Westport Fuel Systems Inc.
Q4 2014 Earnings Call Transcript

Published: 10 Mar 2015

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Westport Innovations, Inc. Q4 2014 Financial Results Conference Call. As a reminder all participants are in listen-only mode and the conference is being recorded. At this time, I'd like to turn the conference over to Darren Seed, Vice President of Capital Markets and Communications. Please go ahead.

[Darren Seed:]

Thank you and good afternoon, everyone. Welcome to our fourth quarter and fiscal 2014 conference call. It is being held to coincide with the disclosure of our financial results earlier this afternoon. For those who haven't seen the release and financial statements yet, they can be found on Westport's website at www.westport.com. Speaking on behalf of the company will be Westport's Chief Executive Officer, David Demers; and Westport's Chief Financial Officer, Ashoka Achuthan; and Westport's President and Chief Operating Officer, Nancy Gougarty. Attendance at this call is open to the public and to media, but for the sake of brevity, we are restricting questions to analysts. You are reminded that certain statements made in this conference call and our responses to various questions may constitute forward-looking statements within the meaning of U.S. and applicable Canadian securities law, and such forward-looking statements are made based on our current expectations and involve certain risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements. Information contained in this conference call is subject to and qualified in its entirety by information contained in the company's public filings, and except as required by applicable securities laws, we do not have any intention or obligation to update forward-looking information after this conference call. You are cautioned not to place undue reliance on any forward-looking statements. Now, I will turn the call over to David Demers.

[David Robert Demers:]

Thanks, Darren. Good afternoon, everyone, and thank you for your interest and support of Westport. As usual, I'll confine my formal remarks to the long-term strategy and our trajectory, and then Nancy and Ashoka will take you through their operational reports for the quarter and the year-end numbers. We'll then open up for questions. It's hard to believe, but as we look back on the turbulence of the last few months, when we called our timeout at the end of September, forecasting a rough Q4, oil was still at $84 and the Canadian dollar and the euro were double-digit percentages higher. Obviously, we were right to take fast action. In retrospect, I think, we've reset appropriately. The collapse in oil prices and gasoline in particular, has caused some markets, such as that for Ford vehicles, to slow down. But on the other hand, many customers even in the light-duty space see the long-term stability of natural gas prices as support for continued fleet migration. Our core business remains solid. And as you can see, 2014 saw us achieve the $1 billion total segment revenue milestone for the first time. Q4 saw good strength in our joint ventures and continued strength in core applications such as transit, refuse trucks, and urban trucking. CWI had a strong top-line in Q4, and we seem to have turned the corner on our warranty accrual challenges that has dampened results for the past several quarters. This resulted in strong profitability in the joint venture. China also continues to see strong growth, and our Weichai Westport joint venture broke 50,000 engines for the year, a spectacular milestone. Combining our two joint ventures, we captured about 2.8% market share of the entire global medium and heavy-duty engine market last year. I think we can conclude that natural gas is now a material and important segment in this business. If the last 10 years were about getting basic products into the market to establish that natural gas can work and get some measurable scale, our next 10 years will be about delivering next-generation products to those established customers as well as new ones. Our major investments in HPDI 2.0 and our advanced spark ignition technologies will deliver more power, better fuel economy, better greenhouse gas performance and lower costs. Our capital-light business model will, we believe, deliver superior returns for our shareholders and allow us to scale up quickly as the market grows. On the light-duty side, where primarily we're looking to displace gasoline vehicles, the market's also going through rapid change driven by two factors

[Ashoka Achuthan:]

Thank you, David. Good afternoon, everyone. I'll begin by giving you some highlights of our fourth-quarter and year-end results, our financial outlook for 2015, and I'll move on to providing you with actions we've taken to address our expenses and our cash position. Most importantly, I will lay out our path to profitability, and the factors we've have identified to get us there. Starting with revenue, total segment revenue including the Cummins Westport and the Weichai Westport JVs and the Westport Operations revenue was $1.1 billion for the year ended December 31, 2014, an increase of 15% over the same period last year and a compound annual growth rate of 43% over the past three years. We are highlighting the combined segment revenue for three main reasons. One, the global market for natural gas vehicles is growing, despite some of the strongest headwinds we've seen in years. Two, we believe that revenues from Westport's own operations and the joint ventures together combined provide better clarity on the market's global picture. Three, we expect much stronger returns from these segments this year towards our own bottom line, and thus are critical factors in our path to profitability. Cummins Westport revenue was $107 million on 3,382 units for the quarter ended December 31, 2014, the second strongest quarterly revenue in the history of the joint venture, primarily due to strong growth in bus applications. For the year ended December 31, 2014, CWI reported record annual revenue and volume of $337.2 million and 10,512 units, respectively. That's an increase of 9% in revenue compared to prior year. We believe CWI's core markets of transit and refuse will remain strong, despite the volatility in energy prices. Weichai Westport's revenue was a record $192.8 million on 16,176 units for the quarter ended December 31, 2014, an increase of 106% in revenue compared to the prior-year period. The full-year numbers were also at an all-time high of $618.5 million on 51,006 units, an increase of 33% in revenue compared to the prior year. We recorded revenue of $130.6 million from what we are referring to as Westport Operations for the year ended December 31, 2014, which is within our previously stated guidance range. This is compared to $164 million in the prior year, which included about $24 million revenue contribution from the first generation Westport HPDI system. Westport Operations include a wide portfolio of products sold in different markets and segments in many parts of the world and is affected by various sensitivities to external factors. Our components revenue captured in the Applied Technologies group decreased by 8% to $86.2 million compared with $93.2 million in the prior-year period. Primarily due to the unfavorable impact of foreign exchange translation from euro to the U.S. dollar and weakness in key markets such as Italy, Russia, and certain other Eastern European countries. That said, we did see growth in markets such as Germany, Poland and India. Our Ford business captured in the On-Road Systems segment was down 1% year-over-year in revenue, but declining over 60% in Q4 of 2014 alone compared to 2013, driven by the impact of lower gasoline prices in the U.S. in 2014 and a sizable fleet order booked in the fourth quarter of 2013. We have taken significant restructuring actions in this business, and we'll continue to monitor the results closely. It is, however, important to note that the bottom line of the business has improved dramatically, and we expect the Ford business to generate positive adjusted EBITDA this year even at the significantly reduced revenue level. Sales of the Volvo Car business improved 25% year-over-year and almost doubled in Q4 2014 compared to Q4 of 2013. Timing of service revenue from our development agreements also impacted our revenue year-over-year. However, the development of our HPDI 2.0 heavy-duty vehicle products is making strong progress and we expect additional service revenue from our disclosed and undisclosed development partners in 2015. For 2015, we are forecasting modest growth in revenue for some markets and continue to remain uncertain in others. The result is that we expect our total segment revenue will be approximately $1.1 billion for Westport Operations and the joint ventures combined for the year ended December 31, 2015. We are able to provide revenue outlook for Westport Operations, but we'll refrain from a specific revenue number on each of the joint ventures for competitive reasons. That said, we expect CWI to have modest revenue growth year-over-year due to current energy prices, although we believe CWI's core markets of transit and refuse will remain strong. We also expect that our portion of CWI's net income would improve significantly in 2015 as a result of our identifying and resolving the warranty issues associated with the 8.9-liter engine. Given the growth we've seen in China in the past few years, we expect Weichai Westport to see continued growth. Revenue from Westport Operations is expected to be between $110 million and $125 million in 2015. Again, our products are sold in different markets and segments in many parts of the world with each business affected by various sensitivities to external factors, including currency fluctuations, which impact our foreign currency translation from euro to U.S. dollars; volatility in U.S. gasoline prices, which affects sales for our Ford QVM products, although we are continuing to see commitments by larger fleets; geopolitical uncertainty in key growth markets, which impact our Applied Technologies business; and the growth of LNG infrastructure, particularly advanced coal LNG stations, which would affect the sales of our products such as the iCE PACK system. Moving on to gross margin. For CWI, the gross margin for the quarter was $33 million, or 30.8% of revenue, a significant improvement of 139% year-over-year. The increase in CWI gross margin during the quarter is primarily due to a favorable warranty adjustment as a result of our resolving warranty issues related to the 8.9-liter engine. Favorable warranty adjustments totaling $4.7 million were recorded in the quarter ended December 31, 2014, compared with an unfavorable adjustment of $21.3 million in the prior year period. For Weichai Westport, the gross margin for the quarter and the year ended December 31, 2014, increased by 197% to $28.5 million and 41% to $52.5 million, respectively, primarily due to product mix and higher margin engine sales and improvements in production efficiencies. From the Westport Operations side, our consolidated gross margin for the year was $32.7 million or 25% of revenue compared with $15.3 million or 9.3% of revenue in the prior year. The increase in gross margin is primarily due to a change in product mix, warranty adjustments and inventory write-downs of $26 million related to the discontinuation of the first generation HPDI system in 2013. For the fourth quarter ended December 31, 2014, gross margin was negative $1.2 million as compared to a negative $17 million for the same period last year. While this is still a 93% improvement, we recorded adjustments totaling $6.1 million in the fourth quarter of this year, primarily related to a one-time charge on an engineering program and provisions for inventory purchase commitments associated with On-Road Systems businesses. Moving on to operating expenses. I will spend some time outlining some of the actions we've taken to reduce operating expenses, but Nancy will go into operational details thereafter. Westport reduced its operating expenses by over $23 million for the year compared to the prior year as a result of several key actions taken in 2014. These included, consolidation of facilities, restructuring of businesses at the Applied Technologies group, Ford, ServoTech, and Volvo Car to focus on lean operations, negotiations on terms with current production suppliers, reduction of our global head count and reduction of general corporate expenses such as reductions to executive salaries and corporate bonuses. In addition, we have rationalized and completed a number of development programs and reduced the overall number from 45 programs in January 2014 down to 29 programs as of December 2014. Westport expects to further rationalize the development programs to a core group of 23 programs by the end of 2015, through continued prioritization of key technologies and programs, combined with the completion of programs which together with improved JV performance, would improve total 2015 corporate and technology investment adjusted EBITDA results by approximately 40%. Moving on to net income. For the fourth quarter of 2014, our net loss was $64.9 million or $1.02 per share. This is compared with a net loss of $89.5 million or $1.42 per share in the prior period, an improvement of 27%. For the fiscal year ended 2014, our net loss was $149.6 million compared with $185 million in 2013, an improvement of 19%. The improvement in net loss for the quarter ended December 31, 2014, was primarily due to increases in consolidated gross margins and joint venture income, combined with a significant reduction in operational expenses. I would also like to point out that during the quarter we recorded non-cash adjustments totaling $35.4 million. This includes goodwill impairment of $18.5 million as a result of our annual goodwill impairment assessment in November. This charge was driven by a significant decline in the price of oil and the lower than expected adoption rate of natural gas vehicles. Other non-cash adjustments include $5.5 million of intangible asset impairment, $4.1 million of provision for inventory purchase commitments, $2.1 million in inventory obsolescence and $5.2 million on impairment of long-lived assets. The good news is that our income from the joint ventures improved considerably during the quarter. CWI reported record net income of $14.3 million for the quarter, an increase of 276% from the prior year as a result of favorable warranty adjustments. All portion of CWI's net income for the quarter was a record $7.7 million, an increase of 175% compared to 2013. Furthermore, Weichai Westport generated record net income for the quarter and the year reporting $10.3 million for the quarter and $17.2 million for the year, an increase of 442% and 42%, respectively, compared to the prior year periods. Our portion of Weichai Westport's net income for the quarter and the year was, again, a record $3.6 million and $6 million, respectively, an increase of 500% and 41% compared to the prior year periods. Moving on to our cash balance and adjusted EBITDA. As of December 31, 2014, our cash, cash equivalents and short-term investment balance was $94 million. During the quarter, cash used in operations was $23.4 million, a sequential decrease of $8 million from the quarter ended September 30, 2014, where the cash used was $31.4 million. This is primarily due to improvements in working capital. Cash used in operations for the year ended December 31, 2014, was $106.8 million, a decrease of $10 million from the prior year, where cash used was $116.8 million. This is primarily due to some of the key actions I mentioned earlier to improve operations and reduce product investments, offset by the costs related to the restructuring activities. In terms of cash and liquidity, our primary motivation is clearly to get the company to breakeven from a cash flow standpoint as soon as possible. We have a number of choices that we can make around investments and other research and development programs that will expedite this process. However, we also have a number of strategic alternatives in front of us to help reduce core expenses and cash burn, and we have the ability to divest certain non-core assets. I expect over the next few months that we will be able to provide more clarity on these alternatives as they evolve. Moving on to adjusted EBITDA and key steps on the path to our profitability. Adjusted EBITDA loss from operations for the year ended December 31, 2014, was $17.7 million, compared to $34.5 million for the prior year. Consolidated adjusted EBITDA loss for the year ended December 31, 2014 was $83.9 million, compared with a loss of $96.9 million in the prior year. The year-over-year improvement was due to the impact of consolidation and restructuring activities I mentioned earlier, and the prioritization of our engineering and investment development programs. The path to breakeven for Westport has stronger headwinds now than when it was originally proposed in 2013. However, we are controlling what we can through rationalizing our businesses, our development programs and technology investments, while looking out for opportunities for incremental sales. Our current forecast for reaching consolidated breakeven using the adjusted EBITDA as a metric is now mid-2016. However, there are some catalysts that could transpire for earlier success

[Nancy S. Gougarty:]

Thanks, Ashoka. I would like to take the opportunity this afternoon to talk about operational highlights. When I complete my comments I will pass back to the operator for questions. Over the past quarter and year, we have continued to exercise financial discipline across our operations. Part of this is focusing on the headwinds in the energy market, we have remained nimble and took immediate action to align our operations with the pace of market adoptions and the readiness of our OEM customers. In terms of investment in new technologies, we remain committed to investing in technologies where we have support of OEMs. Westport invested $38.2 million towards HPDI 2.0, while Westport – during the year. The lead customer for HPDI 2.0 is Volvo AB, while Westport continues to develop HPDI products with other OEMs. The key components of the Westport HPDI 2.0 system is a brand of new family, high-pressure fuel injectors, co-developed by Delphi. These have been designed to provide better cost, smaller size and improved packaging compared to the prior generation of Westport HPDI injector designs. The new generation are currently running on engine tests, and we expect to have volume production available by mid-2016. As we look at Applied Technologies, we have strengthened our leadership by the appointment of Mehran Rahbar, Executive Vice President responsible for Applied Technologies' business unit. His career includes 17 years with Siemens VDO in multiple divisions throughout Europe and North America. His last position was CEO and Executive Vice President of the Engine Actuator and Emissions Management division. Just prior to joining Westport, Mehran was a global member of leadership for quality in the Valeo Automotive Group. During fourth quarter, we continued our intense review to improve the Applied Technologies' business performance related to sales, productivity, inventory and quality management. Priority investment projects were identified and implemented resulting in immediate cost savings. The remaining projects planned are for execution over calendar year 2015. We also launched product cost reductions, product benchmarking and improved the competitive pricing and response time for our customers. Activities included products, technology enhancements, consolidation of our two warehouses in Italy, and a new e-commerce site. The e-commerce site developed in 2014 will go live in 2015 and will reach new and untapped customers, as well as providing information and education on products, as well as optional services available to support customer purchasing decisions. Our consolidated warehouse located right on our Italian property will bring our staff under one roof, increase our transportation efficiencies, allow us to ensure responsive delivery at best cost. We will report back throughout the year on the financial benefits of these actions. The acquisition of Prins will further strengthen Westport's dominant technology portfolio. It extends our markets into Africa, Korea, Turkey, and Central Europe. As a result of the acquisition, we expect to realize synergies and economies of scale across our products, sales, and operations. Prins is a leading developer of direct injection LPG technology. The acquisition of Prins enhances our LPG capabilities, thus stimulating demand and supporting our market growth in this area. Westport's Italian-based injector business remains consistently strong. The new Valtek type 39 in the OMVL Gemini (28

[Operator:]

The first question is from Laurence Alexander of Jefferies. Please go head.

[Laurence Alexander:]

Good morning. Just a couple of questions. First, when you speak about the cost reductions, is that a year-over-year adjustment or is that your run-rate cost adjustments at the end of 2015?

[Ashoka Achuthan:]

Laurence, that would depend on the nature of the cost reductions. For instance, clearly it relates to a shutdown of a location. Something we did in the first quarter of – fourth quarter of 2014. That would be a run-rate reduction, whereas others would be more of a year-over-year reduction. So it's a combination of both those factors.

[Laurence Alexander:]

Okay. So then just to clarify, so the 40% reduction is there a tailwind into 2015 that is implied by the reductions you're already planning?

[Ashoka Achuthan:]

The 40% is a year-over-year reduction, Laurence.

[Laurence Alexander:]

Okay. And secondly, can you give a sense for – can you help size – you make a couple comments around asset sales and FX. Can you give us a quantification of what the size of potential asset sales might be and what your sensitivity is to, say, a $0.10 move in the euro?

[Ashoka Achuthan:]

It's – I mean, you can look through our balance sheet to get a sense of what kind of assets we carry. We are looking into all kinds of monetization opportunities. And at this point, I'm a little reluctant to go more specific than that. We will, as I mentioned, giving you more color and adding more clarity as each of these initiative evolves over the next few months. But, believe me, it's right there on the front burner for us.

[Laurence Alexander:]

Okay. And then, lastly, just in the reference to moving to full system sales, will there be any – are there any situations where you'll be competing with your customers, and what percentage of your business might be affected by that?

[Ashoka Achuthan:]

Nancy, you want to take that? His question was – is there risk of the Ford business with system sales competing with the customer, meaning competing with Ford?

[Nancy S. Gougarty:]

I don't – I mean...

[Ashoka Achuthan:]

I don't think so, but...

[Nancy S. Gougarty:]

I can't think of anything that would fit that scenario. No.

[Ashoka Achuthan:]

Yeah. Well, we don't see that concern at this point, Laurence.

[Laurence Alexander:]

Okay. Thank you.

[Ashoka Achuthan:]

Sure.

[Operator:]

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

[Ann P. Duignan:]

Hi. Thank you. Where to begin? You talked about covering development programs from 45 to 29 today, but down to 23 by year-end. I guess, my question is, with the cash burn where it's at, with your inventories at an elevated level, your receivables at an elevated level and your payables at an elevated level, are we moving with a fast enough sense of urgency here? I mean, we've got less than four quarters of cash to use up. And why wouldn't we stop every development program and go into survival mode right now, until you generate cash, generate profits in the business as you have and then go back and look at development programs?

[Ashoka Achuthan:]

Yeah. I'll let David answer the second part of the question is, why don't we stop doing everything to regenerate cash? But I can assure you, Ann, that our management of working capital has our highest priority and attention. Yes, you do – you have noticed receivables, as well as payables, I may add on the high side and we'll try and offset it the best we can. We are struggling with certain headwinds, particularly Russia and South America with the macroeconomic conditions there. We've had some issues related to collectability, but outside of that, we are – we have written off inventories, where we have been holding amounts well in excess of current requirements, which is a part of our one-time adjustments this year, but raw working capital management is – and will continue to be our highest priority this year. Your second part of the question, why don't we pull out of engineering programs till we get cash positive? David? I guess, you wish it could be something as simple as that, right?

[David Robert Demers:]

Yeah, I wish we could do it as simple as that. And as you know, we've got commitments to people. We've got alliances. We've got joint development agreements. And frankly, we've got a lot of enthusiastic customers, who think that these next-generation products are really important. So it's not something that we can just shut down. I think as Nancy said, we have been pretty ruthless about programs where we don't see that demand and that excitement, or where the timetable would have been pushed out. And as we've seen in the mining and rail business, it looks like there's going to be some more time, but there's also a whole bunch of partners who are looking as to how they're going to make those investments. And so there's no need for us to make investments on our own. Right now we'll wait and see how that team coalesces. But for the things that we are doing now, we think we have a strong demand and a good return for shareholders, and we want to preserve those programs. And obviously, we think that we can afford them, or we'd be shutting them down. We don't think this is a question of survival, frankly.

[Ann P. Duignan:]

Okay. (40

[Ashoka Achuthan:]

No, the impairment had to do with our North American business; goodwill and certain intangible assets related to the business.

[Ann P. Duignan:]

Okay. I'll get back in line in the interest of time. Thank you.

[Ashoka Achuthan:]

Thank you.

[Operator:]

The next question is from Nicole DeBlase of Morgan Stanley. Please go ahead.

[Nicole DeBlase:]

Yeah. Thanks. Good afternoon, guys.

[Ashoka Achuthan:]

Hi, Nicole.

[Nicole DeBlase:]

Hey, there. So, I think the question was asked, but I'm not sure we've got an answer on this. So you guys have embedded $1.15 to $1.20 on the euro within your revenue guidance. And I'm just curious, now that we're at $1.08 could potentially move to parity by year-end, how much of an additional headwind could that represent to your guidance?

[Ashoka Achuthan:]

Yeah. It's something we've been looking at and as you rightly pointed out, that's the range we were gone with for the guidance, which explains why the guidance is flat to lower than our current year revenue. Our current year average was closer to $1.33 to the euro. Let me answer the question this way. About 80% of our Westport operating revenue is from the ATG group, and that is substantially all euro denominated. So you can do the math to get a sense of what any change in the euro was in the dollar would do to us there. But it's just as important to note that while our revenues are dollar-denominated, all the input costs are also dollar-denominated. So we expect corresponding benefit on the cost side. Yes. So, net-net, profitability-wise, there is going to be a negative impact, but the important thing to note is that we are substantially self-hedged there.

[Nicole DeBlase:]

Okay, that's helpful. And then my second question is just around the new EBITDA guidance, so pushing it out to mid-2016. I'm just curious what level of confidence you guys have around hitting that, and what market conditions you need to see in 2016 in order to execute on that guidance?

[Ashoka Achuthan:]

Confidence – we are reasonably confident, which is why we shared it. We were hoping to be able to get there by the end of 2015. Obviously, we made that commitment under totally different set of circumstances – macroeconomic, oil prices, currency situation, you name it. But in terms of operational improvements and the things that we're doing that we can control, we have an extremely high degree of confidence that we will execute. And with the macroeconomic wins, probably not as much as against us as it is today, we expect we'll be able to get there by mid-2016, as stated.

[Nicole DeBlase:]

Okay. Thanks. I'll pass it on.

[Operator:]

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

[Jerry D. Revich:]

Good afternoon.

[David Robert Demers:]

Hi, Jerry.

[Ashoka Achuthan:]

Hey, Jerry.

[Jerry D. Revich:]

I'm wondering if you folks can talk about the margin profile in Cummins Westport, going forward. This quarter, excluding that of period warranty benefit, it looks like the margin profile was about 14%, I know the margins have been pretty volatile here. I'm wondering if you'd counsel us to think about the go-forward margin profile at a similar rate.

[Ashoka Achuthan:]

Yeah. We've always – I believe we have always stated the go-forward margins for that business to be in the mid – early to mid-20% range, and we expect that will continue. Obviously, we expect 2015 to be a little favorable because of the impact of certain warranty accrual reversals, but the specific answer to your question, we will continue to be early to mid-20%s as we've said in the past.

[Jerry D. Revich:]

Okay .And then, in terms of what you folks are considering non-core as you review the portfolio, I know you're not going to tell us the exact businesses, but can you just help us understand the overall profile of what you folks might consider non-core? And what the potential buyer pool for any of those assets could look like?

[Nancy S. Gougarty:]

Well, I would say that, as I mentioned, the tender cars. At this point in time we don't see that market developing as quickly as we had hoped, so we have now set that out and said that as that market comes about, we will take – continue to keep our eye on it, but at this point in time it's not core to our portfolio in the upcoming 24 months. So therefore, we have said we'll continue to support the activity and watch the market develop. So I think that those were the kinds of decisions we're making in terms of market readiness, where the customers are willing to support programs as well as where we, in general, think that the technology is going. And as mentioned, in light-duty space, the challenges are a bit different than in the heavy trucking space, so we've tried to place our priority in the different sectors and trying to make best calls as we can.

[Jerry D. Revich:]

Okay. And then I know you're changing the reporting structure going forward, but looks like for the On-Road business, the sales were down to just over $1 million in the fourth quarter versus $6.5 million in the prior quarter. Can you just step us through, was there any timing related revenue recognition that drove the lower number in the fourth quarter? Is that the type of run-rate we should be thinking about for this part of the business?

[Ashoka Achuthan:]

Yeah. We've had one-time adjustments. A matter of fact, there was about $2.5 million of revenue reversal that we booked in the fourth quarter in On-Road, so that would impact us. It is – and also the fourth quarter, our North American Ford business was down compared to the fourth quarter in the prior year for the reasons I touched upon in my script. It had to do with a significant slug (46

[Nancy S. Gougarty:]

And the ServoTech piece, yeah.

[Ashoka Achuthan:]

Yeah, and the ServoTech piece, yeah.

[Jerry D. Revich:]

Okay. Thank you.

[Ashoka Achuthan:]

Sure.

[Operator:]

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

[Eric A. Stine:]

Hi, everyone. I was wondering if we could just start with Weichai Westport, the gross margins there, that number, I mean, that's a better number than we've seen in a while. Just wondering different approach there to the market in terms of pricing, or is it mix or overhead absorption? Just some clarity there, and how we should think about that number going forward?

[Ashoka Achuthan:]

Yeah. It is an impressive number by all accounts, Eric, and we were just as happy to see it as you are. No, nothing out of the ordinary. I mean, they continue to push for market share. The market is booming in China. They are doing their thing. They're up there as the market leader. Product mix did help, but I don't think there was any one-time or extraordinary impact that contributed to that 12% gross margin that you saw in the quarter.

[Eric A. Stine:]

Okay. Maybe sticking with China, just – and this is turning to the WP12, just wondering how that pipeline is shaping up, an update on the test – and you may have a few handful of test units out there – and just kind of an update on when you think you'll start to see meaningful volumes. Is that still a late 2015, early 2016 type of event?

[Nancy S. Gougarty:]

Well, as mentioned in my comments that we're working with on some key components. Right now one of them is working on the next-generation injectors. What we would anticipate is that we would be using current generation, as we get started, and then moving to next generation. So I think that our test are – continue to move forward with positive results. And I would say, I think, it's a bit early at this moment to comment when we think the launch is actually going to be because we're working – as you know, Weichai is the engine manufacturer – we are working with a series of OEMs as well as we bed the engine on their vehicles. So, at this point in time, I'm going to hold from giving information. But I think, like I said, we see 2015 and 2016 being transformative years in terms of getting into production in terms of HPDI 2.0.

[Eric A. Stine:]

Okay. Maybe last one for me, just – I know you talked about the non-core assets in your thinking there, but you also referenced strategic alternatives to reduce core expenses. And just to clarify, I mean, are those things that are under consideration now, you need the business to deteriorate further to trigger those? Or are those things that are – those are things you're thinking about in the near term?

[Ashoka Achuthan:]

We are thinking about them in the near term, Eric. No, I don't think we are waiting for deterioration. It's on the table. It's being discussed. And we will share details as they crystallize.

[Eric A. Stine:]

Okay, that's great. Thanks.

[Operator:]

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

[Vishal Shah:]

Yeah. Hi. Thanks for taking my question. You mentioned your Ford business will have positive EBITDA in 2015. Can you maybe talk about your assumptions in that business and your guidance for this year?

[Ashoka Achuthan:]

Yeah. Vishal, are you with Scotiabank? You show up as Scotiabank. Just checking.

[Unknown Speaker:]

Yeah. Anyone? (50

[Vishal Shah:]

Sorry, Deutsche Bank.

[Ashoka Achuthan:]

Yeah, yeah. Okay. It shows up as Scotiabank on the website, but could you please repeat that question, Vishal?

[Vishal Shah:]

I wanted to just get your assumptions behind your guidance for the Ford business turning positive EBITDA in 2015.

[Ashoka Achuthan:]

Well, I mean, we've got it restructured to a point that we are extremely confident it will be adjusted EBITDA positive. As I mentioned in my script, we did have a very significant one-time fleet order in 2014 that did not – I mean, 2013 that did not repeat in 2014. Gasoline prices have come down a lot more significantly at the pump than have diesel prices. And the Ford business is impacted by that. So we expect to see, if you will, a market reacting negatively to our light-duty businesses like the Ford businesses more than we do in medium-duty and heavy-duty. Having said that, we have restructured the business both from a cost, location and from a people and staffing standpoint to the level where we think we will get to adjusted EBITDA positive even at these low revenue levels.

[Vishal Shah:]

Okay, great. Thank you. And then you also mentioned that you're seeing similar activity from the larger fleets. Can you maybe just provide some more color on what you're seeing there and also some color on what you're seeing in the refuse and the transit business in this environment? Thank you.

[Ashoka Achuthan:]

(52

[Unknown Speaker:]

Yeah. I mean, the refuse market and transit fleet market has been pretty much at the solid base of our core, Vishal, which is great. And obviously with Cummins Westport supporting a lot of the business, I think over 50% of that business is transit and refuse, which, again, despite some volatility in the energy and oil prices, it just has not been affected by the current volatility. So there is a good part of that. In terms of the fleet order business within the 12-liter Cummins Westport engine, it's tough for us to comment right now, just maybe specifically around North American trucking. I think it's still been a substantive business. We do know some of our bigger customers have already put their orders in for calendar 2015. And so I think for calendar 2015, actually it's why we're sort of guiding between the segments some moderate growth year-over-year, but in some cases maybe flat. It just boils down to the fact that a lot of these orders are just for bigger fleets – are baked into 2015. I think, come around Q4, when larger fleets need to start work, even (53

[Vishal Shah:]

Okay, thank you.

[Ashoka Achuthan:]

Thanks, Vishal.

[Operator:]

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

[John Quealy:]

Hi. Thanks, folks. Good afternoon. So could we just summarize the expense reductions here? So, looking into 2015 off the 2014 base, this is a $26-million savings and give or take in corporate and technology expenses; does that include any, let's say, cash reversal on the warranty side? If you don't mind, Ashoka, just summarizing right now with the available information you have for expense reductions, what's under your control to go down in 2015?

[Ashoka Achuthan:]

Well, the single biggest area is prioritization of engineering programs because that's far our single largest bucket of expense. So between improvements and curtailing of engineering and development program expense and improved dividend performance from our JVs, as David mentioned, we expect a 40% year-over-year cost improvement in those buckets. In addition to that, we are looking at improved performance in our Westport Operations businesses and our corporate expenses as well.

[John Quealy:]

Okay, great. And then, lastly, just a follow-up to this, so OEM development programs, whether its sales and support or R&D, is every program across the board being optimized, or some relationships being more fully funded than others? Thanks, guys.

[Nancy S. Gougarty:]

I would...

[Ashoka Achuthan:]

You want to take it, Nancy?

[Nancy S. Gougarty:]

I would say – I think that certainly we're trying to optimize everything and we're trying to build on the synergies of the business in order for us to be able to do development across multitude of customers, but also, I think one of the focuses is making also – getting customers to support us through part of the development process. And so, that's been one of our focuses as well as we try to do this, because that gives us a strong indication relative to their interest in making sure that we bring the product to market. So, that's one area that we continue to focus on and that is helping in terms of our total investments in making sure that we have the right partners as we move forward.

[Operator:]

Next question is from Rob Brown of Lake Street Capital Markets. Please go ahead.

[Rob Brown:]

Good afternoon.

[David Robert Demers:]

Hey, Rob.

[Rob Brown:]

Could you – you kind of mentioned that the trucking market, your outlook was sort of flat. Is that – could you just really characterize how the 12-liter engine has been selling and what sort of visibility you have in that segment?

[Ashoka Achuthan:]

We don't break out sales for engine-by-engine unit sales for obvious reasons, Rob. But all I can tell you is that it's been a success. We always hope for higher adoption rates than what you see. I mean, that's the case no matter what the adoption rate is. But the product itself has been very well-received by the market. We have had no warranty related issues like you've had on the 8.9-liter engine. And we expect to see continued strong growth with the 12-liter engine.

[Unknown Speaker:]

And, Rob, I mean, in North America, the Cummins Westport unit volume has increased 28% year-over-year. In fairness, really was almost on the back of some trucking and bus applications, about 41%, 40%, respectively. And I appreciate that's a bit of truck and bus in there, but you've got a solid base in the bus, but you are seeing some growth, or we just witnessed some growth in Q4. Where does the growth (57

[Rob Brown:]

Okay. Thanks for the color. And then – and you mentioned a one-time revenue adjustment in Q4. Could you give us some color there?

[Ashoka Achuthan:]

You mean for CWI? Is that what you're referring to, Rob?

[Rob Brown:]

No. I think earlier in response to a question you talked about $2.5 million revenue reversal. I believe that was about...

[Ashoka Achuthan:]

Yeah, that was in our On-Road segment. It had to do with a program that we were working on for an OEM that we had to adjust out in the fourth quarter. That's all it was. It was a one-time event, $2.5 million.

[Rob Brown:]

Okay, great. I'll turn it over. Thank you.

[Ashoka Achuthan:]

Sure.

[Operator:]

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

[Noah Duke Kaye:]

Thank you. Just one question. You've commented on your outlook for the LNG rail tender market. I was wondering if you could touch on Off-Road industrial applications, generally. I believe you have the forklift and oil field programs. What are your aspirations for the industrial segment? And maybe you could tell us, of the development programs you have now, how many of them are for kind of Off-Road applications?

[Nancy S. Gougarty:]

Well, I would say that we're still in actually – we're still – for the industrial business, we're pleased where we are – ended calendar year 2014. I would say that we have done some investments. We have the 2.4-liter. We're introducing the 3.8-liter, and that will give us additional opportunity both in the oil field as well as in mobile forklift applications. So we believe at this point in time that we got the right portfolio moving forward, and we continue to be quite pleased with – as we partner in the market with – as we deliver those with Clark and others.

[Noah Duke Kaye:]

And the second part of the question on the number of development programs that are not for On-Road?

[Nancy S. Gougarty:]

Not for On-Road...

[Noah Duke Kaye:]

That are for the Off-Road.

[Nancy S. Gougarty:]

For Off-Road, we do continue to have some component activity going on. There are some key technologies both for the engine and also for the fuel delivery system that we keep our eye on. As we have customers interested, then we do more of the, I'll say, application work. So at this point in time, in most cases, we're doing component development, as we see the market readying. But for our application work at this point in time is limited to those where we have active customer contribution.

[Noah Duke Kaye:]

Okay, thank you.

[Operator:]

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

[Alexander Eugene Potter:]

Hi, guys. Question on the iCE PACK. I didn't see a lot of mention of that in the release or the prepared remarks. Just wondering if you can give an update there.

[Nancy S. Gougarty:]

Well, let's see. Obviously, iCE PACK is a product that we're very, very pleased to still have in our portfolio. We believe that it has good opportunity. At this point in time, I would say that as we look through calendar year 2014, our sales were not as strong as what we had initially anticipated, but we are still having quite good dialogue in the field and in a variety of different applications, both as you bed them on trucks, but we're also seeing some very good stationary applications for them. We continue to work across a series of industries in order to bring it forward. I think at this point in time the reason that you didn't see much there is as we are keeping our focus on here, we are really making sure that in our statements today, we were trying to really lay out and focus on the choices we have made, and the things that we are really setting aside. iCE PACK is still in our portfolio and we are actively marketing it and looking at additional, I'll say, placements in calendar year 2015.

[Alexander Eugene Potter:]

Okay, very good. I was wondering also, you mentioned on the increasing pricing pressure, given the decline in gasoline prices, I think that was specifically related to Applied Technologies. And you had also mentioned that...

[Unknown Speaker:]

The Ford business helps (01

[Alexander Eugene Potter:]

Okay.

[Unknown Speaker:]

... just gasoline pressure against (01

[Alexander Eugene Potter:]

Okay. I guess my question there was primarily regarding, you mentioned that you expect to see consolidation, partnerships, given the increased pricing pressure over the next year. Would you consider yourself to be more of, I guess, a buyer or a seller in that consolidation process?

[David Robert Demers:]

I think that was probably my new line you're quoting, so I have to, I mean, just to answer that one. I think a good example is what you just saw with Prins. In December, Prins have been suppliers, competitors, partners over the years with Westport in the light-duty business. And at the end of the year, it just became very clear that there were so many synergies by combining with Westport that we put together a very attractive deal to bring their technology portfolio and their experience and their customer base inside with us. And I think that that's true around the world. We're seeing a lot of headwinds against what I would call traditional players in the natural gas conversion business. There are new commodity suppliers as well as kind of new expectations from the OEMs as they get into the business, so new suppliers are getting into the business there. The new markets like China are forcing people to make big investments, so I think there's going to be continued pressure there. We believe we've got a good solid strategy. We've been saying this for years. It's the reason we're into the light-duty business is because the OEMs are taking us there. But there's going to be some turbulence. I think this energy situation is putting pressure on lots of people.

[Alexander Eugene Potter:]

Okay. Thank you.

[Operator:]

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

[Pavel S. Molchanov:]

Thanks for taking my question, guys. You alluded to South America and Russia as headwinds this year. How would you characterize the U.S.? Is that a headwind or a tailwind or neutral?

[Unknown Speaker:]

Well, I think, Pavel, in terms of Russia and South America, there was more of a collections issue as a headwind to be very specific. In North America, I don't think – it's just a different animal. We've got a solid customer base within Cummins Westport in the refuse and transit. So I'm not sure you're going to be seeing a lot of degradation there. But I think in North America you've also got some new products. We're bringing in some components and systems into North America. So you'll have some new introductions. I just don't see significant degradation in the market. And then looking for new products to launch to grow the market, maybe that's another way.

[Pavel S. Molchanov:]

Okay. As a follow-up, if you were to predict how many natural gas fueled trucks will be sold in the U.S. in 2015 versus last year, what do you think that trajectory looks like?

[Unknown Speaker:]

I think the challenge is, Pavel, realizing that we represent – I mean, to be quick, frankly, we represent about 98% of the market. And your question is strikingly similar to an earlier analyst question. And we're just a bit nervous about giving specific or gross numbers around the trucking market. If there was a handful of competitors ironically, it would be easier for us to guide, but it's – I would say ask French (01

[Pavel S. Molchanov:]

Okay. Fair enough, guys. Appreciate it.

[Operator:]

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

[Aditya A. Satghare:]

Thank you. Good evening, guys. So first question on sort of CNG, LNG and iCE PACK, right. When – can you sort of help us understand if customers are willing to acknowledge some of the (01

[Unknown Speaker:]

So Aditya, just to further clarify, the question is about given the weight benefit, perhaps, with an iCE PACK versus a CNG tank package, perhaps we should see a greater pickup? Is that – I just want to make sure we understood the question correctly (01

[Aditya A. Satghare:]

That's correct. I'm just trying to understand, are customers willing to acknowledge the weight savings of the LNG system, which you guys produced, or does it still come down to the infrastructure and things like that?

[David Robert Demers:]

I mean, (01

[Nancy S. Gougarty:]

Yeah. Go ahead.

[David Robert Demers:]

Yeah. I was going to start by saying I think that the pattern we're seeing playing out is just what we've been saying for a while. In regional trucking, it really depends on – can you get LNG and can you get it at the right price? And then people pick LNG, because it's got such obvious benefits. If you don't have access to LNG or you don't like the price of the LNG, you have CNG and that drives that. So we've seen I think over the year, I'm looking, Nancy, I think we've seen it settled out around 60/40, 50/50. It's not a big swing one way or the other, CNG versus LNG. Going forward in markets like China and in Europe, I think LNG is going to take more and more of the market because there is so much more interest in LNG infrastructure. And the price advantages are clear in those markets. So I think over time we're going to see people move to these new technologies. I wouldn't draw too much conclusion from any particular data point in any particular year. The U.S. story, I guess the other thing you'd say just looking at the numbers out of Cummins Westport, part of why the transit and refuse business has been so strong is they typically do in-yard refueling and they own their own infrastructure. In case of a lot of the refuse business, they're generating their own fuel, which, obviously, has tremendous economic benefits. And the long-term stability of those fuel prices gives people certainty. Now, that tends to be a CNG business because its return to base, quite localized, not an LNG business. The LNG business is doing well. I think it's continuing to grow. And globally, I think there's a bright future. So let's continue to monitor it, but we don't see any real change in strategy on that front. Nancy, do you want to add to that?

[Nancy S. Gougarty:]

No, I'd just say what we find a lot of customers are very, very – look at LNG also for long haul. So, again, as David said, the CNG where they have the in-yard refueling and versus long haul and long distance is also one of the differentiators, as we talk to them. And then some – as I mentioned, we're also seeing some stationary applications. And the stationary application, obviously, weight doesn't play the factor, but they want the opportunity to have easy refueling and on-site LNG fueling stations that serve them well.

[Aditya A. Satghare:]

I want to get to...

[Unknown Speaker:]

Go ahead.

[Aditya A. Satghare:]

Thank you. Now, just moving on to China, one quick question there. And I'm sorry if I missed this, but can you give us an update on sort of HPDI in China and how we should think about the cadence between pilot offers and then actual deployments there?

[Nancy S. Gougarty:]

So, I mean, I'm a little bit on the – the last part of your question was?

[Unknown Speaker:]

(01

[Nancy S. Gougarty:]

No, but he said private owners (01

[Aditya A. Satghare:]

How you're thinking (01

[Unknown Speaker:]

Pilot orders.

[Nancy S. Gougarty:]

Oh, pilot. Okay, I'm sorry.

[Unknown Speaker:]

(01

[Nancy S. Gougarty:]

We were having a hard time. I would say, at this point in time, what we're finding is in the China market that there appears to be, I'll say, quite good interest in HPDI product for a variety of reasons. As mentioned before, with HPDI, you can get really long-haul applications. And what we're finding is that in the pilot vehicles that we have, people are real pleased with the performance. And as you know, we were able to get China V performance on the engine that we have been working with Weichai on. And that also gives some additional, I'll say – what do you call – I'll say, environmental conditions that are positive for that to take off in that market, because right now China has moved to China IV regulations, and we're one generation better than that. So we're thinking at this point in time with the customers and the feedback that we have gotten that it looks like this could be – as we move into the next couple years, could be a real positive for the market.

[Aditya A. Satghare:]

All right, thank you. Thanks for the updates there.

[Operator:]

Next is a follow-up from Ann Duignan of JPMorgan. Please go ahead.

[Ann P. Duignan:]

Hi, there. Yeah. I just wanted to come back – somebody asked me to ask a question on the cash burn and I should have asked it the first time around. How much cash do you need to run this business going forward? Just a (01

[Ashoka Achuthan:]

No. Directionally, the numbers we talked about earlier, Ann, is quite reflective of what our cash burn is going to run like. We talked about a 40% reduction or improvement, if you will, in our corporate and technology investments segments and the JV contributions. Our operations business will be adjusted EBITDA positive in 2015. So you can expect a contribution from that part of the business as well. So that's – we're not guiding to any specific number on cash, but that should be able to give you a sense of where we expect to be by the end of 2015.

[Ann P. Duignan:]

Let me ask it a different way, then. Would you expect to generate cash in the first quarter, or are you still going to be burning cash?

[Ashoka Achuthan:]

First quarter of which year?

[Ann P. Duignan:]

2015.

[Ashoka Achuthan:]

No. We don't expect to be cash positive in the first quarter of 2015.

[Ann P. Duignan:]

Okay. And then seasonally, I would imagine that inventory builds in Q2, or do you relieve inventory and generate sales seasonally?

[Ashoka Achuthan:]

It's not terribly seasonal. Yes, there is a buildup in Q2 and it's let out in Q3, but I don't think the swings are that dramatic.

[Ann P. Duignan:]

Okay. I'll leave it there. Thanks.

[Ashoka Achuthan:]

Thank you.

[Operator:]

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

[Darren Seed:]

Thanks very much, everyone, for your attendance on the call, and we look forward to seeing everybody on the Q1 conference call roughly the first week of May.

[Operator:]

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