Westport Fuel Systems Inc (WPRT) 2014 Q2 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Westport Innovations Inc. Q2, financial results conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. (Operator Instructions) I would like to turn the conference over to Darren Seed, Vice President of Investor Relations and Communications. Please go ahead.

Thank you and good afternoon. Welcome to our second quarter conference call for fiscal 2014. It's being held to coincide with disclosure of our financial results earlier this afternoon. For those who have not 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, Ashoka Achuthan, 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 on 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. Q2 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 our focus on market creation and proof of our technologies, to product development, sales, 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 just reiterate those for you and I will focus my remarks on those topics.

Number one, positive adjusted EBITDA from operations by Q4 2014, and continued profitable growth in our joint ventures. Number two was careful management of our investment programs to ensure that operational cash flow from Westport direct sales as well as our joint venture dividends will cover investment by the end of 2015 and allow Westport to achieve overall consolidated positive adjusted EBITDA. And third we have to deliver on contractual commitments to strategic partners and key OEMs to develop attractive new customer relationships and continue to help removing barriers to rapid adoption of natural gas as a transportation fuel around the world. Moving to slide six, I'm very pleased to report that our team has delivered on the first strategic goal two quarters early with a strong move to positive adjusted EBITDA from operations. As you can see from the graphic, there's been a consistent adjusted EBITDA loss of around CAD9 million per quarter from operations over the last two years.

Last quarter, we achieved a step change to a CAD1.6 million adjusted EBITDA loss from operations and this quarter we achieved a CAD1 million positive adjusted EBITDA on roughly the same revenue base. I'm very pleased that we are able to deliver this milestone ahead of schedule and I now want to expand our guidance by confirming that we intend to achieve full year positive adjusted EBITDA from operations this year in 2014. Now, let me remind you that our existing guidance calls for revenue of CAD175 million to CAD185 million this year, excluding our joint venture, of course. Despite political uncertainty and macro economic challenges in many of our key markets we believe this is still realistic and we see continued growth from our existing product portfolio.

New product such as the Weichai Westport WP12 HPDI system, the Westport WP580 engine management system, new models of Ford and Volvo vehicles, and the iCE PACK LNG tank system and LNG Tenders in the rail business will deliver platforms for future growth in the operating business. Now turning to the corporate and strategic investments on slide seven, as you know, Westport's co-investing with OEMs to develop a portfolio of new natural gas vehicle technologies and related systems and components.

Since 2012, we have invested over CAD239 million into these development programs in three major application areas; global trucking, automotive products and off road applications such as rail and large mine trucks. We have also allocated a portion of this investment to Advanced Engineering and Capital Expenditures. Now these investments typically have a three to five year development cycle from the start of development to actual sales. We are carefully managing these programs and allocating our investment capital to products and technologies that are designed to deliver high returns in the future, of course, as this market develops. Much of this expense is going to be incurred in 2014 and 2015 and with development of this broad portfolio of vehicle components which includes spark ignited, dual fuel, and HPDI engine systems, for applications from forklifts to locomotives, and with fully integrated intelligent fuel supply systems for CNG and LNG applications, we believe we will be in a unique position by the end of this cycle to support virtually any OEM natural gas vehicle program in the near to middle term.

We think it's important that in this next phase of the development of natural gas transportation, we have significant flexibility as markets and our customers gain experience with this new fuel. We need to balance investment in future product and technology with commitments from customers and partners, and sales from existing products. By that definition, really, this is the adjusted EBITDA positive that we have been talking about and we intend to hit this balance point by the end of 2015, as I said earlier.

Now let me wrap up by reiterating that 2014 is the beginning of our phase in the development of our long-term vision of high performance Westport natural gas vehicles in markets around the world. We laid out a plan. We believe that the last two quarters demonstrate that the plan is realistic and working. I firmly believe that Westport and our shareholders are in the right place to take advantage of this global growth opportunity. Thanks for your continued interest and support and I will pass the call to Ashoka to run through the quarter financials. Ashoka?

Thank you, David. Good afternoon, everyone. As David just mentioned, the second quarter of 2014 marked a significant milestone for Westport, as we recorded positive adjusted EBITDA of CAD1 million from our operating business units, two quarters ahead of guidance. As noted on slide nine, this compares to a loss of CAD8.9 million in the prior year period, and a loss of CAD1.6 million in the first quarter of this year. This year-over-year sequential improvement in adjusted EBITDA is the direct result of increasing our operational efficiencies, optimizing our product portfolio and controlling our expenses.

I will now provide a brief overview of our second quarter results. For the quarter ended June 30th 2014, we recorded consolidated revenue, excluding joint venture revenue, of CAD40 million, compared with CAD34.9 million in the prior year period, a 15% increase. The breakdown of revenue by segment is CAD24.8 million for applied technologies, CAD11.6 million for on-road systems, CAD1.5 million for off-road systems, and CAD2.1 million for corporate and technology investments. Our consolidated gross margin and gross margin percentage for the second quarter were CAD13.6 million and 34%, compared to CAD8.3 million and 23.8% in the prior year period.

This increase in gross margin and gross margin percentage for the quarter is due primarily to product mix, service revenue, and our exit and production of the first generation of the Westport High Pressure Direct Injection or HPDI system. Research and development expenses were CAD18.7 million for the quarter, compared with CAD23.9 million in the prior year period. Selling, general and administrative expenses were CAD16.2 million for this quarter, compared with CAD20.9 million in the prior year period. These operating expenses decreased as a result of prioritization of investment programs and our exiting the first generation HPDI system.

For the second quarter of 2014, our net loss was CAD35.4 million, or CAD0.56 per share, compared with a net loss of CAD33.9 million, or a loss of CAD0.61 per share in the prior year period. Included in our net loss for the second quarter 2014, is an unrealized foreign exchange loss of CAD8.6 million, compared to an unrealized foreign exchange gain of CAD3.4 million in the prior year period. Excluding this foreign exchange loss on gain, Westport's net loss for the quarter was CAD26.8 million in 2014, versus a loss of CAD37.3 million in the same period in 2013. This represents a 28% improvement year-over-year. Moving on to our joint ventures, Cummins Westport Inc., generated CAD79.6 million in revenues during the quarter on delivery of 2,479 units which is a 9% decrease over prior year period.

This decrease is primarily due to the timing of international orders which are typically uneven over quarters. Shipments in North America for trucking applications, however, increased by 22% for the quarter, compared with the prior year period, as a result of the strong demand for the ISX12g. During the second quarter, CWI's operating performance was impacted by CAD10.2 million of quantity related adjustments primarily related to the 8.9-liter ISLG engine which reduced our EPS by CAD0.05 per share.

Excluding the warranty impact, our portion of CWI's net income would have been approximately CAD3.7 million instead of CAD400,000. The CW team has made significant progress in identifying and resolving these warranty issues and we expect gross margins and net income to improve significantly in upcoming quarters. HI Westport Inc., our other joint venture, generated CAD133.1 million in revenues during the quarter on delivery of over 11,000 units which is a decrease of 11% over the prior year period.

This decline in volume is primarily due to softer macro economic conditions, credit tightening, and higher natural gas prices in China. Westport, however, continues to investment in China to capture the significant market opportunity there with the launch of the Weichai Westport WP12 engine featuring Westport HPDI technology, the sale of Westport components to the JV and other vehicle OEMs, and the expansion of other product offerings with differentiated technology.

As of June 30th, 2014, our cash, cash equivalents, and short-term investment balance was CAD168.8 million. During the second quarter, cash used in operations was CAD28.9 million, compared to CAD23.1 million in the first quarter of 2014. This increase of CAD5.8 million is primarily due to investments in working capital to support product sales of products, such as the Westport iCE PACK system, offset by lower operating expenses and lower spending on investment programs. At the end of the June, we extended the maturity date of our 9% unsecured subordinated debentures to September 15th, 2017, and secured an additional CAD19 million of debentures on the same terms, bringing the total outstanding debentures to CAD55 million. We continued to make progress towards our goal of consolidated positive adjusted EBITDA by the end of 2015.

As noted on slide 10, for the second quarter of 2014, our consolidated adjusted EBITDA was a loss of CAD17 million, compared with a loss of CAD27.8 million in the prior year period. An improvement of CAD10.8 million or 39% year over year. To achieve this goal of consolidated adjusted positive adjusted EBITDA by the end of 2014, or 2015, I'm sorry, we will manage spending on corporate and technology investments so that by the end of 2015, such spending will not exceed the sum of one, our income generated by our operating business units, two, the earnings from our JVs and three, contributions from our program development partners. We are carefully managing our investment programs and methodically allocating capital to products and technologies designed to deliver attractive returns in the future. We believe this model will deliver great value to our shareholders as the market shift to natural gas inevitably plays out.

As outlined in the press release, we have added a new goal. While the path may not be linear, we expect that our operating business units combined will obtain positive adjusted EBITDA for the full year ended December 31, 2014. To conclude, we are recreating our revenue guidance for the year 2014 to be between CAD175 million and CAD185 million, which represents a growth of 7% to 13% over 2013. This growth will be primarily driven by sales of new products, such as the Westport iCE PACK system, the Westport WiNG power system on 2015 model year vehicles, the Weichai Westport WP12 HDPI system, the Westport WP580 controller, and component sales to new OEM customers. We believe that these new products will continue to power our growth in future years. With that, I will pass the call on to Nancy.

Thank you, Ashoka. Good afternoon, everyone, as David and Ashoka have pointed out, the second quarter of 2013 marked a significant milestone for Westport because we have recorded a positive adjusted EBITDA of CAD1 million from our operating business units. This is two quarters ahead of guidance. This was achieved through improving our operational efficiencies and optimizing our product portfolio and controlling expenses. However, this is not without any headwinds. Major challenges in our applied technology business continue to be from Europe, particularly Italy, our largest market, which saw a significant drop in year over year revenues for the quarter. Growth in Russia has been flattened by weaker currency. However, China, our third largest market, continues to grow, but the growth rate has slowed from last year.

Our immediate focus in North America is prioritization of the investments and the return on product sales with the next phase of growth. With the expansion of our 2015 model year Ford vehicle lineup, we further solidify our position of having the largest Ford CNG product portfolio for the Ford QVM program. I will now provide some operational highlights and initiatives. Final development of Volvo HPDI program continues at a high pace. Design of the new generation HPDI injectors with Delphi is also underway. We are now engaged in development -- of developing detailed manufacturing process and equipment plans for a dedicated HPDI injector product -- or production line.

HPDI and spark ignited activities with other OEMs are progressing on many fronts with a series of innovative products. We deliver -- we delivered the second and the third LNG Tender to Canadian National Railroads in quarter two, while the stationary testing of our first Tender continues at EMD. We are exploring opportunities in marine applications with focus on inland waterways, offshore service vehicles, ferries and LNG bunkering segments. Westport designed WP580 controller validation activities are substantially complete and [tata] vehicle production has commenced. To improve our operational efficiency, we have restructured the Beijing office, implemented a process of improving and training throughout the Company, completed the consolidation of the Ford business in Dallas, implemented lean manufacturing in Italy, and it's progressing as planned. To improve the cost and the optimization of our product portfolio, we have identified a number of opportunities where we can supply our own components to the different products we have.

For example, the Ford WiNG power system uses components manufactured by applied technologies Italian operation. The Westport iCE PACK LNG tank system uses the emer regulator designed primarily for iCE PACK, but is also used on other LNG products as well. We have expanded our vehicle lineup with the 2015 model year dedicated or bifuel, CNG for the Ford transit connect. We have launched the bifuel CNG version of the Ford 150 featuring the Westport WiNG power system. We continue to focus on creation of shareholder value in making sure that we are getting full value out of every dollar we spend. We are also working diligently with our OEM partners to ensure to satisfy their needs and their quest to participate in this market. We still have a lot of heavy lifting to do, but we're on our way. Execution focus with accountability continues.

With that, I will now turn the call back to the operator to open the call for questions.

Thank you. (Operator instructions.) The first question is from Jerry Revich of Goldman Sachs. Please go ahead.

Good afternoon.

Good afternoon, Jerry.

I'm wondering if you could talk about order trends in the applied technologies business or touch on inquiries. It looks like the business has generally been flattish over the past 18 months. It sounds like you have a couple of new products maybe. Can you just flesh out the -- do you expect the pick up in the back half of the year?

Okay. This is Nancy. I would say that what we're finding is is that the products that we have are doing quite well. We are seeing significant uptake in many, I will say, emerging markets. One of the things that we have run into a bit on is some of the geopolitical activity that's going on around the world, and some currency on that front and that, I think some uncertainty in some certain regions of the world right now we believe has impacted some of the orders we have seen in the first -- or in the second quarter. I would say in general, our product portfolio continues to remain very strong, and we're seeing quite a bit of uptake, not only on the individual components but also on the activity where people are buying full kit systems in order to do, you know, modifications on a full vehicle basis, and we're finding that to be quite a successful piece of our business in an area of focus.

Okay. Thank you. And in Cummins Westport, in the press release, you cited some delays in international sales. Can you just say which markets was that? Do you expect to make up for those volumes next quarter? And in the press release, you gave us a North America shipments year-to-date, I wonder if you could share the North America year-over-year shipments in the quarter if you have it.

Yes, I will take that, Jerry, this is Ashoka. The international shipments have always been pretty lumpy. While there can be no assurance about timing we have no reason to believe that on a full year basis it is going to be significantly different. It's purely a matter of timing, towards the end of last year, we picked up a big chunk of international shipments and there is no regularity to it.

And Ashoka, the other part of the question, North America CWI shipments in the quarter, on a year-over-year basis?

Yes, the shipments are pretty much as we expect. We have been -- the reaction to the ISX 12g has been positive and there have been no surprises there as far as we are concerned. I mean, we are seeing that customers typically are placing seed orders for 5 and 10 units until such point they are comfortable with the integration of the vehicle with infrastructure, and with the support, but for the most part, all reactions we are getting on the ISX 12g has been extremely positive.

Okay. And lastly, Ashoka, I would love your perspective on the warranty side. We have been talking about Cummins Westport warranties for a while. Should we just think of these products as having structurally higher warranty rates than other products? I would just love your perspective, and if you anticipate warranties will come down based on, I guess, the data at your fingertips. When would that be?

Yes, Jerry, the good news here is that the warranty is not related to the new ISX 12g engine, it's primarily, almost entirely, I'd say, related almost entirely to the 8.9-liter engine that's out there. We have addressed the quality issues that we found on the 8.9 in the production of the 12-liter so we don't expect the 12-liter to have the kind of warranty issues that we are seeing on the 8.9. Specifically the issues that we're seeing on the 8.9, we have or the CWI team has put in a tremendous effort to identify the issues and come up with the solution. We believe they have a solution on hand and it's just a matter of the effect of those, shall we say, repairs rolling out into the general population. So there's little doubt in my mind that these warranty adjustments will come down significantly in the upcoming quarters.

Okay. Thank you.

Sure.

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

Hi, good afternoon.

Hi, Ann.

Yes, I just wanted to focus a little bit on the balance sheet. It appears that Nancy you and your team have done a good job on the profit and loss side. But I was curious on the balance sheet, it seemed like receivables went up quarter over quarter, inventory days went up quarter over quarter, and payables went up quarter over quarter in terms of days outstanding. Could you address that and tell us what's going on there and, you know, what we should expect going forward?

No, Ann, there's nothing systemic here. It's essentially a matter of timing. One of the reasons you see an uptick in both inventories and receivables is we are ramping up iCE PACK sales and we have some collections on that and as well as some prepayments on -- on inventories that we are building up to meet our delivery targets for Q3 and Q4. Outside of that, there's a small -- there's a CAD2 million timing issue on Italy which is also not typical, because we did have a ramp up of sales towards the end of the quarter. Again, nothing systemic, nothing extraordinary, purely timing and it has to do with a ramping up of production.

Okay. Thank you. That's helpful to understand. And then more strategic question, on your locomotive development, with Caterpillar, I know you are pursuing HPDI. GE is making big noise about pursuing dual fuel and saying publicly that they believe that customers will prefer the dual fuel option rather than natural gas only. Can you just talk about what you are seeing out there, what you are hearing, or what customer feedback you are getting or is it too early to know which technology will win?

Hi, it's David. No, there's actually no -- no question about this. EMD is also launching dual fuel. I think everyone is keen to get their -- you know, their hands on something that uses natural gas. Dual fuel as you know is going to have relatively low substitution rates. So this is not a technology that's going to be, you know, a long-term deal, but it certainly can let people get used to the idea of running on natural gas. Until there's LNG infrastructure out there, though, the industry needs 100% diesel backup and that's the only way you can do that is with some sort of dual fuel technology.

I think you should expect to see, you know, a few dual fuel locomotives. I don't know that you will see thousands but you will see a handful maybe in the next couple of years and maybe a couple of double handfuls as people get their head around how they are going to deploy this. But long term, I've got no doubt you're going to need high pressure and direct injection to deliver the kind of torque and power and fuel economy that the locomotive industry is going to need. Getting all of this in place is going to take years, though. Let's not expect anything magic. Our fuel Tenders are going to support low pressure or high pressure. We obviously want people to have reusability among this capital investment and so as the industry starts to roll out natural gas, these Tenders are going to flow no matter what the locomotive technology is going to be. Long term, I fully expect that it's going to be direct injection and high pressure that dominates the industry.

So we are talking about, you know, the next decade at least, is that --

Yes, I would say the rail industry is certainly longer term. You know this as well as we do. Certainly you've got a longer sense of what, you know, a short-term or medium-term time horizon might be. For a truck fleet might be a few years, for rail industry it might be a decade. They have a lot of enthusiasm for going to the natural gas and the lower priced fuel. It is going take significant capital investment to get that LNG and get it rolled out. There's a product cycle that's fairly long. We believe it's a very interesting market for us, but for us, that's medium to long term. It's not going to happen, certainly not going to be the thing we are relying on to get to profitability next year. How is that?

No, I totally agree with that. Okay I will leave it there and pass it on. Thanks.

Thanks.

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

Good afternoon. The unit trends at CWI and the 12-liter, I just wanted to get a sense. Do you still think you are on track for that 3% to 5% market penetration rate this year?

Well, Rob, the 3% to 5%, does encompass some 9-liter app -- 8.9-liter applications in trucking as well as the 12 and right now we are still looking at 3% to 5% of the North American truck market, class 7 and 8 being natural gas. We can't, unfortunately break down individual engine unit sales, at the request of our partner. So the only thing we can say is we are still seeing this 3% to 5% trend of natural -- of class 7 and 8 trucking in North America for calendar 2014.

Okay, good. Thank you. And then in terms of your reiterating revenue guidance, could you maybe go through the buckets or the sort of the rank order of the drivers for the revenue step up in the back half of the year? What are the kind of the things coming in the back half of the year that will drive revenue over what you have seen thus far this year?

Yes, you know, I don't think -- I don't think we can give specific details but, you know, the obvious one is iCE PACK and as I mentioned, you know, we are going to -- we are ramping up iCE PACK and we are going to see a significant uptick in Q3 and Q4, you know, for the -- for the rest of which is -- which falls into the on road segment. For the rest of the businesses, you know, we got off road and ATG pretty much on track, and we expect -- we expect to come through as guided.

Yes, I think, Rob, just building on it, so it's on road systems is really the only major brand new product availability. Obviously we expect to ship some HPDI systems over the next couple of quarters to various markets around the world too. But, again, that also shows up in on-road systems. Other than we can't break down specific business units, on-road definitely has some of the bigger catalysts in it.

Okay. Great. Thank you. I will turn it over.

Next question is from Nicole DeBlase of Morgan Stanley. Please go ahead.

Yeah, high, guys. Good afternoon.

Hi, Nicole.

Hello. So just maybe starting with EBITDA reaching the break even operating EBITDA was a nice positive surprise this quarter, but you guys are now expecting, you know, full year EBITDA to be positive which implies a full year step up in 3Q and 4Q. I'm just curious, clearly revenue is going up. Is that the key driver of EBITDA getting better or is there more cost cutting? If you could elaborate on that.

Yes, I mean, the revenues will certainly help and, again, I come e back to, you know, iCE PACK which will show improving margins as we -- as we have -- as we have increased volumes of the product going out quarter over quarter. So it is primarily increase of revenue and also to some extent our continued controlling of operating expenses and operational improvements, you know, as Nancy mentioned we are seeing streamlining. Streamlining of businesses and process improvements in Italy. We are going to see some impact of that. We are already seeing the impact of consolidation of the Ford business in Dallas.

There's still some, shall we say, residual effect of that, that we will see. So that's what we expect will get us to our full-year adjusted EBITDA. But I must caution you, this does not necessarily mean that it is going to be linear. We do have challenges in the third quarter. It is a quiet quarter in Europe as you know, with a lot of our customers being on vacation there. So I'm not suggesting that it's going to be linear between now and the end of the year, but, yes, we expect we will be adjusted positive -- adjusted positive EBITDA for the full year.

Let me just add on, I think that, again, it's all down to prioritization of activities, and with a strong decision at the top, with the leadership team getting together and ensuring that we are making the right investments and we are putting our efforts against the right things. What you can say is the team here is very focused on getting that done. We had major projects and we have small projects, but all of them are, you know, collectively together add up, and I think that that's where our focus is, is just making sure that we are, you know, focused on big and small and making sure that we are being able to get the best use out of every dollar and its value.

Okay. Got it. That's really helpful. Thank you. And then secondly, maybe speaking of investment, your CapEx fell pretty dramatically this quarter. Can you just talk about the sustainability of the CapEx that you guys spent or the potential for it to pick up from here?

Yes, our CapEx spend, again, it's not linear and we -- we spent about -- if I recollect a little less than CAD5 million in the first half of the year. We have always expected our CapEx to be skewed towards -- towards the second half of the year, and we expect some of it will pick up, particularly with our Delphi development program on injectors picking up steam. And we have some CapEx investment that we have committed in Italy, primarily related to the consolidation of our warehouse and some process improvement implementations, as well as some equipment for new products in Italy. So no, the first half spend, the CAD5 million is not indicative of what it is going to be for the rest of the year. I expect it will pick up significantly in the third and fourth quarters.

Okay. Got it. Thank you very much. I will pass it on.

Sure.

The next question is from Jeffrey Schnell of Jeffries. Please go ahead.

Hi. If you look at your R&D, can you talk about the opportunities you may have shelved or discontinued because, you know, it's been coming down in the last couple of quarters and any of those opportunities you can potentially bring back later on when the mark is more developed?

I would say that, you know, what we have found and we have taken the opportunity and you can see it across the Company is looking at projects that we do have and understanding what is going on. So as you have heard, we had a very heavy focus on iCE PACK and what we have found is that we had some projects that we're working in multiple regions. And what we've decided is to bundle them all together and to go to a fueling system approach that allows us to have similar products throughout the world. So it's not so much that we are shelving products. We are just trying to figure out how to consolidate them better and try to use the same resources around the world to build on them, versus having each region do their own activity. We've found that that has been quite successful.

We are bringing all the voices around the world together to get the specs done, but then having a very focused team, looking at that and then moving very quickly forward in order to serve all the markets. It's a slight different approach than we had in the past, but we think that that is going to serve us well and that's one of the things that has helped us, one of the areas that has helped us on R&D.

Great. And then there's been increased competition, especially on light duty on the tank side. Is there still room for you to take out costs and drive down ASPs to get a better payback period for fleets?

I -- I don't know that I -- to be honest with you, on the light duty side, it's primarily on the CNG side and I would say I don't think I'm the best person to respond to, you know, what the market sees. We have had very good success with the suppliers that we work with and to order for us to be quite competitive on the products that we are offering and so I would guess that if the kinds of things that we are seeing through our supply base is happening elsewhere, then I would -- I would say your theory is likely correct.

Great. Thanks.

I will jump in on, that just because it's a theme that we keep hitting that, you know, over time, the cost of the vehicles has to come down, just like the cost of fuel has to become more competitive. Everyone understands this, and ten years from now, the market is going to be much more mature. And I think this is good evidence of the maturation of the supply chain. We are getting a lot more choice of suppliers who are building quality products and investing because we they see the market opportunity and they want to participate. So CNG tanks has come on very well over the last 18 months, I would say, and we are able to take advantage of that in our light duty products.

We don't make CNG tanks, obviously, this is a supply chain issue. Same thing has to happen everywhere else, though, and that's why we are investing with people like Delphi on the fuel injector side. The goal here is to get volumes up and costs down, while still making a nice return for our shareholders. So we are in the early days of this transition. The market ten years from now, I think is going to be, you know, a lot more competitive, but also going to be a lot more sizable, worth chasing.

Yes.

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

Hi, thanks for taking my question. I just wanted to better understand your revenue guidance functions. Has anything changed? Has the mix improved or decreased? You said that applied technology, all the trends have been weakening. You talked about Should we be thinking about the mix of business for this year and is that part of the reason why the EBITDA performance was so strong in the second quarter?

Well, I think that -- let me just try to take a shot it and I will let Ashoka take it from here. If you look at where we were last year, as you know that we had our first generation HPDI product, and this year, we have introduced some new products such as iCE PACK and I think that, you know, from my perspective, that's one of the strong contributors relative to where we are. We have been able to, you know, introduce products to the market that we believe are quite competitive cost-wise but also are well honed in terms of their bills of material and the competitiveness relative to the -- I will say the cost of goods sold. So I would say those are activities that are taking place. Ashoka, I think beyond that on guidance, my guess is, you know --

Yes, I don't think -- I don't think the mix has fundamentally changed Vishal. I think our Q2 performance has to do quite simply with a strong operating margins on ATG. You notice a significant improvement quarter over quarter in ATG. We had a good product mix. Our efforts at rationalizing operations are beginning to pay off. And I come back to, you know, iCE PACK as it picks up volumes and we -- we expect to see improved margins there.

You know, another point is, you know, could you see on the Ford product, we have introduced now a Ford F-150 that's now bifuel and we now have dedicated. We now have the Ford Transit Connect. So I think that you can see that, you know, you would -- as we moved forward, our product portfolio is getting richer on lots of different fronts, whether it's fueling systems, whether it's truck offerings, or whether it's technologies and I think those are all things that are going to, you know -- you know, bear with us as we -- as we look at our revenue.

That's helpful. You mentioned that the growth rate in China is slowing down. Do you see any changes on pricing on margins in that market particularly?

I wouldn't -- I guess what I would tell you in China is what we find in China is it's -- it's the price of -- of liquid natural gas or CNG in the market has influence relative to growth. As you know that in China, there is some relative control of that price. So as that fluctuates, we do see, you know, some -- some items. I would say in general, though, in China, I would say in most cases we are still seeing strong growth but it isn't the kind of growth that they had last decade. I mean, you know -- and I think that that is true regardless of what industry you are in. So, yes, it is still strong growth, but it is just not as strong as it was in the last couple of years.

Thank you.

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

Hi, everyone. Thank you for taking the questions. Maybe just on Weichai, I wonder if you could give us some commentary on how the pipeline is shaping up now that it's, you know, its been announced, finalized agreement for a couple of months with -- I guess you've got a few units hitting the road but, you know, your thoughts on that and how that takes shape in 2015 and beyond.

Okay, Eric, I'm assuming you are referring to HPDI W -- the HPDI program for Weichai?

Yes. The WP--

We expect to deliver about 30 customer validation units this year, and we expect that will happen. We expect that will be successful. Next year, we are probably talking of, you know in big round numbers hundreds, and the year after that, you know, we expect that we could be sitting on a gold mine. So --

So --

Okay.

I guess just to add, you know, to the Weichai, at this point in time, I think that as you know, in China, the infrastructure for the LNG and those kinds of things, it's much -- one of the most developed markets that exists. So you can imagine that having the fueling infrastructure as mature as it is in that market really will lend itself, we strongly believe, to the products that they are currently selling, but also the introduction of this HPDI.

Got it. Okay. I guess we'll stay tuned on that. And maybe, you know, just high level, just turning to the WiNG business. I mean, you have clearly built out a pretty significant presence there. Just thoughts longer term. What do you think Ford needs to see, you know, before they think about taking that in-house and then taking it a step further, I know you -- you acquired Servo Tech as part of the BAF acquisition. Just thoughts on, you know, what kind of leg up that gives you as part of the process with Ford.

Well, maybe I will start with the second part first. I would say that we're very pleased with here we are, just one year into the, you know, acquisition of BAF last year and we now have the operation fully consolidated in our Dallas facility. We found that, you know, we -- that the product and the, I will say the combination of the products that we had from the WiNG and what BAF brought to us as well as the kitting activity where BAF was very strong in providing kits to the market really has served us well in the business.

I would indicate, you know, I guess I'm not in a position at all to give you any sense of where Ford's threshold is, where they bring it in-house so I don't think I'm able to comment on that. I would say that we're very pleased that we are in such strong position with the BAF acquisition and our product portfolio lineup that we do have the strongest portfolio relative to vehicle offering in this and I think that that, you know, is serving us quite well in the market, and is very helpful to Ford as they is service their market in a variety of different customers that they have. So I think we work quite well together and -- but I can't -- I can't speak to what Ford has on their mind.

No, I understood. And what I was getting at was Servo Tech. I mean, as I remember, when that was part of Clean Energy, that that was a business that, you know there was some access to Ford's control software and just some thoughts on what that means for you in terms of your relationship with Ford.

Well, I would say that, yes, the good news for us is that the combination of BAF, I mean, still continues to be the, you know -- part of their, you know, QVM. but also with Servo Tech having the ability and the authority to, you know, touch the controllers is also powerful for us. And, you know, Servo Tech also is very strong in clean exhaust. So we believe all in all, that, you know, the combination of the companies has served us not only for Ford, but we are finding that this is also being a nice, I will say, entree to some other customers in a variety of different ways.

Okay. That's helpful. Thank you.

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

Hello, this is Noah Kaye in for Colin. I was hoping to get a little bit of granularity on iCE PACK, unit shipments, bookings, backlog, just to help us understand this ramp a little bit better. We have obviously seen a few key announcements. I just wanted to get a sense of how you see it shaping up for the rest of the year.

Hey, Noah it's Darren. We previously announced the order for roughly 900 iCE PACKs delivered over two years.

Yes.

That's pretty much the run rate, the kind of agreement we are working against. Otherwise we don't really -- we are not in a position, I guess just to publish backlog. Traditionally working with OEMs and different suppliers. They just have a function of build slot commitments which can be moved, so it's very dangerous for companies, let alone public companies, to get into forecasting backlogs when build slots are such flexible items. So, firstly all we can comment on is just what we've already publicly announced as it pertains to iCE PACK, so, sorry about that.

And you are still expecting about half of that 900 will ship this year?

That's correct --

That's currently the goal. Yes.

It was split pretty evenly between 2014 and 2015.

Okay. And could you give us a little bit of an update on where Volvo is? Have they started taking orders or indicated when they are going to start taking orders for the 13-liter?

I don't think so. I mean, I'm looking around the table, Nancy, I don't think there's formal orders. The -- I think Nancy said in her comments, you know, we are working very hard as everyone is. I think the opportunity in Europe is firming up really well. We've got a strong interest in LNG as a transport fuel and as you know Cummins Westport hasn't had a lot of presence in Europe there because the OEMs are much more vertically integrated. So Europe is, I think, looking forward to their first natural gas trucking products and we're keen to make that happen. But there's a lot of work to be done yet, and we will have the same sequence that you heard us do before. There will be some customer trial units and there will be some early production and then there will be a release for production, but that's really up to Volvo to sort out.

Yes. Great.

The timing at this point, Noah, it's Volvo's call. It's their product, in essence. So unfortunately, it's up to them to comment on timing.

Great. And finally, can you just talk a little bit about traction in terms of increasing component sales into China? You have been able to add any customers, you know, for any meaningful volumes going forward? And how do you see that shaping up? You mentioned there's been some reorganization in Beijing and, you know, I know this is obviously a great source of potential growth for you guys.

Absolutely. We see China as one of our growth engines, for sure. As I mentioned earlier with the fueling infrastructure, we are getting pulled in lots of different directions from a variety of different constituents in the market, the component side is certainly one of the areas that we are seeing but we are also talking to a variety of folks that want to offer, I will say, LNG, CNG vehicles of all sorts. We just talked about Weichai, obviously on the trucking side, but also from the light duty side. I'm not at the position with any of those customers at this point in time to reveal who they are. I would just indicate you to that at this point in time, there is a lot of activity. Our focus at this point in time and why we did some restructuring in China, was partly because we want to get relatively close to our customers and as you know, a lot of the customer base is in the Shanghai area. So we are looking to utilize that area because that puts us in in many cases closer zone-wise to the customers as we're doing these development projects.

Okay, thanks so much for the color and congrats on reaching your milestones ahead of time.

Thank you.

Thanks, Noah, good to see you back.

(Operator instructions.)The next question is from Aditya Satghare of FBR Capital Markets. Please go ahead.

Thank you. Good afternoon, all. I have two questions. One is I wanted to make sure I understood the investment criteria and R&D investment criteria as we think of 2015, and then does that mean that once we get past this phase of investment, we should see some sort of step down, as you go past that period?

Yes, I mean, we have a pretty rigorous process of evaluating what -- we have what we call the IRB process, an investment review board, that has a pretty subtle and methodical process of evaluating programs as they are put fourth for approval. So, yes, I mean, when we look to a program, we look at the business case, we make sure that it meets our thresholds. We make sure that it meets our hurdle rates and more importantly that it's a substantial business. So, you know, it doesn't necessarily mean that it trends down year-over-year. It's on a case-by-case basis, you know, each program could have its own individual spend pattern but at the end of the day, it doesn't get our approval unless it meets one, the criteria I just mentioned and two, it supports our position of getting to adjusted EBITDA positive here by the last quarter of 2015.

I think there's also an opportunity and we continue to find opportunities where with our technology and our technology lead in the market, that we have customers that are coming to us that are, you know, teamed with us, not a whole lot different than what Volvo has and that we are, you know, able to team with them, which then, you know, helps us with the R&D spend activity. So I think that that's a continuation, and I would say at this point in time, we are seeing a lot of activity, and again, as David said in his comments, the market is getting more and more ready. And so as this happens, folks are looking at their product portfolios and deciding where they are against this industry, and Westport is benefiting from that.

Got it. My second question is on the WiNG business. Given that your offering now is pretty broad, and it touches multiple segments, maybe on a high level, can you sort of talk about which segments you've seen -- or which segments you expect to see the fastest growth, and how does that sort of business evolve in the next 12 months or so?

I would say, you know, if you look at the amount of vehicles on the road, obviously, the 150s and the Ford 250s are the big users on the road and to be honest with you, there's a lot of, you know -- though we have a product portfolio that goes through all of them, no different than where Ford sees their volume and those tend to be the areas where we see our volume.

Thank you. That's all I had.

This concludes time allocated for questions on today's call. I will now hand the call back over to Mr. Seed for closing comments.

Just to thank everyone for their attendance to the call and expect to see everyone back around the end of the October for our Q3 conference call.

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