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Westport Innovations Inc. (NASDAQ:WPRT)

Q1 2013 Results Earnings Call

May 2, 2013 5:00 PM ET

Executives

Darren Seed - VP, IR and Communications

David Demers - Chief Executive Officer

Bill Larkin - Chief Financial Officer

Analysts

Laurence Alexander - Jefferies

Susan Lin - Deutsche Bank

Ann Duignan - J.P. Morgan

Eric Stine - Craig Hallum

Colin Rusch - Northland Capital Markets

Rob Brown - Lake Street Capital

Aditya Satghare - Lazard Capital

Rupert Merer - National Bank Financial

Chip Moore - Canaccord Genuity

David Galison - CIBC

Matt Gowing - Mackie Research Capital

Matthew Blair - Macquarie Capital

Jeff Osborne - Stifel Nicolaus

Alex Potter - Piper Jaffray

Operator

Hello. This is the conference operator. Welcome to the Westport Innovations 2013 First Quarter Financial Results Conference Call and Webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

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

Darren Seed

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

Speaking on behalf of the company will be Westport's Chief Executive Officer, David Demers and Westport's Chief Financial Officer, Bill Larkin. Attendance on this call is open to the public and to media, but for the sake of brevity, we are restricting questions to analysts.

You are reminded that certain statements made in this conference call, and our responses to various questions may constitute forward-looking statements within the meaning of U.S. 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.

David Demers

Thanks Darren and good afternoon everyone. As expected, our first quarter of 2013 was a transition period with random effects from the soft market conditions at the end of 2012, and the impact on timing and recognition of service revenue from our development projects and opportunities in our On-Road Systems business unit.

We are expecting a step change in growth over the course of this year and we remain confident the market for natural gas as a fuel in trucking in particular is here and now -- not five or ten years down the road. With the launch of so many new truck models with the new Cummins Westport ISX12 G engine, we see strong customer demand going forward alongside the new Westport LNG Tank System.

At the same time, the change in infrastructure availability year-over-year has been spectacular and more is on the way. Just the public announcement of stations for trucks now stands at around 560, that we’ll have LNG by the end of 2015, now that we presume a minimum of 40 trucks operating at each station, this would apply over 22,000 LNG trucks on the road in United States by end of 2015.

Now typically these stations could support 100 trucks each maybe a bit more and since we are also expecting a lot of CNG in the trucking business, this should explain our comment on step change in demand.

Our Westport WiNG products have also established a market leading position for performance, quality and value, withstanding that offering into the largest F-450 and 550 models, and we’ll producing in Canada for the Canadian market in June.

Internationally, we continue to see excellent growth in China. Our joint venture with Weichai ship more than 8,500 engines this quarter, which is up over 200% year-over-year.

It’s important to remember that we are also launching Westport products directly into the China market this year and now such a robust market established, we expect that those products are going to find strong demand.

In Sweden, uncertainty about the availability of government incentives slowed sales of our Volvo car business substantially in the quarter, but the recent announcement by the Swedish government that NGV credits will continue for three years as revive sales.

Perhaps the most interesting news this quarter was very public interest in discussion about the use of LNG in the rail industry. As you know, we’ve been working with Caterpillar to develop locomotives and mining applications that use our HPDI technology for high performance and fuel economy that matches diesel in these demanding operations. These programs are going well. We are seeing high commitment to building out an LNG fuel distribution system that will be dedicated to the rail industry

So we are reiterating strong growth for the full year in 2013, based on our strong build in our new products and sales of those new products, particularly in our On-Road Systems business, which will take Westport direct revenue to $180 million to $200 million as we said last quarter.

Each of our joint venture is also positioned for great growth this year and we are in a position we think to capture our share of this emerging opportunity by leveraging our first mover advantage, our technologies, and our asset-light business model.

Our balance sheet has enabled us to continuously invest in new products and innovative technologies. We think this will fundamentally transform the transportation sector as we see more and more penetration of natural gas.

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

Bill Larkin

Thank you, Dave, and good afternoon, everyone. I’ll begin with the brief overview of our first quarter results and then I’ll highlight each of our business units including our joint ventures.

For the quarter ended March 31, 2013, under the new financial presentation we recorded consolidated revenue of $30.1 million, compared to $36 million in the prior year period, a decrease of $5.9 million or 16%.

Total revenue for the quarter was $23.3 million for Applied Technologies, $5.8 million for On-Road Systems business, $1 million for Corporate and Technology Investments; and then our joint ventures, $44.7 million for CWI and $105.9 million for Weichai Westport.

The decrease in Westport revenue year-over-year was primarily due to timing of a small number of major fleet orders on the Westport 15 leader system and uncertainty around the Swedish government incentives, which impacted the sale of the Westport bi-fuel system for the Volvo V70 cars. As David mentioned, however, we expect the step change in growth and revenue over the course of the year.

Our consolidated gross margin and gross margin percentage for the quarter ended March 31, 2013, was $8.1 million and 26.9%, compared with $8.9 million and 24.7% respectively in the prior year period. Gross margin percentage improvement is primarily related to the service revenue recorded during the quarter 100% margin and mix of sales.

Research and development expenses were $20.4 million for the quarter ended March 31, 2013, an increase of $6.2 million from $14.2 million in the same period last year. The increase is primarily due to our investments in new proprietary technologies and long-term product development. In addition to our development agreements with Volvo, Tata, General Motors and other OEMs, which are recorded in our Corporate and Technology Investments segment.

General administrative expenses increased by $200,000 to $11.7 million for the ended March 31, 2013. This is compared with $11.5 million in the prior year period.

As we are closer to launching new products we are advancing sales and marketing efforts to support our OEM partners. As a result sales and marketing expenses were $7.4 million for the quarter ended March 31, 2013, the increase of $1.1 million from $6.3 million same period year.

The combination of lower revenue and higher level of investments and decrease in Westport’s share of equity income from CWI contribute to the increase in our net loss. For the three months ended March 31, 2013, our net loss was 31.8 million or $0.57 loss per share. This compared with the net loss of 22.6 million or $0.44 loss per share in the prior year period. Included in our net loss for this year is a 3 million net foreign exchange gain mainly attributed to the movement on the Canadian dollar relative to the U.S. dollar which is unrealized. Excluding the same tax, Westport consolidated net loss per share for the quarter was 34.8 million and $0.63 loss per share respectively.

Now I will walk through each of our business unit, starting with the On Road Systems business unit. The On Road Systems business unit revenues were 5.8 million compared to 12.7 million in the prior year, a decline of 6.9 million. During the quarter, three Westport 15 liter units were delivered. This reduction in unit deliveries was impacted by the weak demand in North American heavy duty truck market and timing of orders from major fleets.

Orders for the Westport bi-fuel system for the Volvo V70 cars were impacted by uncertainty around the Swedish government NGB credits which caused to pause orders for our products. Recently the Swedish government announced the NGB credits would continue for three years and we are seeing sales activity pick up in the second quarter. The Ford 250, 350 products has been well-received with a delivery of over 200 units during the quarter and expect to see increased sales in the U.S. from sales in Canada and from the F-455 products when launched.

Gross margin and gross margin percentage for the quarter were 400,000 and 6.9% compared to 2.3 million and 18.1% in the prior year period. This decrease in gross margin percentage is due to mix in sales. We are managing our operating expenses which declined by 3.1 million to 9.5 million in the first quarter of 2013, a 25% decrease when compared to the prior year period.

We expect sales in the on-road systems business unit to improve throughout the year while we manage our operating costs. We have many opportunities that will support our sales growth in the on-road systems business unit from sale of Westport 15 liter systems and to an increase in wind power systems on Ford products as previously discussed, increasing sales of Westport bi-fuel systems for Volvo V70 cars now that we have certainty on the NGB credits and sales of our LNG tank systems for natural gas trucks which are expected to deliver in the second half of this year.

Now moving on to the applied technologies business units, other revenue for the quarter ended March 31, 2013 was 23.3 million which is comparable to the same period last year. As discussed on previous earnings call, the economic conditions in key geographic markets, including the Euro zone and weaker euro to US dollar exchange rate have impacted our revenue growth.

Gross margin and gross margin percentage were 6.7 million and 28.8% during the quarter compared to 6.6 million and 20.3% in the prior year period respectively. Operating expenses increased 1 million to 4.8 million for the quarter ended March 31, 2013 compared to the prior year period which has turned into new product development programs and the acquisition of facilities and assets for AC in Australia. The team in Perth is supporting new product initiatives to the applied technologies business unit. For the quarter ended March 31, 2013, applied technologies earned positive operating income of 1.9 million.

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

Now I will briefly talk about our joint-venture starting with Cummins Westport. CWI generated 44.7 million in revenues and shipped 1313 units during the quarter, compared to 52.7 million and 1943 engines in the prior year period. Decrease in revenues was driven by a 65% decrease in international volumes. In the prior year period international sales included a large bus shipment to Yutong. In North America sales 2%.

We continue to see high interest and demand for the ISX12 G engine which began limited production in April and we’ll ramp up the full production scheduled to start in August. Operating expenses increased 130% to 10.8 million which was driven by research and development expenses related to the ISX12 G, ongoing products and reliability improvements for the ISLG and the commencement of development of ISB6.7G which was announced in the fourth quarter of 2012. Our portion of CWI’s net income was $800,000 for the quarter and we expect our portion of income to increase as unit points increase. And we start seeing improvements in warranty experience.

Weichai Westport realized incredible growth again in the first quarter of 2013. The first quarter sales volume was at the same level as the full-year 2011 sales volume. At 8,500 engines, the JV tripled the sales in the first quarter of 2013 compared to the prior period. Weichai Westport continues to penetrate new markets and build market share aggressively in China. Therefore margin still remain in the single digits.

As of March 31, 2013, our cash, cash equivalents and short-term investments balance was $173.9 million compared to $215.9 million at December 31, 2012. Cash used in operations was only $33.4 million. During the quarter, we purchased fixed assets for a total of $8.2 million primarily for our new facilities in Detroit and Kentucky. During the quarter, we also paid $3.5 million debt in interest payments and we received $1.5 million dividend payments for joint ventures.

To wrap up here, we’re in a position to capture our share of this emerging opportunity. We will leverage our technology, partnerships in market position and continue to prudently invest in new products and new technologies that makes sense to provide significant returns.

Today, applied technologies is generating positive cash flows. We expect the consolidated offering business units to be generating positive cash flows by the end of 2014.

We expect the operating business units plus contributions from our joint venture interests that generates efficient cash flow to cover our corporate and technology investments by the end of 2015. However, we do have a few payouts that can accelerate this timeline by either managing the level of our investments in new products and technology. We’re increasing our revenues and contribution margin if we see acceleration in the adoption of natural gas as the transportation fuel.

I will now pass the call back to the operator to open the call for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) First question is from Laurence Alexander of Jefferies. Please go ahead.

Laurence Alexander - Jefferies

Good afternoon.

David Demers

Hi Laurence.

Bill Larkin

Hi Laurence.

Laurence Alexander - Jefferies

So I guess, the question I have is about lumpiness. I mean, we’ve seen in prior years some amount of lumpiness around order patterns. And given your cash burn on the quarter was about one quarter of your total cash remaining. What levers are you -- would you plan to pull in. What kind of triggers would you have to pull those levers to ratchet down you cash burn if there is any adverse lumpiness this summer. That pushes back the ramp that you’re expecting?

Bill Larkin

Well, when we look at -- first, I’ll just talk about cash flows generate from our sales. We see a lot of opportunities and changes in the market which we think we believe our sales is going to increase throughout Europe which will help to provide cash flows through the contribution margins.

But now on the expense side, as we mentioned earlier, we’re planning to invest roughly about $60 million research and development throughout the year. And we’ve had a process in place in which we review all those investments. And we have the ability to dial down those investments, if necessary.

David Demers

Hi Laurence. I’ll take a wack at it too just to jump in. I think that when we deep consolidate CWI, we spent many years building up enough of a broader ray of products that would go into revenue that some of these lumpiness would be muted. And now we deconsolidated, unfortunately we got a very few products which you’re going to see very disproportionate impact on our few -- our few orders of our few customer until we get that broad portfolio built up again which is what you’re going to see over the course of the year.

I think that the guidance we’ve given should give you some confidence. We’re pretty confident and pretty serious ramp, just simpler arithmetic as we’re going to have to be averaging $50 million a quarter to hit the low end of that curve going forward. So we think the cash flow is pretty substantial but as Bill said we do have lots of levers to pull.

The only other factor I’d mention is don’t forget we do have service contracts for development and we pay those expenses and we cover them. So we got a quarter of expenses built that we will recover in the future. So this quarter, it has happened to be that coalition of a number of different factors that we think is quite obvious we’re going to change over the course of the year, we wouldn’t be saying this. I give a sense of where we are going.

Laurence Alexander - Jefferies

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

David Demers

Well, let’s start with some basics, what Weichai is doing is very similar to what Cummins Westport is doing, building natural gas engines and selling them and we participate in the profit. They are growing very quickly as you would imagine and you don’t do 200% growth with no changes in the plants and equipment and distribution. So they are investing for growth. And I think the growth is going to continue. But what’s happened is we’ve now created a very substantial market for natural gas trucks in China and as we start to introduce products like the Westport LNG tank system in China, as we start to introduce new engine technology like our HPDI engine that goes into the joint venture we will start to see direct Westport revenue and you will see that this year hitting our revenue stream. Today none of that hits our Westport consolidated revenue. So the market is now there, we think that there is a good shot, seeing pretty rapid ramping of Westport revenue in China as we introduce new products.

Operator

Next question is from Vishal Shah of Deutsche Bank.

Susan Lin - Deutsche Bank

Hi. This is Susan Lin for Vishal Shah. I wanted to better understand the comment you made on the on-road systems and the timing of some of the suite orders and is this something where you expected orders in the first quarter and they are getting pushed to the second or third or is that something we should expect, any color would be helpful?

David Demers

Okay. I will take a first crack. Obviously the 8015 order flow has been very lumpy, if you just look back over the last few quarters, this is not a representative quarter and it’s just because there were so few major orders we are constraining our sales, don’t forget to pretty large fleets and we went large numbers -- it’s hard to get the infrastructure build for this large fleet. And what you see orders of 20 to 50 trucks, so that limits the population and the 15 has also been directed at fleets that have got very heavy duty cycles and a lot of off-road, high grade, high load. So those aren’t the fleets that are going on the truck stops either. So this is a coordination effort, big part of what we've done for example is Fortis and BC on their natural gas trucking program which we expected would start shipping fourth quarter last year, we are going to see those shipments that have been delayed, they are coming. We know that, they are going to follow-on orders with our existing customers. It’s just the timing has been unfortunate this quarter and we are as disappointed as everybody in the actual numbers. Don’t think it changes the impact on what we are going to see over the course of the year. So it’s just lumpiness.

Susan Lin - Deutsche Bank

Maybe just a broad picture of margins, as we are seeing kind of a degradation in margin in China, Weichai (inaudible) is there and how you’re pricing it and as you continue to sell more products into China, might see kind of driven on margin but kind of offset that with some of the newer better priced products. So could you just kind of walk us through the margin profile over the next few quarters with the mix?

Bill Larkin

Well as Dave mentioned, within the current joint venture it’s a very competitive environment over there with, to be significant increase in sales of natural gas vehicles, Weichai has consciously reduced the margins, sales price, to go after and capture that market, originally it was grabbing the bus market. So they continue -- there is a huge opportunity and if we look at the results of those initiatives, we are seeing just phenomenal growth, almost over 200% year over year in that business and that’s really setting up nicely for us, as we come in and launch our 12-liter product and we are going try to defend those margins. It is going to be a premium product compared to the existing SI business and we will try to defend those margins. And then we think there is some other opportunities in selling components, Westport content into the SI markets. And we will try to defend those margins as well. I’m not going to provide any specifics because there is still, we saw a quite a bit of work to do on that. But we think we will see higher margins as those products start delivering in that market.

Darren Seed

This is Darren. I think in addition to the way in which -- when you mentioned general margins overall, with the Cummins Westport 12-liter engine, naturally that’s going to grow out at fairly conservative gross margin for the reasons I’ve just -- warranty and making sure we have the appropriate attention warranty for those engines. So it’s going to be again, as we’ve all mentioned a big contributor to gross margin, dollars or income dollars. But on a percentage basis that may have a waiving affect as that product continue to ramp its production over the course of the year and into early next.

Susan Lin - Deutsche Bank

Great. Thank you.

Operator

The next question is from Ann Duignan of J.P. Morgan. Please go ahead.

Ann Duignan - J.P. Morgan

Hi. Good afternoon.

David Demers

Hi, Ann.

Ann Duignan - J.P. Morgan

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

David Demers

Yeah. I think the biggest contributor is going to be from On-Road business systems. You look at the quarter. We really saw three Westport 15-liter systems. We think there is -- we won’t see big growth in that business. Also two, as we mentioned, it was pause in orders for Volvo V70 products. Now that we have it certainly on the LTV credits in Sweden. And we’ve already seen initial orders here in the second quarter start to pick up versus the first quarter. And then you look at the -- our existing Ford product, the 250/350, that business has been growing. We expect it to grow, especially when we started, we were in a position to sell product in Canada. And then also through later this year, we are going to be shipping 450/550 products in which we are already taking orders.

And other opportunity which we are very excited about is our LNG Tank System. It doesn’t matter what engine platform it can support a 9-liter or the 12-liter engine platform. But with the demand and interest that we’ve seen in the 12-liter, we see a significant opportunity for sales for this product.

Ann Duignan - J.P. Morgan

Yeah. But let’s take a step back. For Q2 though, on the on-road side, you would have to have those orders in hand right now on the 15-liter. Do you have those orders or do you hope to get sometime that might get delivered later in the year?

David Demers

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

Bill Larkin

And generally, we have never given quarter-by-quarter guidance ever in our history. So we do try to our best to say, we are reiterating our guidance for the year of $180 million to $200 million. And as David pointed out earlier, that’s a definite step change even if you just average at linked quarters. It obviously is a big change from Q1.

It’s just not a number that we can provide on a quarter-by-quarter basis other than to say clearly, on-road systems for all the bells just ran through them delivering the biggest sales jumps. And I know you are very aware that the 12-liter is not recorded in our sales of the On-Road Systems but the income dollars towards Westport are expected to be markedly different than they just under $1 million we did in Q1. So that will be a contributing factor on an overall performance basis.

Ann Duignan - J.P. Morgan

Yeah. And the reason for my question by quarter is that we started the year very weak. We’ve maintained guidance and yet we are chewing up cash. So, I think investors are going to want assurance that these are not stretchables?

Bill Larkin

No. I don’t believe there are stretchables. We obviously wouldn’t make the comment that we didn’t believe in the confidence in our, the business we expect and have on hand today.

Ann Duignan - J.P. Morgan

How many on-road 15 meter and do you anticipate shipping this year then?

David Demers

We haven’t broken that down either. I think that the simply answer to all of these questions is just look at the enthusiasm that we saw in North America truck show. We’ve got suddenly for the first time we got every major trucking manufacture launching natural gas products. They were selling natural gas. But the soft truck market, I think says something. We are going to see shipments of that engine, that’s no surprise and we are going to see a whole bunch of new customers and they are going to need the help and support and we’re going to see lot of new infrastructure being built and those companies building that infrastructure are working with us to make the financial pitch for natural gas and make that transition easy.

So these factors are all there. So I think it’s pretty straightforward looking -- looking out the next few quarters we are going to see a lot of product on-road, both trucks and pick up trucks and passenger cars in Europe. Lots of challenges and obstacles but we don’t think there is much doubt that the market is coming.

Bill Larkin

I think one point to add to Ann would be the press releases from other companies. We have seen them where companies like [Nucleaus] announced their interest to buy 700, 800 trucks over the course of next 12 to 18 months. It’s that in starting in the Q two of this series, three or four, of course, it’s not answer we can get into but -- and just trying to answer your question, with the level of confidence we have, those orders are starting and expect to deliver this and again, this is not Wesport announcing those orders as other companies. That’s just another anecdotal, piece of evidence to provide some of that confidence.

Ann Duignan - J.P. Morgan

I guess what I am trying to get comfortable with is, is the truck that you are going to cannibalize both the 15 liter and the 8.9, is it -- I understand there is tremendous pent-up demand it could cannibalize on the segment in these other sectors also.

David Demers

I don’t think cannibalization is the right word but as we have talked about before 8.9 or the 15 are really the right products for the mass market on road trucking. We are going to stop that clean energy statement on their natural gas highway. 15 is not the right product for a potholes in Los Angeles but they are buying because that’s all they have. And the 8.9 is not the right product for long-haul trucking but people have been buying it and putting into service, because they are keying to get their hands on that for best. So I think we are going to naturally see the 8.9 revert back to where it is, which is a great add which is trucks and rapid use market and buses and maybe some regional trucking. But the 12 is going to hit a sweet spot that is much, much bigger and less compromised than either what we have been doing with the 15 or the 8.9 in the past.

Now 15 is going to do really well as we start to see infrastructure built up and as we see more and more of these fleets able to justify the refuelling. So I think that if anything that 12 is going to create more demand for 8.9 and 15, even if you might say that those customers might have bought something different a year ago, that’s true. But it’s because they had no choice. So we really do believe that we’re going to see the whole market grow as we see more product availability and that’s what we see happening this year.

Operator

Next question is from Eric Stine of Craig Hallum.

Eric Stine - Craig Hallum

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

David Demers

There is no -- it’s just no getting around with that, 15 is only available in a few truck chassis, that’s no secret in a couple of brands, (inaudible) computer built and as a solution the way it’s priced, and the way it’s being marketed, it’s been targeted at heavy haul and large fleet and people that we can support in a concentrated way with those people came to our dealers, so is it how we’re going to help, of course because it has been marketed at a very broad array of customers with everybody who has trucks in the market so there is going to be a much wider array of customers which will create customer support, which will create enable dealers.

So now it’s quite enabled the market for everything which is why we’ve been spending so much time and getting ready for it. I think we are seeing that interest in the marketplace. Darren said, you know, we can’t give you any definitive customer names or numbers or timings but certainly we can tell you that there is a very large amount of industry interest in natural gas which has been driven by the array of products that’s coming this year.

And obviously that’s not the end there is Volvo product coming in 2014. There will be other natural gas products coming in the future I guarantee that. So I think the market has taken off. We’ll see it over the course of this year.

Eric Stine - Craig Hallum

Okay. That is helpful. Maybe just return to light duty from the last question. What do you think the mix eventually looks like when you launched the Ford, the 450 and F-550 and also the service off feed option, you know just curious, you think that those vehicles have bigger opportunity than what you are current offering is or how should we think about that going forward? Thank you.

David Demers

Well, I think we can pick on the F-250 and 350. Bill is going to chime in a minute I can see him. I think you know that was really developed for our friends in oil and gas industry that’s by products, designed and targeted at customers that you’ve heard talking about pioneers is a great example that’s who we expected to buy the F-250. Now the service bodies going to lots of other fleets. These are commercial vehicles.

Frankly, I am a bit surprised. We’re see consumer orders for big truck. There are consumer orders and people are buying one-off and they are getting their Ford dealer and everybody is excited by it. But, we think that this is still a fleet marketplace and that’s why our growth has been into the larger platform. I think there is going to be lots of volume. We want to create this customized solution that gives a combination of performance, and value, and serviceability, and I think that the team has achieved that and that’s why we’re seeing order growth.

Eric Stine - Craig Hallum

But eventually, I mean it sounds like you think that those new models or new versions to come as a bigger opportunity than where you currently are…

David Demers

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

Eric Stine - Craig Hallum

Okay, thank you.

Operator

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

Colin Rusch - Northland Capital Markets

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

David Demers

Well, honestly, I don’t think we’re going to see spark in these applications just because you really start to see that the challenge in getting the torque in particular out of that constant displacement. So this is going to be a rebuild market as well. It can be pretty hard to take a diesel engine and rebuild it as a spark-ignited engine that’s just not going to happen. So I think HPDI is really well-positioned which is why there is so much enthusiasm.

I think what you can see from the rail industry in particular they’ve all been very public now that they are looking seriously at gas and because of the way the industry is setup with so much sharing of equipment, it really needs to be something that the whole industry adopts and frankly that’s what we’re seeing. I think everybody is quite excited about the opportunity to see this lower cost fuel. We’re seeing a lot of industry-wide collaboration and cooperation.

To do that, we’re going to need to be rebuilding the existing engines as well as shipping new that means we’re going to have to have diesel cycle. So you are going to see lots of things like dual fuel conversions, you know that product has been out there for years around the world, you’re going to see people getting their feet wet with that but ultimately we’re going to need the energy density and the performance in the fuel economy of HPDI which I think is why Caterpillar have that choice because that’s what the industry is going to need to be successful. So I think what has been exciting for us is how quickly the idea has taken traction in these markets and the volume of fuel that we’re talking about in these industries is literally billions of gallons a year. So it’s a very powerful economic argument for rapid adoption. I think we are going to see very fast penetration in these high horsepower applications as we get these products developed out in the market.

Colin Rusch - Northland Capital Markets

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

Bill Larkin

Currently the engines that are sold through the joint venture we don’t recognize any revenue. At the end of the period, we just recognize our 35% of the profits of the joint venture, and that’s what you see down below by line of P&L. Once we start selling products, the HPDI components that will be -- that will hit our top line directly to revenue and then fall down to gross margins, or bottom line. And then also that will be captured within our new markets and off road business unit going forward. We won’t provide any additional color or guidance on what that’s going to look like at this time.

Operator

Next question is from Rob Brown from Lake Street Capital.

Rob Brown - Lake Street Capital

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

David Demers

Rob, you always ask a good one. So just to remind everybody what we have done with the LNG tank system, which we announced last fall, is to take the LNG tank and pump system that we have developed for our HBI trucks and adapt that for use with spark ignited engines for a bunch of reasons. The major one being that we can use coal fuel to reduce the complexity of the station, we can increase the range and the amount of fuel that’s been in the tank and improved performance for a high fuel use applications, light trucking. So as we launch 12 liter trucks, we expect most of those trucks will be LNG fuel. There is going to be a lot of CNG for regional people and there is a bit of an anomaly on pricing the CNG versus LNG for various reasons that I am sure you will understand. So there are going to be some 12 liter trucks that are operating on CNG but in general we think that’s going to be a relatively small portion of the market because the penalty in both range and weight is so high to go CNG.

So most of them are going to be LNG, I think most of them are going to want to be able to coal fuel and therefore the use the Westport tank and because of our integration with the vehicle and with the OEMs today we think we are going to see very good market share for that system. Now tank is the most expensive part of the truck, it’s just the inevitable that the fuel system we’ve always said the most expensive parts, not the engine, are fuel tanks. So revenue potential for us is very encouraging. That said, we’ve also announced and told people we want to bring down the price of natural gas vehicles. And the way to do that is by reducing the cost of components and broadly speaking our global supply chains on LNG tanks and pumps are allowing us to have a really encouraging cost profile as we see volume from 12 liter application in America.

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

Rob Brown - Lake Street Capital

Yeah. Thank you. And then, just in terms of timing, do you start to see revenue for that product sort of at the same time as the engine shipped or do you sort of, are you ahead or behind there just…

David Demers

Pretty much, it’s not quite, we both shipped to the truck OEM, so CWI will have an engine supply agreement, and those engines will arrive and get put into a truck and you going to need a fuel tank to go along with the engine. But I wouldn’t say its one for one because they are hitting the line slightly different times with slightly different inventory policy. But in general, yeah, you are going see one tank system for and one engine for truck.

Rob Brown - Lake Street Capital

All right. Thank you.

Operator

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

Aditya Satghare - Lazard Capital

Great. Thank you. Two questions please, first one is one Volvo. So can you give us an update on, what you are seeing, any kind of initial feedback from the early pilot in shipping this 13-litre engine? And maybe update us again on launch dates and when this product is expected to reach the market?

David Demers

Yeah. Sorry, we can’t give you much. The truck was at, (inaudible) which no cause some surprise to some people which, I mean, the truck is there and people are kicking tires and yeah, customers have had their hands on it, but can’t give you much more than that.

Aditya Satghare - Lazard Capital

Got it. And just following up on the earlier question, LNG Tank rates? So the recent order from UPS for 700 incremental trucks? Have you finalized the tank solution provider and if not, what -- what do you think would be some of the competitive factors going into winning order like that?

David Demers

Let me…

Bill Larkin

(Inaudible) has not been decided yet.

David Demers

Yeah. Well, I was going to even go one step beyond that, I haven’t seen an order from UPS, let’s be clear. So that’s between UPS and their truck vendor. I’m not sure they announced that one either. So, the way this works, yes, we are hope to talking to customers and yes, we are working to creat demand. But really it ends up going through the OEM distribution channel and that’s when we see finalized decisions on tanker pump.

Bill Larkin

Now, what is happening, as we are seeing the transition from these early markets, as we are working with people to build the 8.9 litre products, those are specialty products that are pretty much built to this specific fleet specifications.

As we get into much more generic product line that’s built on the production line, we are going to see much more standardization on the tank package, which is why think, right time to introduce our LNG system.

Yes, it has been fully validated by the OEMs that are taking it today. They know these components. They know these, how to install them. They’ve done the quality control. So I think it’s going to be relative straight forward to see our LNG solutions on to these vehicles.

Same time we are working with CNG on our Ford products and packaging that in the production line. So we are working with people to develop standardized CNG packages which some of you I know saw at our in the open house.

So I think we are going to see over the next year or so is a very rapid increase in standardization and professionalism of producing natural gas trucks in every one of these vendors, and we are going to see all kind of developments movement next 12 months. So, yes, we are in the middle of those discussions.

Aditya Satghare - Lazard Capital

All right. Thank you. And that’s all I had.

Operator

Next question is from Rupert Merer from National Bank Financial. Please go ahead.

Rupert Merer - National Bank Financial

Hello, everyone. Thanks for taking the question.

Bill Larkin

Hi, Rupert.

David Demers

Hi Rupert.

Rupert Merer - National Bank Financial

Looking again the Weichai in China, you talked about the opportunity to sell more Westport product into China going forward. But if we focus on the joint venture alone, can you talk about how trends for pricing sent to the JV and how the business model for the JV can evolve overtime, maybe talk a little about and how margins could evolve in the JV?

Bill Larkin

Well, you don’t forget that the way the HPDI part is being working, let just start with that. Again, if an engine company and so we will supply the on engine components like fuel injectors and controllers…

David Demers

Tanks.

Bill Larkin

… and some of the specific modules required for the engine will go to the joint venture. So we’ll see revenue from Westport to the joint venture and then of course that will have to get, that sold into how we share the income from those products, you’re going to see bit of income from the joint venture, and you’re going to see revenue and gross margin for the sales through the joint venture. The tank package goes to the truck manufacturer, so we see direct revenue for the tank package and direct gross margin all of which is going to be in the on-road system business.

Rupert Merer - National Bank Financial

I think just the new market -- the revenues for HPI for the 12 liter HPI system component that should be accounted in reported in the new markets and --

David Demes

But that model applies to the other businesses as well.

Bill Larkin

Well, as there is a supply arrangement between the joint venture and Weichai as they supply the engines, as I mentioned before, this is a rapidly growing market, there is a significant opportunities, it’s extremely competitive. And the joint venture made a conscious decision to go after a very specific markets. As you may know Weichai they dominate the trucking market but they are not as strong in the bus segment. And so they made a conscious decision to get aggressively pricing and go after the bus market. And that’s why we have seen a degradation of margins over the last say 18 months, how long that policy is going to continue, I can’t comment on that point in time because we are at the table in discussions with our joint venture partners, what it is of strategy for approaching the market.

But looking at it from our perspective, they are actually doing a huge favor going forward as we start preparing to launch the HPDI version of the engine because they are building up a market for their products. So I think at the end of the day it could help us quitter a bit as we launch our products and also so sell and integrate our tank packages into the market because as you know, as we talk about the low-pressure tank system it’s not very similar to what we see here in North America is the opportunity, over there the joint-venture last year they delivered over 20,000 engines in the first quarter, this year they did 8500 engines. Well all those engines, that’s an opportunity for us to sell this low-pressure tank package and that’s huge opportunity and I think ultimately at the end of the day we have a good opportunity to sell lot of these packages and generate a lot of revenue and profit for the business.

David Demes

I will weigh in a bit too. It’s great to have this problem but I have to say, I am sure any of you know that this automotive business, when you get 200% growth it’s not an efficient, just a supply chain, not geared for that kind of growth. Your own production and distribution channels aren’t all that efficient. So cost of good may not be optimum let’s say and until things stabilize and get down to a little more manageable system you’re not really going to be able to optimize gross margins. But that’s what we want, we want to see spectacular growth because that gives us the opportunity to generate great margins in the future and we think we will see good margins of the joint venture. We’ve talked about double digits, China is not going to be a 30% gross margin business for sure.

But we see a very strong possibility of improving margins in the joint venture, and of course the Westport proprietary technology we should be able to get good margins even in China as long as we can get load sourcing and meet price expectations which is challenging. That’s a bit of a hand waived but over the next 12 months let’s say we should see some of these trends becoming quite evident and in many case we think that the growth is very encouraging.

Rupert Merer - National Bank Financial

Second question, if you look at the wing system, you talked a little about the competitiveness of the market, you mentioned you have a market leading position. Can -- you talk about your market share today and what do you think that could go? In the wing system in North America?

David Demes

We think we are a market leader in the F 450, there are QVMs of course selling other product and you don’t need us to tell who they are. But I think the market feedback on the wing product has been good and we’re seeing strong interest in the products we just announced. So I think our challenge now is to push ahead on the path that we talk both. And that means improving quality and dropping price and broadening the product offering with Ford, pretty straight forward.

Rupert Merer - National Bank Financial

Very good. Thanks.

Operator

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

Chip Moore - Canaccord Genuity

Thanks. It’s Chip Moore for John. Just back to Caterpillar real quick, maybe you can bring up the speed on the way it is solving efforts there and then a little more detail on how you’re thinking about retrograde opportunities in that marketplace?

David Demers

I’m looking at Darren. Not sure, we can comment on developments. Cat have been very active in the market place over the last few months. Talking to customers, I think the customer reaction would be very good. We’re certainly very pleased with the reaction we’re seeing and the -- let's call it the energy that’s being put into it from LNG Industry because of course these are very big potential customers.

We’re going to stop up a lot of that excess natural gas. So I think that it’s gone as well as any of us could have hoped. That said, we tried a lot of development book to get a product that is going to be up to the expectations of our customers. So that’s obvious I hope.

That said I think that the opportunity in rail is very exciting. Rebuilding these engines is not a huge technical challenge. It’s a marketing and logistics challenge and a performance challenge but there is quite a bit of confidence that this is going to be a project that is manageable and make sense for everyone, particularly in a climate where we’re seeing increasing emission control has been introduced. And this is a way to bring emissions profile of our industry down.

So I think the plan is doable. The economics justify it. And we’re all going to make a lot of money.

Bill Larkin

Chip, we also did say that we expected to launching product in the outburst of this year. (Inaudible) right now till we announce exactly what that product is.

Chip Moore - Canaccord Genuity

Fair enough. Thanks.

Operator

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

David Galison - CIBC

Hi guys. Thanks for taking my question. Just first one on, just touch on the guidance. So you’ve reiterated guidance for excluding CWI. But do you have the same level of confidence from the $4.30 to $4.60 guidance that was provided with CWI?

Bill Larkin

I’m just doing the math. You’re quick in our entity. I think clearly -- there are two different company questions in terms of Westport and Cummins Westport. Cummins Westport, I think has got some, frankly some phenomenally expect to grow over the course of this year. Because it will recognize the revenue of the 12 meter sale. So I think there is a quite of growth expected on Cummins Westport and in terms of Westport, maybe, 180 to 200. I think it’s just hard whether it’s just having a calculator in the room, David exactly what and frankly it’s tough for us to give guidance on Cummins Westport as a segment, so something we took as a challenge.

David Demers

Nor have we said much of a Weichai Westport. I think what I hope you’ve gathered is that we’re pretty confident that CWI and Weichai are both going to see very strong growth this year. Now I was talking to shop on our consolidated revenue but we get benefit, ISB participation of the profits or by creation of the market and the market polled for our direct products. But the direct product, 180 to 200 as I said is something we’re pretty confident in for the direct Westport sales.

Bill Larkin

And I think we’re actually -- sorry Dave. Just remembering from our last quarterly conference call, I believe we did actually give a through Westport plus Cummins Westport outlook. And if we’re going to be reiterating guidance, we just haven’t expected any significant change to that. That’s again why we reiterate our guidance for the year.

David Galison - CIBC

The previous guidance including CWI was $4.30 to $4.60 provided last quarter.

Bill Larkin

Yeah. And we haven’t changed anything but I just need you to understand going forward, we won’t be in a position to provide segment guidance on CWI. So -- because we just don’t give guidance on that business unit anymore. But we do -- now I am going to step away from any kind of the expectation that we delivered at the beginning of the year. I’d just reiterate d our growth expectation.

David Galison - CIBC

So you’re not seeing anything happening in the markets that would suggest that there to be major difference from your view provided --

Bill Larkin

That’s a fair assessment.

David Galison - CIBC

I am sure you’re probably not going to be able to much, just want to touch on the two most recent development agreements that were announced in Q4, can you talk a bit about how they are progressing and maybe when we might be able to get some further color on those agreements?

Bill Larkin

I think we expect to be able to unveil at least one of them this year, perhaps even both in -- again it’s pretty candidad, Dave, it’s really a the OEM’s request. We are a bit holding to them as well, not necessarily --

David Demers

And I will jump in again, because I want to make this clear. This is serious, we are fine to play games, people now are taking that actually seriously and all of our OEM partners are scrambling to build their natural gas strategy. It’s just not -- this is not operate, there is going to be a lot of natural gas in the automotive industry and it’s just not something we can do to out anybody’s product plans until they want to do that. We’ve got pretty strong insight as to what everyone is up to but it’s critical for us not to give anybody a strategic advantage. So sorry, I think that this will come out in time but you will see it from OEMs, not from Westport probably.

Operator

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

Matt Gowing - Mackie Research Capital

One, if you could provide some background on the 15 liter that you sell, if you have to look at that product and you kind of break the value down in rough percentages between the value of the HPDI in sector as M1 bucket and then the other bucket some of the components that David was talking about the tanks, the modules that controllers in another bucket. And then any other sort of value that would be in that ASP. I know it’s ranged from say 45,000 and $50,000 per unit but just wondering if you could provide some background on that.

David Demers

Yeah we’ve never really broken down the raw materials in detail for obvious reasons. I think we are going to be outdated as you start to see product revenue from tank systems but the short answer is no, don’t want to break down into material. But the clue we gave you though to be something that is natural, the tank packages and some expensive parts on the truck, now the tank package is not just fuel tanks, its tanks line regulators, valves, controls, and any sort of architecture you’re going to be paying the tanks on the trucks. So the package itself is the most expensive component. The engine price being the advice we’ve given to people if they want to just a model, just look at the revenue in the ASPs, for natural gas engines out of our joint venture, they are not much different than the diesel engine. And that’s true. So typically costs for natural gas engine isn’t that far off the diesel engine. And as we get them being produced in volume, and as tooling gets amortized, supply chain get more mature, you’re going to see cost of natural gas and then migrate down even closer to price of a diesel engine. So I think the only answer we can give you is tank package is the biggest opportunity for pricing cost reduction, it’s also the biggest revenue opportunity in the near term for us.

Matt Gowing - Mackie Research Capital

Just a quick follow up one, you mentioned that kind of growth acceleration in the remainder of the year is going to come from mainly in the on-road business and then you mentioned a number of the buckets there. Would you agree with the assessment that it really is going to be the LNG Tank Systems that are kind of the number one driver of the growth in the on-road business for the rest of the year?

David Demers

We said publically that the Ford ASPs are in $9,500 to $10,000 range. So these are not insignificant sales either. The Volvo Car products ASPs are in that range. They are not quite that high. The volume potential is very high with those products as well. So, I think it’s going to be very difficult for us to pick one favorite trail over the other quite yet. I think the excitement around LNG and trucking is real and this is a market that could move very quickly and is dependent on the development of this LNG refueling infrastructure, which is coming over the next couple of years.

But it’s going to be paced by the availability of stations and the management of those truck roads and the stations are going to be opened in conjunction with truck fleets who make this decisions. So this is quite a deliberate and long-term play I think, but we think with lot of momentum and lot of volume. A lot easier these days for people to buy a Ford pickup truck and get CNG out of local refueling stations. So potentially the volume growth is not as constrained and the impediments to growth is not as high. And similarly in Europe, as we move the Volvo product out of just being its home Sweden, which is the only place sold today.

And as we develop other product, we think that also has potential for a step change in growth. So long weighted answer that says I think, we laid all of the cards, still to play and they are all going to develop at a different place. But we think they are all going to have very large potential.

Matt Gowing - Mackie Research Capital

Great. Thanks very much.

Operator

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

Matthew Blair - Macquarie Capital

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

David Demers

Well, I think you expect something from Caterpillar because we have seen revenue from Caterpillar. So we are developing with them. But we are not going to breakdown who and for what gain for the obvious strategic reasons.

Bill Larkin

And in terms of the outlook for the year, what we can say I guess in general is that the Volvo products moving closer and closer to commercialization. We probably don’t expect as much contributions or service revenue from the Volvo program, as we have had in years gone by.

David Demers

I think we want to see irrational management of our resources, so there is multiple development programs and we are trying to do our best to make sure that people are not over booked and then under worked to see my address. So you are going to see service revenue business in pace by the availability of people in (inaudible) and resource. This really is an engineering development project that depends on work and milestones.

So all of these projects are structured in similar ways we expect to milestone -- we deliver the milestones and we will recover our expenses. It’s not an hourly going sort of process. But we are getting lots of work and we are very busy and so you should expect service revenue to be something as part of the P&L for sometime to come anyway.

Matthew Blair - Macquarie Capital

Sure. Okay. That’s helpful. And then also on the Cummins Westport 11.9, I know that you are going to slowly ramp production in 2013, but how should we think about your production capacity for this engine in 2014 and 2015? I think it’s being built at the Cummins Jamestown facility, which has capacity around 100,000 engines per year. So, are you capped out on a certain percentage of that space or could you build all the engines that you gave orders for? Can you help us think about your maximum production capacity there? Thanks.

David Demers

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

Bill Larkin

I’m so happy to hear you ask from where the runaway capacity is coming. So my heart is good. I think I have to be serious on this. It isn’t just engine assembly. It’s the whole supply chain and there aren’t all that many different parts on a natural gas engines from a diesel engine. But yeah, we do need to go through and make sure that every supplier is coordinated.

I mean that’s what the business is all about. We typically are able to rely on the volumes and the experience of our engine production partners like Cummins and Weichai. And going forward, as we launched with Volvo, these businesses are very sophisticated and they manage their supply chains. But that said, we got to manage the supply chains and we are going to be managing a very high growth product we all believe. And so that’s going to create shortages and problems that people have to jump on and sort out.

Am I concerned about running out of engine capacity in North America? No, I don’t think so. I think that there is lots of capacity in the truck supply channels and from what we’ve seen from suppliers, people are quite anxious to get a piece of the natural gas business. So, I think we will build that supply capacity as we see demand.

Matthew Blair - Macquarie Capital

Okay. Thanks.

Operator

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

Jeff Osborne - Stifel Nicolaus

Hey. Good evening. And thanks for squeezing me in. Just had a couple of questions here. I know you don’t want to get into the linearity of the guidance. But it was my understanding that the 400 horsepower version of the 12-liter comes out in August. I think that’s what you said at your event in Kentucky. And that appear to be the better seller, at least from our checks on the floor versus the 350.

So, I guess with that and the infrastructure being built largely being back-end loaded which I think was the rationale for the weakness in 15 liter last year. It seems like maybe not using or kind of divide by 3, the meter guidance to get the run rate but maybe the fourth quarter would really be where everything kind of hinges on. I guess, maybe, a, if you can just touch on why the 15 meter was so weak last year and why you think it will get a lot better this year. And then also if you can just touch on the delays of the 400 horsepower and why that’s not out yet. And is there any type of pent-up demand, people waiting for that for August?

David Demers

I’ll take a crack and then Bill is going to jump in. I have to start by saying I don’t think we’re disappointed in ‘15 last year. We thought we built some good customers. It was managed launch with some very key customers and we provided support to those guys and it’s built the LNG business and built the LNG infrastructure.

So that growth last year was good, lumpy. A few customers, not thousands of customers but we’re going to see continued growth from those customers of that products and that’s paved the way for -- we think it’s going to be a very successful product with 12 liter.

Jeff Osborne - Stifel Nicolaus

Well, you had said that that you start the year starting 2012, you’re expecting 800 units but maybe I’m mistaken over the different products. But I’ll tell you actually….

Bill Larkin

Don’t be very careless, Jeff. That’s not the number that the company ever issued but…

David Demers

Again, it’s bit of -- like I’m guilty of just now, I just said, we’re going to see or what the industry has announced is 500, 600 LNG stations and that implies it’s going to be 40 to 100 trucks per station. That’s a lot of volume but there is a lot of lumpiness between today and the end of 2015 to get to that number. It’s just a path of life with low volumes. I wouldn’t expect any sort of linear, smooth curve.

Jeff Osborne - Stifel Nicolaus

Okay.

David Demers

Because it’s such a -- it's going to be customer by customer and region by region. Early days, lot’s of work but I think you can see starting guns going off and you’re going to see very substantial penetration in these markets.

Bill Larkin

Jeff, the rating, the horsepower rating over the CWI engine, again it’s expected to be delayed beyond August. I think that’s the production schedule.

David Demers

I’ll step back and say we sold out between now and August. There is no problem in selling the lower ratings. It can be lost demand for 400 rating. I think it is going to be lost demand for other ratings as well and the reason for having the 400 at August is we want to have a controlled release or controlled launch. And we want to provide good customer support and not -- the plan, I think it’s going to go well.

Jeff Osborne - Stifel Nicolaus

Okay. So there is no compression problems or any other issues that you experience in trial with higher horsepower?

Bill Larkin

No.

Jeff Osborne - Stifel Nicolaus

Okay. Thank you.

Operator

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

Alex Potter - Piper Jaffray

Hi, guys. Thanks. I was just wondering you had mentioned earlier introducing the premium HPDI product into China and attempting to maintain margins. Certainly, it looks likes kind of blood bath, to forget the margin on the existing products. So just wondering what I guess some of our strategies will be to try to maintain margins. It seem like expectations are being set at a level where people expect this natural gas, trucks to be relatively cheap. So if you come in with a premium product on top of that. Are you going to be targeting specific segments of the market or how do you expect to maintain margins? Thanks.

David Demers

Yeah. You’re right. Obviously, going for a premium product, so high performance product that is very differentiated. And yeah, we fully expect that we’re going to see a premium price for these trucks and the customers that we expect to buy it are going to pay a premium price. There is no doubt. That said it’s not going to be $75,000 or $80,000 premium either. So that also should give you a hand on how this is going to play out.

I think the margin issue in the joint venture, don’t forget is very different than our profile. Joint venture margins are being driven by the engine price and that’s a very competitive business in Weichai like common sales to people who make engines too. So they have to be very competitive

We’re going to be selling 10 packets. It’s for example, at a different price points, different margin expectation and I said, it’s proprietary technology. So we’re confident we’re going to get good margins on that product. It may not be the 30’s that we talked about in North America but pretty good in China.

I think that the challenge in any of these businesses is managing our cost and our supply chains. And we’re developing local partners and local suppliers that we think can hit the price points and the quality that we want. But that’s -- it’s much like the automobile market in China. There is a lot of different product between the top end of the market and bottom end of the market and we’re going to be going for the premium truck fleets that have high-fuel consumptions and high-quality expectations and as a result are able to pay for.

Alex Potter - Piper Jaffray

Okay. Great. I was just wondering this as follow-on there, if you could give or at least from my understanding the majority of the truck begin purchased in China are owner operated, kind of, one-off as oppose to fleet. So -- big fleets with hundreds or thousands of truck. So I was just wondering if you have any specific areas of the truck market that you’re going to targeting, who is that you’ve identified that’s willing to pay that premium? Thanks.

David Demers

Yeah. We’re talking about Weichai here, I’m assuming. Yeah. It will be the fleets. When you see that the majority are owner operators that’s true. But it’s a million truck of your market too. So there is still great content for sophisticated fleets and increasingly we’re seeing the truck fleets get organized. So I think we will see transition in China to more organized logistic fleets. The oil and gas industry, the resource industry, these guys are pretty big fleet operators and our team to reduce their operating costs. And that’s where we would see a sophisticated life cycle products sort of analyses that we can appeal to.

Bill Larkin

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

Alex Potter - Piper Jaffray

Okay. Fair enough. Thank you.

Bill Larkin

Thanks.

Operator

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

Darren Seed

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

Operator

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

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