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Westport Innovations (NASDAQ:WPRT)

Q4 2013 Results Earnings Conference Call

February 26, 2014, 5:00 p.m. ET

Executives

Darren Seed - Vice President, Investor Relations and Communications

David Demers - Chief Executive Officer

Bill Larkin - Chief Financial Officer

Analysts

Laurence Alexander - Jefferies & Company

Rob Brown - Lake Street Capital Markets

Ann Duignan - JP Morgan

Jerry Revich - Goldman Sachs

Vishal Shah - Deutsche Bank

Eric Stine - Craig-Hallum

Aditya Satghare - FBR Capital Markets

Colin Rusch - Northland Capital Markets

Matthew Blair - Macquarie Capital

John Quealy - Canaccord Genuity

Pavel Molchanov - Raymond James

Jeff Osborne - Stifel Nicolaus

Operator

Welcome to the Westport Innovations Inc. fiscal 2013 Q4 and year-end financial results conference call. [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.

Darren Seed

Welcome to our fourth quarter and year-end conference call for fiscal 2013. It’s being held to coincide with the disclosure of our financial results earlier this afternoon. For those who haven’t seen the release and financial statements yet, they can be found on Westport’s website at www.westport.com.

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

You are reminded that certain statements made in this conference call and our responses to various questions may constitute forward-looking statements within the meaning of U.S. and applicable Canadian securities laws, 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. At the end of a fiscal year, I think it’s useful to review the year and our progress against our strategic plans, and 2013 is an especially interesting one as we went through considerable change as we reconfigured our business from its roots as an R&D and market creation venture into what we now believe will be a high growth product phase in our development.

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

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

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

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

But put the two together, and you have our fundamental thesis, that we’re going to see natural gas as a primary fuel for transportation applications. It’s hard to believe, but as recently as 2012 we were still debating this concept. The question now is exactly where and how fast and how much - in other words, where should investors and companies focus for the best returns, in what we now all believe is going to be inevitable change.

That’s a very challenging question, and frankly it’s been the origin of a lot of noise in 2013. But accepting this foundation thesis at Westport, we focused on where the market is going to be, not where it has been or even where it is today.

There are lots of companies doing very well supplying goods and services to the niche markets that have already embraced fuels like propane and natural gas, and that’s great, and there’s the usual business scrap going on around the world for market share in those traditional segments.

But we believe, and you should too, that the real prize is the emerging market, the coming market for fully developed, globally built OEM supply chain based products that are built and distributed to the same high quality that current products are and using the traditional automotive industry channels.

Now, again there’s some question. In fact, there’s a lot of question, about exactly where and how fast the breakthrough products will come. We have a pragmatic strategy. Our plans are based on evidence in the markets that we’re targeting, but we believe the market ahead of us is coming quickly.

We’ve concluded that the first priority should be markets where customers spend a lot of money on fuel and where regulation or policy are encouraging a change and where there’s a full ecosystem of product distribution and service, fuel infrastructure, and customer awareness. We have to develop that complete ecosystem before we can really see product sales.

Now, at Westport, we’ve spent over a decade educating and encouraging and demonstrating and proving out the necessary components of that ecosystem in different markets around the world. At the end of 2013, the situation is quite clear. We’re able to survey the situation around the world, and we can be satisfied with the proof that we’re on the right track.

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

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

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

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

Now, we spent the last year reviewing our current product portfolio, all of our alliances on opportunities, and we’ve made the appropriate shifts in business based on what we think are the most important strategic opportunities, and getting an optimum mix of short and long term products.

Furthermore, we believe we have strong leads on competition, and we can foresee considerable flexibility in our plans as the markets mature, in case things speed up or slow down, anything in particular. So we’re entering 2014 with some clear goals.

We’ve been talking about this for years, but we look at 2014 as the critical breakthrough year in heavy duty trucks in North America. We expect to see 3% to 5% market penetration in class A trucks for natural gas this year, which is up from virtually zero in 2011.

At that rate, we’d have a total population on the road of about 12,000 trucks over the last couple of years, which consume on average about 18,000 gallons of fuel per year each. So this is becoming a material amount of energy that’s being allocated to the class A truck market.

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

Westport has content in about 100% of those trucks this year, with Cummins Westport engines supplemented by sales of the Westport iCE PACK LNG system and of course on the CNG side, we have the various specialized components that we manufacture, including tank valves, regulators, and so on.

We think 2014 is also going to be a breakthrough year in China for us. Our joint venture hit 38,000 engines last year, and it will grow again in 2014. 70% or more of those sales are in the trucking application as well.

Westport will begin supplying components and HPDI kits to the JV this year, as we shift our strategy from market creation to product sales through the joint venture. This is simply a spectacular opportunity, and we’re excited at the opportunity to continue to work with Weichai to lead this energy transition in China.

I should point out that the JV has announced another capacity expansion so that by the end of this year we’ll be in a position to ship 100,000 natural gas engines annually from the joint venture.

On the automotive side, we’ve got two paths to market, our [unintelligible] business, which is well-positioned for growth as our OEM customers expand their product offerings globally and as sales develop, and to our complete vehicle systems, including our work with Volvo Car and Ford.

In both cases, we’ve taken big steps to position ourselves for profitable growth, even at current sales levels, which are still relatively small. For example, we agreed with our friends at Clean Energy Fuels last year to merge the BAF and Westport wing divisions last year to create the single largest Ford QVM business.

We’ve consolidated our operations now into the former BAF facility in Dallas. The combined business is the largest Ford QVM, and although this isn’t really the long term strategic and scalable business that we’ve talked about, we expect to see it develop very well, and we’re going to make money this year and as the market develops.

Similarly, with the launch of the new Volvo V60 model in Europe, and with the changes we’ve made to that business, we expect to be in a position for profitable growth in 2014 and beyond.

We’re seeing surprisingly quick enthusiasm in the rail industry and we’re well-positioned to sell fuel tenders and engine systems in that market over the next few years. This is brand new. Our first fuel tender shipped right at the end of the year. But this is emerging as a very interesting business for Westport, and of course you’ll see the evidence of this develop in 2014.

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

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

Now, all of these products are in the market today, and are going to form the basis for our stated goal of reaching operational positive adjusted EBITDA by the end of the year, excluding the income from our joint ventures.

This is a big deal for us. Please understand that we’re very serious about this goal. The swing from the 2013 number of $97 million adjusted EBITDA loss to positive adjusted EBITDA on a consolidated basis within the next two years is a real challenge, but we believe we have the roadmap in front of us.

And of course, the endgame is not just a breakeven business. We’re continuing to invest heavily in technology and product development with our partners, and we believe we’re developing a sustainable, competitive position. As the market for natural gas vehicles emerges over the next few years, Westport will be the leading partner for OEMs as they launch new products.

So I’m going to close and turn the call over to Bill, but let me just reiterate our goals for 2014. Number one, positive adjusted EBITDA from operations by Q4 and continued profitable growth in our joint ventures. Second, we want to be careful and prudent managers of our investment programs to ensure that we can hit the operational cash flow from Westport direct sale plus our JV dividends to cover our business in 2015, as we’ve said.

We want to allow Westport to achieve overall consolidated positive adjusted EBITDA, but at the same time, maintain the right investment and the right priorities to ensure our continued leadership of the industry.

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

So those three dimensions give you some sense of the strategic challenges in front of us, but I think 2014 is going to be a great year for us. We’ve laid the trajectory out, we’ve identified a meaningful scorecard that tracks our path to profitability, the industry is still growing beyond many expectations, and I firmly believe that Westport and our shareholders are in the right place to take advantage of this new opportunity.

So thanks for your support and interest, and I’ll turn the call over to Bill to run through the financial highlights.

Bill Larkin

Thanks, David, and good afternoon everyone. I’ll begin with a brief overview of our fourth quarter results. For the quarter ended December 31, 2013, we recorded consolidated revenue, excluding our revenue from joint ventures of $52.6 million compared to $39.9 million in the prior year period. This is a 32% increase.

A breakdown of revenue by segment is $24.3 million for applied technologies, $26 million for on-road systems, $500,000 for off-road systems, and $1.8 million for corporate and technology investments. For the full year, our revenue was $164 million.

CWI had a record quarter, with revenues of $110.5 million on the delivery of over 3,800 units. And Weichai Westport WWI generated $93.6 million in revenue on the delivery of over 8,100 units.

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

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

Also, U.S. GAAP requires us to at least annually, which was November 30 for us, review our goodwill for impairments. Based on historical experience, financial forecasts, and industry trends and conditions, we recorded noncash goodwill impairment charges in the fourth quarter related to our Volvo cars business and Italian operations.

However, our Italian operations are generating positive adjusted EBITDA, and we are still expecting to grow and diversify revenues through expanding sales of our products in other markets, including China.

Finally, we recorded other writedowns primarily relating to consolidating our four businesses, as David mentioned, into our Dallas facilities, where we expect to realize operational efficiencies beginning in 2014. So during the quarter, total adjustments recorded were $67.8 million. Of this amount, $26.3 million was recorded in cost of goods sold.

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

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

For the fourth quarter of 2013, our net loss was $89.5 million, or $1.42 loss per share, compared with a net loss of $37.6 million, or a $0.68 loss per share in the year prior. Excluding the impact of the adjustments I had discussed, and these are partially reduced by $10.1 million in unrealized foreign exchange gains, our consolidated net loss and net loss per share for the fourth quarter were $8 million and a $0.51 loss per share respectively.

As of December 31,2013, our cash, cash equivalents, and short term investments balance was $210.6 million. Our cash burn is down, and during the fourth quarter we used $26.9 million in cash, which is a sequential decrease of $19.1 million. For the fourth quarter, our consolidated adjusted EBITDA loss was $23.2 million.

We have been describing the Westport financial plan and our path from a heavy investment phase through overall cash flow and profitability. We believe our business model can and will deliver great value to our shareholders as this market shift plays out. In the near term, we communicate specific metrics and milestones so you can measure our progress. The path won’t be a straight line of course, but our progress should be very visible.

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

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

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

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

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

To wrap it up here, we expect our revenue for the year ended December 31, 2014 to be between $175 million and $185 million. We are starting the year in a $25 million hole without the contributions from the first generation Westport HPDI system. We expect the revenue in our core businesses to increase up to 30% out of this hole, which will deliver a 2014 revenue increase of 7% to 13%.

2014 is going to be an exciting year. I will now pass the call back to the operator to open the call for questions. Operator?

Question-and-Answer Session

Operator

[Operator instructions.] The first question is from Laurence Alexander of Jefferies & Company.

Laurence Alexander - Jefferies & Company

First, on the operating efficiencies and the curtailment of the first-gen HPDI, what is the net savings that you’ve realized on that? And then do you expect your operating expenses to track down further in 2014?

David Demers

We are going to have realized net savings. I think they’ll be in excess of about $5 million. We have redeployed those individuals to other programs, to focus on those programs, but we will realize those efficiencies and cost reductions on a go forward basis.

Laurence Alexander - Jefferies & Company

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

David Demers

It could be lumpy. It could be driven by top line revenue. We do have debt payments that we make about every six months. So there are many factors that could impact our cash burn. Also, we’re making capital investments as well throughout the year, and the timing of those investments could impact our quarterly cash flows.

Laurence Alexander - Jefferies & Company

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

David Demers

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

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

Darren Seed

And I think in accordance with our previous disclosure, we’ve been in negotiation with Weichai on the supply agreement. I think at this point, we just say we’re confident we’ll be able to resolve that supply agreement, and get underway at some point this year.

Operator

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

Rob Brown - Lake Street Capital Markets

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

Bill Larkin

I think by nature, most of that’s going to be in our applied technologies group, because it is a mature business, and we expect, as they execute their strategy and try to diversify geographically and penetrate new markets, that’s where we’re going to expect growth in our business. Also, this year we plan on delivering tenders within our off-road business, and so that’s going to drive growth in our business. We launched iCE PACK in the fourth quarter, and we expect to see some nice contributions from that product throughout the year.

David Demers

I’ll just add that I think as I said the real focus this year, for all of us, I assume for you too, is going to be the success of the Cummins Westport [unintelligible] leader in trucking, which unfortunately doesn’t count to Westport revenue anymore.

We will see an impact if that is more successful or less successful. We expect there will be some direct implication for iCE PACK sales, which will show up as Westport revenue. But of course that’s going to be impacted by the famous CNG/LNG mix question, which we may as well raise now too.

So I think that while we see 2014 as getting to positive cash flow, the real growth will be as our investment programs start to roll off and we see these global programs and particularly the HPDI 2.0 generation products hitting the market over the next few years is really what’s going to accelerate Westport Direct revenue.

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

Rob Brown - Lake Street Capital Markets

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

David Demers

I’m going to repeat my answer to Laurence. We have to let our OEM partners manage their product introductions. That’s been beaten into us, and we just have to defer to them. I think we can say, because it’s quite public, there are test trucks in customer hands.

And we want to see that product do very well around the world, for obvious reasons, but we have to allow Volvo to develop the products to their standards, to their schedules, and they’re going to launch and price the product the way they decide they want to do it. And so we’re there to support them, not to try and run the show. So you’re just going to have to wait and see.

Operator

The next question is from Ann Duignan with JP Morgan.

Ann Duignan - JP Morgan

Can you talk a little bit more about the review you’re doing of your projects in terms of ROI and a little bit more about what return on invested capital you’re looking for, what is your threshold, what’s your timeframe? And then how confident are you in your forecast, given everything we’ve seen in the last two or three years, the changes in outlook for penetration in different regions?

David Demers

As part of our annual review, and even before we started to get into that annual review, we took a comprehensive look at our portfolio of projects. Because we have a limited amount of capital, we have a limited amount of resources, and we define very specific criteria in terms of how do we rank our projects.

And it’s just not financially driven. We have customer commitments, specifically Volvo. We’re looking at new opportunities in the markets, where we expect to see significant returns. I’m not going to give you specific internal hurdle rates, but we do have those hurdle rates defined internally.

Also, we’re looking at time to market. How quickly will that investment project turn into revenues for the business. So there’s many different metrics that we look at when evaluating our projects. And as I mentioned, we did a comprehensive review of every project within our company.

And so based on that, we’re going to have to make tough decisions going forward, and those projects that don’t make the cut, they will get deferred going forward.

Ann Duignan - JP Morgan

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

David Demers

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

Bill Larkin

It’s not just the direct financials, because as you’ve rightly pointed out, this is really difficult to predict the future. Nobody can predict how this market is going to play out. I think we can all be confident ten years from now there’s going to be a lot more gas than there is today. But where and when, and how, and who’s going to have the biggest market share, is impossible to predict.

So what we can do is rank things. And so we spent most of our time ranking them, things that we are more certain of and less certain of, and apply a factor to the investment risk factor, as you could probably figure out, and put a cutoff, and say, well, anything below this is too risky.

But then we also have to weigh that against the strength of our partnerships. And if we have a really enthusiastic partner who is moving the earth to make a successful product, or there’s a very strong regulatory driver that we can see, obviously that’s going to apply some weight to this too.

So it’s not just the financial, it’s the likelihood of success, the likelihood of market penetration, and so you can imagine, we’re looking for, in the worst case, are we going to get our money back, and then have an option on how the market grows. Or in the best case, is this something that delivers us real strategic advantage.

So it’s primarily a ranking exercise is how it’s played out, and then we can clearly allocate kind of 100% of the resources that are requested to the top priority projects, and then we can go down and give people a short term leash to go and test out certain assumptions on some of the less important projects. And as Bill says, we’ve deferred a few and we’ll probably continue to evaluate new ideas with a pretty tough lens.

So hope that makes sense. But no, you’re absolutely right. We can’t even predict, in six months, which of our products are going to do better or worse. What we’re trying to do is position ourselves for upside growth but make money even if markets stay choppy.

Ann Duignan - JP Morgan

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

David Demers

Yeah, of course. Of course we would. Obviously it’s in partnership with our partner. But our partners are not shy either. They’re going to be looking for evidence that they’re going to make a return.

Bill Larkin

Yeah, they are very disciplined investors of their capital, and they’ve got a lot of demands on it. They’re not in the natural gas business, they’re in an automotive business, and there’s lots of regulatory challenges over the next few years that are demanding investment and R&D. So I think it’s typically a mutual discussion, and we’re all in this looking at where we’re going to each get the best return. And of course we want to be aligned on that. We don’t want to have a partner who’s highly motivated where we’re not, or vice versa. So this has been a collaborative process with our partners.

Ann Duignan - JP Morgan

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

David Demers

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

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

Ann Duignan - JP Morgan

But organic growth? Do you want to take a stab at that, year over year?

David Demers

We don’t give individual product guidance. That’s the tough part. We do expect organic growth. Maybe that’s to answer your question directly. But we don’t break down individual units or guidance by sector or segment.

Operator

The next question is from Jerry Revich of Goldman Sachs.

Jerry Revich - Goldman Sachs

Can you just talk about the outlook for the Ford WING business? You mentioned it’s going to be profitable for you this year at the EBIT line. Can you just provide some more context around your top line expectations and how that program’s tracking? I know you don’t love to give segment color, but since you’re looking for profit at the segment, I’m wondering if you could just share with us the underlying assumptions.

David Demers

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

So it’s a bit of a mix between increased organic growth in addition to reduction in expenses. And I think that’s why it’s just tough for us to give any more specificity around what numbers that entails, whether the number is in reduction or the organic growth percentage. And that’s as much color as we can provide, specifically on the Ford business.

Jerry Revich - Goldman Sachs

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

Bill Larkin

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

And LNG [tender] cars is kind of the surprise. Don’t call it a dark horse, but this is an area that we’ve been, as David pointed out, sort of quickly and enthusiastically moving while our HPDI commercialization agreement with Caterpillar is not expected to be in full production until roughly 2017 for EMD and locomotives.

Between now and then, we’re seeing a number of rail operators run things like dual fuel or other natural gas related systems, where we’re happy to provide the LNG tender, and with an average selling price of literally $600,000 to $1 million per tender, it doesn’t take much to move the dial on that. I think that’s another area that’s easy to say we can see logarithmic growth, because we had very little in that business last year. So that’s another area we expect a lot of growth.

Jerry Revich - Goldman Sachs

And along your comment of deferring or discontinuing low-ROI investments, can you just talk about the charge in applied technologies? Are you stepping away from any products or regions? Can you give us some more context behind what the writedown represents?

David Demers

No, that’s strictly a goodwill impairment. We’ve got to go through our annual analysis. It was somewhat of a surprise to us, because that business, we had year over year growth. It’s generating positive adjusted EBITDA. However, when we look back historically and going forward, now we’ve got multiple data points, and based on that analysis, we end up writing down a portion of that goodwill.

Jerry Revich - Goldman Sachs

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

David Demers

There’s a fair amount of detail in the press release, and we’re happy to take you through that in more detail if you like, but the simple fact is that every component has been redeveloped and redesigned. We’ve got new suppliers for every component. They’ve been developed in conjunction with partners like Volvo and Delphi. And so there’s a completely different profile, both from a cost, scalability, reliability, durability factor. And we think that’s why there’s been so much interest in the platform.

Jerry Revich - Goldman Sachs

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

David Demers

No, it’s tough, I think, because there’s some information we haven’t disclosed. We are working with some of the OEM channel to develop some of these new components and systems. Some of the highlights, of course, in terms of improving the combustion, it’s really a comparison versus other technologies out there like spark ignition engines. That’s where the combustion efficiency is going to improve.

We’ve been doing some work in the background, obviously R&D , related to the injector. If you remember, back in September, in our use of proceeds from our financing, we’ve identified some areas of strength to increase and invest in would be along the injector plant in terms of getting a closer relationship with that channel and developing some new injectors. So that’s one specific area we do expect to see some improvements on.

Again, the press release, probably, if you don’t mind, I’ll just defer everybody, because there’s an entire laundry list, on December 10, the press release, that just goes through every specific feature and detail. But in trying to answer your question directly, again, the combustion, the injector, that work will get done. And it’s a lot of it to make it sort of more of a cross platform friendly system as well.

I think the compatibility component will be noticeable and allow us, to be candid, save some investment dollars and R&D dollars, and have that system applicable to a number of these OEMs we disclosed in the same press release, where we have seven OEMs working with us today, three of which have not been publicly disclosed as to their names. But they’re at various stages, and by focusing a lot on those are injector and components. It allows us to have the system applicable to those other OEMs and save us some R&D bucks.

Operator

The next question is from Vishal Shah with Deutsche Bank.

Vishal Shah - Deutsche Bank

I just wanted to ask you about your guidance, EBITDA, [unintelligible] guidance. Can you talk about some of the risks or the key puts and takes in achieving that EBITDA [unintelligible] guidance for the year? And then can you just give us your thoughts on what the mix of LNG versus CNG is in the field right now and how you think about the iCE PACK sales this year relative to lower volume sales.

Bill Larkin

I’ll talk about the roadmap to getting to adjusted EBITDA positive. I think David already talked about some of those risks. It’s hard to predict the future. So in any plan, there’s risks. Of course we’re planning on growing our top line revenue. We’re focusing on pulling operating costs out. If you saw in the latest quarter we reduced our operating cost by about $10 million.

So I think those are the two biggest factors, growing top line, protecting our gross margins, and managing our operating costs, which will help drive us to positive adjusted EBITDA in our consolidated operating businesses by the end of ’14.

Vishal Shah - Deutsche Bank

And the mix of LNG with CNG? How do you think about that this year?

Bill Larkin

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

David Demers

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

So I’m not sure it’s really useful to really look at either what the mix has been up until now, or even speculate about what the mix is going forward. Obviously it’s going to impact us if people are buying LNG, and we want to sell them an iCE PACK. And if they’re buying CNG, we want to make sure that they get CNG components in the CNG, system. Obviously we don’t make CNG tanks.

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

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

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

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

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

Vishal Shah - Deutsche Bank

And when do you expect to sign an OEM agreement on HPDI 2.0? How should we think about the timing on that? Does it take a couple of quarters for that? Or should we see something soon?

David Demers

Sure, we’ve signed a few.

Bill Larkin

We’ve done these three. I guess there’s four public, being Weichai, EMD, Caterpillar, and Volvo. And so there’s three names. These parties, they always want to hold their cards close to their chest. So what I can assure you is that there’s very little interest on their part to disclose their entire development plan. I suspect it’s for competitive reasons. That makes a bunch of sense.

I think the part we just want to keep reassuring people is that we have started work with a large number of these OEMs, three of which have signed up to start initial work on HPDI. So this is not just sitting on the back of an AutoCAD drawing. There’s some actual work underway. I think it’s a function that just seems more pertinent for the industry that these parties will probably announce something, and until we’re comfortable announcing something when they’re much closer to product launch. It just seems to be the trend.

Of course, we’ll see if they’ll be willing to communicate prior to that, but we always want to make sure people understand, we are working with these OEMs, and there is progress and work going forward, but in terms of identifying them, it’s just tough to say.

David Demers

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

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

Operator

Your next question is from Eric Stine of Craig-Hallum.

Eric Stine - Craig-Hallum

You touched on the urgency at the OEM level. Just curious, the reaction out there to discontinuation of 1.0, have heard that there were some heavy haul fleets that were pretty disappointed that that engine was discontinued. And just wondering, has that kind of forced the OEM hand a little bit? Have you noticed anything, and maybe you’re limited as to what you can say with these three unnamed OEMs, but just curious how that’s kind of factoring into the development decision.

Bill Larkin

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

So we actually haven’t had a lot of surprise on the decision. We had no illusions. We told customers all along, we only work with [unintelligible] on that engine. It was no surprise that we didn’t have an ambition to become a full blown engine supplier. It was a technology demonstration engine where we did what we had to do to get the product into the market, and people bought it and validated that there was a need for a high performance, high fuel economy natural gas engine. And so I think that’s what’s given us confidence going forward with HPDI 2.0.

But yeah, I think there is room, and the OEMs are keen to develop differentiated products that meet their customers’ needs, and there’s certainly a trend, as you’ve heard, to go to higher fuel economy, lower displacement engines, higher power. Those are all factors that support the development of HPDI.

So yeah, we think having that fleet out there is very encouraging for people to develop high performance natural gas vehicles going forward.

Eric Stine - Craig-Hallum

Maybe just sticking with HPDI 2.0, and thinking about Europe, a lot of this has been about North America and China. But just wondering, given that that market is lower displacement engines, that the OEMs are vertically integrated, just how you think Europe develops going forward, in addition to the Volvo engine launch.

Bill Larkin

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

So there is a strong economic driver. There’s a very dense transportation system, and there’s a pent up demand for LNG trucks to reduce fuel costs. So I think that Europe is going to be a very productive market for us as it gets going. That said, we’ve seen a very weak market in Europe the last couple of years, just because of their economic conditions. We’ve seen a lot of political and energy turbulence in Europe. No surprises there. And certainly the last market for us to develop on the trucking side.

So again, we’re trying to walk a line between recognizing the opportunity and then rushing and being too quick to market. So we’re letting our partners pace that one, and I think it’s going to emerge as a really great opportunity for us. But is it 2014 or 2017? That’s really hard to predict when everything’s going to be right for LNG trucks in Europe.

Eric Stine - Craig-Hallum

Maybe just turning to the recent Tata announcement. Just curious there, are you unseating an existing supplier? Or is this Tata realizing it’s a big market and they’re turning the EMS over to you given your capabilities?

David Demers

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

Right now, we can put dots on the map that there’s a product or a vehicle with a partner, but really we need to see hundreds of different models to give the market the choice it needs. So I think this is just an example of Tata expanding its product line. We’re happy to be the supplier they picked and that we’re partnered with, and don’t think this will be the last new product you’re going to see from that market.

Eric Stine - Craig-Hallum

And this is the same product that is the basis with GAZ, right?

David Demers

WP580 controller, with Tata. Part of the whole system with GAZ.

Eric Stine - Craig-Hallum

And timing?

Bill Larkin

With Tata, the 3.8 liter is expected to launch this year. And they’re also actually looking to launch, I believe, the 5.7 liter later this year. That’s their current plan with our WP580 controller. With GAZ, in Russia, that’s a whole system, and, at the moment, I believe, still is planned for this year.

Operator

The next question is from Aditya Satghare with FBR Capital Markets.

Aditya Satghare - FBR Capital Markets

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

Bill Larkin

In terms of R&D efficiency, I think the capital rationalization for Westport, we tried to cover it best earlier, in terms of we have a criteria and the short list on the criteria is economic return, timing in terms of how quick this product would get to market, as well as strategic value to the company and to the market.

David Demers

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

Bill Larkin

I think the main thing we can tell you is that we have obviously new criteria, new management focus on this. So a lot of what we were doing a couple of years ago, we were looking for new markets, demonstration of technology, looking for support of a partner. There’s very different approval protocols around those demonstration projects than if we’re investing money for a product that’s going to go into serial production. It’s just a completely different exercise in analysis.

What we can tell you now is that we have centralized this. We have our operating divisions, the different segments, the global markets, the different joint ventures. There is one central investment bucket now, and we make all those decisions here in the corporate strategic group.

So there’s no difference of an investment by the group in China or Italy versus a new market opportunity or an advanced technology. We’re weighing all of these, trying to move with the real time data flow. So we may accelerate priorities or slow things down, but certainly all new programs are going through this screening process where we’re trying to assess some sort of absolute return, risk-reward mechanism.

Aditya Satghare - FBR Capital Markets

My second question is on the Weichai capacity expansion. How should we think about the potential for returns to increase in that business? Obviously [unintelligible] a rapidly growing market. But how should we think about the potential expense going forward there?

Bill Larkin

Well, you can see margins are creeping up. Some of this is product mix, some of it is competitive pricing and positioning, and some of it is we’ve talked about over the year has just been production inefficiencies as we’ve seen such a huge growth. I think the scale of the business and growth rates are going to slow down. It’s hard to grow at 150% for a decade. So I think growth rates are going to moderate slightly over the next few years, and that’s going to allow much more managed efficiencies, and that’s going to help margins.

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

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

Operator

The next question is from Colin Rusch from Northland Capital Markets.

Colin Rusch - Northland Capital Markets

Can you talk a little bit about the pacing of deals with fleets at this point, if you’re seeing deal flow get any faster? And if you could talk a little bit about the size. Are folks starting to sign larger deals? Or are you still kind of bumping along at the same level?

David Demers

It’s been bumping along pretty well, if you look and see the revised numbers. I think it’s no secret that the growth in CWI is being driven by the enthusiasm in the trucking business last year. There were some good international sales. But the delivery of the high horsepower ratings in August is why the Q4 numbers are so strong. And honestly, 2014 we don’t see any sign that that’s going to slow down at all.

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

Colin Rusch - Northland Capital Markets

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

David Demers

Oh, jeez, I wish I could tell you. Bill?

Bill Larkin

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

David Demers

I think we’re confident that we’ve shot bugs. We’re confident that we have a much more robust product leaving the plant today. But the cost of the population that’s out in the field is what’s really hurting us on this, and yeah, we’ve been caught more than we’d like, last year, on particularly the 9 liter product in trucking and apps.

It’s been a very visible and painful expense, which really dampened the profitability of the joint venture last year. That said, we learned a lot, and we’ve gotten a lot of the very direct experience now on the duty cycle for natural gas engines of this class in the trucking industry, and that’s why you’ve seen the warranty accruals jump up so high. But have we nailed it? I sure hope so.

Operator

The next question is from Matthew Blair of Macquarie Capital.

Matthew Blair - Macquarie Capital

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

David Demers

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

Bill Larkin

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

Matthew Blair - Macquarie Capital

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

David Demers

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

Matthew Blair - Macquarie Capital

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

David Demers

Ironically, the very first HPDI engines were in buses, and they were CNG, believe it or not. This is really going back into the dark pre-history of Westport. But yeah, there’s no reason why the technology can’t run on CNG tanks. We just designed what we call now HPDI 1.0. It was going into trucks at the port, and we wanted to demonstrate LNG. At the time, LNG was the big, hot news, and the first LNG station at the port built by Clean Energy was to support that demonstration of LNG.

So there’s nothing in the technology that says we can’t do CNG or LNG. Frankly, we think HPDI is going to be going into high [fuelings] applications that are going to be dominated by LNG. But we’ve had some requests for CNG, and so the technology is capable of it. If you translate that into will we see commercial product from any specific OEM, that’s where we have to kind of put the lid down and say wait and see.

Operator

The next question is from John Quealy of Canaccord Genuity.

John Quealy - Canaccord Genuity

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

David Demers

Question that I could go on and on, and Darren’s already telling me that we’re going too long, so I’ll try and keep it short. But you’ll see a lot more on this this year. I think the enthusiasm for natural gas in all of those markets is really sincere, and we’re going to see this globally. Any high fuel use application has now got it in their head that they could save a lot of money by going to natural gas.

And just for packaging reasons, that’s likely going to be LNG, because they need so much fuel and these are space constrained. Some possible exceptions, just so people won’t yell at me, around oil and gas, where you may see some use of well gas and stuff like that, rather than LNG.

But there’s a lot of enthusiasm. Now, it depends on the specific product that you use in that industry. Big ships, little ships, big locomotives versus mine haul trucks. There’s a lot of moving variables, and this is a much more high price low volume business than we’re used to on the automotive side.

So things are going to move depending on the enthusiasm of specific customers. I think that what we’re seeing is the North American rail business has been very quick off the mark. The marine business worldwide is quick off the mark, although there’s going to be lots of work to get that sorted out from a regulatory viewpoint.

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

Operator

The next question is from Pavel Molchanov with Raymond James.

Pavel Molchanov - Raymond James

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

Bill Larkin

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

Pavel Molchanov - Raymond James

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

Bill Larkin

And if it changes that should be good.

Operator

The next question is from Jeff Osborne of Stifel.

Jeff Osborne - Stifel Nicolaus

You implied that you’re taking a hard look at the opex. Can you just kind of give us a cadence on when you would expect the trajectory of opex or this review process with the kind of unknown variables to play out? Is it more second half weighted? How should we think about the expense level or trajectory here?

David Demers

No, I think fourth quarter is a good example. We pulled out quite a bit of our operating costs in the fourth quarter compared to previous quarters in 2013. And we will continue to look at our operating costs going forward.

Bill Larkin

If it wasn’t clear, we’ve completed this process, and we’ve made the changes, and that’s why you’ve seen the restructuring charges and the writedowns and things like that. Because that’s the outcome of the process. So we’re starting the year with the expense run rate that we think is going to get us to that breakeven point.

Jeff Osborne - Stifel Nicolaus

And just a question on the adjusted EBITDA guidance, kind of a two parter here. One is Bill would you be excluding any additional warranty reserves as it relates to your calculation of hitting that? And part two, is management compensation aligned with hitting those targets for ’14 and ’15? And if not, if you could just tell us the key variables as the board looks to determine your bonus for this year.

Bill Larkin

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

Operator

Next is a follow up question from Laurence Alexander of Jefferies & Company.

Laurence Alexander - Jefferies & Company

Two quick ones, both on Weichai. First, if Weichai doesn’t move on the HPDI by June, what’s your priorities for proceeding in China? And secondly, the capacity expansion that you flagged to about 100,000 units, is that going to be funded just out of ongoing operations? And if so, how does that impact the margin profile for the JV? Or will there need to be a new capital contribution?

Bill Larkin

No, the terms of the JV are much like Cummins Westport, frankly. The parent company, Weichai, provides the facilities, and the joint venture operates the facilities. So the joint venture isn’t required to make capital contributions to that new facility. So I think that’s the good news. The bad news, of course, is that they charge us for that use of the facility. So that gets into the negotiation on price and margin and transfer prices.

So I think that we’re in a good position to see the expansion and the scalability, and what we need to do now of course is work on the return to Westport, and that’s what we’re talking about.

Laurence Alexander - Jefferies & Company

And the other one, just quickly, if they don’t proceed on the launch by June? I believe they lose exclusivity. What’s your priorities for the back half of the year.

Bill Larkin

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

Darren Seed

I think our business in China, there’s a lot of different avenues for us to generate revenue in China, things like components, for example, from our applied technologies group. HPDI is just one of the revenue streams we’d expect to generate on the back of solving the agreements with Weichai. There’s multiple ways for Westport to generate revenue in China. This is clearly the most important, and again, I think our comment is that we’re confident we’re going to resolve the supply agreement shortly.

David Demers

Again, to be clear, just so we’re not creating undue speculation about creating competition for the joint venture, I think the relationship with Weichai is really good, and we have built a great business, and I think it’s far exceeded anybody’s expectation, including ours and Weichai’s. This is now a big business, and if we get it to 100,000 engines per year, that’s just a spectacular story. So we’re not about to go and idly mess that up. If we can optimize for both of our returns by creating differentiated product in this very competitive Chinese market, great.

Now, we do have some exceptions, just for the benefit of people that haven’t read the JV agreements in detail. Volvo could come in with their HPDI product into China through their joint ventures and sell directly. That doesn’t breach this exclusivity. It was designed to give Weichai a lead in the market around the Chinese domestic industry with this technology to reward them for taking the early mover risk.

So I think things are going really well, and all the lights are green, to create a very interesting and proprietary product line in this high growth market in China, with the joint venture, and that’s what both parent companies want to see.

Operator

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

Darren Seed

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

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