Westport Fuel Systems Inc (WPRT) 2008 Q3 法說會逐字稿

Good morning ladies and gentlemen. Thank you so much for standing by. Welcome to the Westport Innovations Incorporated fiscal 2008 third quarter financial results conference call. At this time, all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and the answer session. In the meantime, should anyone require an operator assistance at any time during the conference, please press the star followed by the zero on your touch-tone phone and an operator will assist you. As a reminder, this conference is being recorded today on Tuesday, February 12, 2008.

I'll now turn the conference over to Mr. Ryan Thompson, Multimedia Manager. Please go ahead.

Thank and good morning. Welcome to our third quarter conference 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 found on Westport's web site at www.westport .com. As usual, the first part of this call will involve prepared statement read by Westport's Chief Executive Officer, David Demers. After David introduction and summary, Elaine Wong, Westport's Chief Financial Officer will discuss the company's financials. We will then conclude with 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 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, believes and intension on strategies regarding the future. It is important to note that Westport's actual future results could differ materially from those projected in such forward-looking statements because of a number of factors, including but not limited to, general economic conditions, business and financing conditions, labor relations, government actions, competitive pricing activity, expense volatility and other risks detailed from time to time in the company's filed with regulatory authorities. Now, I will turn the call over to David Demers, Westport's Chief Executive Officer. David?

Thanks, Ryan. Good morning, everyone. I will make my usual few introductory comments and then turn the call over to Elaine for her review of the financial statements at our Cummins Westport business unit. Mike will then give an update on the heavy-duty truck business unit and status of our project in California and Australia. As you can see from the financials this morning, sales growth continues to be very strong and quite broadly based. In U.S. dollar terms, the quarter was up 34% for the quarter year over year. And we should note that Q3 last year was very strong, the first of several successive record revenue quarters at the time. So growth beyond that, we think demonstrates some long-term trends here. Year to date, the revenue in U.S. dollars is up 49%.

We are seeing good results in our traditional markets of U.S. transit bus, which belong to the new ISL-G engine earlier this year and also U.S. refuse trucks. International markets have also been strong this year with major shipment to fleet in India, China and South America. At the end of the quarter, the year to date mix stood at 60% North America, 40% international. Cummins Westport, our joint venture with Cummins post its 13th consecutive profitable quarter with $2.8 million operating profit before interest and income tax. And over $11 million profit before-tax for their 2007 fiscal year. For CWI fiscal year which ended December 31, the results are, they are pre-audit of course. But they demonstrate the profit leverage that we expect from this joint venture. Revenue for the year was $66.4 million, which is up 46%. Operating contribution before taxes in 2007 was $11.3 million, which is up 169% from 2006. Net earnings after interest and taxes for the year was $18 million. So if we look at historical trends using CWIs fiscal year which is the calendar year, revenue growth from 2004 through 2007 compounded at 34% annually and profit growth is compounded at 572% annually. This is great performance and we congratulate the CWI team for their success. We expect CWI to continue to grow quickly and profitably.

CWIs business has been focused on urban fleets operating out of central depots, such as city bus fleets and refuse trucks. And the U.S. transit market, for example, the Department of Energy in the U.S. reports that over the ten-year period from 1996 to 2005, natural gas usage grew from just under 1% of all fuel used to just over 14% for an annual compound growth rate of about 28%. Overall, conventional fuel use rose at under 1% annually, so you can see that the growth in the industry has gone to natural gas. We'd like to think that trends is what we are going to see in other markets. The driver for the growth in the transit bus market was primarily environmental regulation. This trends is going to continue in its spreading around the world from its original start in California. CWI, of course, is well-positioned to capture significant global market share of this business. But increasingly, our customers are buying for economic reasons. The environmental benefits are simply a bonus to a sounds financial decision.

In the refuse market for example, the town of Smithtown, New York has moved from 100% diesel in 2005 to 100% natural gas fueling their refuse fleet. Their reasoning, it's all about money. As city management explain it, they changed out an average 15 years old truck fleet for all new CNG refuse trucks, build a high capacity CNG refueling station and they still expect to save money over the next five-year contract period even with all these costs wrapped in. That's even in diesel and natural gas prices stay relatively the same. Yes, the trucks are cleaner and they are quieter, but the real catalyst to change for Smithtown was the risk of diesel fuel prices would continue to rise. Over the last five-year period, they saw diesel fuel prices rise by 300% in their area. While the fuel prices for diesel be in 2012 no one knows, but not many people want to bet that diesel prices will decline. Smithtown chose to manage their risk with the long-term natural gas price guarantee from clean energy, our fueling partner in North America. They are very happy with the results and I think that's a trend we are going to see continue. Smithtown is not unique in their concern over over-rising fuel prices.

We are seeing significant growth in the refuse truck business for CWI with all of the manufacturers offering CWIs new ISL-G as an option, including Mack truck, which is part of the Volvo group. Most of these fleets are choosing natural gas because of the economic advantages. Conventional CNG or LNG source from pipeline gas is the most common choice of fuel, but a number of biomethane facilities are also being built that are supplying fuel for refuse trucks. This looks like a very strong trend operating economic clean fuel and substantial greenhouse gas benefit, too. So the value proposition for natural gas for these fleets continues to be strong and recognition of these advantages continues to grow in our target markets around the world. In operation, our vehicles are cleaner and quieter. The fuel is domestically available. Supply disruption are therefore less likely and we can provide important cost certainty going forward. In all of that with lower cost.

This past year, we launched a second business unit that focusing on the largest on highway trucks. This is a very different application with different needs and the business unit that has being structured accordingly. The recent announcement of Kenworth as our production partner for North America and Australia heavy-duty truck is probably the most significant announcement for Westport since we originally announced the Cummins Westport joint venture in 2001. As you saw in the announcement, Westport will build an assembly center here in Vancouver to prepare a natural gas engines and fuel systems in support of truck production at the Kenworth factory in Renton, Washington.

Mike will take you through the heavy-duty business unit details in a few minutes, so I won't go into any more detail than that. As you can imagine, it's an exciting and busy time for heavy-duty business units and market interest is high after Kenworth's announcement. We are confident that natural gas is immerging as the leading alternative fuel. And over the next decade, we expect it to take a significant chunk of global energy use. We believe our strategy will allow to us participate in this growing market as the technology leader. Now, I will turn the floor over to Elaine to take you through the financials. Elaine?

Thanks, David, and good morning, everyone. Consolidated net income for the third quarter was $7.4 million or $0.08 per share. That's $0.07 fully diluted compared to a loss of $5.8 million or $0.08 per share in the same quarter of the prior year. The profitable quarter was primarily the result of $9.4 million of gains recognized on the sale of approximately 600,000 shares of Clean Energy and substantially, all of our shares of Wild River. And $5.9 million of future income tax benefits recognized by CWI in the period, half of which, after accounting for Cummins share drops to our bottom line. Excluding gains from taxes, our net loss for the period was $5 million, down $800,000 from $5.8 million in the third quarter last year, primarily because of increased margins in higher interest in and other income. Consolidated expenses i.e. R&D and SG&A, were relatively unchanged at about $10 million in Q3 '08 compared to Q3 '07. The increases in [view of] R&D with the launch of ISL-G engine earlier this fiscal year were offset by higher engineering costs associated with the certification of the '07 LNG system in the quarter, supply chains and other production related costs.

Net loss for the nine months ended December 31, 2007, was $2.2 million, or $0.03 loss per share, compared to $13 million, or $0.17 loss per share for the same period in the prior year. Excluding gains and taxes, our net loss for the nine months ended December 31, 2007, was $15 million compared to $16.9 million for the prior year. The improvement was primarily from higher revenues and related gross margins, lower R&D costs, offset by higher sales and marketing expenses and foreign exchange loss over the year. Consolidated revenues for the third quarter ended December 31, 2007, were $19.3 million, a 15% increase from the prior year. For the nine months ended December 31, 2007, revenues were $56.2 million, up 37% from the prior year, and nearly matching last year's full year revenues of $60.5 million despite the weakening U.S. dollar over the period. U.S. dollar revenue growth was up 49% with increased CWI shipments to Asia, Europe and North America, and the launch of Westport's LNG systems for heavy-duty trucks in California. As David alluded to, CWI has just completed its fiscal year which is on the calendar year basis.

For the year ending December 31, 2007, it had unaudited revenues of approximately $66 million U.S. and unaudited operating profits before interest, FX and taxes of $11.4 million U.S. It up from $4.5 million -- it's up from $45 million and $4.2 million U.S. respectively from 2006. As David noted, CWIs highly leveraged and as a result CWI saw almost all of the approximate $7 million in incremental gross margin generate beside the higher revenues drop to its bottom line. We recognize the 100% of the CWIs revenues and expenses and 50% of its net income after taken into account Cummins share in our consolidated financial statements.

In our fiscal year to date through December 31, 2007, in Canadian dollar terms, CWI revenues have increased 32% to C$52.3 million. Product revenues were C$40 million year to date; up from C$30 million at this time last year. CWI has seen strong revenue growth in all of its geographic segments including 15% increase in North America , a 74% increase in Asia, and 61% elsewhere. CWI parts revenues have also increased by 27% due to a larger engine population, the launch of ISL-G, requiring dealers to stock up on new parts, the modifications which made to the L-Gas plus. CWI gross margin percentages for the quarter were approximately 33% and are comparable to gross margins percentage in the prior year. Year to date the gross margins are down 33% from 35% of the prior year due to product and geography mix, more aggressive pricing and conservative warranties being taken in the ISL-G launch.

Turning to Westport, we shipped three LNG systems in the quarter bringing total LNG systems delivered in fiscal year 236 units. To date, we have also built another 75 units which are awaiting deliveries to port customers. These 75 units are being funded by Clean Energy through a $6 million advance which is unsecured and repayable only from the receipts from sale of these units. We have received approximately $4 million of advance as of December 31.

Our cash and short term investments as of December 31, 2007, was $24.9 million compared to $23.1 million as of March 31, an increase of $1.0 million. We also had approximately $1.4 million of share of Clean Energy remaining right to approximately $21.2 million, bringing total cash and marketable securities to just over $46 million with access to another $8 million on our bank line. During the quarter, we netted proceeds of approximately $9.4 million on the sale of Clean Energy shares and $6.7 million from the sale of Wild River. The $6.7 million was used to offset the limited resource loan of $6.7 million set up last year. And accordingly, we did not see any funds from the transaction. We also drew $2 million against our demand loan in the quarter. For the three quarters ended December 31, 2007, we have used $9.4 million for cash for operating purposes and $6.8 million dollars for working capital with $4 million of that relates to inventory. Capital expenses to date have been relatively modest at just over $0.5 million. However, we do expect that to increase substantially as we ramp up activities related to our center which we expect to require budgets somewhere in the $3 to $3.5 million range. As our current intents to funds our capital requirements from our existing cash resources and estimates, our bank line gross margins from sales from LNG systems, [they are shares and] cash flow. More detailed information on our financial results can be found on our web site. Now, over to Mike for an update of operations.

Thank you, Elaine, and good morning, everyone. In the past, I've discussed the importance of our longstanding relationship with Cummins. First, the Cummins Westport joint venture has enabled us to establish our global brand along side Cummins as a leader in alternative fueled engines for medium duty applications. With over 19,000 engines in service, it has allowed us to capture significant market share in truck and bus fleets throughout the world. And thanks to Cummins manufacturing capability, it has allowed a relatively small organization to scale up significantly with modest cost structure increase to meet the demand in the marketplace. In addition, our relationship with Cummins has contributed tremendously to Westport's reputation in the marketplace. I can now tell you that our new relationship with PACCAR and its Kenworth truck company subsidiary is intended to achieve the same kind of goals in the very large heavy-duty truck market. Our new agreement with Kenworth to deliver factory built LNG HPDI trucks is game changing for us. It represents a huge ramp up in our truck delivery capacity. We can now capitalize on major opportunities and private and public truck fleets knowing that large orders can be fulfilled on a scale that was previously just not possible. We can leverage the Kenworth production capacity and brand and its reputation as second to none of the North American trucking industry and benefit significantly from Kenworth's marketing muscle. This new relationship gives us instant credibility with heavy-duty trucks and puts Westport's LNG fuel system on the map for fleets seeking alternatives for their truck fleets in the face of rising oil costs, increasing environmental pressures and regulations and the new focus on climate change action. We applaud Kenworth for their vision and foresight are very much looking forward to working with them. They are a leader in technology and innovation and we look forward to adapting our high performance LNG fuel systems on to their trucks.

Ramping up, our LNG truck production capacity in this way also gives us the chance to optimize our systems integration and assembly work on LNG systems. So as you have heard, we are taking this opportunity to open a new Westport assembly center facility here in British Columbia. Our assembly center will assemble LNG engines, as well as LNG fuel systems including injectors, tanks, pumps and other components being procured from around the world. The opportunity that first caught PACCAR's attention was of course our involvement with the clean trucks program at the ports of L.A. and Long Beach. As an update, I can tell you that administrative efforts are moving forward to get the first 158 port trucks into service. And as a reminder, the ports of L.A., Long Beach with the south coast air district approved $27.5 million in funding in October, '07, to replace the 158 trucks with Kenworth LNG trucks. While the contracting process has being completed, we took the opportunity to arrange financing, as Elaine mentioned, and completed the building of an additional 75 trucks, which makes the first 112 for the ports since our last quarter call. The ports are now working out the details of the longer term and larger truck replacement program as part of their clean air action program.

Six weeks ago, the ports and separate board meetings approved the new $1.6 billion clean truck super fund. The fund will help replace 16,800 class eight trucks serving the ports with new clean trucks. And just a month earlier, they had also approved a new progressive truck ban that will remove all pre-2007 trucks by January 2012. We and our partners as you would expect are working closely with port staff to ensure that the replacement program meets the needs of all stakeholders. Looking outside the port, we continue to see increasing interest for our LNG heavy-duty trucks. Wal-Mart stores who operate over 7,000 heavy-duty trucks in the United States, will be deploying their first four LNG PACCAR Peterbilt trucks at their goods distribution center in Apple Valley, California. They will be evaluating these vehicles in real world operations and the deployment is being supported by the Mojave Desert Air District. Large fleets such as Wal-Mart use these programs to evaluate products for larger deployment and we believe that fleets will fall in love with the power and performance of our new LNG trucks and recognize that they represent a cost-effective alternative to oil while delivering best available control technology on a missions reduction including greenhouse gas reductions. Many other private fleets are now expressing publicly their intension to reduce the greenhouse gas emissions and overall environmental footprint from their goods distribution fleets.

Across the Pacific Ocean, we are also continuing to make great progress with our Australia heavy-duty LNG truck product. The new fleet of four vehicles which just went into service a little over 90 days ago has now surpassed 100,000 kilometers of real world operations by early January. Power and performance feedback has been excellent from the drivers who have also remarked on how the Westport trucks are delivering exceptional performance compared to other available solutions. We also just announced Australian product certification last week. Our hard work is beginning to pay off. With the endorsement in the full industrial capacity brought to us from major players such as Cummins and now PACCAR Kenworth, we are in position to generate significant growth and the returns to our shareholders that go with that. The continuing exceptional financial results from our Cummins Westport joint venture and clear market signals from environmental and economic drivers mean that alternative fuels are here to stay. And I can assure you that we are absolutely committed to capitalizing on these huge opportunities. I will now pass it back to Ryan who will open the call to your questions.

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

Certainly. Thank you, Ryan. Ladies and gentlemen, at this time, we will begin our question and answer session. (OPERATOR INSTRUCTIONS) Our first question will be coming from the line of Philip Tulk with P. I. Financial. Please go ahead.

Good morning. I'm sorry I missed a bit of the call. I wonder on the Australian business, remind us the production arrangement for trucks there? Is there likely to be, I guess is it on the drawing board right now to get an arrangement similar to the one you have with Kenworth here to produce trucks? Is there an indication of volume there yet? Just kind of take me through where Australia is and how you see that ramping?

Hi, Philip, this is Mike, how are you today?

I'm well, thanks.

What we've said about Australia, of course, is that we've got the first four demonstration trucks on the road. I think you probably heard me cite the accumulated mileage.

Yes.

To date. And we've now certified the product for use in Australia which sets the stage for commercial sales. We, at the moment, are working -- as we are in North America with both Cummins and Kenworth to get trucks and engines available to the Australian market. So we are working with the Australian entities of both those firms. We, the Australia program is not as far as along as North America as you know. We haven't developed commercial sales in volume yet. But we are looking to use those same partnerships in much the same way we have in North America and California. Would fully expect over time that Kenworth, for example, would be looking at similar arrangements with us in Australia. But for the moment, we are quite capable of meeting short term demands with the arrangements we have in place with the Australian entities of Kenworth and Cummins.

What kind of capacity, I mean is it can offset type of situation I would imagine there now, is it?

That's correct, yes.

I mean what type of capacity would you have, sort of, it's early days but could you do ten a month or?

Yes, I mean we can do ten a month or more if required by the marketplace. In the United States, we were doing multiples of that figure. So we would just plan to ramp up that up fit capacity as demands develop.

Okay, great. I'll get back in the queue. Thank you.

Thank you. Rupert Merer with National Bank Financial, please go ahead with your question.

Good morning.

Good morning, Rupert.

Turning to the ports, do you have a feel for what the specific hold up is with the orders from the ports and what it will take to get the orders flowing?

Rupert, Mike again. Are you referring to the 158 trucks?

Yes, I am.

Yes, we do have an understanding for what the hold up is at the ports, kind of gone through their process, so the hold is up not at the ports. They've signed contracts with these different trucking fleets. But the port of Los Angeles in making procurements and funding of commitments of this kind has a process which requires them to go through the city of L.A. which is their governing body essentially and specifically the L.A. city council. So there are various contracts are working their way towards the city council through the L.A. city administrative offices. We do hear that the city council agenda item is likely to occur over the next two or three weeks. But that's the milestone that's pacing, the release of monies from the city of L.A. to those fleets.

So if the first orders can get approved in the next few weeks or the next quarter let say, what happens next? Is there also a parallel processing works to streamline bad orders in the future?

So take the two steps separately. Once the L.A. city council approves the contracts, monies will begin to flow from the city of L.A. to the ten fleets which will then trigger our delivery of those trucks to the fleets. And as I've mentioned, we've developed a significant ready inventory of completed trucks to accelerate that process from our end. So that's the 158 process. The clean truck program, as you know, calls for replacement of a lot more trucks than that, 16,800. And the ports are now looking at how to mobilize their resources and their plans for kind of the next traunch of commitment of clean trucks. There's a lot of activity in Southern California between the two ports right now around the likelihood of putting together another request for proposal that would trigger production and delivery schedules and potential prices for replacement trucks over the next couple of years. I can't make any statements about when that RFP is going to come out. But I can tell you that the two boards are talking about setting up another joint board meeting to approval the outlines of such a procurement process in the near future.

Okay. There is still confidence then that they can meet the first truck mandate of October 1?

Well, I mean I guess the question is who's confidence are you looking for, the ports, boards have approved those ban. They are leaning on their staff. They are very aggressively right now to get the program moving and the procurement process will trigger the delivery of a large number of trucks as soon as people are ready to provide them.

Okay. One more question around this.

Just the last thought on that is that you may have seen the note just in the last week, there's been some significant new pressure on the ports, particularly in the port of Long Beach from some of the non-governmental organizations out there, I'm thinking specifically of the NRDC letter that went to the port of Long Beach last week.

Yes, I did see that. Around this issue then, the end of the last quarter, did you have 50 or 75 trucks in inventory?

At December 31, we had something less than 50 trucks finished in inventory, Rupert.

Okay. So that accounts for much of the $2.5 million in inventory.

That's right.

I'll get back in queue. Thank you.

Thank you, ladies and gentlemen, (OPERATOR INSTRUCTIONS). Sarah Elford with Canaccord Adams, please go ahead.

Hi, guys. Just one housekeeping item, Elaine, if you could talk about the review -- you are talking about the review, reviewing the process with Cummins in terms of settling the quarterly payments between the two of you, guys. Can you just elaborate a little bit more on that in terms of current process and what could change in terms of how that goes ahead?

Sure, the current focus today, as you know, Cummins are after -- there is other working capital that manages all the accounts payable, accounts receivable et cetera for CWI. Clearly what happens is that at the end of each quarter, they kind of subtract and say, here's your, here's [the bag of] money. In the past, Cummins has had no requirement for cash and they've been very flush with cash and been happy to give all of that to CWI. Last quarter, they did a major share buy-back and they were looking for access to some of that cash; particularly because CWI has been spinning off so much of it recently. And so, they are also looking at this growing cash flow coming from CWI. And at the same time, we've also been saying, hey, given how much cash CWI is spinning off quarterly is probably a little bit too long. And so, we've been still working through Cummins in terms of what's the best method from a tax perspective, accounting perspective to do this going forward. We don't expect any changes to our existing cash balances, i.e. we don't expect Cummins to declare a dividend or take anything out of CWI today. This would be a go forward type process. And so we are working through that right now.

And okay.

In terms of your models, to the extent you've been modeling 50% of CWI, there should be no impact to your model.

Okay. That's helpful. I think I just saw you guys, so I obviously don't have too many questions other than that. I just wanted a clarification, thank you.

Thank you, Sarah.

Okay. Thank you. Shawn Boyd with Westcliff Capital Management, please go ahead with your question. Shawn Boyd, your line is open. Did you have a question?

I do. If I could, I want to go back to clarify the number of trucks shift in the quarter. We had three HPDI trucks shift in the quarter?

That's correct.

Okay. And I came on the call late. Can you just remind me again what's the situation on the inventory?

So the inventory today, there's about 75 units as of today that are substantially completed and ready to go. As of December 31, something less than two-thirds of that were completed and the bulk of them were completed in January, the bulk, most of them were completed for the rest.

Got it. Do we start the quarter with any trucks in inventory?

We did start the quarter with trucks in inventory, yes.

And how many is that?

I would rather not say right now. Let's just say it's less than 50. Roughly, yes.

Okay. So and these trucks that we have in inventory, the 75 units, are backed by an advance from Clean Energy?

That's right.

And how much is that again?

$6 million total advanced, $4 million of which was advanced to the ends of December 31.

Okay. So given what the discussion earlier in terms of the ports and this funding that we are trying to get to the city council, is it in your estimation that we will see these trucks go out entirely in the March quarter or what's the timing as we think about the 75 in inventory today?

This is Mike, Shawn, how you doing?

I'm all right, how are you, Mike?

Good. Yes, hard to say because we have to wait for the city council to get the thing on their agenda. I expect that in the next two or three weeks, but I'm not going to guarantee the date. That's getting in about 30 days at the end of the quarter right there. Once they finish with the agenda item, then have to go through their finance machine to start cutting checks to these fleets who will then once they have the checks, what they've said is they will then flip the switch to us and Kenworth to deliver these trucks that are in inventory. It's just hard to predict what week these things are going to go out, what week and weeks. But they will start, once the checks start flowing, once the city council make the checks start flowing, those trucks will move out quite expeditiously over a period of weeks. Whether it falls into this quarter or next quarter, don't know yet.

Okay. And last question on this, if we look at just the cumulative number of trucks here, it looks like if my numbers are correct, 25, 36, we've got about 42 trucks over the last four quarters. Are those all nonport trucks?

No, 25 of them were recognized as port, early port sales around arrangements with Clean, et cetera. The rest are nonport trucks.

Okay, great. And then something like the Wal-Mart announcements, would that literally trigger another four trucks?

That's an interesting question, actually, because it's kind of a complicated sale if you will with funding agencies involved, et cetera, et cetera. So we are looking at that question right now. Elaine and I are looking at it. I think it may well trigger a sale of four trucks, but we are not sure yet. We are looking at the kind of the specifications on the funding, et cetera. And regardless the trucks won't be delivered for three or four months, it will be a question for kind of early summer it looks like.

Yes, we have to look and see what the final paperwork looks like around this.

Got it. Okay. And on Australia, what's the earliest we would start to see commercial sales on trucks into Australia?

Well, we have already announced our first very modest commercial sale which was a sale, a conditional sale, we are calling it, of four trucks which we announced three or four months ago, I want to say. It's conditional on the outcome and the completion of the demonstration program which is running another couple of months. And then after that, we are sort of open for business so we could see, we could see the next order any time, any time as the year goes on once that demonstration program is complete.

Okay. So in the second half of this calendar year we might start to see?

The orders could be before that, but the deliveries would be know sooner than the second half of this calendar year.

Got it. Okay. And once again, Mike, your estimation on kind of just market size for us, the available potential market in Australia?

Australia, of course, is smaller than the U.S. We are looking at truck market there of about 10,000 units annually. And we see kind of an accessible market in excess of 10% of that just through the current Cummins I expect position which could grow with interest in LNG trucks.

Got it. Okay. I will jump back in the queue. Thank you.

All right. Thank you. And we have a follow up from the line of Rupert Merer with National Bank Financial. Please go ahead.

Hi, just a housekeeping question here. On R&D and general administrative, the numbers are up a little bit over last quarter. Can you comment on whether these levels we see this quarter, we should see going forward or is this seasonally high or what should we expect in our model going forward?

Yeah, Rupert, as you know our quarters can be kind of lumpy around both revenues and expenses, so depending on what's going on in the engineering program. My counsel sort of uses an average. So what you saw in Q3 was should drop off a little bit because they completed the ISL-G which was launched earlier in the year and you saw Westport's engineering costs go up with certification costs associated with the '07 product and other engineering work. The other thing I would say, too, we are looking for government funding as well to offset these costs. So TPC as you may have been -- we have maxed out our claims against TPC, but are looking for replacement funding to replace that.

Okay. Great. On the R&D at that's mostly for engine certification I imagine. Are you spending much on improving, durability and reliability on HPDI at this point or is it pretty much set to go?

No, there's work being done on that as well. And there's early work on the 2010 product and there's also work in Australia as well and CWI as well. It continue product support as well. It's a combination of thing. You saw that we have a spike in Q3, I would say, because of the certification work in that quarter.

Right. Okay. Great. Thank you.

All right. Thank you. There are to further questions at this time. Mr. Thompson, please continue with any closing comments.

Thank you very much, everyone, for taking the time to listen to our conference call. For those callers who had technical difficulties when dialing in, we would like to extend our apologies. We hope to he see you on our next conference call which we expect to be in early June with the disclosure of fourth quarter and full year results for fiscal 2008. Goodbye.

All right. Thank you. Ladies and gentlemen, this does conclude the Westport Innovations Incorporated fiscal 2008 conference call. You may now disconnect. Thank you for your participation. Have a very pleasant rest of your day.