Westport Fuel Systems Inc (WPRT) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Westport Innovations third-quarter financial results conference call. (OPERATOR INSTRUCTIONS) At this time I would now like to turn the floor over to Mr. Ryan Thompson (ph). Sir, the floor is yours.

Good morning. My name is Ryan Thompson. I am the Multimedia Manager for Westport Innovations Inc. Welcome to our third fiscal quarter conference call. It is being held to coincide with the disclosure of our financial results. For those who haven't seen it yet, the news release is on Westport's website at www.Westport.com.

The first part of this call will involve a prepared statement read by Westport's Chief Executive Officer, David Demers. After David's introduction and summary, Elaine Wong, Westport's Chief Financial Officer, will provide a breakout of the Company's financials. After that, Hugh Foden will introduce Mr. Guan Saw, Cummins Westport's incoming President, and review CWI's activities for the quarter. The speeches will then conclude with Michael Gallagher, Westport's President and Chief Operating Officer, who will speak to Westport's development program.

Attendance of this call is open to the public and to the media, but for the sake of brevity we are restricting questions to analysts and institutional investors. Please identify yourself by name and company when asking questions. For anyone else who has questions or requires additional information, we would please ask that you contact our investor relations department via email at invest@Westport.com.

This conference call may include forward-looking statements expressing Westport's expectations, hopes, beliefs and intentions on strategies regarding the future. It is important to note that Westport's actual future results could differ materially from those projected in such forward-looking statements because of a number of factors, including, but not limited to general economic conditions, business and financing conditions, labor relations, government actions, competitive pricing activity, expense volatility, and other risks detailed from time to time in the Company's filings with regulatory authorities.

Now I will turn the call over to David Demers, Westport's Chief Executive Officer. David?

Chief Executive Office -- I like that title. Thanks, Ryan, and good morning, everyone. As usual, I will make my opening remarks and turn the call over to Elaine, who will take you through the financial results. And then we will hear from Hugh on progress in Cummins Westport and Mike on Westport's other business activities.

But before we get into the substance of the call, I wanted to remind everyone that Hugh has accepted a promotion within Cummins and will be moving back to Europe in a few months. And we would like to congratulate him of course on that, and thank him for his hard work to launch Cummins Westport on its successful international growth path.

Guan Saw, who will officially take over as President on April 1st, is also on the call with us. He is in Beijing, where I understand it is just after midnight. So thank you for joining us, Guan. You'll hear from both of them.

Now as you can see from the numbers, our business plan is playing out very nicely. Our global initiatives are working. Sales in new markets representing almost 30 percent of our shipments year-to-date. Our margins are improving, primarily because of significant improvements in product quality. And new products are being delivered in a focused, disciplined process. Our financial risk for this research and development has been substantially reduced by co-investment from governments and partners.

Of course, Westport continues to look out with a long-term business vision and strategy. We believe that our global transportation systems must move to a more sustainable energy source, and that means finding a way to diversify away from oil. Obviously this transition can't and will not happen overnight. The complexity of the systems and the global investment required will ensure that this takes decades, but clearly it is a matter of when, not if the world moves to non-petroleum fuels in transportation.

Natural gas is an excellent first step, as many of our customers are discovering. Our Company's current focus is heavy-duty fleet vehicles, such as trucks and buses, where economics and performance are paramount. With our partners we build strong, successful fleet operations that depend on natural gas for their daily operations. In fleets that have adopted natural gas as a primary fuel, like transit fleets in Los Angeles, San Diego and Tacoma, for example, we are hearing that their overall lifecycle costs are getting much better and they can be on par or even better than conditional fuels. The situation is only going to move in our favor as diesel vehicles move to cleaner, low-sulfur fuel and expensive after-treatment devices to meet the tough diesel emission standards later this decade. If we are cheaper and cleaner at the same time, we think we have a winning solution for our customers. In the meantime, we are delivering ever-widening environmental benefits.

But no matter how compelling the long-term vision may be, our business must follow short-term disciplines in order to be sustainable ourselves. Our management team's focus for the past year has been simple -- stick to the fundamentals; follow our planned path to profitability. The progress we've made over the past 12 months is apparent. Every financial measure looks stronger. We have cut our burn rate. We have got a strong balance sheet. We are seeing sales growth with stronger margins. Costs are down. Investment by partners is up. The net result is that our bottom-line is demonstrating steady improvement while we continue to invest in high-growth opportunities.

If we look back and then project these apparent trends into the future, I think we have got a very interesting few years ahead of us. We have demonstrated four key elements of our business plan over the past few quarters.

First, Cummins Westport, our joint venture with Cummins, has very attractive financial leverage for us past its breakeven point. Because we have got no need to invest in production facilities, distribution or even working capital, CWI can potentially spin out great cash returns. Our breakeven point is even lower than we told you to expect. This year Cummins Westport balanced sales of its current products with the disciplined introduction of important new products like the top-of-the-line L Gas Plus engine, which is just starting to ship, and the B Gas International product, both of which were successfully completed in 2004. Our primary financial goal for Cummins Westport was to achieve growth but still breakeven or better at the bottom-line. As you can see, Hugh and his team have succeeded and achieved this goal.

Second, the demand for natural gas as a transportation fuel continues to develop around the world with strong growth in Asia, South America, and Europe. The Philippines contract that we announced is a representative example of this trend, but it is by no means the only one that we are seeing. There are three drivers for this international interest -- energy security, urban pollution, and climate change. We are well positioned as the global leader in the heavy-duty sector to take advantage of this trend, and we expect this to accelerate. A recent report published by The Inform Group called "The Transportation Boom in Asia -- Crisis and Opportunities" is an excellent survey of the issues and the potential solutions. You can find a link to The Inform Group on our webpage.

Third, Westport's key development initiatives beyond Cummins Westport have all developed strong financial and market development partnerships over the past year. We now have significant financial support for each of our non-Cummins Westport programs -- hydrogen engines with BMW and Ford; our urban truck program with Isuzu; and at the end of the quarter we announced major support for our heavy-duty HPDI truck program from the U.S. Department of Energy and from the South Coast Air Quality Management District. We are now able to develop new products for these markets with much lower risk with a sustainable burn rate that is approaching zero, and also, and most importantly, with greater certainty of market support for an eventual commercial launch.

Fourth and finally, I think we have demonstrated the internal operational discipline that will ensure that our business can grow in a financially sustainable fashion. We have built a solid foundation for our business. We have a team in place that has repeatedly delivered success. This gives us confidence that we can achieve our plans going forward.

As the international Kyoto Treaty on climate change comes into court this month, I thought it would be appropriate to close my remarks with a personal comment on this issue. In this part of the world we have seen many concerns raised about this Treaty and some of its implications. Some of these concerns are legitimate, but I prefer to focus on the fact that the great majority of nations around the world have agreed to work together to take bold steps to reduce human impact on our global environment. We face many environmental challenges, and at the same time we want to improve the economic security and lifestyle for every citizen around the world. Despite the formidable challenges to reach an economic sustainability, I have got no doubt that we can meet both goals. Canadian companies are among the world leaders in these initiatives and Kyoto, like other major environmental legislation, helps establish clear priorities and goals for our society and for our business.

I will turn it over to Elaine to take us through the numbers.

Thanks, David, and good morning, everyone. Our financial statements and management's discussion and analysis have been posted on our website and filed with SEDAR. I will be hitting the highlights this morning.

We ended the quarter with $22.2 million in cash and short-term investments, slightly up from the start of the year. Over the last 12 months as part of our past possibility (ph) strategy we have made a concerted effort to grow revenues and margins and to pace our spending with available funding as the market for our products develop. Since the start of our fiscal year, our cash used in operations before changes in working capital has decreased from $4.7 million in Q1 '05 to $3.7 million in Q2 '05 to $2.1 million in Q3.

While revenues and expenses vary from quarter to quarter depending on the timing of engine shipments, engineering milestones and government funding, we have significantly reduced our cost base and are confident that we will end the fiscal year well under our operating cash burn goals of $17.5 million. At the current burn rate and cash balance we would expect to end the fiscal year with about two years of cash. The exercising of the 4.5 million warrants outstanding would add another $9.5 million to our cash reserve.

Out-of-pocket capital expenditures for the year-to-date were just under $300,000. As part of our office move in December, $551,000 in leasehold improvements were acquired through leasehold inducements and were paid for by a third party on our behalf.

From an income statement perspective, Westport consolidated loss for the three months ended December 31, 2004 improved for the third quarter in a row to $4.2 million or 6 cents per share, down from $13 million or 20 cents per share this quarter last year on revenues of 9.2 million and 7.9 million respectively.

Comparing the third quarter this year to last year, gross margin dollars were up 36 (ph) percent, net research and development costs were down 38 percent and sales and marketing costs were down 58 percent. While managing our cost, we are also continuing to invest in R&D and marketing and development. There has been more success in finding partners to make those investments with us. For example, as Michael will speak to later on, in the third quarter we were awarded US$1.95 million from South Coast and US$1.65 (ph) million from NREL for heavy-duty programs. For the nine months ended (indiscernible) 2004 loss per share was down by half to 25 cents compared to 54 cents last year.

I’m going to change companies and fiscal years and talk about CWI for a bit. Under the terms of our joint venture agreement with Cummins, CWI has a calendar fiscal year and reports in US dollars. For CWI's first fiscal year ending December 31, 2004 CWI finished the year with a 16 percent increase in unit shipments and met its goal to breakeven for the calendar year with 1295 units shipped.

As we have (indiscernible) results can be volatile as it lost 1.1 million in each of the second and third quarters but made 1.1 million and 1.3 million respectively in its first and fourth calendar quarters. During our third fiscal quarter, CWI shipped 328 units, bringing total units shipped for the nine months ending December 31, 2004 to 832. Product revenues for the quarter were 6.0 million (ph) with parts revenue 2.2 million (ph) compared to 7.3 million (ph) and 0.6 (ph) million this quarter last year. Recall that until December 31, 2003 we used to report parts revenue on a net revenue basis, but with the revised JV agreement, we now report parts on a gross basis showing both gross revenue and gross cost of sales.

Gross margin for the quarter was 38 percent. Excluding CWI's change in warranty estimate of $600,000, gross margin percentages improved to 32 percent from 30 percent in the second quarter. As Hugh will tell you a little bit later on, product margins are very sensitive to mix (indiscernible) better product reliability.

CWI also carried $1.6 million in inventory related to engine stock in China to shorten delivery time.

As most listeners already know, effective January 1, 2005 under the JV term our economic interest in CWI will decrease from 100 (ph) percent to 50 percent which means that under the current proportionate consolidation method of accounting, Westport will be picking up 50 percent of the revenues and expenses of CWI from that date onward. We will need to review the accounting for CWI in light of the new accounting guidelines accounting for variable interest entities which comes into effect for interim and annual periods starting after November 1, 2004, which means our Q4 '05. However, although the section is pretty complicated and if applied may affect the way we report revenues and expenses, we don't anticipate any changes to the bottom line. Whether or not this new section applies, we will be picking up our economic interest in CWI or 50 percent of its bottom-line results.

Let me conclude by congratulating Hugh on his successful first year for CWI under the minute (ph) JV agreement. Just over a year ago, Westport and Cummins set out to make CWI a commercial entity focused on growing revenues, improving product reliability and developing markets for natural gas products. Based on the results in the past year and the past quarter in particular, he has done a great job positioning CWI for the future.

Now over to you, Hugh.

Thank you, Elaine.

Before I do my customary review of CWI's three geographic performance sales (ph) -- the Americas, Asia, and Europe -- I would like to take a step back and make some comments regarding CWI's results in the 2004 calendar year just closed.

As you will have noted from Westport's press release of earlier today, CWI did make a small profit in its first full year of operation since the creation of the new joint venture focused on the mid-range bus and truck markets. I believe this is a significant achievement, especially as our volumes of 1295 units were slightly lower than anticipated, showing 16 percent unit growth versus their target of 20 percent as some of our Asia volumes slipped into the next quarter, i.e. this current quarter.

In this quarter there were three key drivers to the strong financial performance. The first was good product mix. This was as a result of strong C and a growing number of L Plus sales. The second was strong engine margins as our product reliability improved. Our cost of coverage in terms of the accrual we make per engine has fallen significantly, which is great news for our margins going forward. Thirdly, we controlled expenses very effectively in the quarter just closed. I believe this performance provides an excellent foundation for CWI going into 2005, and we should expect to see continued profitable growth.

Now to a review of our business in the quarter just closed. I will start with the Americas.

We had a solid quarter and a solid year in North America, although uncertainty over the South Coast 1100 fleet rules (ph) does continue. We have previously announced a transit order pipeline which will start to flow in the second calendar quarter of this year. That is the Washington, Los Angeles and San Diego orders which we have previously announced. So overall we are expecting a good year in North America. We have also shipped our first units in the quarter just closed to South America. Our objective right now is to get broad OEM availability in South America. Longer-term we see South America as a significant potential developing market, in the same way as we view both China and India.

Turning to Asia, the Beijing order of 450 units was the good news we have been expecting for quite awhile. This and the previously announced Philippines business will start to flow this quarter. We have also continued to win smaller contracts in various Chinese cities, and expect to see some of these develop into major orders during 2005.

Finally, Europe. The availability of our B Plus and C Plus in Renault refuse chassis was great news. It shows that CWI is capable of breaking into one of the larger European-integrated OEMs. Our European strategy is two pronged in that we look at developed markets through such OEMs as Ponticelli, Renault and hopefully others in the future; but also, we look at developing markets such as Russia, Egypt, the Czech Republic and Turkey.

I've served as CWI President for close to three years. During that time the business has been significantly restructured to reflect our mid-range bus and truck automotive focus and our optimism in the developing markets of Asia, India and elsewhere. I hand over a profitable business with a clear vision and a strategy to deliver that vision to a Cummins colleague of mine, Guan Saw. Guan does, I believe, have the experience and knowledge to bring real added value to the work CWI has been doing in India and China in particular. And I would expect this is where Guan will focus in his first few months at the helm.

I have had an amazing experience running Cummins Westport; in many ways a unique experience. And I think it is a perfect time to move on to a new challenge in Europe and hand over the next phase of CWI's development to Guan Saw. I would now like to ask Guan to say a few words of his own. Thank you. Guan?

Thank you, Hugh. First of all, I would like to thank the Board of Directors of Cummins Westport Inc. for their trust and confidence in me taking up this important role. I also want to thank Hugh for building up a strong organization at Cummins Westport and getting the business to profitability. Hugh has built this strong foundation, and Cummins Westport is now reaping the benefits of his work. I am really excited to join Cummins Westport. They are a natural leader in natural gas engine market. And I believe Cummins Westport is a marriage between a leader in a clean-burning fuel technology company and a world leader, which is Cummins, in engine design, manufacturing, marketing, and distribution. And CWI's products are well-positioned to support efforts to improve air quality in the world's largest cities, particularly Asia. I look forward to leading CWI's international growth plan, especially in Asia, where the demand for alternative fuel engines continues to increase.

Before joining CWI I was with Cummins since 1989, and currently I am based in Beijing. I have been responsible for Cummins (indiscernible) business growth in East Asia including mainland China, Hong Kong, Taiwan, and Mongolia. Previously I have held a number of key Cummins management roles in managing the marketing and business development in China, Hong Kong, and later on I was a general manager for Cummins Hong Kong and various management roles in the United States. I will be relocating my family to Vancouver this summer. Thank you, and I look forward to updating everyone at our next quarter conference call in May.

Thank you, Hugh and Quan. This is Mike, by the way. I am going to conclude with some remarks about the Westport side of the business. These are primary technology initiatives that are aimed at diversifying our business in the areas of heavy-duty trucking, light-duty vehicles, hydrogen programs, as well as geographic markets like Europe and China.

Our heavy-duty trucking program has made some tremendous strides over the past year. We have advanced our HPDI technology work significantly, and at the same time we have transformed our program from one where we were the sole investors to one now where our various government and industry partners have stepped up with us to commit the funding for the technology work.

The big recent news here was our announcement in December of the new commitment by the governing board of the South Coast Air Quality Management District. In one of South Coast's largest ever technology funding agreements, they are going to provide to Westport US$1.95 million to further the development of our HPDI LNG truck technology. This commitment of course comes right on the heels of our other large new heavy-duty funding commitment, the US$1.5 million from NREL which we announced in late October.

Coming down the pipeline even sooner is our planned roll out at the end of this March of five new demonstration LNG truck vehicles. This is part of our Eastern Canadian 401 Corridor Program. These new LNG trucks, which will be at 1.2 gram knots (ph), will hit the Ontario roads with Challenger Motor Freight in association with Enbridge and supported by Canadian government funding both from SBTC (ph) and Enarecam (ph). We have now completed converting our first Volvo truck that will operation here in Vancouver to run on natural gas with the HPDI technology adapted to the common Diosects G (ph) engine platform.

On the light-duty front, we talked last quarter about the new agreement and the CAN$1.5 million of new Isuzu monies to Westport. This is for our work on the light-duty program. Our technical teams in Vancouver and Japan are making good progress on the technology and the layout of two new demonstration vehicles for 2005 using our hot surface direct injection technology. We have also done a lot of work showing the commercial opportunity available for the HSI elf (ph) vehicle with a 2008 product roll out program. Results of this technical program will put Isuzu in position later this year to make those key decisions on corporate commitments to the full scale commercial development program.

Over in Germany our technology group is also continuing its work with BMW on hydrogen and working with MAN to prepare their transient test cell for use in our HPDI heavy-duty engine in the February/March time period.

We have also begun talking to various interested parties in China about new initiatives to apply our Westport technologies to that rapidly-growing marketplace. In China the pressures of economic growth, energy security, and improvement of city environments are all coming together to create a huge drive and appetite for clean energy technologies such as those we offer. We expect to see strong and continuing interest in our programs as the world continues its stride for environmental improvement, energy security, and economic growth.

In just two weeks on February 16, the Kyoto Protocol and Climate Change Treaty will become international law, as Dave mentioned. Growing pressures on the oil supply and pricing side create increased economic incentives for our technologies.

So I want to close by returning to the strong third-quarter and year-to-date results which Elaine detailed. As we have said for the last several quarters, our focus on pacing our technology programs with partner commitments and funding is paying big dividends. We are improving our quarter-to-quarter financial performance and moving closer and closer to commercial break even as a corporation. This quarter's results of 72 percent, or a $5.5 million drop in quarterly cash burn from just 12 months ago, demonstrate that we are serious and we are realizing very significant success in driving our Company from a research and development organization toward a full-commercial enterprise. We have done all this while continuing to advance our heavy-duty trucking, light-duty and hydrogen vehicle technology programs.

Finally, on a bit of a personal note and on behalf of Westport, I would like to say what an honor and a privilege it has been to work these past two plus years with Hugh Foden as President of CWI. We all wish Hugh the best in his new position with Cummins, and we are also very much look forward to working with Quan as we build CWI to the next level as the world's leading supplier of natural gas engines.

With that, I would like to turn it back to Ryan and leave some time for questions from the conference call participants.

Thank you, Mike. We have now concluded the formal remarks of the call and are ready to take any questions that you may have. Matt, could you please queue any questions?

(OPERATOR INSTRUCTIONS) Robert Stabile, CIBC.

This question is for Elaine actually. With regard to the inventory on the balance sheet this quarter, I may have missed it when you were going over that detail, but was there a reason for the build up? Is there something to do with a buildup of inventory to meet orders that are kind of in the pipeline right now?

Yes, it is mostly -- Robert, it is mostly to shorten the leadtimes in China, because generally what happens is they ship from the DC plant in Rocky Mount, (ph) North Carolina. They go on a slow boat to China, and then they get delivered to the end customer. In order to avoid some of that leadtime and also make sure that we can do timely deliveries to the customer, CWI has decided to hold some inventory in China.

And how about the manufacturing facilities that are in Asia and I guess in China and India? How is production going there? Has any engines been shipped there? Is there any target dates when those will start coming off?

No, we have not made any change to what we have previously said in terms of India and China, which is we expect to begin local assembly middle of this year. So none of the engines that we have shipped to date have been assembled locally in India or China. As Elaine has said, we have built up inventory really to satisfy the shorter leadtimes that customers are requesting out of China, but also to fill part of the Beijing order. Some of that inventory will flow to fill that order.

Guess there is not much else to ask. You guys have done a good job of covering most topics, so I will listen to who else has any other questions. Thanks.

Sara Elford, Canaccord Capital.

You touched on this a little bit, but I just wanted to circle back on it. You had talked previously about a quarterly break even rate on engine shipments for CWI in the 375 range. This quarter you did 328, and obviously there was some warranty benefit there in terms of some of the success you have had there on that side. So even excluding that you were quite profitable for the quarter at the EBITDA level for CWI. So I am kind of curious as to whether or not this is a onetime blip in terms of your ability to be profitable at that level or whether or not this is something you think you can sustain?

That question's for me, Sara, yes?

Yes, whoever wants to answer it.

I'll take a shot at it. The quarter just closed. We are very sensitive to mix, and I think I've said that a little before. We make more dollars if we sell a C or, in particular, an L than we do on a B. We had a good mix in the quarter just closed. As I think David mentioned, we had some of our first L Plus shipments and a chunk of Cs. So the mix was excellent, plus, as you mentioned, we had a warranty reversal benefit as well.

I think the number of 375 is typically the kind of break even level I think with a typical traditional mix. We just had a few things really go right for us this quarter on the mix side. But also, as I said in my speech, we have got much better gross engine margins beginning to flow through, and that is not just about mix; that's about considerably improved reliability. And we have been able to reduce the warranty accruals that on all of our engines so our absolute engine margins are definitely seeing an improvement. When you couple that with the mix in the quarter just closed, it was good news.

Are you able to give us sort of a magnitude of reduction in terms of warranty accrual percentages? Is it fairly substantial?

I'm not able to give you the magnitude obviously. But it was fairly substantial, yes.

My other question just relates to sort of the cost side for CWI. Obviously my model has been looking for overall cost reductions in the Westport side of things, but CWI on your overall general administrative, marketing and net R&D expenditures were down for the quarter sort of sequentially. Is there anything there? I would have anticipated them to at best stay flat, but they're actually down sequentially quarter over quarter. Is there anything I should understand about that?

Basically there is a couple of things driving the cost down in CWI. I mean, CWI is still making investments in sales and marketing, but what is happening is because a lot of the sales expenses tend to be in US dollars, with the improving Canadian dollar that reduces some of the G&A and sales and marketing costs somewhat. Hugh has also done a very good job of managing his costs overall in general in terms of just even getting Cummins to share some of the costs in Europe, for instance. And the last part of that is just timing. I mean, there is always some lumpiness in terms of travel and conferences and trade shows etc. You will see some variability there as well.

Perfect. That helps me out a lot. And then, I guess the same thing holds true for the Westport side of it. I saw your R&D number bump sequentially up about $1 million. That's presumably just timing issues.

Right. There is always timing around what the engineers are doing around materials purchases and meeting milestones, and also timing of government funding.

I guess the question is always asked about the TPC funding. How much of that is left?

I think we are about under $10 million left actually (multiple speakers) look that up for you, but I just don’t have it in front of me.

My final question, obviously on the past several quarters I know you had been targeting 1500 engines being shipped in your fiscal 2005. Again, I'm fully cognizant that things are lumpy and it is still going to be the nature of the beast at this stage that you will see delays or obviously positive surprises one way or the other. Are you still gearing towards that, because that would seemingly produce a pretty spectacular fourth quarter from an engine shipments perspective? Or have you seen some flippage?

We are expecting a pretty decent quarter this quarter. Obviously part of the Beijing order is going to flow this quarter. We are not exactly sure how much of it, and there is a lot of -- we are just trying to figure out what proportion of the 450 will flow this quarter and what proportion will flow in subsequent quarters. And that is the key variable right now. But we are expecting a pretty decent quarter in the current quarter, yes.

So 1500 engines for the year is not out of the question, but not a slam dunk at this point?

I would say that is correct.

David, could you give us an update on where we are in California in terms of some of the regulatory side of things? Has there been any change there in terms of how we are going to progress on a go-forward basis? I am just trying to look at demand for the L Plus and how that is going to plan out.

I assume you are talking about the fleet rule.

Yes.

I haven't seen any major change in that. For the benefit of everybody that is listening that is not completely up on the litigation south of the border, Southern California, the Los Angeles Air District, I guess three years ago began to require people to buy the cleanest available vehicle, not just something that complies with the 50 state EPA legislation. And that triggered a series of lawsuits which were successfully concluded against Los Angeles in the Supreme Court last year that said they can't do it that way.

So I think that we are still in limbo in the sense that South Coast wants to cleanup the air, and to do that they have to have things move faster than the EPA is going to just naturally float cleaner vehicles. I think it is the combination of carrot and stick, is what is needed. South Coast tried to do it by legislation and say that big fleets just have to buy clean vehicles, including a lot of natural gas. I think now they are going to have to go back to more of an emissions trading and credit and incentives approach while they work out what they do on regulation.

But we are less concerned, frankly. We have never really seen government legislation or local legislation as being a real successful way of winning the hearts and minds of our customers. It's nice that people have to buy your product, but I had rather that they choose our product.

What we are seeing is that with the fleets that are buying natural gas, they are buying it because it is cheaper, as well as cleaner. That is the message we want to send, is that this is a good business, it is a good decision and it is just a natural thing to do.

So we are seeing a lot more concern about fuel price volatility, particularly in California. We have seen a lot of concern about availability of low-sulfur diesel fuel. We are seeing concern about reliability and durability of diesel after-treatment. All of these things are of great interest to large fleets, and we are showing them our plans and where we think things are going to go. I think that is naturally going to result in people buying the product, which is what we want.

So we are certainly watching with interest the legislative side of this. And clearly South Coast is still very much committed to this area. This is why they gave us the largest technology development grant. They tell us they can't make their plans without doing heavy-duty trucks, for example. But I think it is our job to make sure that the total system solution is just the best one for our customers. That is how we are going to get good market penetration.

Great. That helps me a lot. I will pass it on to other people.

Just to answer your question about TPC, it is $6.4 million remaining.

Thank you.

Bob Wallace (ph), Raymond James.

Question basically is one about the availability of the natural gas on an international basis. With your interest in Clean Energy there was no comment about how Clean Energy has contributed. Also, in Asia I understand there has been quite a move for infrastructure construction in China. Has there been the same type of structure in India?

Broadly speaking there has in India. I wouldn't say with quite the same speed as we are seeing it in China, but they definitely are gearing up. As you are aware, natural gas is used predominantly by the bus fleets in Delhi and more recently Mumbai. They are gearing up in HR bus 50s (ph). Yes, the infrastructure is coming. But I wouldn't say it is quite at the pace of China, where it is developing very quickly.

How quickly in China?

I might hand over to one of my Westport colleagues who have just spent a bunch of time over there in the last few weeks and may be able to answer that a little bit more accurately than me.

Since I am in Beijing, I am a little bit closer to the market. What it is (multiple speakers) what it is is that is -- just to tell you about the magnitude of China is that there is about 83,000 kilometers of expressway being built in the last three decades, so which means that if you are looking at the amount of roads in China and also the city population -- easily like Beijing we have about 14 million; in Shanghai you have easily about 15, 16 million people -- so there is really a tremendous need in terms of clean fuel transit buses and also (indiscernible) transit buses. So in a way if I were to look at how fast the development grows instead of this is really very fast-growing place, and that is why that the Beijing Public Transit is purchasing 450 of our natural gas buses.

Thank you what is the cost efficiency vs. oil in China vs. natural gas, the cost factor -- BTU, calorie?

It really depends. I am looking down at the end of the table at Phil, who I am sure about to jump in with some answers. I guess our experience is that it is a controlled market in China for fuel and the pricing is really local. So it is not really something that we can give you a definitive answer that it is (MULTIPLE SPEAKERS). Typically, in fact, it is quite expensive in the cities, but they don't have a choice. There is a mandate to go natural gas in the transit fleets, and they pay what the government tells them to pay.

Typically around the world we are seeing it 25 to 30 percent cheaper than oil, and that is a pretty good number to use in general. And that is what we are seeing in California, for example. So I think that is a consistent gap that is a reasonable expectation, but it is always subject to local fluctuations in local taxation and issues like that.

Then Clean Energy, can you speak on Clean Energy? What was the -- how has that affected the balance sheet this year?

It hasn't at all. We put Clean Energy at our cost on the balance sheet. We don't have anything on the income statement flowing from Clean Energy because our interest in them is down at about 10 or 11 percent right now. So you don't see the impact on our financials.

Obviously it is a really important strategic partnership for us, and that has worked really well for us in some of our larger customers. In fact, our very high percentage of our recent sales have been where Clean Energy is providing the infrastructure for the fleet. I think going forward it is going to be even more important as we start to penetrate new customers and new fleets, Clean Energy can offer them financial assistance on the construction of infrastructure, which take that (indiscernible) they just add it to the price of fuel if they are buying a long-term fuel contract.

I said lots of fleets are starting to get concerned about fuel price volatility on the diesel side. Clean Energy has been doing some long-term contract with natural gas. It is a feature that is possible because of the sophisticated market for gas futures. So we can go in and offer a complete solution to fleets where they have got security that they can have the infrastructure built and managed by professionals, and they will have fuel at a defined price for as long a period as they like.

So Clean Energy is doing very well. They are the largest fuel supplier now in North America and headed into a major development program for LNG in California next year.

(indiscernible) another question, if you don't mind. This is basically -- you mentioned something in shipping some units to South America. Can you quantify that? Also, I believe you mentioned Russia. Can you quantify that?

I'll answer that Bob. The South America units -- it's a handful. But why it is important is not so much the volume. What you have got to do in any of these markets initially is you have got to get yourself available in as many OEM chassis as possible. That is the stage we are at at the moment. We are now available in I think four or five OEM chassis down there in South America. That is what is really important. The actual volume at this point is a half a dozen kind of number.

I didn't actually mention Russia, but we are the same stage really in Russia. We have shipped units that have gone into bus chassis, locally built bus chassis. Again, it is all about getting availability in certain chassis in Russia. So we are at about the same level in both markets.

Hugh, I would like to thank you for your work over the last few years. And I am sure you will carry the Cummins Westport flag wherever you go.

I will do and thank you.

At this time I would now like to turn the floor back over to management for any further comments.

Thank you very much, everyone, for taking the time to listen to our call. We hope to see you at our next conference call, which we expect to be in May with the disclosure of our year-end results for fiscal 2005. Good bye.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.