Westport Fuel Systems Inc (WPRT) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Carlie and I will be your conference operator today. At this time, I would like to welcome everyone to the Westport Innovations fiscal 2007 year-end financial results conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to turn the floor over to your host, to Mr. Ryan Thompson, Multimedia Manager. Sir, the floor is yours.

Thank you, Carlie and good morning, everyone. Welcome to our fourth-quarter and year-end conference call for fiscal 2007. It is being held to coincide with the disclosure of our financial results earlier this morning. For those who haven't seen the release and 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, Westport's 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 media, but for the sake of brevity, we are restricting questions to analysts and institutional investors. Please identify yourselves by name and company when asking questions. For anyone else who has questions or requires additional information, we would 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 or 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. David?

Thanks, Ryan. Good morning, everyone. My comments will be brief so I can turn the line over to Elaine for her review of the financial statements. Obviously, there's lots of things to talk about this morning. Mike will wrap up with an update on operations, and, in particular, he's going to discuss the launch of our first heavy-duty trucks in the California market during the quarter.

Our fourth quarter for fiscal 2007 set another revenue record at $19.3 million and therefore our total revenue for the fiscal year was just over $60 million, up substantially from last year's $43 million. Of course, virtually all of this year's revenue was generated by our first commercial venture, Cummins Westport Inc. CWI had an excellent year and this quarter is the tenth consecutive quarter of profitability for CWI. With record revenue of U.S. $15.6 million for the quarter, CWI also achieved a profit for the quarter of $7.2 million, which included an adjustment for future tax benefits. Gross margins for the year for CWI improved to 37%, up from 34% last year, so all in all, it's clearly a very successful and encouraging year for CWI. We expect CWI to continue to grow quickly and profitably in the future.

In fiscal '07, CWI shipped almost 2,000 engines. We saw the fastest growth this year in the international markets. In fiscal 2006, 82% of our revenue came from North America, but this year, international sales rose 150% and rose to 28% of total revenue. This doesn't say that North America was all that bad. We grew 34% in North America, but the international markets are clearly moving in our direction.

We began commercial production of the B Gas international engine at both Cummins India Ltd. and at Dongfeng Cummins Engine Co. in China. Recently we announced a 500 unit sales to Tata Motors for Delhi Transport and a 250-engine order for Beijing Public Transport.

CWI is now preparing for commercial production of the 2007 ISL G engine. The ISL G will surpass the EPA in CARB 2007 phase-in levels and meet the 2010 emission standards of 0.2 g per brake horsepower hour for NOx. This is 6 times lower NOx emissions than the newest clean diesel products meeting the '07 standards. We expect to certify this product over the next few days and launch it later in June. Cummins Westport has already logged over 500 orders for this new flagship engines.

Starting in Q4, as you know, we launched a second commercial business unit to stand beside CWI, our heavy-duty truck program. This program incorporates our proprietary HPDI technologies and incorporates both an engine and a fuel storage system to allow track manufacturers to build high-performance integrated trucks that use LNG as fuel. Now, as some of you know, this program has been in development for many years. I think we started in 1999. This quarter marks the delivery of the first commercial product, so we are very proud of that. It's a major milestone for Westport.

We only posted a little under $1 million in revenue for the quarter, so clearly this is just a start, but we believe that with the established beachhead that we developed in California and with projects like the Los Angeles and Long Beach ports, we have the opportunity to grow this business substantially over the next few years. As you may have seen earlier this week, we have just been informed that the first contract for trucks for the ports, for 20 trucks, has been approved for funding. Requests for funding for about another 150 trucks are working their way through various approvals cycles.

Westport has had a productive strategic alliance over the past few years with Clean Energy Fuels and we are pleased to note their successful IPO on the NASDAQ exchange last month. The new cash rate by Clean Energy will be used to increase the availability of LNG fuel for our trucks in the Southwest U.S., so as a direct and positive impact on Westport's business plans as a result of this IPO.

During the year, we reported that we will seek an extension to our agreement with Technology Partnerships Canada. This agreement officially expired on March 31st, 2006, but clearly it was everyone's intent to allow the project to finish and the full funding to flow. I am pleased to report that the extension has been formally approved and our claim for $2.2 million, as the Canadian government's share of R&D work done in fiscal 2007, is reflected in our year-end results.

We are continuing to see strong interest around the world in our ideas and we continue to develop new alliances and technologies that we believe will be valuable in the future. Fiscal 2007 was a watershed year in our corporate development and we look forward to building on that strong foundation in fiscal 2008 and beyond. I'll turn the floor over to Elaine now to take you through the financials.

Thanks, David, and good morning, everyone. The press release, financial statements, and management's discusses and analysis provide considerable amounts of detail regarding our fiscal year ended March 31st, 2007 financial results and are posted on our Web site.

Starting with the fourth quarter, revenues in Q4 '07 were $19.3 million compared to $12.2 million in Q4 '06. CWI revenues increased 56% period-over-period on 609 units shipped. In addition, we recorded our first $800,000 in revenues associated with the delivery of our first eight LNG systems to customers in California.

Consolidated gross margins for the quarter were a healthy $7.9 million or 41% of total revenues. Net income for the quarter was $1.7 million compared to net loss of $3.7 million in the same quarter of the prior year. We recognized our first quarter of profitability on a consolidated basis primarily as the result of the following two non-cash items -- $4.2 million gain recognized in the quarter on the dilution and partial sale of our interest in Wild River Resources Ltd., formally Westport Research. During the fourth quarter, as a result of the product placements undertaken by Wild River, our interest in the company was reduced from 55% to 16%. This dilution gain brought the full-year gain recognized on this transaction to $8.1 million net of transaction costs.

In addition, as of March 31st, 2007, CWI had approximately $31 million in net operating loss carryforwards available for use through 2024. With significant profit growth over the past few years and continued profitability expected, in Q4 '07, CWI recognized a $3.5 million future tax benefit. After taking into account Cummins' 50% share of CWI, the net impact to us was $1.7 million.

Operationally, as David noted, we received approval from TPC for a two-year extension of our existing agreement. As a result, we approved $2.2 million in claims in the fourth quarter and reversed $1 million in accrued royalty payments for a total positive impact of $3.2 million in Q4 '07. We appreciate the significant assistance and support we have received from TPC over the past few years. This extension will allow us to claim approximately $1.2 million in fiscal 2008 and to the further start of our royalty payment period until fiscal year 2009.

Turning to the full-year results, revenues were up 39% to $60.5 million in fiscal year 2007 compared to $43.6 million in fiscal year 2006. Consolidated product revenues increased by 58% with over 2,000 units shipped in the year. Net loss for the year was $11.3 million or $0.15 per share compared to $16.9 million or $0.23 per share in fiscal 2006. The $5.6 million improvement was primarily attributable to the $8.1 million gain on the reorganization of Westport Research previously discussed and a $4.5 million improvement in Westport's share of CWI from $1.6 million in fiscal 2006 to $6.1 million in fiscal 2007, offset by $1.7 million in interest and amortization of discount related to the purchase convertible notes, a $5 million increase in net R&D expenses primarily related to increased CWI development expenses around the ISL G and reduced government funding.

R&D expenses for the year totaled $21.9 million compared to $16.9 million in the previous fiscal year. While we intend to continue to look for government and other third-party funding for R&D projects, and we expect to launch the ISL G this month, and our '07 HPDI products in the latter half of this year, we do not expect our R&D expenses to decrease significantly in fiscal year 2008. Instead, we plan to reallocate engineering resources to continuing product support and field support, areas where government funding is not generally available.

On a cash basis, we started the year with $[34.4] million and ended it with $23.1 million. Cash used in operations during the year before changes in working capital was $11.3 million, up from $8.7 million in fiscal 2006. Working capital requirements were virtually unchanged at $3 million in both years. We expect our working capital requirements to increase in fiscal year 2008 as we built up our inventories in advance of deliveries. If appropriate, we will draw upon our existing $13 million line of credit to fund working capital.

Before I close, I would like to touch on our accounting for clean energy going forward. Effective April 1, 2007, we will be adopting CICA Handbook Section 3855 Financial Instruments. Under this section, we will be classifying Clean Energy as available for sale and recording it as fair value with changes in fair value included in other comprehensive income, a new equity section, until we actually sell our shares, at which time we will recognize the gain on our income statement. As at March 31st, 2007, Clean Energy has recorded historical costs of $9.1 million. Using Clean's IPO price of U.S. $12, if this section had applied at March 31st 2007, we would have recorded our investment on Clean Energy on our balance sheet at $29 million with a $20 million gain included in other comprehensive income. This would not have had an impact to our net loss or earnings per share numbers.

There is currently a six-month restriction on selling our shares in Clean Energy from the IPO date. We will review and take advantage of favorable opportunities to dispose of our shares as their rise. Now over to Mike for a discussion of our operating results and plans.

Thank you, Elaine, and good morning, everyone. It has once again been a very busy quarter here at Westport as you can see. Cummins Westport achieved record annual revenues and unit shipments. We shipped our first heavy-duty LNG trucks to customers in California and we saw major progress at the San Pedro Bay Ports in the implementation of the Clean Air Action Plan. Our new JV in China for LNG tanks has also received formal government approval. And we have focused our resources and energies to deliver on our largest opportunity ahead above, the heavy-duty LNG truck systems at the ports and elsewhere, which we think should position us well for the increased demand for those products.

Now I'd like to give you some of the details around these programs. To better capitalize on the opportunity, we have formed a new business unit called Global Heavy-Duty. I will personally lead the Global Heavy-Duty group in addition to my ongoing corporate operations portfolio. This unit will be responsible for all aspects of managing the commercial sales of our Westport heavy-duty LNG systems -- supply chain, manufacturing, sales and marketing, customer support, and product development will all be under the Global Heavy-Duty umbrella. The Heavy-Duty team is now completely focused on ensuring the commercial success of the Class 8 LNG trucks in both North America and Australia.

As David mentioned, the Global Heavy-Duty group shipped its first-ever LNG systems, eight units in total, during the final quarter of fiscal '07. While that number is not large, it was still a huge milestone both for Westport and for our industry partners. It confirmed that the new LNG truck opportunity is real and can be converted to orders, dollars and cents, and commercial LNG trucks delivered to customers.

Then yesterday, we announced our first orders for LNG trucks at the San Pedro Bay Ports, funded by South Coast AQMD. Total Transport Solutions Inc. will take immediate delivery of 20 of our systems for port service. TQSI was one of the lead fleets responding to the first port RFP in April. We will outfit and deliver these Kenworth chassis trucks at our Cummins Cal Pacific facility and this is another big milestone for us as they are the first LNG trucks committed, as you know, as part of the Port five-year Clean Air Action Plan.

These early orders have also validated our strategy over the past year of certifying the LNG truck engine and building relationships and preorder inventory with suppliers and partners around the world to position ourselves for anticipated market demand. We can now see with some pride a large movement across the oceans to California of many key high-technology components for our systems -- injectors from Duap in Switzerland, cryogenic pumps from Cryostar in France, and LNG tanks from our new BTIC Westport joint venture in Beijing. We are integrating these components into complete engineered trucks with our Kenworth, Clean Energy and Cummins Cal Pacific Partners in California. And we are continuing to secure new orders while working to commission quality products and expand our delivery capacities on all fronts as we proceed.

In recognition of our efforts, in Anaheim in early April, Westport was very pleased to receive jointly with our partners Kenworth, Inland Kenworth and Clean Energy, the prestigious 2007 Industry Innovation Award for alternative fuel technology. This award was delivered at the Alternative Fuels and Vehicles National Conference and Expo. It was presented by the AFEI and honors annually companies that work together to identify creative solutions and overcome obstacles to clean transportation alternatives. Finally, I want to close with a word on our Australia heavy-duty program. That program is in full swing as well with engineering work progressing to deploy our four high performance demonstration vehicles in Melbourne and Perth later this summer. We are seeing already a tremendous interest from Australian trucking fleets and, in fact, are beginning to discuss the outlines of possible sales agreements there. And we are once again working with our partners, Kenworth, and Cummins in their Australian ventures --Kenworth Australia, Cummins South Pacific, to bring this program to commercial reality in Australia.

So as you can see, we finished the year with a bang. Record sales and profits at Cummins Westport, the first sales of our Westport heavy-duty LNG systems and ongoing positive developments in our global markets.

So with that, 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. Carlie, could you please queue any questions?

(OPERATOR INSTRUCTIONS). Rupert Merer, National Bank Financial.

Good morning and congratulations on a strong result. To start on a high level, the San Pedro Bay Ports plan, the plan seems to have virtually unanimous support on the clean air initiative at this point, though perhaps some disagreement on the social engineering portion of the plan. Can you discuss from your perspective what are the hurdles that remain to the January 1st implementation? And what's the potential for delay?

Maybe I will start in here and then Dave, you can jump in if you like, Rupert. As we mentioned, we were very pleased with the first milestone coming out of the ports with this week's announcement of the first 20 trucks being ordered. The port, as you may know, has received proposals from a number of fleets, numbering close to 170 trucks in total, of which this 20 we announced yesterday was the first batch. And the port in those fleets are in discussions around conditions around the incentive money that might make it possible to move forward. But as you mentioned, kind of in parallel, the Port has begun this fairly significant social engineering drive with a January 1 start date with a key factor there, their desire to move toward an employee operated set of truck fleets as opposed to the large number of independents operating today.

It's interesting that just yesterday, don't know how much news it got -- actually, the day before yesterday, the L.A. Times reported quite a significant driver event in Wilmington at the heart of the ports, where a number of drivers got together to voice support for this five-year Clean Air Action Plan. There have been some question as to whether they would be completely supportive, particularly given the social engineering aspects of the plan, but I read in the L.A. Times that this was the largest gatherings of drivers around port issues in some time, and normally we wouldn't see a turnout like that for anything other than strike support. So it was quite a phenomenal show of support for the overall objectives of the plan by the drivers themselves. So as you say, support is moving toward consensus as wrinkles are being worked out.

I do think this social engineering aspect, the revision of the business model at the port would like to see with employee operated trucks is quite a significant variation and will take some time to iron out the wrinkles and manage the relationships with the fleets involved, the ports, the drivers, et cetera. It could take some time. Very hard to predict from where we sit I think exactly how that's going to play out. There's very heavy constituencies involved, ranging from political officeholders to port executives to fleet chief executives to the drivers themselves. But we are hopeful that we can continue to find ways to break out components of this Clean Air Action Plan LNG fleet as we go, just as we saw yesterday. Although I'm not in a position to try to predict just exactly how that timing will play out. Dave, anything you want to add to that?

I guess I'd just comment, Rupert, that I use the word beachhead, which I think is actually pretty accurate for what we're talking about. So the atmosphere that I'm trying to convey when we say that is that this is a very, very large project. This is not something that we can call a demo. It's not something that we can do with a few resources. It's a huge opportunity. It's also a very complicated and high-profile business, so we've got to do a lot of work to get ready.

So the delays might look frustrating. Actually I think everybody involved in this deal has been quite pleased that things are moving at a more measured pace let's call it.

We're not just talking about shipping some trucks. We're talking about building a complete fuel infrastructure. If you have looked at Clean Energy's public material, you know that they are building a large LNG production facility in California, primarily because it's clear that the port opportunity is moving ahead. We have got to build fuel stations. We have got to train drivers. We have got to build the supply chain up. There's a lot of work to do.

The great news is that there is such a huge opportunity at the port, it could keep us all very busy for many years. So I think everybody is pleased to see the start of movement of trucks. It says that a lot of the other projects with other customers in the background we think are also moving along and they will get to fruition too. But this is the first one and the first one is always the most important. So it's going to be a very interesting year as we work out some of the details in delivery. But I think the momentum is clearly there and it's going to be a really exciting project.

Oh, definitely. As far as milestones go, it looks like we're looking for a couple of things at this point. One, of course, the remainder of the granting of orders under the first RFP. And secondly, it looks like the ports will approve the detail on the plan in July. Is that accurate?

That is what we're hearing in terms of their overall implementation plan, social engineering aspects. That is what we're hearing as well coming out of this working group that they've set up that is meeting monthly right now.

Just one more before I jump back in the queue then. If the plan goes ahead with this January 1st, 2008 implementation, it's calling for ban of about 2300 trucks that are pre 1988 trucks. How do you think orders would roll out around that implementation? Should we be expecting 2300 new trucks on the read before January 1 under this plan or does it assume that the orders will build after that timeframe?

The port hasn't -- kind of going back to my earlier comments. The port hasn't clarified or specified precisely how they would plan to roll out the LNG trucks with respect to timing. But I certainly don't think they plan or expect to have them all on the roads before January 1 of next year. We would hope to roll out modules and batches leading up to then. Certainly, hopefully to complete the first RFP rollout perhaps a bit more, but we would expect the bulk of the trucks as part of the program to roll out in calendar '08 and beyond as part of those numbers.

Are there any challenges to ramping up production to the sort of levels we might be looking at from your side?

Well, we are -- there's -- if you kind of take every component of the system as Dave highlighted, we are not just providing a product or a component, but really an integrated truck system, including the outfit services that go with integrating every component in the LNG system, including the HPDI combustion systems onto a full truck. So really the way we look at challenges and requirements is we take every component of that system and go through a period of planning and preparation and analysis to ask ourselves what it's going to take to get that part of the system up and ready to go and in different levels of numbers.

So for example, you know, for over a year really, we've been identifying lining up, coming to agreement with and placing purchase orders with suppliers of the key long lead-time components. And the principal ones there are the ones I mentioned, the injectors, the pumps and the tanks. And in fact, we have been -- if you look at our financial results, we've been building up inventory in advance of the firm, committed orders so that we can be prepared to deliver as soon as possible after the demand materializes and is committed. So that is part of the response to the challenge. So the challenge is to get the various supplies, components, and suppliers ready.

And then the second part is working with them to assess the needs for capacity ramp-up in each of those components and in the outfit services, to kind of come up with plans to do that to assess how difficult that's going to be for each of these different areas and to work with them to give them whatever advanced commitments we can or advanced planning information at least to help them plan their ramp-ups.

Typically, what these various suppliers are telling us is that if we can give them three to six months notice on greater numbers of units required, they can do a pretty good job of getting themselves ready to deliver. It's -- and that's why we've been doing a fair amount of this in advance of the orders.

So I think you will see as we go, though, Rupert, as we go from small numbers of units, orders for 20 as we saw yesterday, to larger numbers of [quarters], orders for 50 to 100 and then as you move up toward 1000 a year and beyond, you will see different pinch points show up at different points in the system and we are just working very hard with each of these guys to make sure we understand where that will be so we can assess whether we need to line up secondary suppliers in some cases, whether we need to encourage capacity expansion on some of those geographic suppliers and just how much time they need with firm information to proceed and we're just working very closely with each of these guys so that we know when they are going to be experiencing potential bottlenecks, so that we can make some decisions to un bottleneck or debottleneck those systems before the demands ramp up to those numbers. But it will be an ongoing issue.

As Dave said, we're going to be very busy, probably for several years, as we work all these volumes through the system with the order and revenue base. And I'm sure we will have issues from time to time, but we've got, as I say, this Global Heavy-Duty group full of resources are working on every one of these as we go and it seems to be going well and the discussions with all the suppliers are proceeding with the kind of progress I would like to see at is point.

Great, thanks. I'll jump back in the queue.

Robert [Wallace], Raymond James.

Good morning, Elaine and gentlemen. Several questions. First of all, great news. The [cap] has a living plan, half LNG, half diesel and it's based on NOx, I believe. Is that correct? The lowest NOx?

Yes, they are looking for a good lowering of emissions and I think it's fair to say, Bob, that NOx is the main driving factor right now.

And can Westport continue to be the lowest NOx?

Well we hope to be. The '06 product that we certified, as you know, was the lowest NOx. We are in the art, engineering and development stage right now, the final stages really, Bob, of completing the development work on an '07 version of our LNG truck system. We have conducted a fair amount of test work already, both here in Vancouver and also at some of the certification testing labs around the country. And we have plans to certify in '07 for a lower NOx product than you see on the road today and I would expect that to be substantially below the '07 diesel standards that we see. And then we would continue to try to continue to stay ahead of diesel as we go out on NOx all the way out over the next several years.

I believe you mentioned earlier in the conversation that your R&D actually is maintaining a fairly hefty pace dollar-wise. The other part, one of the things, how is the Canadian dollar affecting you?

Well, the Canadian dollar is -- has been strengthening quite a bit since -- over the last year or so. Our revenues and our cost of goods sold are both -- both tend to be U.S. dollar denominated. So --

Are you hedged? We're not -- well we have a bit of a natural hedge in the sense of a lot of our expenses are sourced out of the U.S., a lot of our supplies. So we have a little bit of a hedge. You'll see the revenue growth, we've been commenting more on what the revenue growth has been in U.S. dollars because you'll see it's been dampened a little bit by the weakening U.S. dollar. But going forward, we do think there's an opportunity here for us to -- if our products are cheaper abroad and then Europe and Asia, with the weakening dollar, we might be able to sell a little bit more as well.

Okay, as you say, a natural hedge embedded in what you're doing then.

That's right.

Is there any chance that's there would be a hybrid of product that you might have at all, David?

I was going to defer that one to Mike, but. Hybrid is a word that's used pretty liberally, Bob, as you know. There's --

[Refrigerator], yes.

There's a range of hybrids. What I guess I'd say is that there is increasing interest in what I'd call light hybrids in the truck sector and the bus sector, and not necessarily the full parallel electric drive systems because they are very expensive and hasn't been a lot of evidence that there's an economic payback for that in these heavy-duty applications. But there's lots of light hybridization with starter, alternators and occasionally regenerative braking systems and things like that. It's not --

Basically in CWI, correct?

Yes, well this would be across the board. What I guess I would say is we don't see that as our job to do. We don't think that we need to do the hybrid work on vehicles. We're going to be partnered with people who are creating the hybrid vehicles and then we can integrate our natural gas engine because a natural gas hybrid, of course, is going to be cleaner than a diesel hybrid. So as these products hit the market, I am reasonably sure that you will see CWI and Westport versions of hybrid vehicles as well, but honestly, we don't see a big flood of this technology hitting the heavy-duty sector quite yet. So we will have to monitor this and see. But we've had lots of requests and if and when it happens, on vehicles generally, then you will see Westport versions of hybrids too.

We saw a little bit of interest last year in an outfit called ISE down in San Diego, who you may know, Bob, came to us and asked us primarily through CWI if we could assist in a demonstration program San Diego Gas & Electric. So we see bits and pieces of interest, but totally agree with Dave. We don't see a lot of movement.

Where we are seeing a bit more technology interest right now, it has surprised us a little bit is around HCNG, hydrogen natural gas engines. And, as you know, we are putting four buses on the roads here in Vancouver with Translake in a demonstration program. But just in the last month, really driven by a lot of this port interest in lower NOx products, we have had two or three initiatives show up wanting to discuss the possibility of HCNG, either in smaller trucks, where a CWI engine might be appropriate and or transit districts. Early stage, but I will be watching that one closely myself.

So you could get another arrow in the quiver. Unfortunately when he was here, Campbell was talking about the cooperation on the port stuff, Campbell mentioned the Ports of Vancouver and I believe Prince Rupert of having an interest. Has there been any further indication along that line? It in other words, are a bunch of other ports interested in your product?

I think there's been really tremendous interest around the world, frankly, in what L.A. and Long Beach have done. And there are other ports in California and in Texas that have got their problems and there's a real initiative up the coast, up the West Coast of North America to try and harmonize environmental standards so that one port doesn't have an unfair advantage over others. If they're imposing environmental charges in Los Angeles, it is reasonable to expect that you'll see similar environmental charges in Seattle and Vancouver. That's the direction that it's going.

So I think there's lots of interest. I think all eyes are on L.A. to see how it goes there. But I think everybody has got the same issue of how do we take advantage of the expanded trade opportunities in the ports on the West Coast, particularly with container traffic from Asia, without dramatically increasing the environmental footprint? So I think there's lots of interest. I think with --

(multiple speakers) into Asia though, with the opening of the multiple ports over there, are you showing -- is there a big interest from over there?

Yes.

We're seeing -- we know that they are watching. We're seeing most of that interest at the moment kind of at the very high levels, through joint California-China, California-Asia, West Coast, to Dave's point, West Coast ports, West Coast Asia kind of port partnerships working groups, that kind of thing, talking about common issues around air quality and growth in traffic. So a fair amount of interest. We haven't yet seen in Asia that convert, the ports coming to Westport and saying we've got $X million, how many LNG trucks can you give us.

But I think the main driving force here is going to be, again, the San Pedro Bay Ports, what they do, what kind of results we can show with these trucks in terms of lower emissions, how they ramp up. And I think you will see Asia and the rest of the world ports kind of leveraging that into their own programs over time.

Okay, and any interest at all from Europe in this area?

We said international results are up a lot. Actually, things are going very well in Europe. Lots of interest in natural gas in Europe. Lots of interest in biogas. There's quite a few interesting projects showing up there. As you know, we've always had difficulties in Europe not because of interest in the idea or interest in the demand, but just because the industry is so vertically integrated, there's relatively few vehicle manufacturers that buy engines from third parties. So there's just another layer of difficulty in getting our product into the market there.

With (multiple speakers) breaking through into rental a couple of years ago, with garbage trucks in France, that's gone quite well and I think we're going to see continued interest in Europe with other vendors. And we're seeing more orders in smaller specialty manufacturers in Europe as well. So Europe is up, as is Asia, and I think that trend is going to continue.

One final question which I ask all the -- or two of them, is patent protection [in rip] and that type of thing and how many employees do you have, those are the last two questions?

I'm not sure. We are in a bit of a hiring surge again. I'll let Elaine think for a minute on the number of employees.

We are about 150 excluding CWI right now.

CBI is about 40?

Excluding -- yes --

Yes, close to 50. We're close to -- pushing 200 if you include both I think, Elaine?

And patents?

I think the issued U.S. patent number is 48 or 49; there's a few new ones filed. The patent number continues to grow, particularly with international coverage, between existing U.S. patents and we've got good coverage in China.

Thank you. The end of questions.

Victoria [Chan], Pacific International.

Good morning. I'm asking on behalf of (indiscernible) unfortunately could not be on the call this morning. I just have a question in regards to Australia. Any updates with the -- I know you mentioned in your press release that maybe in 2008, would be expecting your first order. But in terms of size or timing within the year?

Yes, Victoria, hi, this is Mike. I'll start with that and Elaina or David can jump in. But yes, as I mentioned in my remarks, the first step is to get our four demonstration trucks ready to go and on the road for that six-month demonstration program, which will start late this summer and finish early '08. So we wouldn't expect, as you suggest, we wouldn't expect to see too many truck fleets wanting to commit until they see the results of that demonstration program. So early first quarter '08 would be the timing when we would expect perhaps the first significant orders. But I might qualify that a bit by saying that we are seeing some interest and I briefly alluded to this, from one or two fleets to perhaps make a conditional agreement ahead of that with pending final commitment upon results from the demo program. So we might get some conditional agreements from people who say look, we are very interested, we would like to buy X number of trucks at Y price, but we will finally sign the agreement once the following demonstration condition had been met by your demonstration programs. So you might get a conditional agreement the second half of this year that would be converted to a firmer order in the first or second quarter of next year.

And in terms of numbers, hard to say, but I guess it wouldn't be out of the question that you with see an order or two in the size range of what we announced yesterday down in California and then over time, growing to larger numbers than that.

Okay, great. That's it for my questions. Thank you.

Sara Elford, Canaccord Adams.

This question seems a little bit ironic to be asking you after the long haul that you've put in so far, but you know, David, you described California as a beachhead and it's very clearly that. I guess my question is after so many years of trying to get to this point and with demand clearly starting to move in the favor of your technology, is there any concern on your part in terms of having to show some restraint in terms of how thin you spread yourself in terms of the number of opportunities? I've seen you talk about Australia; obviously, California on its own would be a great showcase and a means to sort of establish yourself, building this out in a rapid but manageable scale. Any sort of any thoughts on whether you would limit yourself in terms of the opportunities you pursue until you have some experience on I guess the first year or so through the California experience?

Hi, Sara, that's a good question. I will let Mike cogitate for a few minutes and then you can lay in, Mike.

The strategy, as, because you've followed us through the long haul, too, Sara, so you know the work that's gone in. The work has gone into creating partnerships and alliances that are going to allow for scalable growth. And we have put a lot of effort into thinking through how we would scale up. Because that's clearly the challenge for most successful technology companies. The next -- once you get your technology accepted, a lot of companies fail just because they can't actually deliver when the demand shows up, and we didn't want to hit that either. Now, it's a bit presumptuous to say that we are at the point where we are worried about scale up issues. But we have had to position ourselves because this is such a big industry and people throw out numbers of thousands of trucks. Well that is still only a single digit percentage of the number of new trucks sold in these markets. So there's plenty of room to grow, but there's lots of pinch points and there's lots of issues that we need to think about. So our strategy has always been to create a very broad range of alliances and partnerships that will let us scale up to demand, and I think that's taken a lot of the worry and pressure off of that issue for us. There's much more capacity in our partnerships than we have if we were trying to build things from scratch.

Now, that said, there's still going to be very specific issue that we want to focus on. One would be availability of liquefied natural gas in our markets. That's why the Clean Energy partnership is so important. We're working closely with them. They've just raised a bunch of capital. As we move forward over the next two or three years, if this market starts to move, availability of fuel is going to be a big deal because there's so much fuel consumed in these trucks. There are individual components that we have to work with suppliers, which is why we have been out creating alliances and joint ventures with people who have that manufacturing capacity in place. So I think it's fair to say we are very concerned. It's something that keeps us working very hard to try and relieve any of these pressure points that we can anticipate over the next six to 12 months. At the same time, we have to be realistic about what the actual demand is and we don't want to get too far ahead of ourselves with building up a bunch of inventory or taking on a lot of capacity risk that doesn't emerge in the market. So it's a balancing act.

I think we've got a few issues that we can focus on, we are focused on them, and we are hoping for the best, which is very fast and rapid market growth. Mike, are you ready to jump in?

Yes, I appreciate that moment of consternation you allowed me there, Dave. I've got a couple of things I'll just add maybe. And Sara, obviously, this is something we've talked about, you and I have talked about off an on, the issue of focus versus development and new initiatives. And I do think you are right that the chemistry here at Westport is changing pretty dramatically here with the launch of our HPDI product in California. So it was, in the past, as you know, we had a lot of work going on around this and other initiatives in the hope that one or more of them would reach this point. All right, so one has reached this point, so we have had to look at this pretty hard. We are aware that we're going to have significant expansion challenges if we ramp up and as we ramp up with these kinds of growth rates that we're talking about.

So we've done -- but we've done a couple of things, just reinforcing what Dave says partly here. But one of the -- the driving force behind our decision to create this new business unit, Global Heavy-Duty and pull it out of the Westport matrix, if you will, was precisely the issue you raise, which is this opportunity is so important that we must insulate it from the pressures of other new initiatives, other R&D efforts, et cetera. We want a business unit totally focused on the objectives of meeting the needs of California and the ports and other commercial customers who may wish to go down this LNG truck route with us.

But interestingly, with respect to Australia, we, in fact, looked very hard a couple of months ago, when we did this organization, at the role of Australia and what about Australia and what about the fact that we're going to be very busy in California and we have a tremendous opportunity and do we even need another geographic front like Australia? We did some pretty hard analysis of pros and cons of financial gains versus investments, market interest, et cetera and I came down -- I think the management team came down very hard on the idea of keeping Australia as a second part of Global Heavy-Duty. And the reasons were as follows -- number one, we saw tremendous technology synergy with what we are were already doing in California, the HPDI technology. It's 95% the same set of systems we would develop to apply in Australia. We're doing some torquing up of the engines to allow for greater power and performance on the Australia duty cycle and some things like that. But it's 95%, I would say, the same engine technology. So we saw a tremendous synergy there.

Secondly, we saw some very good synergy with our relationships and our partners. The fact that both Kenworth and Cummins, on their Australian arms, were quite interested in what they saw happening with us, LNG trucks and Australia, was a big factor in our deciding to pursue that program.

And lastly, the thing I really liked is what we see in Australia, unlike California, to some degree, is pretty much a pure economic interest. The Australian trucking guys are being driven not by government mandates or emissions reduction initiatives, but by the fact that the price of LNG, natural gas initially and then LNG in Australia, is so competitive, so much lower on a comparative basis to diesel as compared to the United States and North America.

So I really like the idea of taking a run at a pure economic market that we see in Australia to see how much interest we can secure around this technology, solely on economic grounds without the -- much in the way of drive from the usual environmental initiatives. Yes, there's interest in our NOx reduction, PM reduction. Yes, there's tremendous interest in our greenhouse gas benefit, but frankly, the money is flowing and the interest is being shown as a result of this economic model. So it was those things that led us to conclude that California plus Australia was a stronger program for us than California alone.

That's a great answer. Thank you.

Rupert Merer, National Bank Financial.

Just a follow-up. Most of the questions have been around the market for HPDI. I don't want to forget that the spark ignited product line seems to be growing very well also. You had 37% growth year over year. What's the outlook for the CWI business? Should we expect continued growth numbers like that do you see it moderating a little going forward?

Hi, Rupert. Elaine and I are [point maybe the x partner] here, so I guess I'm the default. We've been, as you know, saying for the past few years that we expect continued compounded growth of Cummins Westport's product line, and we've used the number of 20% a year. And we have to caution people that with foreign exchange being so volatile and things like that, it's hard to say what's up. There's no doubt that demand is growing and there's no doubt that we're going to continue to see strong demand for CWI's products and we're positioning ourselves in new markets like India and China. And you saw some nice orders there. I don't see any reason for CWI not to have another high-growth year next year.

Now, if I said 20% compound growth, I'm sure everybody would jump on us and say so growth is going to moderate and plateau, so we're not saying anything. At the same time, I think CWI had a fabulous year. So is growth next year going to be as strong as it was this year? We really want to stay away from giving any firm guidance. But I think we can say that we're confident that the demand is continuing to grow. The product is well positioned. We've got a strong backlog for the new flagship engine, the ISL G, so I fully expect CWI to have a great year.

I think the profit they posted this quarter was exceptional, so we can say that that was an unusual set of circumstances where we had very high growth on the revenue side of all the products that give us the highest margin. So that worked out very well. But clearly we're going to see a lot more profit next year just because of the scalability of the business model in CWI. So CWI I think is going to do very well in '08, '09, and 2010 and I just don't see any reason why the growth you've seen over the last two or three years isn't going to carry on.

Thanks a lot, Dave.

Rupert, if I can just add one sentence. And Dave, I think you mentioned it in your remarks actually, but just to put a last highlight on that, I think this new CWI product, the ISL G that will be certified within 30 days at 0.2 g NOx is going to be a fabulous product for the market. I think Dave mentioned, we already had several hundred orders in backlog and we're just seeing tremendous interest in that new product, which isn't even launched yet. It will be launched over the next few weeks.

Okay, great. A couple of housekeeping items, the first with regards to CWI, your now carrying a fairly large item on your balance sheet, the joint venture partner share of income. How would you see that impacting cash flow? Would you expect to pay that out to Cummins at some point in time in the foreseeable future?

Yes, CWI has had a couple of very good cash orders and they've been spinning off a lot of cash. As David said, their business model is very scalable and because Cummins manages their working capital, they don't really have to use a lot of their cash. Cummins' share of the interest is now about $7.7 million. That includes the non-cash portion related to the tax benefit. Cummins has had some phenomenal years as well and I don't think they need the cash, but given how well Cummins is doing, I would expect at some point that they may look at withdrawing some of their shares in some form.

Okay, nothing for seeable, but it sounds good.

We'll see, yes.

Just one final question. We had a bit of a bump up in the G&A line this last quarter and it sounds like you have done a little bit of hiring. Going forward, should we expect to continue at this level on G&A? I think it was about $2.5 million in the last quarter.

Not necessarily at fourth-quarter levels because there were some items in the quarter including year-end bonus accruals and the MBNA also talks about stock-based comp, but there was some vesting that happened in the quarter based on prior grants of RFU's under our long-term incentive program. So there was some anomaly in that fourth-quarter number. A better gauge would be probably if you take the third-quarter number and take that for your model, Rupert.

Okay, great. Thank you very much.

(OPERATOR INSTRUCTIONS). I would now like to turn the floor back over to Mr. Thompson for any closing remarks.

Thank you very much, everyone, for taking the time to listen to our conference call. We hope to see you all at our next conference call, which we expect to be in early August this year with the disclosure of our first-quarter results for fiscal 2008. Good bye.

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