Hello, this is the conference operator. Welcome to the Westport Innovations Inc. 2012 First Quarter Financial Results Conference Call and Webcast. [Operator Instructions] And the conference is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Darren Seed, Vice President of Investor Relations and Communications. Please go ahead.

Thank you, and good afternoon. Welcome to our first quarter conference call for fiscal 2012. It is being held to coincide with the disclosure of our financial results earlier this afternoon. For those who haven't seen the release and financial statements yet, they can be found on Westport's website at www.westport.com. Speaking on behalf of the company will be Westport's Chief Executive Officer, David Demers; and Westport's Chief Financial Officer, 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 law, and such forward-looking statements are made based on our current expectations and involve certain risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements. Information contained in this conference call is subject to and qualified in its entirety by information contained in the company's public filings and except as required by applicable securities laws, we do not have any intention or obligation to update forward-looking information after this conference call. You are cautioned not to place undue reliance on any forward-looking statements. Now I will turn the call over to David Demers.

Thanks, Darren, and good afternoon, everyone. Well, it's been another remarkable quarter for Westport. Obviously, our growth strategy is executing nicely with revenue up 133% year-over-year, with strength across every segment. I'll come back to go through some of the highlights in a minute, before I turn the podium over to Bill for his review of the financial statements. But leaving aside the quarterly results for the moment, I want to take a few minutes to review the dramatic changes in market conditions that are transforming our business, and I want to respond to some recent confusion about Westport's strategy. Our natural gas is now seen as an inevitable fuel for transportation applications. I think over the last 2 years, we've seen dramatic shifts in attitude from everyone, from government policymakers, oil and gas participants and the vehicle manufacturers themselves, of course, and customers and fleet operators. So the question now is not if we'll see the natural gas, it's how fast and how far this new fuel is going to penetrate each specific market. So this is no longer just a niche, speculative opportunity. The market data clearly shows the development of an industry with many billions of dollars of overall annual turnover, from supply chain participants, to the OEMs, infrastructure construction and service, to the actual sale of the fuel itself. So anywhere today that we see gasoline or diesel fuel in use, we see potential opportunity for Westport. We are on a strong leadership position, in the right place, at the right time, with a compelling portfolio of capabilities, technology and the available hardware that allows our partners to quickly embrace these new opportunities. So really, despite this dramatic talk about disruption to global energy markets, our business model is simple. We want to do things that…

Thanks, David. Good afternoon. I'll jump into the numbers now. We recorded a consolidated revenue of $88.6 million for the first quarter of calendar 2012 ended March 31, driven by increasing demand of natural gas vehicles around the world. This represents an increase of $50.5 million or 132.5% compared to the prior year period. Our consolidated gross margin for the quarter at March 31, 2012, was $28.5 million or 32.2% of total revenue, compared to $17.6 million or 46.3% of total revenue in the prior year period. As we execute our strategy, we continue to diversify revenues among our business units which have an effect on our consolidated gross margin percentage when compared to the prior year period and future comparable periods. We break out our business into 4 operating segments: Westport Light-Duty; CWI; Westport Heavy-Duty; and Corporate. I'll walk through the financial details for each segment. We start off here with Westport LD. Westport LD generated $26.7 million in revenues during the quarter, compared to $7.5 million in the prior year period, which represents a 256% quarter-over-quarter increase, driven by contributions from our previous acquisitions. During the quarter, Westport LD recorded gross margin and gross margin percentage of $7.4 million and 27.8%, compared to $1.7 million and 23.2% in the prior year period. Going forward, we expect a margin for Light-Duty business to be in the 25% to 30% range. Our operating expenses for Westport Light-Duty increased by $7.2 million. The consolidation of our acquisitions added $3.1 million in operating costs. R&D investments increased $3.3 million to expand our OEM product offerings to include the launch of the Westport WiNG Power Systems for the Ford F-250, F-350 pickup trucks and increase in headcount and G&A-related costs to support this growing business. Westport LD recorded net operating loss of $2.2…

[Operator Instructions] Our first question today comes from Graham Mattison of Lazard Capital Markets.

I wonder if you could just talk a little bit about the HD engine, specifically about the ASPs and how you see that trending over the coming years? And then also if you could comment on the cadence of the Heavy-Duty orders that you've seen so far this year? And is there and if you could give any update on your Shell relationship?

Lots of questions there, Graham. I thought we had one at a time rule, don't we, Darren? ASPs, I mean, obviously, you know where this is growing, Graham. We are hoping to take prices down but we don't set prices per truck. And I know Darren talked about this in the past, we're going to see lower cost, we expect in China and Europe. We think there's a different price for products there. And so you're going to see ASPs come down. Our costs, in fact, have been coming down very quickly and, particularly, the warranty accrual being taken has been -- being very conservative but that result means that we can start taking lower accruals, and that gives us much lower costs, certainly going forward. Now some of this isn't quite clear in the P&L today because you're seeing those early deals that we did with Heckmann and Robert flowing through, where there were some nice terms and extended warranties and things like that. So it's not necessarily apparent in the gross margins that we're posting today. Although the gross margins are certainly improving. I think that what we want to do in North America is push the price of trucks down, along with the price of fuel so that we have a very compelling offering. And that's really what we're doing in the bundling programs with Shell and with others. I think it's clear that the MSRP for a new LNG truck is not necessarily what the price actually paid, and we're encouraging, particularly the larger fleets, the ones that can really make a move into natural gas to do this in a significant way and we're using our pricing power with our partners to be able to get those prices down to the right level. That inevitably is going to change ASPs over time. But I think Bill guided you to reasonable gross margins on Heavy-Duty, and we want to see a price all-in for the truck and the fuel that's going to give people a great payback and a great incentive. So complicated answer but it's a complicated story and, as I said, really the real question is what price the customer see for the price of the truck and that's not something that's within our control so we have to move some remote levers. Does that making sense? Do you want me to elaborate on anything?

No, that does make sense. And if you can just comment on the Shell relationship and then the cadence of orders so far this year.

You talked about backlog and orders. I think you can see we actually had some pretty good shipment volume this quarter. The interest is very high. I have to say -- I mean, I know you've been at some of the trade shows, interest is really high. I think everyone is -- everyone in the industry is now expecting natural gas to be part of their operations, so it's a case of working with them on exactly what sort of configuration of vehicles they want to buy. When are they available? What's the price? How are they going to get fuel. So it's a long slow process but lots and lots of interest. And I think we should be able to see the numbers that we talked about. We've been guiding for some time, we want to see volumes up to 700, 800, 900 Heavy-Duty trucks North America this year or next year, we would hope. I think that's given the interest we're seeing, that's very doable.

The next question comes from Vance Edelson of Morgan Stanley.

This is Vikram in for Vance. I just -- one question we've been getting a lot is just differences in HPDI versus SI, as it pertains to more Heavy-Duty market. I'm wondering if you can maybe elaborate a bit more? And is there any metrics you have you could share with us, that would be helpful.

Sure, and let's be clear. We are big fans of SI in the Heavy-Duty marketplace. I mean, this is what I been the basis of our products with Cummins Westport for years, it's the bulk of our sales with Weichai. I mean, SI has a very strong place in the Light-Duty side, of course, SI is what we're doing with Ford. So don't take this as anything negative about spark ignition. That said, there are some very well-understood characteristics of spark ignition engines that differ from diesel engines, in terms of their torque, fuel economy, basic performance, you can get out of a given package. And in some markets like long-haul trucking, we think those are going to be very difficult to overcome. In those markets, we really need to have exactly the same torque and horsepower as a base diesel. We need the maximum that we can deliver, and of course, those markets are overwhelmingly interested in fuel economy and fuel consumption, and that's where direct injection high performance products are, we think, going to win the bulk of it. Not to say there's not a home for a spark-ignited engine in some markets. That's really why we're launching the ISX12 G. We think that's going to be an interesting product to top up in the refuse market. We think that's a great application. And coaches, big buses, some regional trucking might work. So somewhere in that, I would call it, in the diesel market, but 10-liter and above displacement is where you're going to start to see direct injection technologies really take control. But there's going to be an overlap for some time, and it's really going to be up to customers. I think we want to let the customers have some choice, and that's why you can pick and choose and what's up. Now there is some more confusion, I'll just keep going up a bit because I know there's been a lot of confusion about CNG versus LNG, and we want to make it very clear that although we've got no vested interest to either one, we don't think the trucking market is going to be able to see a lot of CNG. CNG is going to be very challenging for those applications for lots of reasons, and we think the overwhelming majority of truck fleets will end up using LNG as their fuel source. So that creates a little bit of color for what's going on.

Okay, great. And if you could just give us a bit more color on kind of the pace of growth in China and its potential for further ramp up on the Weichai side. And any change in tone you're hearing in other larger markets, in terms of customers potentially wanting to at least increase or at least jumpstart the adoption of nat gas, maybe they were thinking to do this a year down the line but now they're looking to it even sooner.

I think the pattern we've seen in North America is getting replicated very quickly in China, and coming fast in Europe. I know there's been some skepticism about Europe but they've got lots of gas and they've got expensive diesel. And so we're seeing exactly the same pattern being replicated as we get products ready for launch in China and Europe. So we're working with the fuel providers. There's numbers of them in both areas, and in fact, in China, we're seeing really spectacular investment in LNG infrastructure already and some substantial government support for doing that. So I don't think there's going to be any constraint on growth in China. As you can see, our sales were up 50% year-over-year. I think that's going to be a pretty regular occurrence going forward. They seem to be tapping a huge opportunity to move to this lower cost fuel. And so I think we're well positioned for HPDI launch there. It's still a couple of years away in Europe, but we've seen a lot of interest, somewhat regionalized, really depends on your availability of LNG, but we're working with people like Shaw around the world who have that knowledge, and I think everyone's getting geared up to be ready so the infrastructure's there when the trucks arrive and that's what we want customers to see.

And just very quickly, lastly clarify, is JumpStart limited right now to one region or is it being rolled out in a couple of regions?

No. JumpStart was a project that we started with our partners about a year ago. It's focused on North American customers who are, for various reasons, wanting to trade trucks now but their infrastructure isn't built or they don't have infrastructure in a particular area. And as I said, we've actually seen lots of interest in places that aren't going to see a permanent infrastructure built, like you're over in the gas field and you want to have trucks servicing a frac site so you need some portability. So there's no real magic here. We're using portable refueling stations built by Chart, they're a great product, just having them available and leasing them to customers is making it easier for them to take delivery early. And we think that's just a logical thing to do to step in and jumpstart the market. I think there's going to be similar opportunities in China and in Europe, but as I said earlier, we've got a little bit more time to get ready for that, and I think you'll see wider scale of LNG available at launch in those markets.

The next question comes from Laurence Alexander of Jefferies & Company.

Two questions. First, on the new partnerships that you may be announcing this year, is the goal just to diversify the OEMs that you're working with on existing product sizes? Or are we going to see a shift in the nature of the partnerships, it would serve a more narrow scope or a smaller cost footprint?

Yes, I think the simple answer to that is, both, Laurence. I don't think it should be any surprise to you on who those names may be. But I think -- I said specifically, I'm just trying to exact quote. We see it in Light-Duty, in Heavy-Duty and in the off-road space. I think there's going to be lots of new product that needs to hit the markets to meet customer expectations, and I think you'll see us in the middle of some of it.

And then can you go back and give a little bit more color on the Shell partnership or at least the progress there? What kind of news flow we might expect and what kind of activity or resources you're allocating to the effort?

Yes, I think I'll just be very quick. Obviously, we can't spend a lot of time on this one. Shell announced that they are making LNG available in the corridor in Alberta, around their LNG facility in Calgary. And so they have now got trucks buying LNG from them on the corridor, which is great. They are working on their supply chain to get trucks running on natural gas. I think they some of those already. I'm looking at their -- anyway, there's some orders there. And we've been out marketing with Kenworth and Peterbilt and Shell, as we talked about in our debundling strategy, we talked about last fall. So there is a specific proposal set, let's say, that we're making, we're going out. It's volume dependent, it's obviously tailored to each individual customer and we have a sales team that has representation from a truck manufacturer, from Shell and from Westport going to sit down and work. So these are complex tailored special proposals for each fleet, so they take some time and they're complicated. But I think we can say that the reaction has been very good, lots of interest. The tenor of that is kind of, as we've said, is what will it take to get you adopt natural gas in a big way in your fleet so it's whatever-will-it take discussion. And if we can answer that request, we will and I think we'll see the orders. It's going to take some time for people to get this straight, but I have no doubt that it's going really well.

Then just lastly, if I can, just one quick one. As you think about the order patterns, are we looking at them on a more linear kind of ramp over the next 2 years or does the timing and lag effect mean you got a bulge somewhere in the first half of next year?

I think generally, I mean, when you see the product patterns as they had launched to, Laurence, that's also going to be have a really big effect. Right now, we really are focused on -- in North America, customers that are looking at a Peterbilt or Kenworth truck, and even within those, we're scrambling to broaden the product offering because there's a very broad array of chassis configurations and engine performance and things that customers expect. So we've got lots of work to do to introduce product. And so I think as you see new products entering the market, that's inevitably going to have a major lift on the available market, and that's going to put a geometric expansion. I think just because of the nature of this business too, we're starting quite slow with early adopters in limited geographic areas that are able to take these risks. Early customers' feedback has been great. I think we're going to see more and more people adopt, as time goes on, and so, inevitably, you're going to see some sort of geometric expansion and adoption, until we hit some sort of plateau in terms of market penetration. But I think we're a long way off of that.

. The next question comes from Ann Duignan of JPMorgan.

It's Ann Duignan. Could you maybe somebody take us through your organic growth rates by segment versus total reported growth rates?

I don't know. Bill, can you do organic? What's organic? I guess, the only one that would not be organic will be Light-Duty.

There was high-teen digits for the organic growth of our existing Light-Duty business.

Tough to tease out what was former business from what's current business with Light-Duty. We've obviously redirected OMVL's marketing pretty substantially so I'm not sure you can really compare business you're during this quarter from business that we're doing a year ago. But the -- certainly if you take out the Emer AFV business, it's probably, 20s, high-single, high-double digits, yes. For OMVL.

I think maybe, Ann, one potential answer to your question is the organic growth this year is coming from the new product launches, like the Ford F-250 and F-350 business, will provide some -- what we expect to be some nice organic growth.

But also with our Heavy-Duty business, as well. Because we started with a little base and that's were going to see a lot of organic growth as well.

That what you're, Ann, or is there...

Yes. No. That's perfect. I just -- we're just used to always -- reported revenue and organic revenue.

Yes, the trouble with those analyses -- because we try and do it internally, too, we scratch our heads a bit about it. But because we are shifting, particularly, the acquisitions, we're moving them away from their former business. OMVL, in particular, with mostly aftermarket and in different geographies, and so we kind of really pushed it into new stuff. And so I think they've done a great job of completely remaking their business and refreshing their product line. So when we added the Emer team, similar, we're really focused on the OEM side. And so the growth, I think is coming from business that we want to encourage in the future and where we want to focus in the future. And as this -- as the acquisition period gets further and further behind, I think you'd be able to start model organic growth a little better.

Perfect, that's good insight. And then just -- if I look at your units shipped sequentially, they were down in CWI, they were down in Heavy-Duty, they were kind of flat on with Weichai. Can you just talk about -- was there anything specific in Q4 like waste management taking delivery of a lot of CNG trucks before year end? Is there any reason to believe that Q2 should or should not be higher than Q1?

I'll kick that off by my ritual reiteration of lumpy quarters. These are still small, small businesses. You'd know probably better than anybody, Ann, that we're talking about tiny fractions of 1% of these total industries, if you were to compare the total gasoline and diesel shipments in these quarters, we're a bit of a rounding error, still. So we can congratulate ourselves that we were 170 this quarter, 150 that quarter. But really, it's not even a rounding error. So it's going to be lumpy until we get to some reasonable critical mass. And I think CWI is now at critical mass and things like transit and refuse, where you can see some pretty consistent quarter-to-quarter numbers. But even there, you'll see some seasonality and you're going to see it biased by major orders, like we did a one single major order for a bus fleet in Venezuela this quarter, for example. So it's always going to be slightly lumpy. And much as we wish we could do some predictions based on past performance, it really is tough, somewhat based on timing of specific customers and their preferences for when they want delivery and what they want to do. In terms of this quarter versus Q4 last year, Q4 was spectacular. It was a record quarter. We matched pretty much those record numbers this quarter, so I think that I wouldn't read too much into it. The overall trend is going to be lumpy quarter-to-quarter in each market. But overall, we reiterate this year we think overall revenue should be up 50%, a little better, so that implies that we're going to see it all average out over the year.

Okay. And in the interest of time, I'll just take my other questions offline.

. The next question comes from Rob Brown of Craig Hallum.

On the new 12-liter engine, you mentioned sort of a lot of interest but could you give us a better dial-in there, in terms of end market demand? Have you seen orders yet? When will you see orders and then kind of what could that start to look like?

Rod, come on, you can figure it out. Yes, you were at the show. We've got launch...

I like to hear your thoughts.

Yes, I'm sorry. Our thoughts are pretty megalomaniac, but we have to find out. The launch partners are some great companies, right? We got Freightliner and Peterbilt and Kenworth and Volvo, have all announced availability of trucks. And I think what we ought to do, I mean, we've got test trucks on the road with each of them. They've all announced availability for early 2013. So I certainly don't think that anybody would claim they've got a backlog today but there's a lot of interest. I think people think that the engine's going to hit a sweet spot of the market, particularly in refuse, which is very heavily going toward natural gas. So I think that's going to be very successful. Some of the coach business looks like that engine's going to be directed fairly well. The regional trucking business is going to depend more on the success of the infrastructure buildout, and exactly how many fleets are comfortable with this product area for their application. So I think you're going to see a year where these early trials are really important, and where people really want to get a sense of performance and fit and get comfortable with this idea of CNG or LNG, and model it into their fleet. So I wouldn't expect that we're going to see a sudden complete conversion of the trucking industry in early 2013. I think what we're going to see is a lot more fleets think that they've got to look at natural gas and are going to start to do their plans and we think this product, the truck products that incorporate this new engine are going to create a lot of new customers for CWI, and that's what we want. Does that make sense? Sorry, I've really ducked your answer. But clearly we see it as a very big addressable market compared to CWI's current addressable market, a big expansion of opportunity but it's also not going to be 100% of the trucking industry either. So it's somewhere between where we are and a much bigger number.

Okay, okay, good. And then on your new portable fueling product, is there an investment required there in terms of CapEx or startup? Or is that sort of a profitable sort of...

Sure, Rob, yes. Because what we are acquiring, the Orca's mobile refueling stations, and then what we're doing is we're leasing them out to our customers, and the consumers are responsible for installing them or putting them in service, again, fueled up by their gas suppliers so we're earning revenues and profits on that leasing income from those Orcas. I think a greater benefit is to our customers and being able to help them through that transition period to where they get to that permanent refueling infrastructure in place. So I think that's where a lot of the value is as well where you can make a little bit of money on it.

I think it's -- I'll elaborate bit more, Rob. There is no magic here, except that it's being a very popular product with a very long lead time from Chart. And so a fallback, we sat down with Chart and came up with an arrangement where we can get a stream of these products that either would be -- we would take ownership of it or we'd allocate it to a customer because we think the temporary refueling idea is going to be a big part of the early stages of this industry. So it's coming along well, it's a great product. We have taken ownership of some of these, where we're going to lease them to customers for some time. I do think the off-road market is going to be an interesting long-term business, not something that we really want to do in the long term but, again, because of the rapid growth that we saw in the mismatch between available infrastructure, refueling and the customers that want to buy trucks, we think this is going to be an essential part of it. So it's just a small business but a critical business to let the overall truck industry get going.

. The next question comes from Shawn Severson of GMP Securities.

I was wondering if you could talk a little bit about the rollout and the refueling infrastructure in the trucking corridors, and I'm sure you've had a good chance to look at what types of trucks and fleets are running on those routes today, and how that overlays with your business mix including CWI. So I guess, another way to ask the question, is when those corridors are up and running, where do you think the sweet spots are, the mix of engines will be for you?

Wow, if I had an answer to that one, boy, we'd be in good shape. Honestly, Shawn, we aren't that sophisticated. We're trying to get to know the fleets early on and get a sense of who's going to natural gas first. But for example, our very first fleet here in BC is a dairy specialist hauling milk and that really wasn't in our radar as the early adopter. It turned out to have been very successful and, much our surprise, they go tremendous miles and burn a lot of fuel. So I really think that the way we would have to categorize this is by how many miles the fleet runs. What's their duty cycle, what's their fuel consumption? And that seems to be directly correlated with their enthusiasm for going to this early learning around LNG because the prize is so high. We have fleets that are telling us that their payback on these new trucks is less than 6 months, which is phenomenal. But it gives you an idea of sort of mileage and fuel consumption that they're putting their diesel trucks through today. So that's our target. They're everywhere. They're not in any particular geographical location, unfortunately, and they're not in any particular industry. It's really the business model of the particular fleet that we're talking about and we're finding them everywhere. Now obviously, we're working closely with clean energy on their public access natural gas highway. I think that there's lots and lots of opportunity that they're going to pick up. That really is a chicken and egg issue, where there's lots of fleets that are kind of sitting on the sidelines waiting for refueling to appear, and as it appears, I think we're going to see fleets pick that up. So that's step one. But our focus has been on the very high fuel consumption fleets where they're going to justify fueling infrastructure on their own and also, of course, the major national fleets who are also likely going to do their own thing. So I think it's pretty broadly based. I think if you look at the diesel industry distribution of product, generally, that's ultimately where we think things are going to plateau out. There's a natural home for engines that look like 10-liter diesels, 12-liter, 13-liter diesels, 15-liter diesels and those are going to end up being the people who buy natural gas products, that have similar performance and capabilities. And so the market share ultimately is going to end up that way I think. But who's on first? It's up to the fleet.

And that's why I'm trying to get a better idea of are these kind of 15-liter HD markets or are these going to be 12-liter markets or an optimal, maybe 13-liter for these at least the initial roll offs by queen?

I think people have underestimated the fuel consumption with those big long-haul fleets. And that's really where we're seeing a lot of excitement. I think you're going to see a lot of fuel moving through the 15-liter direct injection engine because those are the guys that are heavy fuel consumers. So I think in the early while, the bulk of the -- call it the cash flow for fuel, is going to be from those fleets. The 12-liter products coming out a year from now, that's going to into some great customer applications but they're typically lower mileage too, and lower duty cycle.

And just lastly, are you considering or looking at any technology changes or design changes in the 15-liter that could take cost out? You know anything, not actually reinventing the wheel here, but are there some things that you're actively pursuing that would be major cost reductions?

Yes. How's that? Sorry, you can't take away our secrets here, come on. Of course, we are.

Okay. But it's clearly part of the strategic -- it's part of the technology roadmap?

Yes. I mean, I'll go a little further. Sorry, I mean, I couldn't resist. As I said, our costs are actually coming down a lot. Most of the costs, much to people's surprise, has been warranty, and our supply chain costs have been coming down rapidly as we start to migrate to new suppliers. There's really not that much hardware and, as we get volumes up, those costs have come down really dramatically. So I think that we're going to be able to see much lower price points if our partners want to lower the price. Obviously, we don't really want to just lower our price and have it not move the price point for the vehicle. So there's some things that we've got to do here. But yes, costs are coming down a lot. I think we also want to improve performance. There's really only one flavor of Heavy-Duty engine today, and we want to expand the applications that it can go to. And some people are going to have different requirements than the version that we've got today, and we're working on that.

. The next question comes from Colin Rusch of ThinkEquity.

Can you give us a -- just a 2-part question. Can you give us a backlog number, actually in the quarter? And then secondly, can you talk about the development of any sort of leasing products line that's in products or arrangements that might still take in acceleration in the sales cycle?

Sorry, you broke up a bit so I missed the last bit. Can you repeat the second half of that?

Sure. Can you talk about the development of any sort of leasing or financing products that might accelerate the sales cycle?

Yes, yes. Frankly, that's part of our large account bundling project. We don't really want to lease, although we did broke that rule, Bill already did with leasing the JumpStart equipment. But it's not really our business. I think the truck leasing business has got lots of players. We have been talking to everybody who is leasing today, and they're all quite happy to lease natural gas trucks now. So that's a good progress but that's going to be part of this bundled arrangement. It's up to the fleet to sort out the financing options. We can present them and we can bundle in all kinds of interesting things, but ultimately it's a financing decision, and they have to be comfortable with who's providing that financing. It won't be Westport leasing, I don't think in the -- certainly not in the near term. First part of your question was backlog. We've really tried to get away from possible backlog. We still do have a backlog. Our shipments are speeding up though. I have to say we've got better build slot availability with both Peterbilt and Kenworth on the Heavy-Duty side. Obviously, on the medium duty side, things are going well as well. So we're starting to shrink the lead time, which is good, but it's still not overnight and it's still not something where we can say well, we've got a backlog of x thousand customers because it's just not the way this industry works. I think that when we get -- when we get major orders, we're going to start shipping them as quickly as we can and you're going to see that in the results.

. The next question comes from John Quealy of Canaccord Genuity.

Just 2 questions. First, can you give us an update on the locomotive side of things and what we should be looking for in the next several quarters or years for that product line or opportunity? And then more housekeeping, for CWI, Bill, can you tell us what the split was between North America and Asia sales?

I'll let Bill look that up. On the locomotive side, just to refresh everybody on that one, we have announced a program, started out with CN Rail in Québec, in partnership with Gas Metro, who are the local LNG provider that we've been working with on the trucking side, to do a demonstration locomotive, through a government funding program called Sustainable Development Technology Canada. And that program is about a year old, it's got great progress. The new news on that one, I guess, was that the locomotive provider whose jumped into the program is EMD, Electro-Motive Division, we're a part now of the Caterpillar group, so it's an EMD locomotive that will be the platform for this. And just looking at Darren for confirmation. I think that we're going to have engine data this year, and you'll see test locomotives running around next year. The question is whether or not that will evolve in 2014 for pulling trains. So it's gone really well, getting a lot of attention, as you can imagine, because these guys consume so much fuel, and the opportunity for a really transformative cost structure in rail is pretty compelling. So lots of details to work out on how fuel will be managed and circulated throughout the rail industry. But I think from the locomotive side, I think everybody's pretty comfortable that we'd be able to deliver a high-performance locomotive that does the job. You're ready for, Bill?

Sure. For the breakdown from the CWI business, it was roughly 58% in North America, and then with the bulk of the remainder for the Venezuela order that we've talked about. So I think that's considered under the Asia because that's where the engines were shipped to and with the buses that are designated for Venezuela.

. The next question comes from Eric Stine of Northland Capital Markets.

Maybe I'll just start with Light-Duty and the Ford, the WiNG. I know it's early but if you could just talk about the interest level you're seeing and maybe how the pipeline has developed early on relative to what your expectations were?

Well, I kind of gave a hint. I know Bill gave a hint, so I 'm going to let Bill elaborate.

It's your turn.

My turn? Well, actually I'll speak up then. It was -- Light-Duty is seeing some interest in demand and increased demand, Eric. I think we do start shipping the product here in the next several weeks. So I think everything seems to be on track, and clearly, the fact that vehicle has a range of 650 miles, it's got the complete OEM-like testing and hot testing, crash testing and a number of successes and accolades so far. I think that's just been driving a lot more interest in demand. I know we're looking at an interesting campaign coming up to get the truck out there in the next few weeks, which we'll talk about probably in a press release shortly.

Okay, fair enough. I guess I'll wait and see on that one. And then maybe just turning to high horsepower, you touched on rail. Just wondered if you could give an update on the Cat relationship. And then I guess back to Light-Duty maybe an update on the GM relationship as well.

Both Caterpillar and GM are technology development relationships. I think we can say, quite honestly, things are going well, both very narrow objectives for those technology demonstrations which have been met. I think all of these programs are not really about proving what we've already done because there's all kinds of good data on that we can give to new OEMs. It's -- they're always about, well, if our plans look like this, could this technology fit into those plans and what would it look like? And so we're into some cutting-edge work that is creating new data and new science, so very exciting. Both programs going well. I can't give you any more than that. We'll have to wait and see what the commercial eventualities are from those programs.

Okay, fair enough. And If I could sneak in one more. Just on the build front, you just touched on it, it sounds like you're more confident than you've been in past quarters. I guess knowing past quarters have been somewhat of an ongoing thing that you've had to deal with. Fair to say that your confidence is there and the build slots are there to meet the demand as it comes?

Yes, it's another one of those 3-dimensional problems. We have to make sure that every one of our suppliers is scaling up and capable of scaling up in time, because we scale up at the pace of the slowest component. That's pretty obvious but some people forget that. So we've done a round, over the last 6 months, of making sure that all of our suppliers have the quality and scale-up capability to meet any conceivable scale-up demand. We have to work with our partners, Peterbilt and Kenworth. Their plants have to be ready to scale up. And then of course, we need to get into their own build cycle where they can allocate build slots in a way that meet customer expectations. So complex problems, I think we are at the point now where everyone is comfortable that we can move that delivery time up, some of which is generally that I think that we've seen a little bit of softening on the truck business. There was a big bulge as you know last year of pent-up demand on truck manufacturing, and so the plants were really busy. Didn't have a lot of time to focus on new stuff like natural gas. So this year, I think we've gotten a little bit more time and energy so I think that we can see more availability of build slots in less than 6 months and the ability to scale up if we see the demand. So now it's back to the sales guys to close on demand and so we can deliver that.

The next question comes from Alex Potter of Piper Jaffray.

I have quick question here on margins in the Heavy-Duty segment. I was just hoping you could add a little bit of color on what exactly was going on in the quarter. I know that from a volume standpoint, the number of units shipped didn't change all that much quarter-over-quarter versus Q4. But the losses of this segment were quite a bit larger this quarter than they were last quarter. So I was just wondering if you could outline why that is and what you kind of expect going forward. It sounds like you expect margins to improve there as volumes ramp.

The major issue, I think, quarter-to-quarter is just the mix of service revenue from Volvo. It was in last quarter and out this quarter. You really need to correct for that and take out service revenue, or add it in, depending on your choice, so you can really figure out what the actual hardware margins are. I know Bill buried it somewhere in his MD&A, but you want to explain it?

Sure. Last quarter, I think David kind of alluded to earlier in his prepared comments is, as we get through these launch customers who had certain pricing incentives for being the launch customers, I think we're starting to see an upward trend in our margins. 15% is what we had for this quarter, it's a good starting point. However, as we continue to focus on our cost reduction initiatives, as we start seeing volume increases where we can leverage our supply chain. Also 2, as we start ramping down the warranty accrual that we have, we should start seeing an upward trend in our gross margins. We've talked about historically this 20% target. However, that's just kind of a reference point. We like to see a maturity over the next several quarters as products get to the 30% range.

Okay, that's very helpful. And then I was wondering, too, if you can give a little bit of color around HPDI, in a 12-liter context, specifically in the context of China. I mean, obviously the larger the truck gets, the more fuel it consumes; the further it travels, the more compelling HPDI should get. But in China, my understanding is that there aren't a lot of 15-liter applications, so 12-liter is kind of where it's going to max out. I was just wondering if -- in that all being the case, whether you think the Chinese consumer or Chinese truck driver is going to want to opt for a 12-liter HPDI instead of a 12-liter spark-ignited?

Well, I guess we'll find out because we have a 12-liter spark-ignited product with the joint venture today, and we'll have a 12-liter DI engine. Pretty much everybody we talked to does see a distinct difference in the marketplace. And whether you're in China or not, there are trucking applications that need high torque and want to have the best possible fuel economy because they're burning a lot of fuel. And the obvious example, I think, in China would be the resorts industry where they have -- moving iron ore and coal there is just as energy-intensive as it is here. Much to people's surprise, fuel is expensive in China. They tax pretty highly and so the difference between diesel and natural gas is pretty powerful. And I think people are going to be incented to get the highest fuel economy product they can get. There's also a bit of a misconception, let me say, about the price differential between direct injection and spark ignition. Technically, there may be some lower cost in some components, but at the end of the day, in the truck, total truck pricing, we expect it's going to be pretty close at the same performance level. It's not a huge premium for DI. So it's is really going to be targeted at who wants fuel economy versus who wants the simplicity of the spark ignition system. Spark ignited is pretty well understood, people understand they have to change the spark plugs and do a few performance things. We don't offer CNG with a direct injection product yet, for example, so if you really are wedded to CNG, you're going to be getting a spark ignited engine. So lots more complex factors are going to go into that decision but I think there's clearly going to be a segment of the market that needs and embraces the direct injection product. I think it's going to do very well.

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

Interested in your comments around testing of the high horsepower products, I'm wondering if you can provide any data points to date on the testing that you've done? You've provided similar or comparable data points for the Westport Weichai DI testing, and you have commented with data points that, that product could generate 20% to 25% better power and torque. Wondering if you can provide any comparable data points for that high horsepower product at this point?

I guess I'd be cute and say we could, but we can't, so sorry. Honestly, we have to have a few things in the background. As soon as we have something to tell you about the commercial product, we will. I think that, in general, all I can say is that we think we can deliver locomotives, mine trucks that meet customer expectations using the technology that we've developed. Not necessarily a direct clone of the HPDI product you've seen today in Heavy-Duty trucking but we think we can deliver products that are going to work for those applications, and that's what we set out to do in these proof-of-concept trials. But it's a long way from where we are today to seeing a viable commercial ecosystem where LNG is just kind of a day-to-day operation in those businesses. So we've got a bit of time to go, but you'll be the first to know as we reveal data. How is that?

Okay, great. Just a couple of quick housekeeping questions. First, on your breakeven level for Westport HD, wondering if you could provide an update on kind of what annual volume run rate you need to be at, or quarterly run rate at for breakeven. And secondly, in CWI, you mentioned the 794 Venezuelan units. Wondering how many of those were shipped in the quarter?

Let's talk about the CWI first. All of those were shipped to the OEM. As to what -- I don't know how many of those were actually shipped to the customer during the quarter. With respect to -- what was the first question?

It was...

Breakeven on HD. We've historically talked about this $300 million a quarter, 20% margin. We're still evaluating our business and we still believe that is where a good metric is a breakeven for the Heavy-Duty business.

. The next question comes from Matthew Blair of Macquarie Capital.

First one, I believe there's some comments about the high horsepower opportunity in the oil and gas industry, and I was hoping you can elaborate on this. Are you talking about using LNG engines for like pressure pumping or drilling rigs? And also, if you have any estimates on the total fuel consumption here, that would be helpful.

The answer is yes, that's exactly what we're talking about. Marine would be another one. Lots of interest in the marine industry, somewhat to our surprise, but I guess everybody is looking for cheaper fuel. Oil and gas exploration, some of this is we're getting just because there's so much interest in, obviously, the water haulers and things like that on frac rigs, but the pickup truck product, generally, hauling equipment, the natural gas industry as you'd expect is quite keen to look at their operating costs and move to natural gas as their primary energy source, and so that's led us into conversations directly about, well, what about all these big engines that are pumping fluids or drilling or doing whatever, and the answer is, of course. An engine is in engine. So it's speculative today, let's say, I think that those class of engines are similar to what you're seeing in the locomotive, mining, marine applications. So those applications are certainly within the realm of possibility but I wouldn't say there's a commercial project underway yet. But customer demand has a way of translating that product eventually, and I think you'll see lots of people out there making noise about the need to go to natural gas to reduce their costs.

Right, yes, definitely. It really seems like a natural customer for you. And then also, Bill, on CWI, just $3.6 million in increased warranty expense, could you provide some details or some clarity on that? I thought most of the CWI offerings were pretty mature, so just trying to figure out the origins of that increased warranty expense.

Sure. As we sign up more customers, we're starting to find that, principally, the ISL G we put in different configurations, duty cycles. And as we put these engines in these new configurations, sometimes you run into some challenges and we started seeing this in the last quarter, which had an overall impact on our warranty accrual, specifically for the ISL G. And over time, we're going to continue to address those, as these engines end up in different configurations, in duty cycles and uses. That's the principal driver there.

I think I'll just elaborate on that a bit. I think it's a bit of a fact that as we see the success of the ISL G, it had been driven down in warranty accrual with past years to it was pretty spectacularly like low says that any slight uptick in what we're seeing in claims pattern is going to change that warranty accrual profile. So we are moving it into lots of new applications and new products that have never seen it before so we're trying to be as conservative as we can about those warranty accruals. So it's not a big real change, just a slight tick up.

. The next question comes from David Galison of CIBC.

So I had a quick question on Weichai. I'm wondering if you can provide some color around how the launch will look for the HPDI product as it begins to ramp up?

Q1 2013, as we said, we're just entering truck trials so we've got trucks on the road doing trials. As you've probably seen from other product launches with us in the past, it typically means you're a year or so from start of production, so you would expect to start to see customer orders next spring and truck manufacturer thereafter. Now nothing is hard and fast on this. We have to finish road testing, we have to finish all the certification work and we have to gear up production. But that's about the schedule that you should come back and talk to us about.

Are you expecting it to be more of a hit-the-ground-running type of a ramp or a slower ramp up?

Yes, it's getting hard to say. I would think that we're going to see pretty rapid acceptance in China, just the demand for natural gas truck, generally, is very robust. And I think there's, as I said earlier, we're seeing a lot of demand for a product like this. Can I give you volumes? No. We'll let you know as soon as we know.

Were you also be having warranty accruals on that product as well, similar to your products in North America?

Yes, of course, with the launch. Now don't forget the engine is going to go through the joint venture so that won't be consolidated. You'll see it in our earnings but the component cost that we delivered to the joint venture and the off-engine systems that we deliver to the truck manufacturers will have their own warranty, our manufacturer's warranty as well. So yes, you'll see warranty accrual pick up on those as well.

And then just if I can touch back on the previous question on EBITDA positive. Just in general, you've highlighted the -- with evolution of the formal market developing now, do you have or could you provide some color on how you see out of the Westport evolving to an EBITDA positive company?

Well, we kind of hinted at that. I'll make it even more explicit if you need to. I'm looking at Bill here. As Bill said, if you kind of average out some of the service revenue, which we think you really have to neutralize for, we're running at about a $5 million a quarter EBITDA loss. And if we're going to get Light-Duty to profitability, which we said will happen second half this year, and if Heavy-Duty gets to $300 million, what you see is kind of double current volumes, it's not a done deal but it certainly not a 10x growth or anything. It would be breakeven in North America. So I think you should draw the conclusion that, that $5 million of incremental EBITDA isn't that far off. We just need to continue to see some volumes rise, not seeing a major change in our investment rate. There will be some new R&D investment that's likely going to be offset with additional revenue opportunities. So I think that, that's the bogey, is that $5 million a quarter of incremental sale of products, which will happen with the Light-Duty and Heavy-Duty portfolio we have. Heavy-Duty doesn't make it in North America, we think that either the Weichai or the European launch should lift it off as well. So I think that's the outer boundary of where we would see profitability.

. The next question comes from Rupert Merer of National Bank Financial.

A couple of quick housekeeping questions. You mentioned a little about phases potentially in R&D with the last question. Can you talk a little about your expectations for R&D and SG&A? Should we expect the current run rate to hold for the rest of the year or do you think you'll need -- that we need something...

It's a little bit hard to hear for -- I think you're talking about our operating expenses for R&D for the year. We said in our press release, we're looking at spending, investing about $80 million in research and development among various programs. We're seeing a quarterly run rate for G&A and sales and marketing about $10 million each on a quarterly basis for the remainder of the year.

Okay, great. And the ASPs at CWI were off a little bit. Was this a product mix issue or...

Yes, it seems like they had that big shipment to Asia, ended up in the buses in South America so it's just product mix, Rupert.

All right. And just one final question and if you look at the revenue outside North America, can you remind us, are there any changes the way you'll booked revenue or earnings with CWI sales that are outside of North America after the changes to the JV?

No, not that I'm aware of.

. That concludes the time allotted for questions. I'll hand the call over to Darren Seed for any closing comments.

Thank you very much, everyone. We look forward to seeing everyone in early August on the Q2 conference call. I understand from our service provider there was a clip out of audio on the webcast. Just as a reminder that the full transcript of this conference call will be on our website shortly. Thank you.

. Ladies and gentlemen, the conference has now concluded. You may disconnect your telephones. Thank you for joining and have a pleasant day.