Westport Fuel Systems Inc (WPRT) 2008 Q2 法說會逐字稿

Good morning. My name is Swaran and I will be your conference operator today. At this time I would like to welcome everyone to the Westport fiscal 2008 second quarter financial results conference calls. All lines have been placed on mute to prevent any background noise. [OPERATOR INSTRUCTIONS].

Thank you. It is now my pleasure to turn the floor over to your host Mr. Ryan Thompson, Multimedia Manager of Westport Innovations. Sir, you may begin your conference.

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

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

Thanks, Ryan and good morning everyone. I am going to make my usual introductory comments and then I will turn the call over to Elaine for her review of the financial statements and Mike will give you an update on the heavy duty truck business unit and the status of our projects in California and Australia.

Our second quarter set another revenue record, despite the dampening effect of the US dollar exchange rate. This is the third revenue record set in the past four quarters so I think we can conclude that we are seeing strong and sustained growth for our products. Product revenue this quarter is up more than 60% over last year at this time based on strong sales internationally and in particular the shipment of a large order to Beijing Public Transit this quarter.

For the first time, we are seeing roughly equal revenue from international sales and North American sales. Cummins Westport, our joint venture with Cummins, posted its 12th consecutive profitable quarter with US$2.3 million after-tax profit for the quarter. We expect to see that we are to continue to grow quickly and profitably, demand is strong for the new ISL G which began shipping last quarter and of course our international sales are strong as well.

As we discussed in previous calls, we planned a limited release program this year for our new LNG heavy duty truck product which is based on new Kenworth's trucks equipped with Cummins ISX 15 liter engines. With the support of the OEMs, Westport supplies a proprietary up fit service to deliver this base truck with LNG fueling capability.

At the beginning of the year we arranged supply of a 100 current model year trucks which were originally earmarked for the LA Long Beach ports, but with the delays at the ports we've have been selectively reallocating a small number of these early trucks to other customers. We also planned a small release of a high performance version of this engine in Australia also with Kenworth.

Now Mike will give you more details on this program, but briefly here is what's happening. We delivered about 40 of these first 100 trucks and we are completing them at the manufacturing of the remainder as we speak and expected that they will be delivered over the next two quarters as contracts with the port are finalized. And although the port program has been delayed about six months, the initial procurement is approved and in the contract stage with healthy demand beyond this. The Clean Trucks program which calls for more than 5000 LNG trucks over the next few years is currently underway at the port.

Interest from non-port customers continues to be strong and the initial deliveries that we've made are getting a lot of visibility, truck performance has been good. Certification testing of the 2007 emission standard engines has been completed and filed. We expect certificate issuance shortly which will allow us to ship new products beyond these first 100 trucks. With demand developing strongly, we're now working hard to build up our supply chain capacity and reliability. We continue to monitor the market demand for other truck chassis and other engines. We've got another -- a number of options under consideration, although we haven't made any decisions yet. It of course is going to depend on the business case going forward.

So, in conclusion we're very optimistic about this program, much work remains to be done to achieve market maturity but the early signs are very good.

Recently we announced our third corporate joint venture, this time with OMVL of Italy. Much like our joint venture with Cummins, this new venture will legally become an engine manufacturer and will sell worldwide, although production will be outsourced to existing plants and facilities. In this case we're focused on smaller engines than anything CWI currently offers. The JV will be responsible for product development certification and market development of its products. Westport will provide product engineering resources and OMVL is providing components, sales support, and production facilities.

For competitive reasons we can't give you much information yet about our business plans, but I can tell you that we have a specific product in mind, we hope to launch prototypes next year and we're marketing this engine now to OEM customers. Our goal is to lever the existing assets and experience that both parents and the global supply chain to deliver new value to the market for alternative fuel engines. The initial capital contributed by the parents is relatively small, but we believe this should be adequate to launch the first product after which new products can be developed through the normal course of business funded by cash flow from this first product. We have a number of ideas in mind, but of course we are going to focus on the first step first.

We've been working with OMVL for two years in this opportunity and we believe the business looks very promising, although of course with any new initiatives they are bound to be some surprises. We will keep you informed as this develops.

Around the world we continue to see growing commitment to natural gas as a transportation fuel because it's cheaper, it's cleaner, and it's available. Traditional oil-based fuels are increasingly expensive, imported or simply unavailable and under increasing environmental pressure. More OEMs are offering natural gas version to their products and more of them are seeking our advice and insight. We are confident that natural will emerge as the leading alternative fuel over the next decade and we believe our strategy will allow us to participate in this growing market as the technology leader. We look forward to building on the strong foundation we've established over the past few years.

I will turn the floor over to Elaine now to take you through the financials. Elaine?

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

As David noted, our consolidated revenues for the second quarter ended September 30th, 2007 were a record $21.2 million, a 54% increase from the prior year. CWI revenues increased by $5.6 million or 42% with product revenues up 45% and parts up 33%, consistent with first quarter results. In the US dollar terms CWI revenues increased by 53% year-over-year.

North American sales continued to be strong with the recent launch of the ISL G but accounts for less than half of the units shipped in the quarter which saw substantial growth in Asian and European markets. Westport revenues increased by $1.8 million or 530% with 22 LNG systems delivered in the quarter.

For the six months ended September 30th, 2007, consolidated revenues were up 52% to $36.9 from 24.4 million in the same period in the prior fiscal year. Our net loss for the second quarter of fiscal 2008 was $4.9 million or $0.05 loss per share compared to 1.8 million or $0.03 loss per share in the same quarter last fiscal year. The $1.8 million loss for the three months ended September 30th, 2006 included a net gain of $3.9 million recognized on the sale of 45% of Westport Research Inc., now Wild River.

Excluding that gain consolidated, net loss actually improved year-over-year by $900,000 with our share up 0.5 million and the loss from Westport operations down 400,000. Our net loss for the six months ended September 30th, 2007 was $9.6 million or $0.12 per share compared to 7.3 million or $0.10 per share in the comparable period of the prior year.

Our cash and short-term investments balance as at September 30, 2007 was $19.4 million compared to $23.1 million as at March 31, 2007, a decrease of $3.7 million. Cash used in operations and for capital expenditures for the three and six months ended September 30, 2007 was $1.5 million and $6.2 million compared to $2.8 million and $6.7 million in the comparable periods of the prior year. Year-to-date, operating cash usage has been offset by $1 million drawn in the quarter against our bank demand installment loan to fund inventory, $1.1 million in proceeds received from our sale of Clean Energy shares in the first quarter, and $800,000 in proceeds received on the issuance of shares on conversion of employee stock options.

During the quarter, purchased exercised their $22.1 million in convertible notes. As a result, we expect to save approximately $900,000 of interest payment after an inducement payment to them of approximately 750,000 and to save an additional 1.5 million or so in amortization expense. The inducement was charged directly to retain earnings and would repeat in [inaudible] shares.

Some comments on general economic factors and their impact or non-impact on our business. First of all regarding cash and short term investments, we do not have any investment in asset-baked Securities. We generally invest primarily in instruments such as the ICs, bankers acceptances with 65 Canadian banks and R-1 high Corporate Commercial Paper. We amended our treasury practices earlier this year to exclude asset-backed securities even ones rated R-1 high.

Secondly, we have seen negative foreign exchange impacts from the weakening US dollar. The lower dollar has dampen revenue growth by approximately 8% comparing this quarter to this quarter last year and has resulted in margin degradation on our LNG system as cost of goods sold reflect the cost of inventory acquired when the US dollar was since coming strong than it is today.

CWI margins and net income are less impacted by the sudden drop in the US dollar as Cummins' managers working capital for CWI and CWIs revenues, margins, and a majority of its expenses are US-dollar denominated. Accordingly we are not seeing a significant drop in this net income despite the doubling effect the foreign exchange has had on revenue. We are, however, seeing negative FX impact on the translation of US dollar net assets. In the past, we have benefited from the risen Canadian dollar as CWI was in net liability position with warrantees greater than receivables or cash.

However, because CWI's growing profitability, CWI is now in a net asset position and accordingly we're seeing FX losses arising from that. So then by converting CWI US dollar cash to Canadian dollars to offset that impact, we are still seeing negative FX impact on the translation of net monetary assets.

Looking ahead, we expect our working capital requirements to increase for inventory purposes as we commercialize our products and solutionis. We expect capital expenditures to increase over the next 6 to 12 months as we ramp up production capabilities and facilities and we also a $1.5 million commitment to fund our share of the capital required for our joint venture with OMVL.

We do not expect significant reductions in our R&D cost which are comprised primarily of product development and support, engine testing and certification, supply chain, manufacturing, and field service support; however, we will pace spending whenever possible through funding and sales. We will continue to fund our current offering activities for our existing cash resources, our share of CWI's profits, our bank loans, and the demand from sale -- proceeds from sale of clean energy shares.

Now over to Mike, for an update on operation.

Thank you, Elaine, and good morning everyone. Our heavy duty LNG truck business, as David mentioned, continues to expand and grow in California at the ports and in Australia. Over the past 90 days since our last call, we have delivered another 22 LNG trucks in California, secured US $27.5 million of port funding for their first LNG trucks, launched our Australian LNG truck business more on that in a minute, ramped up our truck outfit supply delivery capacity with a new supplier agreement, and submitted all our documents for current EPA '07 certification.

I am going to reverse the usual order this morning and start with our Australian program and our announcement last night that we are now formally launching our business in Australia this week with the four demonstration trucks rolling out in Perth and Melbourne and also are securing the first market entries to small commercial order for another four trucks with Mitchells once the demonstration is complete.

We and our fleet customers and the Australian government are all really enthused by the early test and driving results. These have demonstrated a greater than 20% greenhouse gas benefit relative to diesel and engine power at least equal to the standard diesel engine. And the economic benefits as oil prices approach a $100 can yield truly enormous fuel cost savings well in excess of $100,000 annually on typical truck routes. Australia's synergy with our North American partners Cummins and Kenworth and those strong economics are validating our interest in this market from a pure economic equation of point of view.

Back in California, developments at the ports of Los Angeles and Long Beach, the San Pedro Bay ports continue to move forward. On August 2nd, as you know, the port of LA issued a revision to the earlier LNG truck RFP or add another $40,000 to the incentive for a total incentive of $184,000 per truck. 10 separate fleets responded aggressively four weeks later with proposals for almost 400 trucks. And then on October 4th at the Port of LA Board Meeting which I attended and presented at, we secured Board approval for 21.5 million from the Ports plus the South Coast Air District's additional $6 million for the total of 27.5 million, which we will allocate out to 158 trucks at 10 fleets.

The Chairman of the Port of LA, David Freeman, stated that this was just the first step in the larger LNG truck program, and he directed his staff to complete contracting of the port-funded trucks immediately. A few of these contracts have in fact since been completed, and we would expect the rest of the contracting process between the fleets and the Ports and ourselves to be wrapped up in the coming weeks.

In other strong development of the ports, at last Thursday's Port of LA Board meeting the progressive ban on older diesel trucks was also approved, and just yesterday the port of Long Beach approved the same measure. These truck bans by the ports will result in all the older trucks being banned from port service by January 2012, less than five years from now and starting in October of next year. This is another huge milestone step in the implementation of the ports Clean Air Action Plan and the Clean Truck program.

As this demand pictures continues to develop, we remain hard at work in parallel to establish, build, and grow our supply chain for the components delivery, up fit, rollout and support of LNG trucks in both California and Australia.

I have just returned from a visit with our Chinese joint venture company supplier of LNG tanks BTIC Westport or as we call it BWI. I can report that BTIC and the JV company are now producing and shipping quality LNG tanks in increasing volumes for both our California and Australia needs. And plans are being formalized for a significant expansion of that capacity to meet for larger volumes that we expect.

On that note, expanding our truck delivery capacity, one of the most significant things we did this quarter was to signup another LNG truck outfit partner in Southern California. Westport and Inland Kenworth agreed to add Kenworth to our LNG truck delivery team to augment and expand the support agreement we already have with Cummins Cal Pacific. So, now we have both Cummins and Kenworth helping us produce LNG trucks and as a result we can now deliver about 25 LNG trucks outfits per month. The equals more than 300% of the number of trucks we delivered last quarter, and it will allow us to step up our supply for the increasing demand for LNG trucks at both the Santiago Bay Ports as well as private fleets.

And I can also assure you that we are continuing to investigate and implement the best ways to achieve even greater increases in LNG trucks delivery capacity as the demands materialize.

Finally on the technology front, I am pleased to say that we have now submitted all our documentation to EPA and CARB Certification of our 2007 LNG system for the Cummins ISX engine. We expect to receive official executive orders certifying us to 0.8 grams NOx shortly, that's one-third lower than the 2007 diesel engines. And by the time of our next quarterly call in early February, I would expect to be in position to tell you about increased demand, backlog, and delivery plans for LNG trucks as well as volume ramp up scale up plans for LNG truck production and component assembly and also a word or two on our longer range plans regarding the next generation 2010 engine technology and emissions profiles.

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

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

[OPERATOR INSTRUCTIONS]. Our first question is coming from Rupert Merer from National Bank Financial. Please go ahead.

Good morning and congratulations on the great top-line growth,

Thanks Rupert.

Thank you.

So, M&A describes how the gross margins on the LNG systems brought down the average gross margin in the quarter. Can you discuss the outlook for the LNG product line business model, what happens to gross margins here in the next few quarters as sales pick up?

Yeah. I guess some of that is going to depend on exchange rates Rupert, because as you can see from our balance sheet we really got $3.8 million of inventory on our balance sheet, that was acquired earlier this year and currently we're still building up inventory as well in preparation for deliveries at the port. Those are being acquired at, you know, yesterday's exchange, rate today's exchange rate. Going forward a lot of that gross margin depends on what the exchange rate is in those ports when we start delivery of the LNG trucks to the port.

So, once you work through the inventory, are we looking at a 40% gross margin pass that point?

I am not sure we're going to provide specific margin guidance today on our margins, but I think what's -- and I am looking at light here but what we would expect to see is improving gross margin over time. If you kind of go back to see our experience and see our early days, they started with gross margin percentages somewhere in the 20% range back in 2001, 2000 and overtime those gross margins have been suddenly increasing.

So, Rupert I don't thing we've ever quoted 40%, Elaine can correct me if that's wrong, but seriously won't. But I think it's fair to say that we'd certainly expect increasing gross margins as does foreign exchange effects plays out -- plays through the system.

Okay. Is there much of a warranty built into those gross margins at this point?

Yes there is a warranty build into those as a gross margin.

Okay. Great, thank you very much.

Our next question is coming from Bob Wallace from Raymond James. Please go ahead.

Good morning ladies and gentlemen. On your -- you talked about an increase of revenue but there seems to be substantial cost of revenue, could you comment on that please?

As revenues increase, our cost of revenues will increase to match the revenue growth.

They seem to excess that, Elaine, they seem to be about 8% higher.

On the gross margin side, as we talked little bit earlier, we are seeing the effects on the LNG systems and on the Cummins Westport side of things, we will see gross margins jump around a little bit depending on where the sales are going. And, as you can see from this quarter, the sales -- a lot of sales were international and we've generally seen lower margins on international sales so even though on a dollar basis we are definitely happy to see the growth on dollar gross margins. We will see some margin degradations on a percentage basis depending on mix and particularly geographical mix. What you tent to see is of smaller engines being shift overseas and the larger engines being sold in North America. And without giving away too much competitive information, we generally have better margins on larger engine.

Are the production being carried both in North America and Asia then?

Most of the engines for Europe and North America come from Cummins CDC plant out of Rocky Mount. In Asia, there will be two types engines that we sell in Asia, one is the premium engine that does come from North America and one is a -- we do sell kits into India and China as well, those will be lower cost to lower price and those will compete with more of the locally developed products in Asia and China. But even for the North America engines going into China, those are generally the smaller B engines that they are shipped to China and they won't have -- necessarily have lot of the options that you would see in North America so generally they are at lower margins. Does that answer your question Bob?

Yes, it does Elaine. Thank you very much. Okay. Mike on this sustainable sales side of the Clean Truck program, how do you see that working out -- you must, I mean you have a working relationship with Clean Energy, is that part of this set of issue?

Part of the...

Being able to sell the existing trucks.

You know, the Clean Energy we do have a working relationship with and I think we reported last year that they had acquired 100 diesel trucks for future deployment as LNG trucks after we convert them. So, that's still operating. The port money will roll out, however, through end-use customers so the way we expect to see the future deployments work I think, Bob, is this 27.5 million will get contracted directly with end-use customers, the 110 fleets and 158 trucks. There will be separate contracts between the Port of LA and each of those 10 fleets and in turn contracts of those 10 fleets with us to deploy and deliver those systems.

You know, there is -- the fuel can be delivered there Clean Energy I believe, you've got a contract to build the delivery system there, is that correct?

Yeah, that's correct, Clean Energy is expanding their LNG refilling spacing capacity in and around the fleets that we are talking about. They've been successful and being awarded a contract from the Port of Long Beach under a competitive procurement to build the station to support these systems and they have of course their large facility that they are now in construction at in Boron, California to provide large quantities of LNG that will be transmitted to these local refueling stations for delivery.

And we still -- and Westport still own the position in Clean Energy, is that correct?

That's correct. There is no substantial change in our position there to date.

Okay.

It's -- I mean as you know Bob, I am on the Board a Clean and Andrew just joined our Board as well. So, there is a close working relationship. Obviously we can't sell LNG trucks to fleets without getting fuel stations built. Alternatively Clean is anxious to grow their business on the LNG side and they have to sell trucks. So, there is a natural marketing alliance here and they are, you know, being very helpful to us in, you know, in introducing new customers the idea and warning people off to the idea of cryogenic fuels as it were and of course we want to direct our prospect to them when, you know, people want to buy trucks and they need filing services...

That's not exclusivity though, is it David?

No, no exclusivity, but obviously they've got the most experience and we got the only product, so it's just a natural strategic alliance regardless of the ownership or the board representation. It's essential that we work together. There is no point in them out marketing the fuel without trucks and there is no ability for us the market trucks without fuel. So, it's just inevitable that we're going to work together.

Definitely. Okay, a question on the number of shares outstanding, it's upto see 93.1 million and there is further dilution, is there not?

There would be outstanding employee options. We also owe CPC some warrants that would be issued September 30th of next year but other than that, I think there is nothing else for them. The 93 million arises from the conversion as you know, of the purchsed steps in the quarter.

Alright, so well as once you mentioned, how substantial are they?

I think it is about 5 million or so in employee options and we owe CPC $4 million in warrants and I think there is a couple million of RCs outstanding as well that's outlined in the MD&A.

So, if we add up it would be about a 100 million?

So, you have 103 million or something like that.

103 million.

103 million, yeah.

Okay. I just wanted--

Sorry, there is also purchase warrants as well.

Okay. And they are -- so there would be money coming in those?

That's right.

Okay.

So, they are cashless warrants, they are cashless warrants.

A cashless warrant, okay.

Yeah, they do have a price, but they are cashless.

Okay. Thank you very much, end of my questions.

Thanks a lot.

Thanks Bob.

Thank you.

Our next question comes from Sarah Elford from Canaccord Adams. Please go ahead.

Hi, guys. Elaine, a question for you, you mentioned CapEx going to increase relatively significantly over the course of the next 6 to 12 months as you ramp up production, could you just put some numbers behind that for may be if you could --if you are willing?

Yeah, CapEx in the past few years, probably last 3 to 5 years has been, well maybe about 5, but last few years have been running somewhere between $0.5 million to $1 million per year.

Yeah.

Going forward I would probably expect that to double in the next -- over the next 6 to 12 months or so.

Okay. And that just brings me to, I guess, a related question and actually my last question and is there going to -- I mean at this point in time obviously the model around the LA ports is what it is in terms of producing these trucks and engines, is there going to be -- is there ever a plan to change that, I mean obviously I know, you know, way back when there was a view that I guess in a way outsource most things and ultimately allow those, had the infrastructure in place to either produce these engines up and service them, for them to manage that and you guys to really be focused in on the technology and overall building of awareness around natural gas. Will that ultimately happen on the heavy-duty truck side at some point in time, I mean will you eventually formalized joint venture-type agreement around that business or is it going to be a totally different [kettle of fish] then say CWI.

Hi, Sarah this is Mike. I tried to drop a very subtle hint in my talks but it was awfully subtle, when I said that we were going to continuing to look at best ways to expand our LNG truck production capacity. And so, in fact, you know, I don't exactly how this will play out or what will happen when, but I can tell you that we are planning and hoping and we certainly expect that it would revolved over time to move into a more commercial approach to truck production. It could be a joint venture, although I suspect it's more likely to be some kind of commercial arrangement with one of the truck OEMs.

I would like to get an arrangement and a business agreement in place some day where we could produce LNG trucks often assembly line, preferably frankly at truck care productions facilities although I would also look at engine -- engine assembly refinements and optimization. So that's clearly in our radar, that's something we are including in our strategic plans and in our discussions. We are seeing a fair amount of interest from the world at large, around what we're up to in various degrees of discussions underway. So, we will see how it plays out but I think you can assume that we certainly like to see something like that down the road.

Okay. That's helpful. Thank you very much.

Our next question is coming from Philip Tulk from PI Financial. Please go ahead.

Good morning. Mike may be further to that, I think you mentioned that with Kenworth coming on stream in the upfitting side you can do, is it 25 you said up-fits a month?

That's right, yeah.

Okay. So, if the -- I guess if all contracts are executed in respect of the what's left to the 158 trucks we're talking about delivery, you know, your capacity to deliver taking us into, I guess third calendar quarter next year, is that correct? Sorry, sorry, 25 a month so middle of first half next year?

Yeah, it's kind of pretty close to the end of the fiscal year. And, in fact, you know, we are doing some things now to get those systems ready for deployment. So, it won't be those number of weeks or months after the contracts are secured sort of those number of weeks or months from today if you will.

Okay. On the CWI side, David in his script mentioned Beijing taking I guess a large number of shipments, is it reasonable to expect then that we're going to see a little bit of flatter or maybe even a bit of a dip into the third quarter here with respect to shipments at CWI or is there another chunky order out there, I can't recall -- remind me what's out there?

Well we don't remind what's out there.

What did the press release tell us?

I don't think we have a press release (inaudible) I think we are press releasing only $5 million orders and --

Sure.

So, I think the--

I mean the growth there has been spectacular for the first--

Yeah I think--

For the first half of the year.

I think the conclusion you should look at, we've always cautioned people that CWI is lumpy based on large orders, but in fact we've really got, you know, pretty broad diversification happening now with orders happening all over the world. I think that's why we are trying to highlight this international versus North America. It's not just Beijing. You know, the orders are 50/50 international versus North America this time -- a couple of years ago, I think we were at 85/15. So, we're getting pretty broad diversification from more than 50 OEM manufacturers and that's really helping smooth out the quarterly flow. You know, we have -- there was a big order from UPS this quarter, for example, that's starting to ship. It's just very broad demand from very many suppliers and I think you should expect that CWI has continued to show strong growth over the next few quarters, I don't see any sign that--

Okay.

--we are seeing things slow down.

Okay. That's helpful David, thanks. Mike, one more to you, I don't know what you can say around this because it seems like this there is a lot of potential for the LNG truck business, but anything on the radar screen now that is, you know, that you could talk about in respect to the other ports, maybe up to West Coast there has been some broad green initiatives around some of them and the other thing is on the corporate fleet side, in the past you've identified that has a I guess target opportunity for the LNG trucks business, anything be sound on those two opportunities at this time?

Maybe just a quick word Philip. With respect to ports, there is interest up and down the West Coast and else where. I think, you know, the thing I would say is that all eyes are on LA, both -- frankly both in terms of other ports and commercial fleets and other countries there is a tremendous level of interest in what David Freeman and the gang are doing in LA right now. Specifically the port of Oakland does have a number of kind of clean up and Clean Air initiatives under discussion including some discussion of entry use of LNG trucks. We're talking to some people down there about a modest initial allotment, but those discussions are still underway.

There have been discussions further up the coast including right here in Vancouver that, you know, I am not sure if Dave wants to add a word on, but just generally to say, there is a lot of interest which has been intensified since the visit of California Governor Schwarzenegger to British Columbia in late May signed a Climate Change agreement with our Premier Gordon Campbell here and where Schwarzenegger praised the efforts of California, the Port of LA, and the role of Westport in that activity. So, it really heightened the interest here in British Columbia to do something.

With respect to commercial fleets, I would say that we're seeing a much bigger level of the interest in the last six months in talking about the technology, getting updates on what we're dong in Los Angeles and to begin to consider what I would characterize as small demonstration programs to get their technical people and their fleet people aware and comfortable with what exactly this technology can do. We haven't announced too many of those deals yet, although as you know, we have deployed a number of the early trucks to private fleets in California.

Good. Thank you

Yeah, I think that covers the scene as we see it today.

Okay. That's helpful Mike. Thank you.

Yeah.

Our next question is coming from Rupert Merer with National Bank Financials. Please go ahead.

Hi, you discussed some of your diversification by OEMs, can you talk a little bit more about geographical diversification I know you've got numbers here for the [inaudible] market in North America and outside North America. But, are we seeing a reliance on some markets like China with the Beijing Transit order or are you seeing more of a increased geographical diversification and I guess on top of that, do you look at further diversifying your global markets at this point and there are opportunities to get into some new countries that are building infrastructure for CNG?

(inaudible - multiple speakers)

I will take it first, David. I mean I guess the short answer to that one Rupert is CWI, I'll talk it from CWI perspective, leverages the Cummins distribution channel and that's one of the beauties of their model. So, they can sell anywhere that Cummins is selling basically and they've done that successfully into Asia, particularly China and India and they've also done into Europe and we're seeing orders from Russia and France and Eastern Europe. There are other areas that Cummins sells into that we have not seen particularly large orders from in the past. But, certainly have potential. The Middle East and South America being two that come to mind. And so, you know, Cummins and Westport is active in all these regions and so -- I mean I would say that we would hopefully get some sales in those area in the in future. I will turn over to you David.

Yeah, thanks Elaine for giving me 30 seconds to figure out what we can say on this.

Let me wander a bit since we've got lots of time here, and everyone knows I love to pontificate on this stuff. I guess one of the patterns you see around the world as these new fuels get going is that the market typically starts with after-market conversions. So, if you look at the numbers and there is lots of -- there is lots of data on the web if you want to go look at this for natural gas vehicle growth. The early market entrants are things like taxies, high fuel use, small cars where you can relatively easily get an after-market conversion kit to change fuel. Some people do that because they want to get cheaper fuel.

There is a strong growth tendency then for people to start to build infrastructure to support those vehicles and that creates demand for better quality vehicles and new OEM vehicles. So, because our strategy is new OEM product, we don't really do after-market conversions, we don't think there is much value in focusing on that. At the same time, you can see that that's where our market development starts, is when we see countries starting to build infrastructure and the demand is starting to build with conversions, you would expect that we're going to see OEM product and the OEMs are likely going to be coming to us for assistance in launching those products.

Where are we seeing growth in natural gas? Well, it's pretty much everywhere. There is strong growth in Europe, strong growth in the Middle East and South America and Asia is absolutely going crazy. There is just no doubt that natural gas is the emerging alternative fuel in Asia. Europe, there is still lots of -- there is a lot of bio-fuels, synthetic fuels, but natural gas is still growing faster. So, I think you should assume that we are seeing global demand, the joint venture with OMVL is targeted that way. I think -- you know, again I can't give you a lot of more detail except, you know, I think we've given you enough hint that OMVL does sell those after-market conversion systems as well as OEM systems so you should assume that we're looking at some of the markets that they've been strong in, in the past. But the OEM demand worldwide is strong. So, we continue to work with kind of anybody that's interested in the natural gas opportunity and we continue to talk to manufacturers of vehicles around the world.

I think it's important for us to be partnered with the leaders in local markets. We are selling in China but clearly the biggest market in China is for -- is for domestically produced truck and bus so we've said for years that we'd like to be working with domestic partners in China. There is very strong truck market in Europe and much as we enjoy working with Kenworth and Cummins they don't have an awful lot of market share in the European market so, we need to work with a European manufacturer to penetrate there. So, our goal is to be everywhere and have product in all of these segments, you should assume that we're seeking alliances and partnerships in those markets and that's what we are up to you.

Okay, great. Thank you.

Thanks.

I will now 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 at our next conference call which we expect to be in early February of next year with the disclosure of our third quarter results for fiscal 2008. Goodbye.

This concludes today's Westport's fiscal 2008 second quarter financial results conference call. You may now disconnect.