Westport Fuel Systems Inc (WPRT) 2015 Q1 法說會逐字稿

Welcome to the Westport Innovations Inc. quarter-one 2015 financial results conference call.

(Operator Instructions)

At this time, I would like to turn the conference over to Darren Seed, Vice President of Capital Markets and Communication. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to our first quarter of FY15 conference call. It is being held to coincide with the disclosure of our financial results earlier this afternoon. For those who haven't seen the release and financial statements yet, they can be found on Westport's website at www.westport.com.

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

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

Now, I will turn the call over to David Demers.

Thanks, Darren. Good afternoon, everyone, and thank you for your interest in and support of Westport. 2015 is off to a strong start, as you have seen. Cummins Westport is back delivering strong financial performance after two years of warranty reserve adjustments, and as you have probably seen, we had two important new products announcements with CWI this week.

We're proud of the near-zero NOx engine announcement, which is going to take our already very low NOx emissions from our current engines down by another 90%, which makes them virtually zero. On our Westport operations and on the corporate investment side this quarter, we've managed to cut our cash used in operations by more than 70% compare to Q4 of 2014, and that's why we're continuing to advance our strategic programs, including HPDI 2.0 developments with a number of partners.

Now, I'm not going to go into a lot of detail because we want to get to Ashoka and Nancy, but I want to remind you we said that we're focusing on four main components to our strategy in 2015 as we transition from an R&D and market-creation company to a profitable, growing operating business. So first, we said we're going to continue to invest with committed OEM partners in commercial products for the next decade that contains strong technology content. But we're going to defer investments where the market timing is uncertain or where's there commercialization risk or where there is just low market priorities.

So I think you can see from the reduction in the burn rate, as we complete programs and we reallocate resources to our core programs, we're starting to see the benefit of this idea. New partners and new programs are continuing, but they're increasingly being funded by customers and partners.

Of course, we are still not complete, and so we're investing heavily on the HPDI 2.0 program, which we expect to run into 2016. Second, we said we're going to continue rationalize and consolidate our current product portfolio. A lot of these products have been -- I call them first-generation or the market just as it was getting going. We talked about the last 10 years as being a market-creation exercise.

Now we're consolidating and rationalizing our product portfolio for cost reduction, for margin improvement, to make sure that we're delivering leading price performance, continuing improvements in terms of cost and price, and then, of course, pushing on to full systems sales, which creates and extracts value beyond the individual components. I think a good example this quarter of the expansion and the improvement of our industrial products, the Volvo car launch. We had some good results from that. The Ford F-150 announcement this week, I think you can see the evidence that we're living up to that promise.

We talked last call about looking at non-core asset sales, I think we can say today we've got more than $50 million identified in potential value in this category, and we're actively negotiating with a number of people on these ideas. This is not a distress sale. We're looking for reasonable returns, but we're confident that we can improve our cash liquidity this year through selected transactions of this type.

And fourth, we said we're going to continue to drive cost efficiencies and reduce our global overhead expenses. And I hope this is very apparent with the drop below $10 million in cash used in operations this quarter, which is dramatically below our Q4 number, and of course, dramatically below our 2014 average. We were burning about $24 million a quarter throughout last year. So, I think this is evidence of a big achievement on the refocusing and repriorization we did at the end of 2014.

We're going to continue to press down on this number, and we continue to target mid-2016 for crossing into sustainable operating cash flow from our operations. So with the short-term shock of the oil price and currency volatility at the end of 2014 behind us, we look forward to continued development of our business in 2015 and continued progress toward our vision of a transition from oil-based fuels like diesel and gasoline to clean, inexpensive natural gas. So over to Ashoka to take you through the numbers.

Thank you, David. Good afternoon, everyone. I will be providing you with highlights of our first quarter, actions we have taken to address our expenditures and cash position, and will then cover our financial outlook for 2015.

Before I begin, however, I would like to briefly remind you that we have realigned the structure of the Company's internal organization during this quarter, as discussed in our fourth-quarter news release. This realignment combines operating our historical segments, which were applied technologies, on-road systems and off-road systems, into a single operating segment, which we now call Westport operations.

As we narrow the focus within certain business units and differ development of certain products and related programs, we believe that combining these units into one operating segment provides more meaningful information to our readers. Westport will continue to report corporate and technology investments and each of the two major joint ventures as separate segments.

Total segments revenue, which includes Cummins Westport, Weichai Westport, Westport operations, and corporate and technology investments, was $156.9 million for the quarter ended March 31, 2015, a decrease of 33% over the same period last year. This decrease is primarily due to weakness at Weichai Westport, significantly lower service revenue in North America and the exchange rate impact of the euro, the renminbi and the Swedish krona against the US dollar.

As David noted in the press release, the swift change in global energy pricing caused some short-term disruptions to our business plan, but these results were well within our expectations. For Westport operations and corporate and technology, or Westport consolidated, we are reiterating our revenue outlook between $110 million and $125 million this year.

A number of factors, such as currency exchange impacts, geopolitical instability and new product successes, are included on our revenue outlook. These are detailed in our press release, and I encourage you to read through them.

Westport's consolidated revenue for the first quarter this year was $28 million, compared to $39.9 million for the same period last year. This 30% decrease is primarily due to the unfavorable impact of foreign currency translation from the euro to the US dollar, significantly reduced service revenue this quarter, and a large US light duty shipment in first quarter of 2014.

Within this, revenue from European operations, which accounts for 63% of Westport consolidated revenue, is showing signs of strength and increased to EUR15.7 million this quarter, up from EUR14.9 million in the same period last year. This excludes the recent acquisition of Prins. As noted, however, this fact gets lost in currency translation, as we report in US dollars.

Cummins Westport revenue was $73 million on 2,278 units for the quarter, a decrease of 9% over the same period last year. This decrease was primarily due to the delay of a shipment to an Asian customer. This shipment will, however, be made in the second quarter of this year. Weichai Westport's revenue was $55.9 million on 4,385 units for the quarter, a decrease of 51% over the same period last year. This decrease is primarily due to a sudden drop in energy prices, some economic uncertainty in China, and a pull forward of emissions compliance system into Q4 of 2014.

Moving on to operating expenses, I will outline some of the actions we have taken to reduce our operating expenditures, and Nancy will go into operational details later. Westport operations and corporate and technology investments reduced its combined operating expenses by $13 million for this quarter, compared to the same period last year, primarily due to the prioritization of investment programs and reduced expenditures as well as the favorable impact of foreign currency translation from the Canadian dollar and the euro to the US dollar.

Westport will continue to drive cost efficiencies and reduce global overhead expenses. We believe our actions and strategic initiatives will be sufficient to carry the Company to reach positive, consolidated adjusted EBITDA in mid-2016 while maintaining the momentum required to launch major product initiatives such as HPDI 2.0. Moving on to net income, our net income from our Cummins Westport joint venture improved significantly during the quarter. Net income for the quarter was $5.9 million, an improvement of over 800% compared to the same period in 2014.

This improvement was largely related to the resolution of the warranty issues associated with the 8.9 litre engine. For Weichai Westport, net income for the quarter was $0.3 million, a decrease of 40% over the same period last year, due to a lower number of units sold as a result of the drop in energy prices and the emissions-related compliance pull forward I mentioned earlier.

From a consolidated viewpoint, the quarter ended March 31, 2015, resulted in a net loss of $17.2 million, or $0.27 per share. This compares to a net loss of $23.9 million, or $0.38 per share in the same period last year, an improvement of 29%. The improvement in net loss was primarily due to increased income in CWI and a significant reduction in operational expenses.

Moving on to our cash balance and adjusted EBITDA, as of March 31, 2015, our cash, cash equivalents and short-term investment balance was $71.3 million. Cash used in operation, excluding changes in working capital, plus dividends received from our joint ventures, was $9.6 million compared with $33.4 million for the quarter ended December 2014, a sequential improvement of over 70%. Working capital changes consumed $6 million this quarter, and we have initiatives in place to improve our working capital performance over the upcoming quarters.

We have a number of options with regard to the pace of product and market investments in addition to possible divestiture of non-core assets, as David mentioned, to improve our Company's cash position. I would like to reiterate that our management believes that our cash balance, in combination with our actions around our operational expenses and our strategic initiatives, will be sufficient to carry the Company to positive consolidated adjusted EBITDA in mid-2016.

Moving on to adjusted EBITDA and key steps on the path to profitability, adjusted EBITDA loss from our operations segment for the quarter ended March 31, 2015, was $1.4 million, compared with a loss of $1.6 million for the prior year. This year-over-year improvement was due to cost-reduction efforts, offset by margin loss due to significantly lower service revenue this quarter. Consolidated adjusted EBITDA loss for the quarter was $9.2 million, compared with a loss of $22.1 million in the prior year, an improvement of 58%.

This was due to our overall improvement in our cost structure, prioritization of our investment programs, and higher net income from the Cummins Westport joint venture. As you can see from our results, we are facing some headwinds from lower oil prices and economic turbulence in some markets, but we have made the necessary adjustments to get back on track and improve our bottom line and core cash burn.

We believe we have the opportunities and the commitment to succeed in this market, and I look forward to bringing you further updates on our progress in the next quarter. With that, I'll pass the call on to Nancy.

Thanks, Ashoka. Today, I will focus my comments relative to the operational highlights and our priorities for the Company. As mentioned earlier, the market is volatile, but we are seeing strong interest from OEMs to ensure that they have natural gas as part of their portfolio going forward. So with that, let me just give you some highlights relative to the various segments.

Firstly, on the light-duty side, our strategy on the light-duty side, relative to our Ford product portfolio, is to offer a broad line of Ford products where gaseous prep engines are available. So with this, we are pleased to be offering one of the broader lines relative to the QVM process or as a QVM. We are proudly in the launch window at this point in time for a 2016 Volvo bi-fuel vehicle.

In fact, I was in Sweden a couple weeks ago and attended a ride-and-drive event in Gothenburg, and I was very please with the vehicle. And I would indicate to you that our customers, who attended to ride-and-drive, were very, very pleased and impressed with the bi-fuel features and the vehicle and the new engine that Volvo is introducing here with natural gas. The V60 and 70 bi-fuel vehicles do include Westport controllers, as well as an array of ATG components.

The good news is we are also seeing good pre-market ordering, even before the customers had been able to do test drives of this at the dealership. So this is one of the items that I would tell you to look forward as we move forward through calendar year 2015. Also on the light-duty side, on the industrial demand, we are seeing an uptick relative to the 2.4 litre engine and had a strong Q1.

We're also expecting that as we offer the 3.8 litre later in the year, our industrial business will also have positive impact. Secondly, if we look at the medium-duty market, our GM DI product, which is a bi -- dual fuel product, we have reached some important milestone of development with our launch partner, Tata. We are also have entered into a new development contract phase with Tata for this with target completion by the end of this calendar year.

Secondly, in the medium-duty sector, our enhanced spark ignited product, or EI product, continues to progress. In fact, we now have over 1,100 engine hours on our -- on this technology. We are also seeing very positive traction with partners and pleased with some funding sources, both privately and governmentally, that will help us with this development activity.

Lastly, on the heavy-duty sector, as always, we have to talk a bit about HPDI. We are seeing a big uptick relative to trucking from the OEMs other than Volvo and Weichai. We are very please with the level of interest and feedback, and we are also pleased with the feedback we're getting from the OEMs, who are impressed with our knowledge, our results and our capability.

Important to mention as well, other than in the heavy duty truck market, we are also having tangible dialogue with other OEMs for applications in industrial, rail, and in mining. Also, in China, we are in our advanced development phase for the introduction of our China 5 HDPI engine with our joint venture, Weichai, and we're, right now, also monitoring some new central government plans for stricter regulations that we think will come in as early as calendar year 2016. We see that this would be another opportunity for HPDI, as well as our ESI products in the China markets, due to our emissions standards.

As I close today, I think it's important for me to just reiterate some of the operational priorities that we're focused on. Revenue stability and growth through our OEMs, as mentioned, our financial performance is focused on gross margin and net income. Thirdly, we want to make sure that we execute our products at the right cost at the right time and in the right quality.

Cash management is a strong focus for us, as well as making sure that we have customer attractions through product offerings, technology, Westport talent and innovative solutions for natural gas. So with that, I would like to thank you, and I will pass it back to the operator for questions.

Thank you.

(Operator Instructions)

The first question is from Laurence Alexander from Jefferies. Please go ahead.

This is [Jeff Hunt] for Laurence. David, can you talk about fleet trials are progressing versus say six months ago? Are customers testing longer than they had in the past, or are they testing multiple engines? I'm trying to get a idea of when do you think CWI units sales will accelerate past this 10,000 unit run rate per year.

I'll switch to Ashoka. He is on the board. Here we can --

I'm sorry, your name was Jeff? Hey, Jeff this is Ashoka. We are quite happy with the work we're seeing at CWI. We had some concerns about the impact of the 8.9 litre engine, but, with those issues behind us and the customers as happy as they are with our responsiveness, if you will, in addressing the issues, we are quite happy with the up take.

Clearly, we, in terms of volumes as you know we closed out last year at 10,300-odd units. We are looking to have, another good year. Customers have been repeat customers. It hasn't been the hundreds and hundreds of units as we would have liked to see, but at the same time, we are seeing repeat orders in numbers that I would say meet our expectations today.

And then on the portfolio, changes, the opportunity to divest non-core assets you high lighted $50 million in opportunity. Can you elaborate maybe on, is this certain products, is this regionally, or how are you thinking about, that going forward?

Yes, I mean, to answer your first question, no, I can't elaborate too much, but to answer your second question about whether it's regionally -- it is -- all our assets are in. It's across the board, across regions.

Great, thank you.

The next question is from Ann Duignan from JPMorgan.

Hi, this is [Mike Harmon], on for Ann. How is everybody?

Good, Mike.

I wanted to ask, quickly, about some of the working capital metrics. We saw the operating cash flow burn come down for the quarter, but DSOs are still pretty high -- are up pretty significantly year on year, as are days on hand. Any color that you can give us about what you're doing to manage the cash flow that we can see?

Our DSOs are high, and they will always be high for the simple reason our terms with some of our larger customer in Europe are 180-day-plus, and that's the reality of the business there. What we try obviously to do, as you've noticed, is that we match our DPOs to offset those DSOs, which we have to live with. The good news, of course, is we've never had any significant bad debt issue, and the terms are the terms with customers like Fiat in Europe.

So we shouldn't expect to see those really come down meaningfully over time?

I don't think that's what I'm saying at all. As we have a broader mix of customers in our base and we increase our North American customer base, you will see that come down. But there are certain realities of the European market that we just have to face and deal with accordingly.

Okay.

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

Yes, high guys, it's [Aaron Spahall] on for Eric. Thanks for taking the questions and nice quarter.

Thanks, Aaron.

Maybe first on Weichai, you talked a little bit about it, Nancy, but can you maybe, testing for the 12 litre and development on the 10 litre can you just -- I know it's up to Weichai, but any thoughts on when we might see volumes there?

Well, I would say at this point in time that we're advancing to the market. We believe that the product has gone through the development cycle, and we do believe that as some of the central governments push for cleaner air and activities around emissions, that will help us propel the product to the market in a nice way. But I think giving you specific volumes and that kind of thing, I would say at this point in time, we'll wait and do that at some point in time later. I think that the China market is definitely ready for the product.

Fair enough. And then I guess, maybe sticking with Weichai a little bit, the pull-forward from the China five standards, how should we think about volumes there for the rest of the year? Are you thinking sequential improvements, or can you just talk about that a little bit, please?

Relative to China markets, I guess that at this point in time we -- I think we've -- we still have strong confidence, I would say that I was in China just a couple weeks ago, and our partner who lives in it each and every day tells us that the market is still there for the product and we believe it's quite strong. We do think it's an important product portfolio, like I -- as I said, as they try to tackle some of these issues relative to pollution, so we continue to believe very strongly that we're going to continue to see positive things happening in the China market.

Okay, good, and maybe last one for me, just on the cost-cutting side of things. You guys have made substantial progress there. Where do you think we can ultimately get to, and kind of what inning are we in, maybe, relative to the run rate we saw in Q1?

I think we've gone on record as saying you can expect to see a 60% decline in our operating cash burn year over year. I think that's state -- we still stand by that statement, and we'll also go on record saying our objective is to get to consolidated policy of adjusted EBITDA by the middle of 2016, and we stand by that statement as well.

So turning it, it's maybe turn, Aaron, it's probably going to be ramping down between now and the middle of 2016 to zero. In terms of -- be pretty sure it's not necessarily a straight line, but could be a little lumpy.

(multiple speakers) trajectory.

Yes, yes.

All right, sounds good. Thank you.

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

Good afternoon.

Hey, Jerry.

I'm wondering if you folks can talk about the timing of payments from JVs. You had a nice cash inflow this quarter. Should we be thinking about cash flow from JVs approximating net income over the balance of the year? Just frame that out for us, because I know that's moved quarter-to-quarter.

Well, the good news, Jerry, is that we have gotten the warranty issues that were absolutely destroying our results over the past few quarters. We have gotten that under control, and a significant portion of the improvement in CWI revenue [by ad] income this quarter had to do with warranty accrual reversals. We expect that trend will continue, obviously not forever, to -- at least to such point that we bring the warranty accruals related to this product down to, shall we say, much more normal levels. So, yes, I think you can expect positive improvement from CWI, but I wouldn't necessarily correlate that to mean current quarter times four.

Okay. And in terms of the sequential revenue improvement in the core operations of about $5 million, can you step us through the moving pieces? I know $2.5 million was, Ashoka, what you mentioned last quarter, was effectively an accrual adjustment on revenue. What's the other $2.5 million, which businesses drove that?

On core operations, our European operations, if you exclude foreign exchange impact was up strongly under the circumstances. Sequentially, what else improved sequentially? No, I think, I think sequentially, it was our European operations.

Okay

Off the top, I can't think of anything else right now.

Okay, thank you. And lastly, you know, on the Ford business -- I know you have a couple of new platforms out there. Can you just talk about how we should think about revenue trajectory for that business? I know it's been tough with lower diesel cost and gasoline cost. How should we think about opportunities going forward, based on additional platforms?

You're absolutely right, Jerry. If there's one business that was impacted very heavily by the drop in gasoline prices, it was Ford business in North America. The Delta between natural gas and CNG has come down significantly, and the customer base they have tends to be the kind of people who make relatively short term decisions. So the Ford business, yes, has been impacted by that. We have taken action from a cost structure standpoint to offset that drop in revenues, and we will see impact of those actions beginning next quarter.

However, there's some really good news there as well. You've heard the news release about the Ford F-50 being available in gaseous prep as a 2016 model. That's going to be available beginning the end of this year. Unfortunately that won't mean too much revenue for us this year but certainly could be big news in 2016.

I think also the alliance we have now -- AFC is also just another indication that we are looking, as we go into the market and look at where this product fits. So as we do this, a lot of interest, obviously, from school buses and from shuttle buses so our tie-up with them, which we have made just, I think, a couple of weeks ago; is also I think an indication that as we look at this market, that we're really pleased that we're going to attack it from every angle in terms of making sure that we are successful here, because we have a great product and we do have good feedback from the customers. It's just unfortunate that oil pricing caught us for this particular business. We're feeling quite good about our product offering and our alliances.

Okay, thank you.

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

Good afternoon. First on the current 6.7 litre, (technical difficulty) litre, could you give us a sense of what that market opportunity is and where you're at in terms of getting programs lined up to (technical difficulty)?

We know the market size for the bus range has increased dramatically. Typically the heavier 8.9 litre that we've been selling so far today, Rob, probably the market size was in the realm of 5,000 school buses, just as you're targeting those larger buses. The 6.7 litre today, targeting shorter and type-A buses, that actually jumps logarithmically up towards even 25,000, 30,000 units as a targeted market size. So there's no doubt, Rob, it's a much bigger market opportunity for Cummins Westport and 6.7 litre.

And do you need to go through a cycle of OEM adoptions with this, or is that sort of (technical difficulty) in the product?

Yes, and I'm sure it will be worked through with most of the bus OEMs. I know we have had a good relationship with customers such as Bluebird and Collins and other bus manufacturers, so we'll just continue to work with our existing bus OEM channels through CWI that we have -- that we already have the relationship with. It's just in that product expansion, which gives our customers more choice.

Great, thank you. And then on your non-core asset sales, sorry if I missed this, but did you give a sense on timing of those, are those this year in your term depends on how it goes? What's the timing there?

I would say keep your ears peeled for the next two quarters.

Okay, thank you. I'll turn it over.

The next question is from Mike [Pandeltel] from Stifel. Please go ahead.

Thank you. The last name was a little botched, but that's okay.

Mike, I know the spelling. I know who you are, Mike. It's okay.

Thanks, Darren. Just to follow up on the last question, I think you said that there's $50 million you're targeting for sales of non-core asset, is that $50 million you're expecting to raise in cash from those sales?

That's correct.

Yep.

Okay, great. And then the question on the working capitol earlier, are you saying in the press release you expect it to improve -- does that mean it's not going to be a drag going forward, or do you expect it to contribute to cash when we think about your cash flow the next few quarters?

We'll get to contributing of cash but over the next few quarters, yes, it will stop being a drag and we expect it to turn around within -- two to three quarters.

Yes, I mean, I guess, Mike, we're still targeting the middle of 2016 for positive -- positive cash. So how much gets taken out over the next two or three quarters from [Kellenor 15]. There's obviously key contributors to Jerry's question earlier from -- around the contributions from Cummins Westport. That's obviously going to have a big impact on cash. You also have got some product improvements, some new products getting into the market. We've got some things that are helping us but still, it's -- it's a path. It's not necessarily an incredible drop, Mike.

Okay. And then, you mentioned $13 million improvement in operating expenses, a portion of that was related just to foreign currency translation. Can you kind of break out those foreign currency effects, please.

I wouldn't go -- it's substantially operational improvements.

Okay. And the last one for me, F-150 announcement, can you explain who exactly you're targeting with that product? Is it mostly fleets, primarily?

Primarily fleets, correct.

Okay, thanks, that's all for me.

Thanks, Mike.

(Operator Instructions)

The next question is from Noah Kaye from Northland Capital Markets. Please go ahead.

Hi, good afternoon, everyone.

Hi, Noah.

Hey, Noah.

Just wanted to ask -- I apologize if this was addressed earlier in the comments -- could you give us an update on the rail car opportunity? Are you seeing tenders out there for LNG, CNG? What are you seeing right now in the marketplace?

I would say that what we're seeing at this point in time, as David commented, this is one of the products that we think will ultimately have a place but at this point in time, we are perhaps a bit ahead of the market. And I think that still there is quite a bit of activity on the rail side, talking about what the regulations are going to be for some of these tanks, and so what we have done at this point in time, we need to just take a moment to really make sure we understand where the regulations are going to head and then do it.

We continue to actively support these on the road, and we're getting -- we have them linked up with engines and getting miles on them, so it's not this is, that they're sitting there, collecting dust. We're continuing to work and learn on them but at this point in time, I think we're from a development and perspective and additional market creation at this stage of the game, we're going to wait and see the regulations, get the feedback from these test units, and then come back when we think the market is really ready.

I think you have to remember -- I'll just jump in and remind people. We said locomotives are likely going to be in the 2017 time frame, so we've got lots of time. This is an industry that has got pretty tight regulatory burden, let's say, so there's still lots of work before we can say that products, commercially, industrialized and ready to go in the marketplace. So, yes, we have a team supporting the CM, the first port tenders are at CM, but we're not planning to deliver any more this year. It will be in line with the development of the locomotive side.

We are seeing up take relative to OEMs that are interested in rail on the HPDI side. So, for for, -- so from that side, I think that rail still looks like it's there but, --

Now we're going to pay so long as market demand develops and as customers, frankly, pay for it.

Okay, great, thanks. And then just turning to the 6.7 litre for CWI, obviously, a very sizable market, addressable market. How do we think about, as this ramps up, kind of the impact, for CWI as a whole with respect to gross margin and the cash that the segment can throw off?

Well, you know, we're not going to lay out volumes, but as Darren mentioned, it's a very attractive market in terms of size, opportunity. It's a robustly-developed engine. We have the learnings from our 8.9 that have been incorporated into it, so things are looking very positive for the engine and it's going to be launched in 2016, as mentioned.

Noah, I know you've known us for some time. Typically when we launch an engine within the joint venture it does get burdened with a more conservative warranty accrual at the outset, so gross margins may be impacted just by more or less a conservative warranty accrual process. But the moment that gets any kind of experience and, as Ashoka said, we know these engines We have poured all of the lessons learned from the 8.9 litre into a 6.7 litre. Hopefully that's a short curve, but there may a slight effect on margin, just depending on the initial volume that gets out the door and how long we have to carry that conservative accrual.

I see. If that -- if you do have to take a conservative accrual and combine it with more operating expense you see a little bit of a drag on net income but, really, specifically, thinking about the accrual, does that actually impact the cash that JV is going to throw off because these are not accruals, right?

No, there's one small correction, maybe, Noah. Don't forget the cash sits on the balance sheet and then secondarily, is -- the 6.7 litre is, the gross margin -- it's a conservative accrual.

Right.

It should be incremental gross margin.

It should be -- yes, and then conversely, it's not necessarily a drag on operational expenses. It's just, literally, it's a margin --

Yes, he is right. The accrual is not a cash impact.

If you look at CWI this quarter, I think you'll see, you know -- I used CWI back as a lead-in and it is certainly a sunnier outlook for CWI. Margins are good, the products are performing well. Lots of market opportunity, and then this new product, the R&D expenses are in the quarter. As we launch the product, we're going to drop off the R&D expenses and, yes, there'll be a conservative warranty accrual but incremental margins so if anything, it should help cash flow out of the joint venture as we get this launched.

Okay, that, that's great and very encouraging. Thanks so much.

Thanks.

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

Good afternoon, folks. I apologize if you touched on this earlier, but, your parent of the joint venture partner, Cummins, entered into an agreement with Agility, can you talk about -- does this overlap anything from a JV perspective that Westport has or technology, or can you just talk about the developments in the ecosystem at a trade show this week?

No, I don't -- I think it's, it's just a sign that people are starting to work together. Agility is doing great work, primarily with CNG packaging, as you have seen. Every one of those vehicles has a Cummins Westport natural gas engine. That's the whole point of this. So I think it's really a good move that Cummins distributors are going to be starting to support natural gas vehicles.

That's really what the news about is all about. So that's good for Cummins Westport. It's good for Agility. It's good for the industry. And it just makes sense that we're going to start to get more coordinated as an ecosystem to improve the customer experience. I think this is just a great sign. But, no, it's not really a change. If you're talking about the relationship between Cummins and Westport, it has -- this is something that we've been working there for awhile.

Right. Got it. And then I'm sorry if you touched on this as well, but in the off-highway market, and I'm talking about earth-moving equipment and things likes this, can you talk about the next data points? I realize it's a long lived to market, and it's probably a couple years away, but what are the latest developments in that sort of yellow liner market?

Yes, haven't seen a lot of movement on that. I think there's still just a lot of anxiety about the capital budgets in the mining industry and certainly oil and gas capital budgets have been -- shall we call it -- muted. I'm looking around for the right word. So there's certainly still lots of interest in natural gas and a lot of big mining customers have been looking at this for years, but the program is running at the pace it's going to run at, based on the arrival of purchase orders, let's put it that way. We can leave it with our friends at Caterpillar that I think the intent is there to deliver LNG to this industry and, there's just going to have to be some critical mass around orders before we see them hitting -- hitting the market.

And on the operating expense side these are the kinds of programs that we defer our expenditures on as well. So this falls into our prioritization of programs, depending on the lead times involved. So in a way, it's helped us address our R&D.

Yes. Because we spread our resources over more programs over more time. I think it's clear, if you look around at the gas industry, there is a lot of LNG, call them producers, providers, distributors seeing this as a really attractive market. So it also depends on how the ecosystem develops on that front.

These are very large potential consumers of fuel, so there is a lot of industrial infrastructure that's going to have to be built for it, much like the rail business. So as that business model gets worked out, we're still call it highly confident that ten years from now, you're going to see a lot of LNG in these applications. There's no need for us to get out too far in front of the demand. I think it's clear they need the technology, they need the HPDI technology to deliver the performance.

They're going to need LNG to deliver the energy density and the range. So, this is going to happen, and we're ready and waiting to help it happen. But we're turning our focus right now to markets that are this year and next year.

Great, thanks.

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

Thanks very much, everyone, for your interest and look forward to seeing everybody on our next Q2 conference call, estimated to be around the end of July.

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