Hello. This is the Chorus Call conference operator. Welcome to the Westport Innovations Inc. 2013 second quarter financial results conference call and webcast. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions). At this time, I would like to turn the conference over to Darren Seed, Vice President of Investor Relations and Communications. Please go ahead, sir.

Thank you, and good afternoon. Welcome to our second quarter 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 on this call is open to the public and to media, but for the sake of brevity, we are restricting questions to analysts. You are reminded that certain statements made in this conference call and our responses to various questions may constitute forward-looking statements within the meaning of U.S. and applicable Canadian securities law and such forward-looking statements are made based on our current expectations and involve certain risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements. Information contained in this conference call is subject to and qualified in its entirety by information contained in the company's public filings and except as required by applicable securities laws, we do not have any intention or obligation to update forward-looking information after this conference call. You are cautioned not to place undue reliance on any forward-looking statements. Now, I will turn the call over to David Demers.

Thanks, Darren, and good afternoon, everyone. As I said in our last call, 2013 is a transition year for us, as we see the rapid development of markets for natural gas in transportation. We are rapidly moving from our proof of concept and market creation phase over the last few years to full commercial operation with a broad product portfolio. As the numbers show, we are seeing great progress in two key initiatives. LNG trucks and the China market generally. So, trucking first. Launch of Cummins Westport's new ISX12 G is off to a good start this quarter and with the higher ratings that are available this month, we expect very strong growth in CWI with this new product over the next year. I think we have the right product at the right time to see us able to breakthrough that will establish LNG as a major fuel for trucks around the world. We are still at the beginning in this market but we estimate we are at about 1% market penetration this year in LNG trucks. We will see a lot of new products entering the market over the next few years. Later this year, we will launch our Westport iCE PACK LNG Tank System and of course the fully integrated next generation HPDI trucks will be coming from Volvo next year. Most analysts are calling for 5% to 20% market penetration in North America within five years, assuming that infrastructure investment keeps up, but basic risk (inaudible) but even the low end of those number would yield great value for our shareholders. So we are pleased to say that the start is behind us and we are confident in the growth trajectory over the next few years. We intend to continue to lead this industry with new technology…

Thank you, David, and good afternoon, everyone. This year was a transition year for Westport as Dave has mentioned but we continue to reiterate our expectations that our consolidated operating and business units will all be generating positive cash flows by the end of 2014. Today, our Applied Technologies business is generating positive cash flows and we plan to launch new products to generate cash flows in each of our businesses. Just to remind everyone about our asset-light business model. We do not expect to make significant investments in facilities or equipments to support products to be launched over the next few years. Also we expect our SG&A expenses as a percentage of revenues to decrease overtime as we grow our businesses and topline. We expect the operating business unit plus contributions from our joint venture interest to generate sufficient cash flow to cover our corporate and technology investments by the end of 2015. We do have a few paths that can accelerate this timeline by either managing the level of our investments in new products and technology or increasing our revenues and contribution margin, if we see acceleration of the adoption of natural gas as a transportation fuel. We are seeing the change in product mix with the launch of Cummins Westport ISX12 G in trucking for which we recognized the income stream only. We are negotiating supply agreements for Westport HDPI products in the China markets. There continues to be economic uncertainty in some of our key markets in the long term of Volvo V60 resulting in some customers deferring orders until the new model is delivered. As a result, we are changing Westport revenue outlook for 2013 and this is excluding our joint venture revenues to $160 million to $180 million from a previous range of $180…

Thank you. We will now begin the question and answer session. (Operator Instructions) The first question is from Laurence Alexander of Jefferies. Please go ahead.

The first question, can you discuss a little bit the push back that you are seeing in order patterns? What's going to be impact on the Volvo volumes into next year? Are you going to get bullish that will distort the first half of next year or is that getting pushed back?

You are talking Volvo Car?

Yes.

Yes. It's one of these things where when we really think there is strong market opportunity for each of these products, but there is always some short-term issues or challenges. In this case, there was a lot of people waiting for that announcement of subsidies coming back. That was expected but as we have talked before, people have this expectation that if it's coming, they are not going to look stupid by buying a product when they won't credit. So you immediately see that pause where people are waiting. Then we announced the V60. A lot of people were excited with the V60 and they want to wait for that. So it's anyone's guess what the actual order patterns are. We need to get the volume up to the point where some of the stuff averages out. We want to get the product into more markets than just Sweden. That's obviously going to have a big impact on smoothing the curve. But at this point, it's so early that any small change in market sentiment is going to distort the number from quarter-to-quarter. So, long-term, we think the part is going to grow in volume substantially and long-term we think that the quarter-to-quarter lumpiness is going to smooth out but in the short-term, yes, you are going to see some ups and downs quarter-to-quarter. That's partly why we are not disclosing units by product this quarter. I may as well wash that one out because I know it's going to cause some concertation but again part of this is because we think it's quite meaningless and at the same time it's giving pretty valuable competitive data out to specific markets. So what we want to do is try and aggregate some of these numbers to give people a little better indication on how to think about the future in a specific market and that's going to be based on the aggregate of a few products in a few markets so that we can average some of the short terms stuff out. That makes sense so far?

Yes, and then secondly on the cash burn. Can you give a little bit more color on how you are thinking about that given the lumpiness in the business and if there is any risk for between 15 targets flipping and how Nancy might change that?

I will weigh in Bill's itching to jump in too. I hope the credit cash burn down sequentially. We expect cash burn to continue to decline for a bunch of reasons, partly as Bill says, we are expecting more cash contribution from sales. What a great concept. But secondly, we got levers to pull on how much of our cash we are investing on our own. We know a lot of our projects, the quantum of products that we are working on is rising. There is a lot new projects but a lot of this are being supported or fully funded by our partners. So our cash burn from investments is also going to shrink as a percentage of new product development. So we are pretty confident that we are on track to do this. I wouldn't say that we are going to have the complete smooth curve down to that cash for breakeven but we are comfortable that the cash burn is dropping and that's going to come for good reasons. That's more sales and more contribution to our expense line. Bill, you want to elaborate?

If you look at, we are confident or comfortable with what we are communicating is. We do see kind of trend where we are going to be launching these products. As we mentioned, we have got Volvo coming down next year which we have very high expectations plus several other new product launches in which we have some visibility on where we think our revenue stream is going to be and the profit stream that's going to come from that. And as I mentioned, we are not going have to make significant investments on our facilities to produce and sell these products. So we are going to be able to leverage our existing footprint while we continue to stay on the topline which will drive all those earnings and margins down into the bottom-line and help drive our cash flow to breakeven for all of our businesses.

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

You mentioned a couple of reasons for the push out to revenue. One of which was the HPDI in China. I wanted to get a sense of sort of what's going on there? Is that just timing of shipments or do you feel that there has been a delay in negotiations there?

Obviously, we are not going to comment on negotiations or pricing or what's going on. I think it's a case we have always said there will be a handful of products going out in 2013 for early testing. We don't think that's going to happen in 2013 in any meaningful way. We still have units in the field for testing but we are not going to see incremental revenues. So I don't think there is any change in the market sentiment. There is no change in the product plan. I think it's just a case of timing for when we are actually going to launch and see revenue recognition in that market. So nothing to report other than that.

Okay. But based on…

Ultimately we can build away and because he is on that joint venture board. I think the point is, if you look at what's going on in China, which is very evident in the sales numbers and the growth numbers. The demand for high performance trucks is very obvious. So this is going to be a very interesting market. Investment in infrastructure is well ahead of the investment rate. Even that we see in North America and that's been going great. So I think real challenge is getting the right long-term deals with everyone so that the distribution and support networks are ready for a major launch of an important part of that.

Okay but no end market demand issue there at all.

No effect, on the contrary, we have seen a lot of enthusiasm for it.

Okay, great, and then second quarter. You talked about 12 liter launching. You had a very strong launch and that may have pulled in some 15 liter or disrupt the little 15 liter shipments. But what long term demand profile you see for the 15 liter? Should that to stabilize once the 12 liter is in the market or should that continue to be cannibalized by the 12 liter?

Well, I will just reiterate what we have been saying for some time. We really see the Class 8 truck market is going to need a wide range of products, different trucks, different engines, to fit all the different segment that are there in the market today. So there is no one size fits all product that anybody is going to see. We have been asked, are we going to see cannibalization of the buying leader of sales in CWI, now that 12 liter is out because, as you know we have been pushing 9 liters into the bottom end of the Class 8 market. I think what we are seeing in fact, is that segment is going to continue and continue to grow and the 12 liter product is finding its own net that really wasn't been properly served. Up until now people that are either buying 9 liters or 15, which weren’t right. So the 12 liter market is substantial and I think it's going to do very well because it's available in a wide range of trucks at a good price, good service. So, that segment is going to do very well. The heavy-haul, long-haul market is still there above the 12 liter segment. So we might launch 400 horsepower with a higher torque rating this month but there is still a segment above that. We think that's going to be served by HPDI products that can Kenworth and Peterbilt are shipping today. They are also going to be serve by the 13 liter Volvo HPDI products. There is going to be a range of products in that space as well. So I think that the market demand for each of these segments is strong and going to get better but the next generation products obviously benefit from better pricing, better service, latest generation technology. The 15, as we have been saying from some time, is now five years old and it needs a refresh of hardware if it's going to be competitive for two months longer. I think people are recognizing that there is going to be a range of products that serves that market over the next few years too. So are we going to reinvest in it? You know, if the market demand is there and if our partners are there, of course we will. But I think there is going to be a lot more than just a 15 in that segment two or three years from now too.

Okay. Thanks for the color.

That make sense, Rob? I realized it was lots of content.

That was perfect. Thank you.

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

Just a couple of follow ups. You noted in the press release that part of the reason for lowering your revenue guidance was the delay in the ISX12 liter. But why would that ever have been in your revenue guidance? What am I missing? That was all as part of the JV.

No. Sorry, Ann, if that was how I came across. What we were saying is that there is a delay in the expected production of the Weichai Westport 12 liter. This is the negotiating that's going on right now for our HPDI products in China. What we did say in the press release was that just the product mix right now is just heavily weighted to the Cummins Westport 12 liter. And to your point, we don't recognize the revenue of that. Right now we have got a strong product mix shipping 12 liter Cummins Westport engines where we recognize the income on our P&L but not the revenue but the change in revenue outlook, to be clear, was more about pushing out our revenue in China and some other factors.

Okay, and just to be clear, do you have a contract with Weichai for the HPDI or is this still in testing mode and they could turn around if they, yes we like it but it is too expensive? Do we have a contract or are we too early to have a contract yet?

Yes. No, there is no contract with the joint venture yet. They have contract. Obviously we have had a contract to jointly develop the technology. We do not have a supply agreement where they get to say, here is the price we pay for the components and here is the volumes that we are going to deliver. That's what we were talking about.

Okay, thanks for the clarification. And then, on not releasing the heavy-duty numbers any more because of competitive reasons. I don't understand that. This was supposed to be like your bread and butter and how are we supposed to figure out what the penetration rate is for the industry or how that business is doing and I don't fully understand the competitive reasons since you have really have had no competitors?

Well, I think it's a very broad product array that we are talking about here, Ann. If you look at the acquisition of BAF, we got all of our Ford products, we got all of the Volvo products and now we got all the heavy duty products. It just isn't practical for us to continue to breakdown units by product. Now what we are going to do and we haven't done it this quarter partly because we wanted to get your input on how we want to do this, is we do want to be able to show you unit shipments by major segment. So whether that's LNG trucks in Class 8 or medium duty pickup trucks or something like that doesn't breakout specific product units, that does give, I think you will, it agree does give very good comparative information in specific segments. We don't want to be giving people our prices or margins by product. That's just not realistic. So we are going to come up with some segmented disclosure that is more than we are doing. But frankly, I think we give people a fairly transparent view of how these markets are going with the market segmentation data that we are disclosing. That should give people a pretty good idea what's happening in the on-road systems business unit where these things falls. We don't think there is a good reason for us to disclose product specific data. We do not see anybody in the industry that does that either. So we do want to come up with some aggregate numbers that make it easy for the financial community to do some modeling and expectations on things like market penetration. That's absolutely what we want to help you to do.

Well, we do get market share data from (inaudible) on engine by class of engine. But the HPDI, I would argue is so important that that will be important to give us at least units going forward?

Well, we will take a look at how that gets disclosed.

Okay, and if I can sneak in one final one. Congratulations on hiring, I was going to say as its President and COO, but I won't. I am just curious on Nancy's role, when she takes over in operations. Would she be given the scope and the responsibility to look at the strategic rationale for some of Westport's businesses? Or is she simply just going to be responsible for making the best of what she is handed? I am thinking would she be able to look at why are we building components in Italy? Would she have to broaden that scope to really look at the fundamentals of the manufacturing footprints and make recommendations?

That's exactly why she has jumped in, Ann, and you will meeting her soon. I am sure. So you can ask her that but I think she has got a very broad scope. She has got a great career in the automotive business. I think she is pretty excited being rolling up her sleeves and diving into it. But yes, that's exactly what it's about. It is how do we pull together all of these disparate partners and suppliers and how do we optimize our own operational commitments to this in conjunction with our partners so that we really do something pretty interesting. So, I think Nancy's background and experience is exactly what we need at this time in our developments and we are really that she has decided to jump in.

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

Hi, good afternoon and good evening. This is Ravi Gill on for Jerry. Can you say more about the warrant issues you are having on the 15 liter product? You have spoken before about being able to reduce the incident rates. So could you just expand on the issues that you recently had with that product? What's driving the issues?

Yes. We are not going to give specific details on here but just very similar to what we experienced in the CWI business. We have a process that we have to go through and look at our warranty experience and then ultimately how does that translate into our accruals. So we got a very rigorous process that we go through on each quarterly basis. So through that process based on the warranty experience, we have to go through and make an adjustment to our warranty which ultimately impacts our margins for the on-road business. It's a broad array, f just based on how these trucks are used, their applications. It's very similar with what we have seen in CWI. As we talked about before the engine was originally designed for transits. It has being put at other application. We are seeing some challenges. Based on that warranty experience, we have had to increase our accrual. It's very similar process that we go through on our 15 liter. So it's nothing very specific that's driving that increase in the warranty provision.

Okay, and then, just on cash again. Can you frame for us in this way, your view of the minimum amount of cash you would like to have on hand? Just so we can gauge how much you need to turn back R&D or at what point you think you would want to go to the market per capital?

We figure today, when we look at our business plans going forward and we reiterated that we expect being cash flow positive by the end of 2014. I think we have sufficient cash to fund our operations and we do have some levers to dial back that cash burn through reducing our investments in new programs or on the flipside is if we start seeing significant adoption or acceleration of adoption of this technology, we see opportunities to increase our cash flows. The fact that we have several products that we are going to be launching over the next 12 months which will ultimately be generating cash flows which will help fund the business going forward. So, I don't think there is any specific amount and so we continues to sit down everyday or at least monthly and go through what our cash burn rate is and what do we see coming down the pipeline and adjust accordingly, if we need to.

We have got some pretty strong income streams coming from the joint ventures, Ravi, which also help offset a fair amount of capital burn and usage there too.

Okay, and then just lastly, when do you expect to be able to utilize the Cummins facility? Just wanted to know to what extend is your 2014 free cash flow neutral target for the business unit? How much of that is driven being able to leverage the Jamestown facility?

I don't think, at the moment, Ravi, we are talking, the 12 liter Cummins Westport is actually built in the Jamestown, expected to be built in the Jamestown facility. So in terms of the 15 liter products that we have previously had commented several quarters ago that there is an opportunity to do some production there at certain volumes and certain numbers were set. I think we just got at the right strategy right now which is we will make sure that we right size the production capacity for the product demand and as our belief the market is going through a vertically integrated solution or obviously going to continue to push for a more vertically integrated solution with that whether it's in Jamestown or some other solution.

Next question is from Sanjay Shrestha of Lazard Capital Markets. Please go ahead.

Great, thank you, good afternoon, guys. I have got a couple of questions here. First on Volvo 13 liter. Can you give us an update on the launch timing and any general uptake regarding that?

Probably not. Probably, it's back half of '14 would be a realistic expectation, Sanjay. Ultimately it's Volvo's call when it gets disclosed to product launch but they are not sharing the exact quarter they are launching it.

The launch would be very similar to the ISX12. That's going to be a slow, gradual launch of the product into the markets.

That's fair enough. So along these lines, in terms of any incremental update you guys can share with us about the LNG tank opportunity in new customers? What sort of traction you are getting in the market? Can you talk about that a bit more?

Yes. You are talking about the iCE PACK?

Correct.

Yes, actually very interesting. I think since we started to talk about the cold LNG and the need to really deal with the fuel demand from these bigger engines, it's got people really focused on this whole issue and the demand is really good. I think the surprise, to a lot of fleets, has been the complexity, let's say, of rolling out LNG. I think everyone just assumes that it's just another liquid. In fact, there are things to learn, there are handling differences, there are metering challenges. There is all kinds of things to learn. So we have been rolling out quite a bit of training and showing people and bringing them up to speed on what these issues are. I think once we are through that, people are quite infused because it becomes very clear, here is how we can make money at this. But the idea of cold LNG is creating a lot of value both from the people building infrastructure and from customers that are starting out how they maximize their range and performance. So the product is being very well received. Obviously we are in testing mode. We are taking advantage of the fact that these are components that have been well tested in previous programs but we have got to get some miles on it and some accelerated testing. We will be launching it later this year but I think the demand is going to be really good.

Okay, great. One final question from me then, guys, right. So obviously the 12 liter is going well and you guys got multiple things happening. Even the Weichai JV looks like it's going to expand pretty rapidly again next year. Maybe margin even gets better. So when you guys talk about that EBITDA breakeven, by let's say end of 2014, right. On a very high level, what's your general expectations? What are you thinking about, right? Like on the 12 liter Cummins JV side, Weichai JV side and the margin targets? Can you give us a big picture view of how do you puts and the takes of getting to that EBITDA breakeven by the end of '14?

Well, I think when we talk about EBITDA breakeven for '14, that’s for our operating businesses. So that's the Applied Technology, the on-road business and we will start seeing some revenues from our off-road business and some off LNG Tender car. So when we talk about that, that's our current core businesses. So we are going to expect our Applied Technology business continue to grows it's topline. We expect to see increases from our existing Ford products or mobile products as David talked about. So we think based on how we can look at future, we think we are going to see enough growth in those businesses where they are going to start to continue to leverage their existing footprints and to their existing capacity that we are going to see sufficient cash flows from those businesses fall on to the bottomline.

I think I will jump on that, because it's obviously a very live issue and from a history viewpoint what we talk about internally and what you can all see is we went through this with Cummins Westport. That’s still branded on a lot of people's memory. It took us some time. It was not just the early market. The first products out of Cummins Westport, remember, were transit buses and we are able to make a profitable business just on transit bus. But the second product refuse truck engines, we were able to get enough critical mass. So that business has become profitable and continue to be profitable and ever since funding all on its growth, funding its new R&D. We are now into the trucking market based on that early discipline of getting that very early market segment to the point where it was cash flow breakeven and then generating cash. So we are trying to replicate that in each segment. So, as Bill said pretty carefully, it is because we are focusing each of our management groups on individually getting to be healthy businesses. That says we want the Applied Technology business funding its own R&D from its cash flow. We want the on-road business to get going. It's got lots of products. None of which are really at the level that we think is maturity but it's moving along. It's getting there. We are going to build that critical mass and get it to the point where its going to be generating a lot of cash and doing very well. Then we expect the financial leverage to start to really to kick in. So, that's how we are going to do it, as we are trying to be very disciplined about these individual businesses making sense and we are pulling back where we need to and we will invest heavily where we see opportunities for short-term growth. So, that isn’t a static thing but we do think all of our businesses now have the opportunity to move out of this R&D stage to be commercial businesses and we intend to do that in the near-term. Obviously, breakeven is not success. What we want to do is, generate really striking financial performance using this business model and on the back of this idea that natural gas is going to get some meaningful market penetration in big market. So I think everybody has got their sights on two, three, five years out. Here is what the strategy should let us deliver but we are only going to get there if we push on quarter-to-quarter doing the things that we need to do. So hopefully you will see this year the evidence of that work and we will start to see the returns very soon.

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

Hi. This is Susie Min for Vishal Shah. Thanks for taking the question. I wondered if I could get a little bit more detail on the 15 liter. I know you said you weren't going to disclose volumes but I think last quarter you had mentioned that you are expecting to at least exceed the 2012 levels. So I wanted to get a sense of how that's tracking and as you look towards the end of the year and then how on road revenues shape up in terms of the 15 liter as well as some of your other products and then would love to hear about your recent acquisition, BAF Technologies, Servo and how that fits into that hold? Sorry, that’s it. I have a long question.

I think the short answer is that's partly why we are not giving forward-looking numbers on the 15. So we are not giving forward-looking number on the 15. The real issue here is, we think you go to look at what's happening in Class 8 trucks. So we expect we are going to see revenue from iCE PACK, which is product that's targeted at 12 liter customers and the 15 is only available in Peterbilt and Kenworth. Peterbilt and Kenworth have also been launch partners for the 12 liter. Honestly, we are quite indifferent at our level, Bill and my level. A bit indifferent whether it's a sale of a Kenworth or Peterbilt with a 12 liter engine with an iCE PACK or a 15 liter system. We are quite indifferent. Whatever the customer make sense. I think we are going to more 12 leaders with iCE PACK and we are 15. I think that's inevitable. Whether the number is meaningful or not, shouldn't really make any difference but we are going to see both the on-road business and Cummins Westport benefit from sale of LNG trucks. 15 liter product, we keep saying is now 5 years old and we have been saying for some time it's going to need a reinvestment at some point to give it another five years of life and whether we do that or Packer does that or Cummins does that, someone is going to have to make that expense and we think there is lots of opportunity in the Class 8 market to invest in new truck and engine product. So, it's one that's on the list but it's certainly not something that’s certain. We will play that out as it plays out in the marketplace and depending on what customers tell us they think they want to do.

Okay, and then as it relates to the BAF Technologies and your acquisition? How should we think about kind of the Ford products and how that fits in your entire mix for on-road?

The Ford business is obviously a core part of the on-road business. We are working with other OEMs with other business models. As we have said, there is a long list of names. But the Ford business and the QBM program has been very successful in North America. I think Ford is quite satisfied with how it's working and of course we have invested heavily in that process and we think it's going to be a strong business. The decision to put our business and be up together is something that we have tying to Clean Energy for some time. It's no secret that, Clean wants to focus on fuel and building out infrastructure and selling fuel. Our expertise is engineering and vehicles and technologies. So we think this makes a lot of sense and obviously there is going to be some synergies between their two operations and there is going to be some product line changes and we are going to apply our own procedures and technologies. So that product line will likely shift over the next 12 to 18 months but directionally, I think it gives us some critical mass and I think a very successful business where we can collaborate with Ford to our mutual benefit. I hope that make sense?

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

Maybe I can just go back to one of the earlier questions, well, and David you just mentioned that the product refresh for the HD system. I know for some time, you have been talking about or working on rightsizing the aftertreatment portion of it, just based of using 5% diesel instead of needing the whole system. Wondering where you stand on that? Then second part, I guess, it is going to be hard to track going forward, but just where you stand in the cost reduction strategy?

Cost reduction strategy on that product. A big part of the cost reduction strategy would be working with Kenworth and Peterbilt on just the straight logistics. As you know, because you have seen it, so it’s a hand built engine today. We take an engine from Cummins in New York. We ship it across the continent to Vancouver where we strip it down and put it back together and then we ship it to the Packer plants. So there is a bunch of rationalization opportunity but that would require investment and infrastructure and investment in product and doing some product engineering and at this point, the volumes are such that we are doing just fine with the way it is. To take it to the next level, we want to re-engineer and to take to the next level we want to change the production strategy. So the real question is working with our partners, at Packer frankly, what do you want to do and right now everybody is focused on launching the 12 liter. I think that was the right choice of resources and the right place to invest our mutual time and energy. So we put a lot f engineering and time and work into getting those products out the door and getting iCE PACK out the door. We are quite enthused about that opportunity. 15 is what it is. It's priced where it is. We have got customers who are buying it. It's quite successful. Obviously we have got a lot benefit of getting those miles in the field and getting the support and the feedback from those customers but we have also got product from Volvo coming up real soon now. So there is going to be competition for it. Those are all factors that's go into the product planning process with all of our OEM partners and much as we would like do everything, there are going to choices to be made on where we want to put our investment. It's also no secret, as we said, over the next few years we think that all of the OEMs are going to need vertically integrated product in their own product line and natural gas strategies for everybody are under examination. That's no secret, and we are working with a lot of different OEMs on those strategies. We just can't comment on what people are up to or what their investment priority is. Last line I give you, I am just looking at Bill, as we have said quite clearly that we don't think it's our place necessarily to fund all of the R&D for other people's products going forward. So our priority, our deals like we have done with Volvo and Caterpillar where the product development expenses are being covered by our OEM partner. So put all that together, I hope you had a very clear idea on where we are going

Generally, Eric, where cost are coming down. What we said publicly too is, our current HPDI systems sale prices in the $45,000 to $50,000 range. Obviously we expect that number next year to be much lower on a different OEM as a result of the benefits of vertical integration and new generation and call it cost reduction activities. So there is no doubt the prices are coming down. Call it payback periods are improving there is no doubt that's on the track for the next 12 months.

Okay, that's helpful. Maybe this is not a number. I know you have been asked a few times but just as far as volumes for the ISX12 G, is that a high level kind of number just to know? That was a big CWI number and I would think that the 12 liter is a nice portion of that?

No, actually to give CWI credit, this was the launch quarter and the 12 was not a material part of those numbers. It will be going forward. I think everybody has got very, very strong expectations for that product that it will be the strongest product that CWI has ever launched by a long shot. But the core business is strong. The 12 liter engine got launched. But we are not lying when we said it was a constrained launch. It was small volume and we were getting a rolling start last quarter. First production was really March, April. This isn't all that recent and we are just picking up with the new ratings this August. By the end of the year, we will be at what we expect to be at commercial run rate capacity but that will be higher than where we are today. So, no, I am pretty optimistic going forward that we will see some strong growth in CWI with that product just because the demand is so high.

Okay. Just one last one from me. So locomotive, just curious and I know this plays out over many years but how do you think this develops? Do you think it's CN or BNSF that they do it and lead the market? Or do you think that because the market is so inner connected that it kind of has to be on the seven Class I railroads if they kind of have to do it together? Thanks a lot.

Yes, a good question. As we got started on this and the first concept discussions with CN, as they have been working with us on a FTTC project for some time. It was a concept of a walled garden. You would have to have a corridor on LNG part of the business that was walled off because the railway do share all their hardware. So it has been really interesting to see that everyone is collaborating and getting together to rollout LNG across the system. So, no. It's not going to be an overnight switch from diesel to LNG but I think it's going to come much more rapidly than people think. The economics are just so compelling and the opportunity to the rail industry to drop their operating cost so substantially. Frankly it's not as if we are talking about millions of units. We would have to change few thousand locomotors and build a few thousand tenders, but it's nowhere near the capital investments that we have been talking about in the trucking industry and the mini thousands of fleets and actors that we would have to get engaged to turnover the entire trucking industry. So, no, I think the real industries is very engaged in doing a rapid adoption of LNG across the system and that's very exciting. There is just nothing to report.

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

It is Northland Capital Markets. Could you guys just talk about your working capital needs. You are launching a number of products. How much do you think you are going to need to grow working capital and how far along are you in establishing and working or the credit lines that you will need to support that?

Well, as we mentioned out, just talked earlier, we are an asset like business model. If you look at the CWI business they don't carry any inventory. So as they ramping up. They don't consume working capital. As we launched future products, we are working with suppliers and I don't foresee where we need to invest heavily in working capital to support the launch of lot of these products because we aren’t physically building a lot of the components ourselves. So I don't perceive where we need to go and get discrete capital to go fund the working capital for the launch of these products in the future?

And just so I am clear, it sounded like, you said, particularly that you don't think you are going to need an additional capital to lead to the breakeven point. Did I hear that correctly?

Correct.

Okay, great, and then can you just give us a quick update on the marine opportunities and where you at with the development with those guys?

Yes, lots of talk in the marine industry. As you know, there has been LNG ships for quite a long time and those big low speed engines, it's pretty easy to build an engine that will run on LNG on that speed. It's more shifting that uses more of the engine types that you see in trucks and buses and offer an equipment that would see a real benefit for the technologies that we are talking about. I would say a very clear interest, particularly for things like tugboats and river and coastal shipping. the people who make engines for that market are all the same people that we know. So it's another very promising opportunity and products will need to be developed for that segment and as and when they are ready for announcement, you will be the first to know.

All right. So nothing really concrete. Just a lot more discussion, just to sum it up.

Yes. Nothing we can tell you.

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

Hey, good afternoon. David, on these new hours of service restrictions in U.S. trucking, do you think this is going to be a headwind for natural gas adoption because of lower utilization of the trucks? Or do you think it actually might help because range concerns would be reduced? Any thoughts here.

Actually, I think it's a bit the other way around. Certainly, what we are seeing from our fleets is that that's helping people to get more hours on the trucks because they are going with multiple drivers. So people are going fixed routes and home but that allows the truck to have a driver jump into the seat and keep it going. So most fleets are trying to up their utilization rates on the hardware while they drop their hours of service on the drivers. So what we are seeing is a trend in the industry or at least in some of the leading fleets to put more miles on their trucks per year which is a great incentive to move to natural gas because as you know it's all about payback on the mileage. So little mileage trucks or low hour trucks are not good candidates for natural gas. As the industry goes to higher hours on the hardware those are the places you are going to see natural gas adopted first. So I think all of these issues are going to affect the overall business but you just can't argue with the economics of going with the cheaper fuel. So it's a question of who and where can we match up the infrastructure and the hardware with the economic need and that's what we are doing today.

Okay, thanks. Then, Bill, on the service revenue, given that it comes through your results as such a high margin line item, could you talk about your outlook here over the next couple of quarters as well as into 2014 and then could you also confirm the 2Q service payment. Was that from Volvo?

The two key Volvo payment.

We have multiple development agreements and the timing of that service revenue and the related accounting because really it's the accounting that's dictating on how we recognize revenue on each of these development programs which frankly is their difference. So, historically, we haven't given any guidance on what we think service revenue is going to be just because it could fluctuate from quarter-to-quarter, just depending on for using percentage of completion or for using milestone for accounting.

Well, that’s sad. I think in the press release you can dig out a note that's says we have accrued. It's roughly $6 million this quarter. It is going to be refundable and that will get paid. I am reasonably confident at a milestone payment in the future, but we can't tell when or where because that's pretty confidential. It will be when it happens. But it wouldn’t hurt to take $6 million and build it into the burn rate this quarter as there is a $6 million refundable that's going to come because that is really what's going on here. We are trying to get our accounting lining up with our contractual process going forward because it really would make a lot more sense for us to accrue these expenses and get paid on a more regular basis but that really requires specific language in the contract to meet the accounting standard. So Bill is helping guide our corporate development guys on how to raise your contracts.

Okay, and then just to clarify, is the $6 million the total accrued service income that is yet to be paid out or is that just what was

I will be careful. It is not this quarter. What we noted was that there is $6 million of expense that is expensed this quarter that we expect to be recoverable in the future. So yes, it creates for lumpy quarter-to-quarter financials that are hard to predict but again overall these programs we will see our R&D expenses refunded.

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

I am going to ask another question on the 15 and I know you are probably sick of hearing it but I was looking over some of my notes and through some the old transcripts from multiple-multiple quarters ago and the tone on the 15 seems to have changed quite materially. Put yourself two years ago looking forward to today, would you say that the 15 or the HPDI has not met expectations?

No, I am not going to say that. The whole point of the 15 was to demonstrate that natural gas works in trucking. So I think it's been resounding success of that. I mean, remember when we launched this five years ago at the port in Los Angeles, it was a heavily subsidized environmental program, which was the first time people used LNG in truck. So that was step one and it was only five years ago. Then we agreed with Kenworth and Peterbilt that there were some customers outside the port that we can offer the product to but it was still the hand built product and that was 2010, 2011. So that's what got us customers like Vedder Transport and UPS and Hackmann and that's been a tremendous experience. I think if you talked to any of those fleets, they would say, it's been a huge success at building awareness with LNG but I don't think we have ever said it was the last product to be held in the market or that it would meet all the needs of everybody. We are going to need a whole range of truck products, trucks and engines to meet the needs of this entire segment. And I also think it's not fair to say that we have said that it's going to continue unchanged. Every product in this industry needs continuous reinvestment just to meet the ignition standards. So companies are always looking at where they put their R&D investment and this is not something that we can do our own because there are so many people involved in this specific product. As the market opportunities expanded, we got way more places to look at where we are going to put our investment dollars as well. It used to be this was the product for LNG trucks but now we are spread across many different OEMs and many different platforms. Going forward, I think what we hope you got out today and what I hope I can pound home now, there is going to be a whole range of engines and truck products hit the market over the next five years. That's a prediction, not some sort of disclosure. We are going to see every manufacture of trucks have to a product or they are going to lose market share. It's as simple as that. So that's the context that we are in now. I think we can declare victory on LNG and trucking. It's going to take a significant part of the market and now we need to let all the product planners and those different truck companies come up with what they are going to do to grab their share of the industry but the 15 liter product is what it is today and we are continuing to sell it and customers continue to buy it. I don't think we need to really get into a lot more detail in that.

Okay, fair enough and then, last question here. Again on the guidance, $20 million cut on the top and bottomline. Just wondering if you can get in a little bit to the puts and takes there. Presumably you are going to get some positive contribution from BAF that was not included in the original guidance that you gave last quarter. So is it fair to say that that's reflected in this guidance or is BAF excluded from it? Is it apples-to-apples or it there actually a bigger revenue cut than what it seem like that?

Well, I just want to jump in. We didn't see we changed bottomline. In fact, we are reiterating that the bottomline isn't changing. Part of this is product mix and part of this is, we will see revenue from a product like the 12 liter where we don't recognize revenues but we are going to see our contribution. So what we are seeing is the Westport revenue guidance we are taking down. On BAF, yes, there hasn’t been any guidance for sometimes. As I said, this is been in works for a while. So when we gave you revenue guidance for Westport, there wasn't allowance in there for BAF. So what we are taking down I think just what we said today is that we are pushing out revenue for shipments into China because that might going to happen this year, some of the product mix in some of the markets just because at the half, we are considerably behind on some of those specific markets like Volvo cars. So we are trying to give you the outlook but it's no big magic.

Okay, that's fair enough. I guess just the main takeaway there is that BAF, even though the announcement hadn't been or I guess the acquisition hasn’t been announced, it was already included in the original guidance that you gave last quarter.

Yes that's correct.

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

Hey, thanks guys. Real quick, if we can go to the light-duty side and I know you guys hate talking about legislative initiatives but last week an interesting bill was introduced in the senate to remove the cap on CAFE bonus credits. Who knows if it happens? But if it does it feels like the type of legislation that could make a late duty OEM really turn towards flex-fuel. Can you just editorialize on that for me? Thanks.

Yes, you quite right. We have been concerned about consumer level subsidies because they are so difficult to manage. My rants about what's been happening in Sweden, I think, is reflecting that. It gets we get so distorting and so unpredictable that we have rather just deal with getting the product economically successful on it's own. But on things like CAFE rules and emission rules those are binary. The market must respond to those rules and if there is a tweak to the regulation that encourages OEMs to adopt natural gas, that's very powerful. It really would be. And that's quite transparent at the consumer level. So that's doesn't have the same distorting effect. It has a much more long-term product planning effect. So we are agnostic on that. I can tell you we don't have big lobbying budget. So we are not in there really trying to push to dial on any of these initiatives, one way or the other. I think we need to let the regulators decide where their interest are and what they want to encourage. I think it is clear, more and more, that people are seeing that natural gas is in the interest of many national governments, not just the U.S. government. Certainly lot of the state governments are encouraging the development of their natural gas resources. Those incentives, we think, are very pragmatic and practical and are less likely to be yo-yoing in consumer preference up or down, one way or the other. So we let that process play out. We are not counting on anything like that. I think in general, the OEMs are seeing market demand from their customers and that's probably the healthiest thing that we can hope for.

The next question is from Pavel Molchanov of Raymond James. Please go ahead.

Thanks for taking the question. Back to your comments about Ford. You are obviously excited about the F-150. How have the 250 and the 350 gone, I guess in the year or so that you have been selling into that market? And then secondly, I think the 450 and the 550 were in the works for this year. So if you could give an update on that as well?

Yes. 450 and 550 are just starting to ship and we are ready to go with the new Super Duty trucks for 2014 as well. So, no, I think market demand has been good. I think everyone is excited about the F-150. That's been something that we have had lot of request for and we are very pleased that Ford is adding that to the QBM program, because I think there is a lot's of people who want to buy a truck that they can drive on gasoline or natural gas and we would have a lot of customers talk about using it as an employee purchase option and use corporate refueling. F-250, F-350 are big trucks aimed at fleet use and the F-150 is a product that is very popular in a whole different range of markets. So we think it's going to incremental sales and we think it's going to be very successful as a QBM product.

And on the F-150, is there a geographic footprint where Ford is going to rollout first? Is it a mainly North America or it's going to go global right away?

It's North America. QBM is a North American program. We are announcing that it's available in both the U.S. and Canada at the same time. We are just going to start shipping products in Canada this quarter. So F-150 will be available anywhere Ford sells product in North America.

This concludes the time allotted for questions on today's call. I will now turn the call back over to Darren Seed for closing comments.

Thanks very much everyone for joining the call, and we look forward to seeing everyone around the end of October, early November for the Q3 conference call.

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