Westport Fuel Systems Inc (WPRT) 2007 Q3 法說會逐字稿

Good morning. My name is Sharita and I will be your conference operator today. At this time I would like to welcome everyone to the Westport fiscal 2007 third quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host Mr. Ryan Thompson. Sir, you may begin your conference.

Thank you, and good morning. Welcome to our third quarter conference call for fiscal 2007. It is being held to coincide with the disclosure of our financial results earlier this morning. For those of who haven't seen the release and the financial statements yet, they can be found on Westport's website at www.Westport.com. As usual, 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, Chief Financial Officer will discuss the company's financials. We will then conclude with Dr. Michael Gallagher, Westport's President and Chief Operating Officer who will speak to Westport's development programs and operations.

Attendance of this call is open to the public and 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 e-mail at invest@westport.com or by telephone at 604-718-2046. 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, competitor 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.

Thanks, Ryan, and good morning everyone. As you can see we achieved strong revenue growth in the third quarter and set new records for quarterly revenue and also year-to-date for the nine months. Cummins Westport completed their 2006 fiscal year with 33% revenue growth over 2005 and 145% increase in profits. Growth and diversification opportunities continue to emerge and we are confident that our business strategy will continue to deliver strong results. We find ourselves in a very different market situation today than just a few years ago. Energy prices continue to be volatile which encourages fleet operators to look at alternative fuels and energy security and supply have become major challenges for the world's leading economies.

Also I don't think anyone expected the sudden global shift in public opinion regarding the importance of climate change and environmental degradation. This is now translated into significant government support worldwide for action on climate change and air quality. And of course we've been busy over the last few years broadening our productline, improving quality and increasing OEM availability around the world.

But the world is changing quickly. 2007 is going to be a watershed in our corporate development, we think. Our customers over the past five years have been looking mostly for environmental benefits in their vehicle purchases. It is now clear that in many applications particularly in heavy fuel use applications like city buses, refuse trucks and highway trucks, vehicles using our natural gas engines can deliver significant economic savings, as well as environmental benefits over the vehicle life.

In the U.S. this year, for example, we've calculated the transit bus operators could save more than $10,000 per year per bus, compared to diesel buses including diesel hybrids. With a long operating life of a bus this adds up to a very significant benefit for natural gas. With environmental leadership as well as economic leadership we expect to see accelerated market penetration for our products this year and in the future.

As I mentioned at the start our joint venture with Cummins, CWI, has posted another great year. Since we launched the permanent joint venture in late 2003 we told you that our goal is to average at least 20% annual revenue growth, measuring CWI on its fiscal calendar which is January to December, and in U.S. dollars since that is CWI's operating currency. In fact, since 2003 CWI has achieved a compound growth rate of 33%, and this year's revenue growth was 33% as well, with U.S. $45.3 million in 2006 versus $34 million in 2005.

Because CWI's costs are mostly fixed, incremental increases in revenue dramatically increased profitability, as you can see. CWI is well positioned for continued growth in 2007 with production of the BGI engine underway in both India and China; the introduction of the new industry-leading ISL G engine this year, and industry-leading global market position with more than 50 OEM vehicle partners in 20 countries. We continue to look for profitable growth from CWI with revenue growth over the next few years averaging, as we've said before more than 20%. We've demonstrated this rate for the past few years, and we think that will continue for some time.

The second [teller] of our business, of course, is our heavy-duty Class 8 LNG truck program. This project has been in development and field testing for seven years, and we are excited to finally see it reaching commercial introduction. This quarter our beach head project, the ports in Los Angeles and Long Beach, approved their clean air action plan which calls for more than 5000 LNG trucks to serve the port within a few years. Last week the formal RFP for the first LNG trucks was released by the ports. As you no, Westport has the only California Air Resources Board and EPA certified natural gas engine for this vehicle class.

In 2003 we postponed the proposed 2004 launch of this product because we believe that market conditions weren't right. Instead we turned CWI's attention to India and China and to the development of the ISL G. We told you then that the ISX would need more time to develop partnerships, adequate LNG infrastructure and focused government programs to achieve a critical mass of 500 to 1000 truck deliveries per year.

In retrospect I think it is clear that our position today is stronger due to that difficult decision. We are much better positioned internationally with CWI at a time of great growth. Our market prospects for the LNG truck program are now strong with many partners and programs in place to support the launch of this important product. We still face many challenges, of course, but we will continue to make improvements over the next few years.

Overall we are pleased with our progress this quarter and this fiscal year. We are making continuous progress in developing the markets for natural gas vehicles. We are ready to capitalize on significant new market opportunities for both the CWI, ISL G and our heavy-duty LNG trucks and our overall business prospects continue to strengthen. I will turn the floor over to Elaine to take you through the financials.

Thanks, David and good morning, everyone. The press release financial statements and management's discussion and analysis provide a considerable amount of detail regarding our third quarter financial results and are posted on our website. This morning I will focus on some of the key financial highlights from the quarter.

We reported record consolidated revenues for the three months ended December 31, 2006 of $16.8 million, up 95% from $8.6 million the same period last year. These increased revenues reflect the strong (indiscernible) sales activities in North America and Asia with more than one-third of the engines shipped in the quarter destined for China and customers in Southeast Asia.

Our consolidated loss for the quarter was $5.8 million or $0.08 per share compared to $3.6 million or $0.05 for the previous year. CWI contributed $400,000, up $200,000 from the prior year after taking into account Cummins 50% share of profits. The $2.2 million increase in consolidated net loss resulted primarily from decreased government funding of $2.2 million, increased business development spending of $0.5 million for China and for the launch of our heavy-duty truck business, offset by $1.7 million in increased gross margins.

Excluding the warrant adjustment taken in the third quarter of the prior year gross margin percentages were fairly consistent at about 31%. Interest and amortization on the convertible notes issued to funds managed by Perseus LLC amounted to $400,000 in the quarter.

On a fiscal year todate basis our revenues were $41.2 million, up from $31.4 million this period last year; with product revenues and engine shipments increasing by almost 50%, while parts decreased by $0.5 million primarily because of foreign exchange with the Canadian dollar strengthening by about 6.5% year-over-year.

Fiscal 2007 numbers also include the first significant shipment of production kits and components to China and India. On a calendar year basis in U.S. dollars, CWI's revenues grew at 33% exceeding their 20% growth target. In its prior fiscal year CWI's revenues grew by about 23% year-over-year. On the Westport side we continue to invest in strategic market and product development programs based on the priority analysis in our strategic plan. Mike will speak further to the many operational and business development activities currently underway.

Going forward we expect to see new revenue streams from delivering HPDI systems for heavy-duty trucks in Southern California. Our consolidated research and development expenses net of government funding for the three months ended December 31, 2006 were $6.3 million compared to $3.7 million for the same period last year. In the last fiscal year we benefited from the government funding of two of our major initiatives, the U.S. government funded 1.2 g project and our Canadian government funded 401 demonstration program, both of which are now essentially completed.

In addition, the work phase of our TPC program ended March 31, 2006. We are in discussions with TPC to extend the work phase of our agreement as only $50.9 million of the $18.9 million in available funding has been claimed to March 31, 2006 and portions of the scope of work are still being completed.

On a year-to-date basis we have submitted or accrued claims of approximately $1.5 million which has not been reflected in our financial results. But we have accrued approximately $1 million in royalty payments which are due March 31, 2007 under the current agreement.

On a year-to-date basis cash used in operations was $11.9 million, up from $6.7 million last year. If we are successful in renegotiating TPC we would expect to reverse approximately $1 million in royalties accrued to date and to be able to accrue another $1.5 million in government funding on a year-to-date basis.

Excluding the impact of TPC cash used in operations through December 31, 2006 would have been $9.4 million. The increase in spending is primarily the result of lower government funding the year and increased SG&A costs associated with our product launch activities in North America and business development activities in China.

Our cash position itself is substantially improved as discussed in the last call that we completed two transactions and purchased Matco earlier this year. Subsequent to the quarter we also completed the issuance of the $22.1 million five-year secured subordinated 8% convertible note to Perseus. The notes were issued in two tranches of $13.8 million and $8.3 million, respectively. With the first tranche having completed in July 2006 and the second tranche completing January 16, 2007.

Interest is payable semi-annually in arrears on June 30 and December 31, and additional notes or shares that are options are for the first two years. As of December 31, 2006 interest of $553,000 was payable. After adjusting for withholding tax we elected to sell the interest by issuing 401,520 shares valued at the 20-day weighted average trading price of $1.24. Our cash, cash equivalents and short-term investments as of December 31, 2006 totaled $19.2 million, and in January we added $8.3 million from the Perseus second tranche funding. We now have a strong balance sheet, rapidly increasing contributions from the CWI joint venture and prospects for significant new revenue from heavy-duty truck sales in Southern California.

On that note I will now pass the call over to Mike.

Thank you, Elaine, and good morning everyone. First I want to say how pleased I am that our year-long effort to help the San Pedro Bay Ports develop and release the RFP for LNG trucks has now been successful. As David mentioned, it just went public last Thursday. Since our last call in early November we've also made significant progress in other areas of our operations. We saw record-breaking revenue from CWI including the first sales of our new industry-leading ISL G. We've begun the first delivery of Westport LNG heavy-duty trucks being upfitted in Southern California, and we advanced a number of our targeted new business initiatives.

I will start with the Port RFP. On February first the Port of Los Angeles issued a request for proposals seeking prospective operators to purchase and integrate LNG powered trucks into fleets at both the ports of Los Angeles and Long Beach. They are collectively called the San Pedro Bay Ports. As a reminder, these ports represent a substantial economic engine, both for the L.A. Basin and the United States. The two ports account for approximately $300 billion U.S. in annual trade and represent more than 40% of all containerized trade in the U.S. flowing through these two ports alone.

The demand for containerized cargo moving through the region is expected to more than double by the year 2020. So the ports in conjunction with the South Coast AQMD and the California Air Resources Board developed the five-year clean air action plan, the so-called CAAP and at a special joint meeting held on November 20th the CAAP was formally adopted by the two boards of Harbor Commissioners. By the way, that was the first joint board meeting in those ports' history.

The plan describes measures that the ports will take to reduce emissions at port operations. It includes specific actions for reducing the emissions of the approximately 41,000 trucks that service both ports with a focus on those traveling in and out of the ports most frequently. Specifically to our interest here at Westport the plan calls for the replacement of up to 5300 aging diesel trucks with cleaner LNG trucks by 2011.

This port's LNG truck program is the first of its kind in the world directly targeted at early adoption of the Westport heavy-duty LNG truck engine technology. The purpose of the first RFP is to kick off this truck modernization element of the CAAP with its technology driving early adoption program, and put in place the initial financial incentives to assist fleets in introducing LNG powered trucks.

The goal of the overall program is to reduce emissions associated with diesel particulate matter and oxides of nitrogen while also reducing oil dependency and gaining benefits from the Westport technologies lower carbon and greenhouse gas (technical difficulty). In order to reduce emissions and modernize the current fleet, the ports and south coast have allocated $22 million U.S. for this initial RFP.

Under the RFP a 1989 model year or older heavy-duty diesel truck will be scrapped and replaced with a 2006 model year or newer heavy-duty LNG truck. Financial incentives under this program will be for up to 144,000 U.S. per truck. This is an amazing incentive, really higher than anything we have seen before and substantially more than the incremental cost of adding our LNG systems to new diesel trucks.

The due date for submission of proposals is March 19th. Applicants will be selected on April the second and then contracts with fleet customers should be executed in the spring of 2007. We will be working closely with potential fleet customers, the ports and LNG fuel supply partners in the coming weeks to position Westport for significant LNG truck engine orders under this program.

Incidentally the port of Long Beach is also releasing a separate and parallel RFP seeking proposals to design, construct and operate a public LNG fueling and maintenance facility on port property. This fuel infrastructure effort will support the LNG truck rollout by providing LNG fuel supplies at convenient locations.

And as I have reported at recent quarterly calls we have been working for several months to prepare ourselves for this RFP and the expected surge in new orders for LNG trucks using our technology. We have already put in place contract agreements with Kenworth and Clean Energy and separately with Cummins Cal Pacific for the delivery and upfit of LNG trucks to meet this first wave of orders expected from the port RFP. And we have placed inventory buildup orders with suppliers around the world for LNG tanks, pumps, injectors and all the components needed to put integrated LNG trucks on the road.

This inventory is now in the pipeline, and we are positioning to deliver the LNG trucks as the new contract commitments are executed. As mentioned in our last call we have also received commercial orders from a range of nonport customers including Los Angeles International Airport, Prometheus Energy, Pacific Gas and Electric and Clean Energy. We are now also beginning to see significant interest in our heavy-duty LNG trucks outside of the L.A. Basin as awareness of both the economic and environmental advantages of LNG fuel and engines increases.

As a side note, many of you have no doubt observed the increasing media and political interest in the subject of climate change in greenhouse gas emissions. Just last Friday, the day after the port RFP was released, the worldwide intergovernmental panel on climate change issued its five-year update on climate change observations and forecasts. This report outlines with the most compelling science yet, the dramatic changes already underway around the world.

Westport can play a big role in helping corporations and governments meet their greenhouse gas reduction plans. Although many of these plans are in their early stages, it is interesting to note that many have referenced freight hauling and heavy-duty truck transport as a major source of GHG emissions growth. Our Westport LNG trucks can help by reducing GHG emissions by anywhere from 15 to 25% depending on actual conditions as compared to standard diesel engine equivalents.

As we see growing demand emerge in North America, we are also seeing significant interest for our LNG trucks internationally. In October the premiere of British Columbia attended the launch of a multicity tour of a Westport LNG heavy-duty truck in Guangzhou, China. The truck was then present at a number of trade shows and has generated significant interest from both trucking fleets and natural gas companies in China.

In addition, in Australia we received $1.4 million Australian from the government's alternative fuels conversion program to upfit and evaluate Westport LNG heavy-duty trucks in Australia. Mitchell Corp., Sands Fridge Lines and Murray Goulburn Cooperative who each operate large fleets of long distance trucks will acquire four new Kenworth trucks under this program powered by Cummins 15 liter ISX engines incorporating Westport LNG fuel technology.

This new Australia program has already stimulated the interest of potential customers there who are encouraging us to roll out our LNG truck product for commercial use in Australia in 2008.

As you can no doubt tell it has been a very busy quarter for Westport. Record sales at Cummins Westport, preparations for demonstrations in Australia and significant scale up for deliveries of LNG trucks in California, as well as our ongoing new business development activities. And through it all we exceeded our expectations for revenue growth.

The next several months we will focus on the successful rollout and delivery of LNG trucks to Southern California while remaining focused on our principle strategic goals which are growing our business, achieving operational cash flow and corporate profitability and profitable scale up of the company to generate shareholder value.

I will now pass it back to Ryan who will open the call to your questions.

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

(OPERATOR INSTRUCTIONS) Tom Astle, National Bank.

Just a couple questions on the HPDI program. Can you talk about the current quarter, any shipments in the quarter and is this something that will run a backlog at, at some point? And then maybe just talk a little bit about the timing of the RFP orders as they come in, when you would expect to see them and then shipment and revenue recognition?

I'll kick off and I'll let Mike and Elaine kibbutz on this. We've got trucks in California. We haven't officially delivered them so we haven't recognized revenue. We will be doing that this quarter for those initial 10 orders. The port trucks will likely, as Mike said, will see contracts in the first fiscal quarter next year. So sometime in the spring, early summer and we expect to start recognizing revenue on those pretty much immediately as we ship them. So we expect that to ramp up and see delivery of that first wave certainly this calendar year, I expect most of that to be done.

And then it should just be normal business after that. We will be able to schedule orders. I don't think we will announce much of a backlog. Typically truck deliveries are pretty much as you go. We wouldn't expect to see a big pipeline deliveries with a long lead-time and not sure it is appropriate that we would say where that is either. But you should see pretty normal flow of product through an inventory cycle and revenue recognition as we deliver vehicles once things get up and running. Elaine you want to add to that?

On the backlog it has never been our practice to announce, give a backlog number. We do announce large sales and so you will see that as we get large orders. And as David said, we will recognize the revenue when they are shipped and accepted by the customer.

Okay, so it's fairly fast. And just to meet expectation of timing for RFPs beyond this initial one. Is that --

We expect kind of this to be the first RFP in a series of procurements as they say. The port hasn't specifically said whether they will all be formal competitive RFPs or perhaps some other kind of directed procurement. They are talking about the second wave certainly this calendar year but haven't set a date and I think they will wait to get this first one lined up and nailed down and begin to look at phasing it out from there.

And just the gross margins on those initial products, I imagine there is a volume issue initially but should we expect positive gross margins? And I guess will be able to see that in the [peer] Westport revenues.

We are planning on positive gross margins from the get go.

Okay, so what is the corporate average at this point or any -- I'm having a little trouble forecasting gross margins here. The trend has been done for three quarters -- I imagine there is a mix issue there obviously from CWI but.

Yes, CWI's gross margins have been pretty consistent at 33.5% gross margin level over the past few quarters. Earlier on I think if you go back a few years their gross margins were a little bit lower than that but the past few quarters they have been pretty consistent. It does depend on mix and last year there was a warranty adjustment that we took in the quarter that resulted in higher gross margins for the quarter. But going forward for CWI I think you can assume it is going to be pretty consistent.

On the Westport side I do not want to give any guidance on the gross margins for now but as Mike said we do expect positive gross margin numbers. And we will be reporting -- we always report the CWI numbers separately so you will be able to pick up heavy-duty revenues versus CWI revenues going forward.

Sara Elford, Canaccord Adams.

Just a couple of questions. On the tank joint venture, you are still waiting approval on that. Do you have any sense of timing for that approval?

We met with our joint venture partner executives just a couple weeks ago in China and got an update on the whole program including the government process. It looks like it shouldn't be too much longer; I do not want to give dates because it is not a process that I can predict with any guarantees. They are going into Chinese new year's spring festival in China in about 10 days, 13 days. So it's probably going to be shortly after that. So I think we are looking at not too much longer, a few weeks but probably after spring festival rather than before.

And regardless of whether or not that timing slips and let's just argue for one moment that it does slip, that presumably doesn't really present any challenges to the delivery of these tanks for what you're doing in California that would carry on with or without a formal JV?

That's correct. We've got an operational relationship that is proceeding, has been proceeding. The engineers and the manufacturing guys are busy at work as we speak getting tanks ready for the California program.

My next question relates to CWI and this isn't that material but I am kind of curious. It looks as though there was a small infusion of cash there by I'm assuming both partners. Is that purely for working capital needs or am I -- I guess maybe I'm looking at the balance sheet wrong, but that's what it seems like. Elaine, could you comment on that?

Actually that is not a cash infusion, Sara. Let me clarify that. What we did there traditionally we've held Cummins Westport's funds in Westport, but going forward CWI generates more funds and want them to be as standalone as possible. We started to keep some short-term investments in CWI's accounts and you're seeing the carveout of our short-term investment. But again these are consolidated financial statements so on the balance sheet the total amount shows up on our consolidated balance sheets.

Okay and then I'm hoping somebody could comment a little bit more on Isuzu and whether or not discussions will continue there or whether or not you've entirely and completely moved on.

The discussions, there are ongoing discussions, we have some activity still ongoing and certainly through the end of this quarter. We have left it that. There is still an interest and that either of us can heat up the discussions at anytime based on things we see in the marketplace, the economics, the environmental forces. We don't have any specific dates or plans as to when to do that, so it is just kind of an ongoing friendly relationship that will continue to be somewhat active but nowhere near as active for a while as it had been.

And my final question just relates to the ports RFP and I guess the plan there over the course of the next several years. My understanding is you guys have the only certified LNG engine that could ultimately satisfy the initial RFP. Would it be overly optimistic on my part to assume that that will continue to be the case over the long-term? Or I guess through 2011 or are you expecting at some point in time to have competing technology there?

We find ourselves in a pretty fortunate position today as you suggest, Sara, that we have the only technology that the port has identified that can meet their needs. We don't have any way obviously to guarantee what is going to be the world around us in 2011, but we are just proceeding with the assumption that we've got the best game in town, the best technology, the best available technology. Wouldn't rule out the possibility others might try to play in this game, but it is a little hard to imagine them catching up with the technology that we've spent so much time getting ready for this kind of opportunity.

That's great. Thank you very much. That's it for my questions.

[Bob Wallace], Raymond James.

Just a follow-up question on Sara's actually. Let's assume that the first thousand trucks are in place for California. The funding is there for a while. Is there any indication that there will be a federal co-funding of this along with California? I know it is a political question.

Bob, of course there's the current federal programs around the energy bill that was past August '05 and the transportation programs associated with that. We expect those to continue to be in place. We don't know of any particular new federal program that would link directly in with the port incentives. The port is getting help from the state, from both [selacoast] and [carb] is involved, so not sure how the Feds will play into the port programs. David, do you have anything else on that? We expect the Fed incentives to stay around, but whether they would get directed at ports we do not know.

I think the tax credit is pretty attractive, about $30,000 tax credit per truck is certainly applicable to any of the private sector customers we've been talking to. And there is the additional tax credit on fuel. So I think the economics are actually looking pretty good. The port is a special situation of course because they've got such a big incentive to get across because their problem of course is to try to compete with 20-year-old diesel trucks.

So the port has to kind of go above and beyond in order to encourage people to adopt brand new technology on top of brand new trucks. So I think the federal credits that are in place are already very attractive. What we are seeing or at least hearing a lot of talk about are new programs around emission trading and emission credits. California and Texas have some programs already for nitrogen oxides but it looks like there is going to be greenhouse gas credits as well as some of the other credits like particulate matter emissions that may evolve as well in some sort of cap and trade system, so that is also going to increase the economic play that we've got with these systems.

I think that carbon world is one to watch for sure. We haven't factored in any credits or incentives around carbon trading, carbon reduction at this point but that could well further improve the economics of our technology.

Looking at the port order that is called the ports order of (indiscernible) do you have any idea where your breakeven level comes in production assuming this continues as sort of prescribed now?

A couple ways to look at that -- and Elaine you can jump in here, too -- but first point is we do expect to be delivering all the trucks at positive gross margin. So we see a positive gross margin business starting at the first numbers and continuing as we ramp up.

When the whole heavy-duty business kind of becomes breakeven gets into a much more complex equation which has to do with how much sales and marketing we intend to ramp up to support a broader business, how much R&D on the future technology around heavy-duty -- 20 the '07 certification that we are active on now and the 2010 program that will all play into what makes a breakeven business. I don't think we are prepared to make that calculation just yet. Elaine, why don't you just --

I understand. That's good. You sort of indicated that there are other people who other than the port that are showing interest and I imagine these are port users, is that correct?

Some are port users and some are just other kinds if fleets. We talked about the orders we have received already.

They are not all just port users?

No. Pacific Gas and Electric, for example, is a big electric and natural gas utility in San Francisco. They don't have much to do with the port so we've got a mix of port and port people.

Is that book -- what do we call a book -- is that book building the interest in it from non port users?

Yes, that is a diversification of that business beyond the port opportunity for sure.

Because I don't see this as 5000 trucks over five years. I mean its going to be substantially should be substantially more -- (indiscernible) the keys to the kingdom.

Well of course the 5000 is the port plan. If they deliver on that number, then obviously our sales would be somewhere north of that depending on how many private fleets and other customers we can engage.

Any interest on the other coast? On the East Coast?

I'll let others speak to that but we see a lot of interest in Texas and the East Coast, in New York and particular around natural gas, natural gas technology, natural gas engines. So we see some interest there. But it's not as far along as this California program. That's why we focused on that.

Because of the incentives by California, is that the --?

Well, yes, you look at these port incentives and they just kind of knock your socks off, don't they?

Well they are attractive because it is a pick up as far as health is concerned as far as I can see. From their perspective its a win-win. Maybe I am being pie in the sky. Back to Isuzu, are there other people that might take up the Isuzu potential on the Isuzu engine?

Possibly. We've always held out the possibility that even if Isuzu chose to commercialize that hot surface technology others might engage with us in their parts of the world or their engine sizes. And in fact our understanding with Isuzu was that was to be encouraged rather than discouraged. We talk to other OEMs on a regular basis, both about our HPDI technologies and the status of that hot surface program and we continue to do that. So certainly possible that one of those discussions would lead to a greater engagement partnership down the road.

Final question, clean air; are you still showing on your books at cost?

Clean Energy, Bob?

Clean Energy I meant. Yes, and so the outlook on that they've indicated they are going to turn public. Any idea of timing?

No, we cannot comment on that, Bob. There's a public filing; you can follow the public filings for the status of the IPO.

Thank you very much. That's the final question.

Greg Hillman, First Wilshire.

Just a couple questions. One about health, whether the terms of the port of Long Beach whether you could achieve a similar health effect just with like low carb, low sulfur diesel fuel or additives compared to your solution.

The diesel options are of course, are getting cleaner. They have new regulations starting now, '07 that require lower emissions of nitrogen oxides particulates. So it is certainly true that the newest diesel options will offer improved environmental footprint compared to the older ones. If you look at the ports clean air action plan grant you will see that they call -- we've focused on their interest in us which is calling for potentially 5300 LNG trucks over the next five years. They also see kind of a similar component for the newest, cleanest diesel trucks maybe another 5000 new diesel trucks to replace the aging diesel trucks, so some benefits from both. However, we would expect the LNG truck technology to pretty much always be putting a lower environmental emission profile out even than the cleanest diesel counterpart at the time.

And they considered all the alternatives, the lowest, most cost-effective thing to improve health for the people living next to the 710?

They are looking at all that and I think the idea is in addition to increasing health there is also a view that they would like to take some action on the oil dependency issue. Of course you can't do that with diesel, you can only do that with an alternate fuel like natural gas.

Okay. And my second question was just considering building the infrastructure up to gear up for greater production the engines for the semis. And I was just wondering do you qualify your partners -- do you do quality control on the component manufacturers? Are all the components that go into your natural gas engine for semi trucks?

The short answer is yes, we've got a part of our delivery organization here includes a group of people engaged in supply and manufacturing issues including oversight of potential suppliers. Including prequalification of alternative potential suppliers and then kind of management of that supply delivery process, whether it be tanks or pumps or injectors or electric controls are what have you.

Do you do quality control on Cummings suppliers or they just do it themselves?

Cummins engines you mean?

Yes, for your -- yes, for the joint venture.

Yes, we have the joint venture with Cummins Westport which is producing and selling spark ignited engines to buses and small truck systems. Those engines are all produced in Cummins manufacturing facilities with quality control systems built up over the close to a century long life of the company. So we work with them in setting up warranty mechanisms, warranty administration processes, that kind of thing. Elaine would be better geared to give you the details in how we do that if you are interested.

Does your new partner -- let's say you have a new partner in China or the United States to make these engines for the trucks -- how or what are you going to do to oversee quality control in that situation? Also for their suppliers?

It will vary with different suppliers, let's take your example of China and our joint venture with tanks. Their key supplier, LNG tanks, we've chosen to set up a formal joint venture business together not only for our supply of tanks for our truck program in California, but also for the delivery and sale of a line of spark ignited LNG tanks to customers worldwide. The way we are doing that is we are setting up an independent management team as part of that joint venture. So it is a base in Beijing, a joint venture general manager, director of product engineering and a staff of several people. Just part of that joint venture whose sole purpose in life is to manage that manufacturing process and deliver a quality product to us for our trucks in California and to other customers worldwide. With other kinds of suppliers we've taken a more traditional relationship where we have procured components, and an example that might be the injector systems from a company called [Duwop] where they are performing supply services of manufactured goods under purchase orders. And again, we have a -- they have their own quality control systems, which they use for their business, and we have ours which operates primarily upon receipt of the equipment. In terms of testing and shakedown a full process of upfitting all these components onto trucks in California which we also test and precommission before turning over to customers.

Thank you very much.

At that time I would like to turn the floor back over to management for any closing remarks.

Thank you very much, everyone, for taking the time to listen to our conference call. We hope to see you at our next conference call which we expect to be in mid-June this year with the disclosure of our year-end and fourth-quarter results for fiscal 2007. Goodbye.

Thank you. This does conclude today's Westport Innovations conference call. You may now disconnect, and have a wonderful day.