year. Do you think there is any prospect of it returning, period? 2015 or beyond?

I could speculate, but let me deflect it back and say, we've said for years, with all respect to all of our friends and partners that are looking for government programs to accelerate the adoption of gas, those are all good ideas. But we can't let our business model depend on that, because as you just said, it's unreliable. The timing's unreliable. The political will is not always there.

We're certainly seeing the advantages of incentives. It's not just a US factor. There are incentives in lots of markets around the world. And those are always very helpful, but they're also fickle. Honestly, we have really downplayed any of these incentives. And, if anything, they help build infrastructure, they help build partnerships. But the tax credits that we've seen, to date, I don't think have been what's been driving the interest in the market.

The long-term interest is going to come from the fundamental economic laws of the cost of natural gas versus the cost of oil. So, we think we need to build on that. And if and when -- we see tax credits come and go. They might give you a temporary bump, but it's not what we'd see part of our sustainable business.

So, we really haven't modeled any of it. We don't pay a lot of attention to it. And, if it comes, it'd be a good thing. And if it doesn't come, I think we've got a plan to get around it. So, I realize that doesn't give you a direct answer. But, honestly, that is how we look at it.

Okay. Fair enough. Appreciate the color, guys.

Thank you. Next question is a follow-up from Jerry Revich of Goldman Sachs. Please go ahead.

Good afternoon, this is Matt on behalf of Jerry. Going back to Cummins Westport, can you touch on a little bit of the driver of the sequential decline in shipments so early on in the 12-liter product cycle? Second, maybe from an accounting standpoint, in the quarter, it looks like Cummins actually reported a slight positive net income from the JV this quarter, while you're showing a slight loss, maybe touch on what's driving the disconnect there.

First of all, we can't comment on specific unit volumes for each of the individual products. We're very happy with the uptake in the 12-liter. We're seeing good progress in that and very good feedback. I can answer the question on the difference in what Cummins reported and what we reported. I think we talked about it before. There's usually about a one-month lag in terms of what's picked up in Cummins' financial statements, their share of income versus ours which reflects the full quarter.

And just on the unit comment -- not asking to go into details, but just in general, the sequential decline, is that a seasonal effect or is that --?

Honestly, we don't disclose 12-liter sales and I don't think Cummins does. The information available --

Talking about unit shipments, Q to Q, don't forget there are multiple engines in that unit count and, last quarter, there was quite a nice shipment.

International.

Of the international engine. Those kind of bias the numbers. I think a better reflection, frankly, is the year over year in this case, because a year ago we didn't have the 12-liter in Q1. This year we did. And so you see an 89% increase. That's, I think, more reflective.

We're actually quite happy with shipments of the 12-liter. We really only had one full quarter of shipment of the full 400-horsepower rating last year, and so this is really only the second quarter and shipments are just fine. So I wouldn't read too much into the unit count. That's just product mix.

Thank you.

The next question is another follow-up from Laurence Alexander of Jefferies & Company. Please go ahead.

Two more quick ones, if I may. Did you ship the remaining three tender cars in Q4 -- sorry, in Q1?

Not yet, Laurence.

Are they still expected to be shipped?

Yes.

Okay. And, secondly, you used the word muted a few times this call and so I guess I just wanted to check on something. As you think about your bridge to cash flow positive over the next few years, yet in the past you've talked about a, call it a 30% sales CAGR. Would that suffice for you to get to the free cash flow positive, or do you need to do better than that?

No, and that's exactly what we're trying to say, Laurence, is we're very happy with 30% compounded. And yet we find a few people disappointed that it's not 100% year-over-year growth. So we're trying to tell people, this is a slow and steady wins the race sort of game. This is going to take some time.

People need to build their fleet plans. These are big capital expenditures. They're building infrastructure. 30% a year is actually pretty hectic growth for this industry. But we have seen people come out and say: Well, we're really disappointed that you're not at 20% market penetration already.

So, that's what I meant by muting expectations. We just need to have people be a little more realistic about the pace of change that's required in an industry that's this big and this complex. So, yes, I think 30% is realistic. It's what we've traditionally built our business models on and, over time, that CAGR is going to add up to very big numbers.

Last thing, Nancy, you did a rare joke on this call about the guns a-blazing, the sheriff in town. What's your read on the cultural change at Westport and how far are we in -- whether like three innings in the nine-inning game or whatever sports metaphor you prefer to use?

Okay, so maybe I'm into knitting or something. I don't know. Sports, maybe not. I would say I think that from where we are in terms of the organization, I would think that, in the day-to-day vocabulary, you'll hear a lot of words around execution, responsibility, and accountability. So, I would say, those are all terms that are now common in the dialogue.

I would say that where we are -- I think that we have turned the corner. I keep on telling people that one data point is we had Quarter 4, this is another data point and when we get to three data points we can call it a trend. I think that, from my perspective, we're well on our way. We still have a lot of heavy lifting to do and -- but we have a very engaged and enthusiastic workforce around the world, and I see them very much backing what's going on. And I see them excited about seeing things that are moving us in a very positive direction to attract new customers and to advance this particular industry.

Thank you.

This concludes the time allocated for the question-and-answer session. I will now turn the call back over to Mr. Seed for closing comments.

Thanks, everyone, for your you attendance. And we do look forward to seeing everyone, at this point, estimated around late July, for what would be the second-quarter conference call.

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