Westport Fuel Systems Inc (WPRT) 2008 Q1 法說會逐字稿

Good morning. My name is Rich, and I will be your conference operator today. At this time, I would like to welcome everyone to the Westport fiscal 2008 first quarter financial results conference call.

(OPERATORS INSTRUCTIONS)

It is now my pleasure to turn the floor over to your host, Ryan Thompson. Sir, you may begin your conference.

Thank you. And good morning. My name is Ryan Thompson. Welcome to our first quarter conference call for fiscal 2008. 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 prepared 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 financial. 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 to 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 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 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 regulator authorities.

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

Thanks, Ryan. And good morning, everyone. Our fiscal 2007 conference call was just a few weeks ago, so our plan this morning is to give you a quick summary of recent developments and then we'll go to questions. I can make a few introductory comments and then I'll turn the call over to Elaine for review of the financials and Mike will close with an update on the heavy-duty truck business unit and the status of our project in California and Australia.

Just turning to the numbers, our first quarter showed continued strong growth after two back-to-back record revenue quarters. We're up 48% over Q1 last year. And, of course, because we report in Canadian dollars, growth would have been even higher if we were still at the same exchange rate as last year at this time.

Cummins Westport, our joint venture with Cummins, posted at the 11th consecutive profitable quarter with a US$1.9 million after-tax profit for the business unit. We expect CWI to continue to grow quickly and profitably. Growth this fiscal year should be on the same order of magnitude as last year, excluding foreign exchange effects, of course.

During the quarter, CWI just began to ship its new 2007 ISL G engine. The ISL G, as you've heard before, surpasses the EPA and CARB 2007 phase-in levels. And it actually meets the very challenging 2010 emission standards of 0.2 grams per brake horsepower hour for nitrogen oxides.

This is more than 80% lower than equivalent diesel engines, and even the modern clean diesel engines, beating 2007 standards. So we've seen very high demand. And we've got a very healthy interest in our transit customers with that engine. Turning to the heavy-duty truck business, of course, we're preparing for volume shipments to the ports in Los Angeles and Long Beach.

And we're dealing with strong interest from other non-port fleets. We're still waiting for further port orders after the first order that we announced for 20 units to one of the customers at the port. Although we don't anticipate there's any material change in project scope at the port, it's clear this is going to take some time to work its way through the system.

We believe that with our established beachhead in California and with projects like the ports and the high-visibility that's been developing, the have the opportunity to grow our truck business substantially over the next few years.

We will be delivering the first port truck this quarter on the order that was announced. And the request for funding that went in this spring for another 150 trucks are working their way through the approval process. Mike will give you some more details on that.

As you know, Westport has had a very productive strategic alliance with Clean Energy Fuels over the past few years. And they do the fueling and fueling infrastructure for the fleets where we, of course, provide the vehicles, so it's a critical part of a complete solution for our customers. And we're pleased to note their successful IPO on NASDAQ this quarter which, of course, creates an opportunity for us to monetize our investment in Clean Energy, which is significant.

The new cash raised by Clean Energy is going to be used to increase the availability of LNG fuel for our trucks, so there's a direct and positive impact on our business plans as a result of this event. The IPO did result with a small green shoe option being exercised which was fulfilled by the shareholders. Westport sold approximately 90,000 shares for proceeds of $1.1 million.

Before closing and passing this over to Elaine, I'm just going to touch on the recent changes for our Board of Directors. As you've seen, Perseus has taken advantage of the strong market demand for our shares and converted their debt instruments to common shares and then turned around and sold this block to investors around the world.

This transaction terminated their formal investment agreements with us. And although Perseus has retained a small block of shares, and they have a substantial warrant position, their two nominees to our board, John Fox and Ken Socha, have resigned last week. I'd like to thank Ken and John for their hard work over the past 18 months.

Their financial support came at a critical time for Westport. And we're all thrilled that their confidence in our plan has resulted in such a successful transactions for them. At our shareholder meeting in July, we increased the size of our Board of Directors to eight members. And shareholders appointed Andrew Littlefair, who is co-founder and CEO of Clean Energy, to our board.

I've worked with Andrew for many years now. And more than ever, our two companies are working together to develop this whole industry. It'll be great to have his energy industry perspective. And, of course, his own business interest in seeing us work together and adding that to our board.

And with the vacancies opened up with the Perseus transaction, the board has asked Michael Gallagher, our President, to join the board as a director effective immediately. So congratulations, Mike, and welcome to the board.

I can close now. I will repeat the line that I usually close these calls with. We're continuing to see strong interest around the world in our ideas. We continue to develop new alliances and new technologies we think can be valuable in the future. And we look forward to building on the strong foundation that we've established over the past few years.

So, Elaine, over to you to take us through the quarter.

Thanks, David. And good morning, everyone. The press release, financial statements and management's discussion analysis provide a considerable amount of detail regarding our first quarter fiscal 2008 financial results and are posted on our website.

Consolidated revenues for the first quarter of fiscal 2008 were $15.7 million, up 48% compared to $10.6 million for the first quarter of the last fiscal year. CWI revenues increased by $4.4 million on 522 units shipped and higher parts revenue. We also recognized $1.1 million in non-CWI revenues primarily from the sale of LNG Systems, which Michael will speak to next.

Consolidated gross margin were a health $5.3 million, or 34% of total revenues, up from $4 million, or 38% of revenues in the prior year. Net loss for the quarter was $4.7 million, or $0.06 per share, compared to net loss of $5.4 million, or $0.07 per share in the same quarter last fiscal year.

Net R&D expenses for the quarter totaled $5.4 million, compared to $6 million in the first quarter last fiscal year. Non-CWI R&D expenses decreased by approximately $900,000 with increased government funding recognized in the quarter primarily from the Industrial Technologies Office, former TPC. CWI R&D expenses increased by about $300,000 with the launch of the ISL G.

SG&A expenses increased by $500,000 with increased margin activities in CWI associated with the launch of the ISL G and increased corporate development activities in Westport, particularly in Asia.

While CWI's operations are somewhat naturally hedge with revenues, cost of sales and the majority of operating expense U.S. dollar-denominated, it did experience a $526,000 foreign currency translation law in the period on its net assets and a [$297,000] revaluation of its future tax assets.

With an 8% weakening of the U.S. dollar between March 31, 2007 and June 30, 2007, CWI investments, receivables and warranties are primarily U.S. dollar-denominated. Excluding the effects of foreign exchange, CWI continued to show strong financial performance with operating income for the quarter of CAD$2 million.

Cash use in operations during the quarter before changes in working capital was $3.4 million, down from $3.7 million the first quarter of fiscal 2007. Working capital requirements increased by $1.2 million year-over-year. We expect our working capital requirements to increase as we move through fiscal 2008 as we build up our inventories in advance of deliveries. If appropriate, we will draw upon our existing $13 million line of credit to fund working capital.

During the quarter, as David noted, we sold 92,575 shares of the 2.1 million shares that own in Clean Energy for proceeds of $1.1 million, and recognized the gain on the sale of $718,000. As of June 30, 2007, our remaining [2 million] shares were valued at approximately $27 million. Based on the closing price yesterday, our shares in Clean Energy had a value of approximately $31.7 million.

Effective April 1, 2007, we adopted the CIC handbook sections on financial instruments and comprehensive income. As of that date, we value our launcher investments at fair value and changes in fair value are showing in other comprehensive income loss in the consolidated statements of shareholder's equity and comprehensive income.

Clean Energy and our launcher investments are now reflected as fair values on the balance sheet. And as of June 30, 2007, totaled $31.3 million, compared to $13.1 million at March 31, 2007 when they were recorded at historical costs.

We have also added a consolidated statement of shareholder's equity and comprehensive income loss. Comprehensive loss for the period was $6.7 million, which includes our loss for the quarter of $4.7 million, $1.2 million in the change in fair values in our long-term investments and reclassification of $718,000 to realize gains as a result of the sale of available for-sale securities.

As David, noted, on July 26, Perseus converted its $22.1 million of convertible notes in order to acquire to approximately 16.5 million common shares of Westport, which were then sold to third parties at a price of $3.10 per share for total gross proceeds of $51.3 million, with all proceeds going to Perseus and its affiliates.

As an inducement for them to convert, we agreed to pay to Perseus an amount equal to 50% of the interest that would have otherwise been payable in the converted notes on December 31, 2007 and June 30, 2008.

These payments, including any interest amounts accrued to the date of conversion are expected to total approximately $884,000 and will likely be paid in common shares, and under certain circumstances, cash. With the convertible note converted, we expect to save up $884,000 in interest payments [to] June 20, 2008 and eliminate any interest exposure of up to an additional $5 million through the original maturity date of debt.

From the accounting perspective, we reduce our interest and amortization of this account expense by approximately $2 million in the current fiscal year and by approximately $14.5 million over the remaining life of the note. While Perseus is no longer a debt holder or a board member, Perseus continues hold 4.1 million warrants and approximately 617,000 shares.

Now, over to Mike for a discussion of our operating results and plans.

Thank you, Elaine, and good morning, everyone. We continue to progress our business here at Westport. And our revenue for the first quarter versus last year, as you see, is a clear demonstration of that progress.

Cummins Westport's moves last year to initiate production in India and China have begun to show dividends. And we now see the global distribution of sales split pretty evenly between North America and the rest of the world. In early July, we also announced that CWI had received formal certification from both the U.S. EPA -- well, from the U.S. EPA for the new 0.2 gram NOx ISL G engine.

It represents a major technological step in spark-ignited natural gas engine technology. In addition to delivering very low emissions, the ISL G, with ratings from 250 to 320 horsepower, will deliver increased fuel economy and better performance compared with today's CWI Plus engines.

Cummings Westport has already logged over 500 orders for the new ISL G from U.S. transit properties, including Sacramento Regional Transit and the Orange Country Transportation Authority. Our global heavy-duty business unit continues to progress through launch and early deployment of our LNG truck business and systems.

And we are preparing for anticipated growth and demand for that product from both the San Pedro Bay and other ports, as well as private fleets. Those efforts are many and include managing the inventory build up, the outfit and delivery of these first units, preparing our new 2007 heavy-duty product for certification and launch, building up our supply chain for deliveries to customers and launching our demonstration project in Australia.

Since our last call just eight weeks ago, there has been a lot of activity on the heavy-duty front. We delivered 11 new LNG truck systems in this quarter, which is up from eight in the launch quarter, the fourth quarter. And we are now outfitting, at Cummings Cal Pacific the 20-unit order we announced in June. The ports are continuing their negotiations with fleets for the commitments for the rest of the LNG truck allotments under the first RFP that we have talked about.

And, incidentally, they've come up with a new and improved deal for the fleets whereby the ports now plan to offer some extra monies for scraping the older diesel trucks. That's another $40,000 on top of the $144,000 per truck already announced in the RFP earlier. And they're also offering a seven-year holiday, as they're calling it, before the new provisions for employee drivers would be required.

As a result of these new deal provision and new incentives, the enthusiasm from some of the key fleets that have been talking to the ports and ourselves has increased and they're showing considerable interest in expediting and moving forward with the LNG truck program. I think we can expect this all to lead to further developments as well as more sales results in top-line growth for Westport.

Our new 2007 LNG system for the Cummins ISX will incorporate all of Cummins' 2007 engine technology to provide a product that meets or beats diesel with both particulate matter and NOx emissions. As with our CARB and EPA certified '06 product, the '07 product will also maintain the horsepower torque and efficiency of the base diesel engine.

We anticipate applying for CARB and EPA certification in the coming weeks, with certification expected in the fall and customer deliveries coming shortly after that. In the meantime, we are continuing to deliver our 2006 certified LNG fuel systems to customers.

In Australia, our work is aimed at ensuring the successful deployment of the four heavy-duty LNG demonstrator vehicles. We are on track to get these first Australian vehicles on the road next month. And we are working closely with both Cummins South Pacific and Kenworth Australia to deploy the demonstrator vehicles and also to develop a product that is ready for commercial launch in 2008.

As a reminder, Australia represents a unique opportunity for the Westport LNG heavy-duty product, as it a region where the significant fuel-cost advantages of natural gas versus diesel can generate capital cost payback periods as short as one year without incentives. And with over 10,000 new heavy-duty trucks delivered each year, Australia represents a valuable potential market for Westport.

Finally, on a personal note, I'm very pleased to accept the invitation and honor of joining the Westport Board of Directors, as mentioned by Dave. Since I joined the Company almost five years ago -- I was just thinking that this is my 19th quarterly call, I think -- I've had the pleasure of being part of a team that is absolutely committed to helping to solve some of the world's energy, oil, environmental and climate change problems.

I think this appointment demonstrates to our shareholders our board's firm commitment to the ongoing success to our business. And I very much look forward to continuing to contribute to Westport's success in the coming years, both as a member of the board in addition to my operating executive roles on the management team.

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 on the call and are ready to take any questions that you may have.

Rich, could you please queue any questions.

(OPERATORS INSTRUCTIONS)

Your first question comes from Philip Tulk of PI Financials.

Good morning.

Good morning, Philip.

Elaine, given exchange movements, should we assume that the FOREX and tax impacts at CWI will recur in Q2? And maybe can you talk a little bit more about the tax impact that we saw in Q1?

Yes. I'll talk to the tax impact. In fact, if you'll remember, CWI's future income tax assets are U.S. dollar-denominated. So what in essence we've put on the balance sheet there is the future benefit of their tax losses. And so that will get realized down the road as they become profitable and it's off set against any future taxes payable.

So what's happening is we're taking a U.S. dollar asset and we're revaluing it at the end of each quarter to the current exchange rate. Because we had a huge drop between March 31 and June 30, you saw that $300,000 adjustment on the tax slide.

Now, the question as to whether or not we expect that to happen going forward will depend on what you think's going to happen to the exchange rate in the future quarters. Based on what I've seen from the bank forecast, the Canadian dollar looks like it's going to strengthen, but probably not to the same extent that we saw between April 1 and June 30 but, then again, I'm not a foreign currency trader.

Okay, fair enough. I will --

And that is a non-cash item too from your perspective, yes.

Okay, fair enough. I'll get in the back of the queue. Thanks for that.

Thanks, Phillip.

Thank you. Your next question comes from Sean Boyd of West Cliff Capital Management.

Hi, thanks for taking the question. On the non-CWI side of the business, the Company did about $400,000 in other parts you all didn't have last year. Was it roughly similar this year?

In revenues? Is that your question, Sean?

Correct.

Yes. The $400,000 revenues last year were primarily applied to work we doing for Isuzu and then some of it's for BMW and Ford. This year we recognized $1.1 million in non-CWI revenues. And the bulk of that revenue was based on the shipments of 11 LNG systems for heavy-duty trucks.

Okay. So non-product revenues for the non-CWI piece of the business is relatively minimal at this point?

Well, it's $1.1 million. That is product revenues, Westport product revenue.

The $1.1 million is all product?

That's right.

Great. Thank you.

Thank you. Your next question comes from Rupert Merer of National Bank Financial.

Good morning.

Good morning, Rupert.

It sounds like to me you have some optimism on the modification of the San Pedro Bay port plan. What's your understanding now then of the timing of the RFP and the approval of the Clean Air Action Plan?

Hey, Rupert, this is Mike. As I say, there's been a lot of activity down there. But as you noted on the last couple of calls, predicting the exact timing on converting this RFP process to actual contracts has been something the board hasn't been willing to state with any specificity. They're just hoping to get it done and then they'll issue an announcement.

But we can kind of track the activity. I've been on the phone with the port twice this week myself as well as some of the other partners down there. It's pretty clear that there's a high level of activity going on right now in terms of communicating to the key fleet that proposed in that first round the nature of this, what I refer to, as the new deal for LNG trucks, the nature of this new $40,000 incentive for scraping trucks, the nature of the holiday and employee drivers.

So what they are trying to do is get those new terms converted in to contract language that can be acceptable to everybody, and that includes not only the fleet and the port of LA, but also the port of Long Beach, who is in this financially with the port of LA.

When is that going to be announced? I don't have a date that I can actively predict. I would expect some further announcements to start developing around -- agreement and principle around these new terms. As I say, the fleets are showing a lot of enthusiasm for the new arrangements. And whether that will be days or weeks from now, hard to say, but certainly expect that to roll out over the coming quarter.

Do you think the key to the success to the plan is initially to go with the fleets and to avoid the independents? It seems like there may be some resistance from touching the independent drivers at this point.

Yes, there's the fleets and then there's the drivers. And actually, there's -- they're not necessarily one or the other. In other words, the port can contract with fleets who can in turn engage and contract with independents to run the trucks or hire their own employees.

So I think what we'll see, it's kind of balance initially of all of that where the port makes its wishes known about the long-term evolution toward a kind of employee driver model, but allows the fleet to kind of run the business as they see fit for these first contracts.

And it looks like they're talking about the seven-year life on these initial contracts. So I think that will simplify getting started with these first dozens of trucks, the first few hundred potentially, and then over time, over a longer period of time, perhaps to evolve more toward the port's long-term goals around employee drivers.

Rupert, it's David. I just wanted to clarify. The Clean Air Action Plan has been passed. I don't think there's much doubt that there's a high level of political will in the cities and the state and local government agencies to proceed with the Clean Air Action Plan. And your point about employee drivers is the whole key here.

We are dealing -- these first fleets don't have employee drivers. They do have independent drivers. They're acting as kind of the aggregator of a number of independent drivers. And this is why this whole process has been so complication. Because the port wants to see fleets bringing drivers back in as employees. And, of course, the companies and the drivers are saying we don't want to mess with our business model.

Yes, and that's held out for years. That's held out the signing of these contracts for a couple of months. And I think that's the significance of this port offering some relief on that requirement with this so-called seven-year holiday on that employee driver provision now.

So now that things are moving -- because clearly things are starting to move again now that they've resolved some of these basic issues. I think we can certainly be hopeful that things will start to move on a much more regular basis once some of the policy stuff has been cleared up.

It seems as though the ports are starting to approve capital in their budgets to put for the trucks. But is the rest of the funding lined up at this point. I think the amounts I've seen in the budgets are only in the order of tens of millions so far.

Yes, they're authorizing monies in increments, I guess, is the obvious way to look at that and somewhat tied to their budget year. So, for example, they satisfied $22 million for that RFP, which $16 million is coming from the two ports and $6 million is coming from the AQMD.

There is now some talk about topping that up into somewhat higher amounts around this new deal where they're offering higher incentives. They've just published some budgets, as you refer to, suggesting another round of several million dollars to cover the next set of trucks.

They haven't stated specifically where the future dollars will come from and when, but they have said that they're going to institute this terror program on container traffic which will raise funds for Clean Truck Program. And that's where we expect the future funds to be mobilized from.

Okay. And that's all part of the approval of the Clean Air Action Plan that we don't have the timing for at this point?

That's right. And the subsequent so-called Clean Truck Program, which is the implementation phase or piece of the Clean Air Action Plan, which they're expecting to approve September or October.

Okay, great. Thanks. I'll get back in queue.

Your next question comes from [Zachary Beck] of [Maitland Paterson].

Hello?

Hello, Mr. Beck? Hello?

I guess we lost him.

We have a follow up question coming from Rupert Merer of National Bank Financial.

Is there any plan to sell the rest of the Clean Energy shares? And what do you think it would take to sell them off.

Hi, Rupert. Elaine's pointing at me and I'm pointing at her. It's really Elaine's call on what and why. So we're locked up, if you look at the U.S. Securities Laws -- we'll be locked up until the end of November. There's a six-month hold on that stock.

And I think we've officially classified it as --

It's available for sale, Rupert.

It is available for sale.

And, as David said, it's locked up until the end of November. And at that time, we'll have to assess will we sell, how much will we sell. And that will be based on what the Clean Energy -- what are our own requirements for cash. Do we hold another company's stock or what do we want to do with that? We'll make that decision at that time.

Yes, we're not in the business of investing in other clean energy company. This is a clean energy company. Green technology companies. We created this strategic partnership with Clean Energy. It is a working strategic partnership.

I think the linkage of the board indicates how strong it is. And the whole port program came both as a result of the collaboration between Clean and Westport. So I think that's working just find. I don't feel the need to own the shares. At the same time, if they're a good investment, it's something we'll hang onto if we don't have a better use for the cash.

As you know, the shareholders turned down the secondary appraised for $12 a share when we did the IPO. There was a planned secondary at the $13 to $17 range that was published. When we downsized the deal and did the IPO at $12, the secondary was pulled off.

So that should give you an idea on our mood on Clean. I think if it's a fair price, if we think it's reasonably valued and we've got a good use for the cash, then we'll sell a block. I think that's what we'll end up doing later this year.

Okay, great. Thanks. I heard some discussion about potential for softening the EPA 2010 regulations because of the difficulty the diesel engines are having in achieving the regulations. Do you have a view on whether this may happen?

This is Mike. Rupert, frankly, I don't see a lot of effort at the moment from the engine manufacturers to achieve a softening there. They are spending millions of dollars in R&D in places like Cummins and CAT and Volvo and elsewhere to get their engines to position where they can meet that standard. There's always a bit of talk on the sides about this is a bit of a challenge and it's costing a lot of money.

But in the public statements I've seen from these guys, for the most part, they've kind of stood up and said, yes, we will be there and we're hard at work to achieve. So I haven't seen any kind of direct attack or backtracking from those standards yet. I mean, there's still a couple of years before they kick in -- almost three years.

I have seen some, I guess, editorializing from the trucking industry. So not really the engine manufacturers. But the trucking industry has continued to worry that increased environmental regulation increases costs.

There's a cost issue.

So there's been a fair amount of pressure on that front. And, of course, fuel costs have risen rapidly in the last few years and no one expects that to change. So there's a lot of concern in the trucking industry itself that these new environmental controls are going to add costs and they're going to add operating costs as fuel economy goes down.

The industry is active -- let's just say that -- on the next round, because there is going to be a next round on EPA and Euro emissions. And, of course, all the talk in California about greenhouse gas emission controls has got everybody quite nervous because it's hard to see what impact greenhouse gas emissions are going to have on existing product plans.

Everybody's focused on NOx and particulate matter and some of the other regulated emissions, but greenhouse gas is something completely new and it's going to take some time for that to work its way through the product cycle. So I think people are nervous about what's being cooked up that's completely new.

And there's also worries about what's going to be the next round. There's the 2010 EPA and the equivalent EURO rounds are very challenging for industry. And there's been a lot of work to get it there. But I'm not sure there's really concrete plans for what to do for the next round, which will crank emissions yet again.

So there's worry in the industry. I think the biggest issue right now for the industry is what's the price of fuel going to be? And getting fuel economy back has got to be the number one issue for customers.

Okay, thanks. Just one more. It looks like ASPs might have been a little lower in the quarter, I suspect because you'd be increasing business in China and India. What should we be looking for in ASPs going forward? Should we expect a lower level than we've seen historically over the next few quarters?

By ASP, I assume you mean average selling price? Is that right?

That's right, yes.

It will depend on mix and just where things are going in that quarter. You noted that half of the sales this quarter were outside of North America. And we are selling smaller engines into Asia than we do in North America.

Again, it depends on mix because the LNG systems are much higher prices than [diesel] engines.

Priced.

Heavy-duty.

Yes, I was thinking of the CWI business in particular.

Yes, the CWI business, now that they're launching the ISL G, we expect the average selling price of that to up. But, again, they're also getting traction overseas. That's a really hard one for me to help you with, Rupert.

I think it just depends on mix and this quarter, I think, was probably a little more heavily weighted towards Asia than the previous quarters have been. They have been getting some very large orders from China and India. So probably, going forward, you'll see more international sales, but not quite half.

Okay, great. Well, that's it for me. Thank you.

All right.

Thank you. Your next question comes from Sean Boyd of West Cliff Capital Management.

Thanks. If I could just follow up on that last one for a second here. Elaine, did you just mention that over 50% of this quarter's units were shipped abroad?

Yes. I think it was 51%, yes.

And you expect that to be kind of a near-term maximum? You wouldn't expect it to go in tires and that?

It's hard to say because the quarters have always been volatile. And a lot of it does depend on -- the way everybody gets orders is they tend to get large orders. And so depending on when an order is shipping, you'll get different product mixes, different average selling prices, different margins.

Got it. So just to give us a little bit of perspective here, would you say that sales overseas command an ASP 10% lower, 20% lower?

I get Elaine off the hook here because I can speak from ignorance. Typically, if you look at CWI's product line today, they're got a B engine, which is a 5.9 liter. And that is by far the most popular international engine. And in North America, we tend to buy much bigger engines.

It's the same thing in heavy-duty as it in passenger cars. So we tend to see people buying the C, which is our -- with the venerable transit bus engine, and increasingly the ISL. The ISL has got a very strong backlog building in transit bus and in refuse truck. The ISL can be anywhere from three to four times the price of the cheapest B. So you get quite a range of price on products.

If we're selling the B Gas International in India, which is manufactured in India, you can imagine there's a big price different between that and selling bus engines to Los Angeles Metro. And that why you see so much variability. It's not a 10% issue. It's a 400% issue. And depending on the size of an order and where it's going and where it's being built, prices and costs can be pretty volatile.

With that said, I think that what you've seen in this quarter was a bit of a lull. I said we started to shift the ISL. It was just, to the last week of June, it started to ship. I think we're going to start to see much bigger shipments of that over the next few quarters, which should help move the average selling price up substantially.

But at the same time, I think we're seeing strong demand in Asia. So all of this just says that we're confident that growth is going to continue and all of it is going to drop something into the gross margin bucket, and we're happy to see that.

Okay. That additional color is helpful. So let's leave the price out of the equation for a second and jump over to the unit side. With backing out the 11 units outside the CWI JV, it look likes the units are kind of low 520s, 522.

Can you help us on your thoughts there -- and you might have said something very early in the call in the prep -- in open comments on the growth of CWI, but specifically I'm thinking about the growth of the units here.

Yes. We've been really discouraging people from looking at units just because of that average price issue. It's really hard to pick an average price that's useful. So we've been encouraging people for the last year or two really to focus on gross revenue and look at gross margins.

And revenue growth, I said when I launched in, was 48% this quarter over first quarter last year. And we're trying to giving -- the quoted language was we expect growth in CWI to look like the growth they had year, which was pretty healthy on a revenue basis, so that the unit numbers is not -- it's something we track and it's something we report, but it's really not something we model.

We've got a pretty comfort that the revenue growths will be strong and gross margins will be healthy. And that's really all we can say at this point.

Got it. Got it. And so when you say the revenue growth of '07, you're talking the 37% in total revenue growth for CWI?

Last year's --

Yes. That's what it was last year. And the other caveat that we stuck in there this morning was watch out for foreign exchange. Of course, we report in Canadian dollars. It's an open question whether or not we should be converting to Canadian dollars because CWI does all its business in U.S. dollars and its expenses are mostly U.S. dollars. So the foreign exchange tends to be non-cash.

And it's a reporting requirement. But that is going to obviously have a big effect on our revenue line. It shouldn't affect the bottom line that much, but if you're trying to calculate a specific percentage growth for revenue, you probably should think about what the foreign exchange might do too.

Got it. Okay, very helpful. On the operating expenses, if we could, the Company has got a lot going on. You've got the launch of the ISL on the CWI side. You've got the launch of the heavy-duty trucks. When we tried to model going forward, should we think about this current level? Is this level a good proxy going forward? Is an average off the last couple quarters? What should we think about your total operating expenses here?

On the operating expense side, our price start was actually last year's R&D numbers. This quarter -- because last year's R&D number also had some of the TPC impact, [that take on] the full-year basis. The numbers going forward, I think sales and marketing are probably about right going forward because we have stacked up in China and California.

In CWI in the sales and marketing side, G&A's probably a little bit low. Some of those things are just kind timing relating. And in R&D, it's probably going to be out where we were at last year. And as we put trucks on the road, you'll probably expect to see some of that field service support costs to go up as well, but that would be tied to shipments with trucks.

Great. And, Elaine, just while I have you a real quick performance for conversion of the convert. We're looking at a fully booted share account in the low 90s? 93 million, 94 million?

I think their number if about 96,000 after the Perseus conversion -- 96 million, sorry, after the Perseus conversion.

96 million, great. And then, Elaine, I really apologize but you mentioned --

Sean, let me correct that. It's 93,068,927 shares outstanding as of July 30, 2007.

Okay. Your precision is very helpful.

I just pulled out the MD&A. There's a share's outstanding paragraph in there.

Perfect. Perfect. Thank you. Last thing, Elaine, you mentioned the issue on the taxes. Just remind me what's driving the tax hit this quarter?

The taxes is all foreign exchange. There's been no change in the underlying tax situation for CWI. So all we're there is taking a U.S. dollar denominated tax asset and translating that into Canadian dollars at a different exchange rate.

Got it. Okay, that's it for me. Thank you very much.

Thanks, Sean.

Thank you. Your next question comes from Bob Wallace of Raymond James.

Thank you very much. A couple of questions. The production capabilities for these PDI going forward -- would you be able to start producing on a minimum scale, intermediate scale, large scale, I would say 50 to 100 trucks soon or next year? Or, how is that being played out?

Bob, this is Mike. We talked a little bit in the last call about getting our supply chain capabilities ready for larger deliveries and then also our system of outfitting with Cummins Cal Pacific in Southern California, so that's proceeding. We have capacity today to deliver at greater numbers than we are being required to deliver as a result of all that work over the last year to build the supply chain capacity.

If we were to get an order for 50 or 100 trucks in the next week, I'm confident we could move that through our system fairly readily over a period of weeks rather than quarters and years anyway.

So we're a bit ahead of demand coming out of the chute with the launch, but not yet in position, as you would expect, to handle the very large volumes that could be envisioned under this Clean Air Action Plan on the order of 1,000 a year or higher.

But we are doing a lot of planning and preparation around what it would take to get to those levels both in conversations with each of our suppliers in terms of what it would take to get their capacity expanded and also what we can do to streamline and expand and augment our existing system of upfitting trucks. So talking to people like Cummings Cal Pacific and Inland Kenworth about those kinds of things.

And longer term, we have some discussions going and feel that eventually we would like to get to some kind of OEM partner model where we'd have a greater degree of actually manufacturing going on around LNG trucks versus this outfit model which we plan to run with for the first year or so of launch. So we have all those things going on.

And we have kind of different stages of delivery capacity that we can anticipate, depending on how fact the demand rolls out and how fast we can trigger the next platform of volume into reality.

And these could be with anybody, Cummins and others as well? Is that correct?

Well, Cummings and others -- if you're talking about the Cummings engine --

There are others that this is available to as well, if you've been working or talking with others as well on this idea.

Talking to others, sure. I intend to continue to talk to others and would hope that over time we would develop additional engine platforms where HPI can run. But in terms of today's product, obviously that's the Cummings IXS plan.

Which is historic, yes.

Yes.

Subsequent question. BTIC Westport, you've been there with them for a year. Elaine, is that reflected anywhere in the income sheet?

We received the approvals from the Chinese government recently to start the formation of the formal part of the joint venture. We've been working with BTIC obviously for the last couple of years.

And we've been working with BTIC around developing tanks, et cetera, a sort of pre-JV formation. The actually formal joint venture itself hasn't quite kicked off operations yet. But we're still working with them outside of that. So what's reflected in our financial statements is our expenses associated with CWI.

Net income?

Well, the income right now is primarily -- it would primarily be intercompany between us buying tanks from CWI, which are manufactured by BTIC.

Okay. (inaudible)

So on consolidation, we eliminate all that because we're just buying from ourselves in effect.

No mark up?

But there is mark up, believe me. I mean, that's part of the joint venture. I mean, the joint venture needs to stand on its own and make a buck. But until the joint venture sells to someone other than Westport, then we're not going to see any impact on the financial statements. We will see it this quarter.

The formal approval of the Chinese government was needed before we can start to publish financial statements for the joint venture. So that has been received and you'll see it this quarter. But until the joint venture starts its third party products, you won't see an impact through it in the financials.

Thank you very much. Now, spreading your wings, I noticed that the Provinces have opened up an operation the Climate Action Secretariat, their province at B.C. Are you in touch with the province here, possibly assisting them in some climate control?

Bob, you're really awake this morning. This is pretty scary. We were hoping for a nice quiet call. I think the short answer is --

You're talking to me, you know.

I know, but you're asking the tough ones. The short answer is, of course, I think it's no secret that B.C. and California have both publicly announced pretty lofty climate change goals. And both jurisdictions, both California and B.C. have a pretty unique problem in that they've got a very clean power system from a greenhouse gas viewpoint.

So that means that if we're going to do something about greenhouse gas emissions, we have to focus on transportation. So both areas, both governments, are turning their attention to transportation. And, of course, our position is, if you're going to try to do something meaningful about greenhouse gases for transportation, you should look at the heavy-duty sector because that's where most of the fuel is consumed.

And you can get a big impact by changing a few vehicles. You have much -- it's much tougher to change out a few million passenger cars to get the same greenhouse gas emission reduction compared to a few thousand buses or trucks.

So, yes, we have been talking to Victoria. We've been talking to Ottawa and we've been talking to Sacramento about their climate change plans. And I think there's a lot of enthusiasm in doing something quickly.

That said, there is no plan that I've seen to date from either government on how they're going to achieve their climate change goals. And government says we'll take a due amount of time to come up with a plan that is viable and meets their policy needs.

But, yes, we're talking to them. And I think there's -- we've got some good ideas to work through with them. And I think that ultimately will result in adoption of some of our ideas. But you're not going to see it next month.

A couple of things I'd just like to say. Thank you very much. The stock has doubled since this time last year. I just checked the price. It was $1.35, now $2.70. And the value of your Clean Energy has gone up by $1.13 since we started this conversation. Maybe you've had something to do with it also.

I hope so. Thanks, Bob.

Yes, thanks, Bob.

Also, Mike, congratulations. This leaves at least one more seat open. Will that be filled post haste?

Probably not, Bob. I think -- the board's been through a fair amount of change the past few weeks. And Andrew has just joined us. He was just on his first board meeting this week. And Mike, of course, has been attending board meetings and engaged in board activities for a while. So that's not a complete change.

But I think boards typically like to move through changes with due deliberation and with due thought. So I can't speak for our chairman or for our governance committee. I suspect what they want to do is look at the board for the next few meetings. See how the new board is working together and see what attributes and skill sets would be nice to add to the board for that last seat.

And at that point, we'll get into a recruit mode and find the person or the skills or whatever it is that the board thinks is useful going forward. So I don't think there's any immediate plans to announce a new person for that seat. The board is certainly talking about what they need and who they could add.

Last question. On any new product, there's always a very large cost on entry, et cetera, so that the cost of the injectors must be of a substantial nature. Are you working towards reducing your cost factor on an overall basis per unit in a pretty concerted basis in not only meeting standards. And by the by, I have heard that there are some 2013 standards being talked about which would definitely put the 2010 firmly in place.

I would just say, simple answer, Bob, is every day, that's definitely on our mind as a long-term part of the commercial roll out and growth of the business. The current products in the market, its cost is whatever it is. We're getting a lot of support from the ports and others to support that cost. We'll have a new product coming out in the fall -- talking about a heavy-duty now.

And we do think there maybe some cost reduction strategies and innovations built into the design for that. So more later on that. But it is something that we're constantly looking at and recognizing that as our volumes grow, we would like to be in position to either capture more margin and/or offer a slightly more attractive price into the marketplace over time.

Thank you. End of my questions. And good to have you on the board.

Thank you.

Thank you. I would now like to turn the floor back to Ryan Thompson for any closing comments.

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

This does concludes today's Westport conference call. You may now disconnect.