Westport Fuel Systems Inc (WPRT) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Westport Innovations fiscal 2008 fourth quarter and year end conference call. I would now like to turn the meeting over to Mr. Ryan Thompson. Please go ahead, Mr. Thompson.

Thank you, and good morning. Welcome to our fourth quarter and year end 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. Speaking on behalf of the company will be Westport's Chief Executive Officer, David Demers. The Chief Financial Officer, Elaine Wong, and the President and Chief Operating Officer, Mike Gallagher. Attendance on this call is open to the public and to media, but for the sake of brevity, we're restricting questions to analysts and institutional investors. This conference call may include forward-looking statements, including, but not limited to, Westport's future performance. 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 detailed in the company's filings with the regulatory authorities. Now, I will turn the call over to David Demers.

Thanks, Ryan. Good morning, everyone. As usual, I'll make a few introductory comments and then we'll turn to over to Elaine to go through the financial statements and Cummins Westport and Mike will wrap up with an update on the heavy duty truck business unit. Although shipment growth this quarter was slower than the quarters earlier in the year, the full year saw 36% growth over fiscal '07, and ignoring foreign exchange shifts, revenue was up 31% year-over-year. Of course the rise in the Canadian dollar has really distorted that top line, but we try and measure the business in U.S. dollars, because that's what we price our products in, and for year to year comparison, it's probably best to take out FX. So we're on track.

The fourth quarter was relatively low compared to earlier in the year because of short-term delays on several fronts, all of which got resolved since the year end. First, as those of you following the port story know, the heavy duty truck shipments began after the end of the fiscal year due to the delays in settling the final details of the clean truck programs. However, this is now under way. Because we require letters of credit to be posted for most international orders, there were some delays in major international orders due to extended letter of credit processing times. Those orders will ship this fiscal year, though. Finally, we saw a delay at one of our OEMs, integrating the new ISL G engine. It pushed deliveries out by a few weeks, to just over year end, but again, those two are now under way. So fundamentally, we don't see any major shift.

As we've cautioned for several years, our business in any particular period is still skewed by a few large orders and as a result, quarter to quarter comparisons are somewhat irrelevant. Over several quarters, this volatility of large orders will average out, so rather than provide any sort of meaningless, or hard to follow quarterly guidance, we focus on multiyear revenue and profit growth. Over the past three years, revenues compounded at about 30%, again, taking out foreign exchange issues. That's what we told you to expect in fiscal '08, and despite the last minute slippage, we still met that growth number. Frankly, my personal view is that we're going to see this growth rate accelerate substantially over the next three years. Shipments last year increased in all of our global markets and we see strong demand growing, even our mature core market, the U.S. I can't give you any specific outlook for fiscal '09 yet, but we continue to see strong growth and strong demand in all of these markets. Just looking at fiscal '08 strategically, though, we believe this was a major turning point in our business.

We passed several important milestones and we completed several important transactions. I would like to run through these briefly and then turn to what this all means for Westport going forward. The role has changed more rapidly than even our most optimistic projections, and this is creating both new opportunities and of course new challenges. From a product viewpoint, the year was of critical importance, as we launched major new engines from CWI and also our flagship 15-liter heavy duty truck engine, the ISX, incorporating our proprietary common rail direct injection systems, and LNG fuel storage and delivery. This has been a long road, it's been years of work on the ISX, as some of you can remember. But this engine is now out there, the largest and the highest performance alternative fuel engine available for an on-road vehicle in the world. It's generated great response, much better than we had hoped. Because of our focus on establishing a beachhead through the clean trucks program at the San Pedro bay ports in Los Angeles, we only shipped a few dozen trucks in the year, although we built more than 100 in anticipation of this port demand. In April after the close of the year, the port closed a competitive RFQ process to develop their four-year plan to put more than 16,800 new clean trucks on the road. The ports have committed that at least half of these will use LNG as fuel. Of the five truck manufacturers that bid on this program, all based their trucks on engines from Westport or CWI.

As most of you have been following us for a long time, you'll remember that we planned to launch this product in very narrow markets, where we could see large number of trucks in concentrated areas, using depot fueling, and where there was substantial environmental pressure. Ports, of course, fit this profile perfectly. We plan to upfit new engines through the Cummins fuel distributors and work with the local truck dealers to deliver new LNG trucks in those markets. We hope to grow over time to 1000 trucks annually, which we estimated would be a break-even point, and thereafter, we would grow to generate a profit stream in much the same way as CWI matured into a financially efficient business by fiscal 2006. So that was the pattern that we've been following. This evolving market, though, brought us an early alliance with Kenworth at the corporate level to build trucks on their production line. Obviously this allowance allows us faster scalability, as demand develops, and because it's much more efficient than field upfit, we'll be able to lower truck prices to customers, which we expect would further stimulate demand. We have seen a number of other major truck brands launch natural gas products with us recently, including Peterbilt, Kenworth's sister company, and Sterling, part of the Daimler group.

So why this sudden flurry? I'm sure you can guess. Fuel prices are now the number one expense and the number one concern for many trucking operations around the world. Natural gas offers cheaper, cleaner fuel, and the fuel is domestically available in most markets around the world. Now that the price gap is approaching $1.50 per gallon, in some cases more, in cities in the U.S., a lot of people want to talk to us. CWI's engines have attracted strong reference base over the past few years and with more than 55 OEM vehicle manufacturers around the world, and thousands of customers who are ever happier with their decision to shift their fleet to natural gas, we expect their business to grow very nicely this year and for the next few years. CWI has high capital efficiency because it levers the global Cummins production and distribution systems. Although scale-up is never automatic, we believe CWI can grow production to meet any realistic demand over the next few years, given some reasonable notice.

Our story on the heavy duty ISX engine has been developing for almost 10 years and we appreciate your patience. But just a few months ago, we were telling you that the objective in our business unit was to develop the major beachhead at the ports and to establish this break-even position. Frankly, no one expected oil prices to move this quickly. It wasn't that long ago that we were below $80 and forecasting that milestone. We expected to develop this business over several years, building momentum and experience as we go. I'm afraid that cautious approach simply isn't realistic anymore. We're seeing intense interest in many markets. We need to expand our ambitions and capabilities accordingly. Mike will give you some more details in a few minutes, so I won't comment more on this now.

Turning to the corporate side, we also saw a number of milestones in fiscal '08. In 2006, we formed a relationship with Perseus, who made a strategic investment and two of their professionals, Ken Sosa and John Fox joined our board. Because of the strong market performance of our shares last year, Perseus completely sold out their position over the summer and naturally both Ken and John left the board as well. Our governance committee of the board has been considering the many challenges we face over the next few years and as a result, we've concluded that some new skills and experience will be useful and that different perspective will be valuable to the board as we move ahead. So we expect to expand the board this year to bring in people with those new perspectives. Over the past year, we've also seen a substantial shaft in our shareholder base, including a shift to more U.S. institutional holders. We don't have perfect visibility on this, but we believe that more than 40% of our ownership has now shifted to U.S. holders, including some major new shareholders, including Boone Pickens, who announced earlier this year that he held 12.2% of our stock. Although Mr. Pickens does not sit on our board and is not involved in daily operations, we're in regular discussion, he's a strong champion of the need to move away from oil as our sole transportation fuel. It's been a pleasure working with him and his team.

As many of you remember, in 1999, we formed a joint venture with BC Gas to focus on natural gas infrastructure, and that company has now emerged as the largest alternative fuel company in North America. Clean Energy IPOed on NASDAQ last May and as a result, our original investment was worth substantially more. Their CEO, Andrew Littlefair joined our board last year and our teams work every day to develop this market. Our strategic relationship is working very well, but as we said before, we feel that we should invest our capital in developing new markets and new products and not just hold a portfolio investment. So we're monetizing our investment in clean, in small steps. We sold about a third of our position last year and we now hold about a million shares, so this has been a very successful investment for us.

We made two new strategic investments last year. The first with BPIC in Beijing, our first joint venture in China and we're now producing LNG tanks for vehicles. BWI is a 50/50 corporate JV and aside from producing LNG tanks for our own programs, it's also selling anyone else to the industry that makes LNG vehicles. We think this venture has a bright future and we're pleased with its progress. A few months ago, we announced a 5149 joint venture with OMVL of Italy. Although we haven't said much about this venture for competitive reasons, it will produce complete alternative fuel engine packages in sizes well below the smallest engine from CWI. I can tell you this morning that we've named this venture Juniper Engines and we have prototype engines developing in our labs today. We'll tell you more as the venture develops, of course. BWI and Juniper are bellwethers for many of the proposals and discussions we're having today. With alternative fuels for transportation emerge as a realistic solution around the world, markets are seeing interesting and disruptive effects. Of course, Westport can't cover the entire global transportation sector ourselves. We need to work with both established and new companies who share our vision of the future and where we can both see an opportunity frankly to make some money. Where we can add value and we see a reasonable prospect of success, we are going to consider a number of formal alliances and joint ventures. In particular, we're focusing today on market opportunities that can use our proprietary technology and experience and our knowledge of the development of alternative fuel markets.

Looking forward, I can say that we feel there's been a dramatic shift in all of our global markets, which will change the dynamics of our business going forward. We're confident that natural gas 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. Thank you, again, for your patience. With your support, we're building a great company. Elaine?

Thanks, David. And good morning, everyone. The press release, financial statements and management's discussion analysis provide a -- fiscal year ended March 31, 2008 financial results and are posted on our website. Turning to the fourth quarter first, revenues in the fourth quarter of fiscal 2008 were $15.3 million compared to $19.3 million in Q4 '07. CWI product revenues were down $3.1 million due to slippage in customer shipments that are now expected to ship in fiscal 2009 and a weaker U.S. dollar. The Canadian dollar appreciated by approximately 15% in the fourth quarter of fiscal 2008 over fiscal 2007, reducing revenues in Canadian dollar terms. Non-CWI revenues were also down about $700,000, primarily because of delays at the ports of Long Beach and Los Angeles. We had expected to start shipping the first LNG trucks to port fleets in the fourth quarter, but the port process of getting funding approved and trucks scrapped has taken longer than anticipated. However, with increased interest seen from ports and non-port fleets, we are continuing to prepare for truck deployments by building up our inventory and supply chain, our sales and marketing efforts, and focusing on our OEM integration work with Kenworth.

Gross margin decreased by $3.3 million on lower revenues and gross margin percentages decreased from 41% in the fourth quarter of fiscal 2007 to 30% in fiscal 2008 as a result of product mix at a $0.8 million warranty adjustment taken by CWI in the fourth fiscal quarter -- was $8.1 million compared to net income of 1.7 million in the three months ended March 31, 2007. In our fourth quarter fiscal 2007, CWI contributed $4.2 million after taxes and Cummins share and Westport's results included a $4.2 million dilution gain on our well river investment and $3.5 million in TPC-related credits. In the fourth quarter of fiscal 2008, CWI lost $0.8 million. During the quarter, CWI made a special $1.4 million accrual to support a significant customer in resolving certain operational issues associated with the Al Gas Plat. CWI does not anticipate further accruals of this magnitude and expect to return to profitability in the first quarter of fiscal 2009. Our fourth quarter results also include a $1.3 million future income tax expense, a noncash item associated with the gains recognized on the sale of long-term investments. We will not have to pay cash taxes on this transaction, as we have sufficient losses to offset any tax gains on sales.

Turning to the full year results, revenues increased to $71.5 million from $60.5 million in fiscal 2007, a year-over-year increase of 18%, or 31% in U.S. dollar terms. CWI revenues increased 60% to $67.3 million from $58 million. In U.S. dollar terms, CWI's increase was approximately 29%, with double-digit growth seen in all regions and parts revenue up 36%. While our quarters continue to be lumpy, as David noted, we are seeing a longer-term trend of increase in global demand and interest for our products. Gross margin percentages were 31.5% in fiscal 2008, compared to 36.5% in fiscal 2007. The decrease in gross margin percentage was primarily the result of product and geographical mix and the launch of the ISL-G, which replaced the C Gas Plat as the most popular, highest margin engine in the North American market. Generally speaking, we take more conservative warranties on product launches due to the limited field experience.

Net loss for the year was $10.3 million, or $0.12 per share compared to $11.3 million, or $0.15 per share in fiscal 2007, with CWI contributing $5.8 million after taxes and after taking into account Cummins' 50% share of net income. In the year ended March 31, 2008, we recognized $8 million in gains and $1.3 million in future income taxes spent from the sale of Sandy's shares, and $2.7 million from the disposition of substantially all of our shares of Wild River Resources, Inc., compared to $8.1 million in gains associated with the Wild River transaction in the prior fiscal year. Interest on long-term debt and amortization of discount decreased by approximately $700,000, with the conversion of the convertible debt issue to purchase in July 2007. With this, we emphasize all of its warrants on a cashless basis in the fourth quarter, we are now pretty much out of both transactions we first entered into in the summer of 2006. We also recognized a foreign exchange loss of $1.3 million, which compares to a gain of about $100,000 in fiscal 2007, a year-over-year swing of $1.4 million. During the year, as we talked about in previous calls, our revenues, margins in U.S. dollar denominated assets, such as accounts receivable from Cummins and U.S. dollar cash holdings have been hit by the depreciation in the U.S. dollar against Canadian dollar since the start of the year.

As of March 31, 2008, our cash and short-term investments balance was $22.8 million compared to $23.1 million at the end of fiscal 2007, and we had drawn about $5.8 million against our bank line, compared to $1.6 million in the prior year. Primarily to fund capital expenditures and inventory. We have also drawn substantially all U.S. $6 million of our limited recourse loan to Clean Energy to fund 75 LNG truck builds. As of March 31, 2008, we had approximately $9 million in inventory, which represents about 75 finished units and parts for just under another 100 or so units. On the receivable side, Cummins borrowed $6 from CWI in a shareholder loan. We expect as they have a consistent history of generating positive cash flow, Cummins may continue to draw its 50% share of profits go-forward basis. As of March 31, we held approximately 1.3 million shares of Clean Energy and currently hold about 1 million shares. We will continue to sell the shares as required to fund our operating activities.

As mentioned earlier, please see your MD&A and financial statements as filed and posted on the company's website for more details. Now, over to Mike for a discussion of our operating results and plans.

Thank you, Elaine, and good morning, everyone. Since our last call in February, we have enjoyed a substantial and heightened level of interest in our natural gas fuel systems solutions, both for medium and heavy duty applications and we have witnessed significant progress in one of our larger revenue opportunities, namely the ports. I'll go through some of these issues over the next few minutes.

As you know, I have been personally involved in the San Pedro Bay ports program opportunity since day one. We've been doing everything we can to help provide the ports and related funding agencies with all the support and information they need to see LNG trucks featuring our technology working at the ports. We have seen significant progress in the last few months, as they prepare to launch the clean trucks program under their clean air action plan. The clean trucks program, as you know, calls for -- truck owners to scrap and replace approximately 16,800 polluting trucks working at the ports, with the assistance of a port-sponsored grant or loan subsidy. Since our last call, the boards of both ports have now agreed that no less than 50% of the clean truck program new trucks will run on alternative fuels, and the port of Long Beach has also issued an RFP and has conducted a procurement process around that RFP that we have responded to. Key elements include over 8000 trucks are expected to be based on natural gas.

The trucks are expected to be delivered over the next four years based on a predetermined schedule by banning older trucks from entering the port, the first being pre-1989 trucks starting this year. The port received five proposals in April from companies proposing alternate-fueled trucks for this very large opportunity, and most importantly, all five of those alt fuel proposals were for natural gas trucks and all five of those natural gas truck proposals included Westport technology, either our heavy duty HPDI systems or CWI's ISL-G systems. Whether or not the bidding truck companies are quoting Cummins or CWI technology or Westport's heavy duty applications with the high pressure direct injection system, we are set to benefit enormously from the rollout of one of the largest truck procurements in history. The ports are currently finishing a related request for proposal to engage in administrator for the program who will manage the funding and procurement process behind the clean truck program. This RFP is expected to close at the end of this month. But in the interim, the ports just three weeks ago began taking steps to move their landmark clean trucks program from concept to reality by beginning to put some people on the ground as part of a so-called jump start agreement. Meeting the anticipated demand for our project of this year highlights the requirement for substantial ramp-up in truck manufacturing capacity. So in January, as you know, we announced that Kenworth, a division of PACCAR, Inc., will begin production in early '08 at its manufacturing facility in Renton, Washington of the Kenworth -- trucks with Westport's L and Z fuel system technology and our engineers are now working closely together every day to make this happen. And in fact, we have also produced the first assembly line prototype truck in less than 90 days after we signed that agreement. To further support -- Westport has also opened a new LNG fuel system facility and assembly center here in metro Vancouver and we've moved our first 20 manufacturing, engineering and supply chain people into that facility in late February. We are now ramping up installation of equipment for full assembly operations later this year. The port's project momentum, wells the new Kenworth mass production deal have helped generate a great deal of expanded interest in Westport in the past 90 days, and I can tell you that we are also now seeing a heightened interest from private truck fleets outside the ports and from other truck manufacturers, especially in light of the latest run-up in crude oil and diesel fuel prices that David mentioned.

As an example, TTSI announced just three weeks ago that it had received the first eight clean HNG trucks with grants provided by the Port of LA, making them the first alternative fuel vehicles to go into full-time grade service in the LA and Long Beach ports. And this is a clear sign that the port monies approved in October '08 are starting to move to the fleets. Accordingly, we are continuing to build our inventories in anticipation of future orders related to the San Pedro ports and non-port private fleet initiatives. Outside of the port, we are at work on executing the $2.25 million in funding awarded to us from the south coast air quality management district, the California energy commission, and the ports of LA and Long Beach, which is supporting the development, demonstration, commercialization and certification of our next generation heavy duty LNG fuel system for the Cummins ISX. This will meet the U.S. EPA 2010 -- emission standard prior to 2010 on our Westport heavy duty engine.

At Cummins Westport, our joint venture has also enjoyed some significant recent successes. In April, CWI announced that the San Diego metropolitan transit system ordered 250 ISL-G engines to be installed in new flyer vehicles and then just last month in May, CWI announced that Sterling trucks of red Ford, Michigan had launched its first natural gas vehicle featuring the Cummins Westport ISL-G engine. This engine, as I think you know, offers the lowest emissions available in the industry today without sacrificing top level performance and efficiency. In Australia, we are continuing to make good progress with our heavy duty programs. We prepared and deployed four demonstration trucks that entered service in three fleets, Mitchell Corp., Murray gold burn cooperate tiffs and SANs fridge lines in October of '07. These vehicles were operated as planned in regular service by the fleets and accumulated 275,000 kilometers of service through March 31 of this year. Highlights of that demonstration program have included high driver satisfaction with the HPDI performance levels, greater than 95% substitution of diesel oil by natural gas and the engine and very significant greenhouse gas reductions of 24% instead of state emission testing, and 28% in transient engine certification tests. With completion of that demonstration, we are now looking for truck OEMs in Australia to integrate HPDI components onto their Australian chassis models to address customer demand.

So overall, we remain very upbeat about the opportunities that lie ahead. We are doing the things we need to do to transform that opportunity into material demand and sales, and we are working with our partners to prepare ourselves to meet the demand for our products as we continue to build and expand our commercial operations and supply chain. It promises to be a very exciting time for Westport. I will now pass it back to Ryan, who will open the call to your questions.

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

Certainly, thank you. (OPERATOR INSTRUCTIONS) The first question is from Sara Elford of Canaccord Adams. Please go ahead.

Hi, guys.

Good morning, Sarah.

I'm just going to start off maybe with some housekeeping questions and then we can get into the more interesting stuff. On CWI, could you explain some of the background behind the $1.8 million accrual that you took to resolve the customer issue? I'm just curious as to the background behind that.

I guess I -- everybody's pointing at me, Sara, it's David. As you know, we got a pretty comprehensive warranty program, but for, for situations that are clearly not warranty, I mean it's not a failure of the design or the component or if it's outside warranty, we get into policy decisions on whether or not we should support the customer and what we should do. So in this particular case, you know, we had a major customer who we were having operational difficulties with the L gas plus, which you remember we started to ship in '05, I guess.

'05-06 and it's been replaced by the ISL G.

In most cases, these engines are either out of warranty or, you know, or they are operating as designed. But this is a customer that has bought more than $70 million of CWI products and so we made a choice to get in and provide some specific support for these long-life vehicles. So we take an accrual. It's done as a marketing decision, and that's why it shows up. So it's not -- this hasn't been an expense per se. It's that we expect we're going to pay the dealers to go in and provide new parts on these engines over the course of the next year or so, as we've accrued it into the year.

Okay, and is there anything specific with respect to the LGAS plus that would prompt other customers to have similar operational challenges, or is this sort of a one-off--

This customer had taken the bulk of the LGASes and it was sort of developed for them. The other customers have LGASs so far -- it's partly the way the customer is using the engine.

Yeah.

And so we haven't seen this in any other customers.

Okay.

We think it's a one-time phenomenon.

Okay, and then my only other question, just sort of on on the financial statements, the $16 million loan to Cummins from CWI, Cummins clearly doesn't need that money, so I'm curious as to the logic behind that and you do expect that to continue. Is that--

-- Cummins did do a major share buyback of their shares last quarter '07, so they have been drawing down their own cash reserves and so there was -- I believe there was a bit of a demand for cash on their side. But going forward, I think it's more -- they have been looking at Cummins Westport has been generating positive cash flow. As David noted, even with this accrual in our Q4 '08, that was an expense item left in the accrual that we took, but it's not all that cash hitting the quarter, so on a cash basis, we're still positive. I think what you're seeing from Cummins, we're watching this cash built up and -- they are being prudent and taking a look at whether or not they should be taking their share of that.

Okay, and then just moving on, on to the ports, I guess there's so many moving parts and so many things to track with the comments and statements of so many different parties out there. I guess what I'm trying to get a feel for is, is there any sense on that October 1st start time line in terms of the batting of the first tranche of trucks? Is there any discussion or possibility of that date changing? Can you just maybe give us some sense of how that date looks and whether or not it's going to stick?

Yeah, I'll make a start at it, Sarah. This is Mike, obviously. -- they appear to be going about their business to get a start before at least a start of some kind before that October 1 date. You know, they have got a lot of systemic things going on and the latest example is the engagement of this system administrator, program administrator, which will handle the very large volumes over four years. But they are definitely of a mind to get the thing -- started for October 1, see some trucks on the road before October 1. And when you say are there any discussions, briefly alluded to some activities starting three weeks ago, where they put some people on the ground to try to organize a bit of a, what they are calling a jump start to the program. So all the details are not yet on the table, but they are working to getting something going by October 1. Whether they will get the full volume of trucks around those early figures on the number of pre-89 trucks, by October 1, who knows. They have got a lot of room to maneuver on that. But I would expect them to be on the road and moving with trucks on the road before October 1.

Okay. Then I guess the other question that kind of struck me as I was looking at the ports and then also some of the activity that you've had with other partners, do you guys have any way to give me an indication of, you know, of the demand that could stem from the port? I'll just use the ports as the obvious example because there's sort of truck numbers out there in terms of the requirement for replacing them. The breakdown and what conceivably requires an HPDI engine and then also what could be satisfied by Cummins Westport, for example? I mean clearly -- and then just as an extension of that, my understanding is that Kenworth has exclusivity in the short-term to be producing these things on mass up in Washington, so they really do have an ability to grab all of the HPDI engines -- almost afraid to go in with the alternative? Am I wrong on that, or--

Sarah, it's David. I don't want to muddy it even more for you, but I'm afraid it's even more complicated than you just laid out. Bunch of different factors, and the one that everybody is kind of ignoring is the price of fuel. The problem at the ports is they don't actually own trucks. These are all independent the port is just setting the rules for who gets to come in the gates. So the October start says we're not going to let really old, really dirty trucks in the gate and the debate will whether those trucks just go elsewhere. I don't think they are -- they are not going to change that rule -- the old truck issue I think is -- has been settled. What we're seeing, though, across the U.S. and frankly around the world is a lot of these independent drivers are just parking their trucks and walking away because they can't find a way to make a living anymore. And even fuel adjustments that some of the customers are offering just aren't keeping up with the rapid rise of fuel pricing. So that's another factor that's just hammering this whole infrastructure of moving goods in and out of the port. On, on the specific CWI versus Westport, I think the short answer is there's a huge difference in operation flexibility and performance between a 9-liter -- and the 15-liter ISX. Frankly there's a big difference in the operations of a Kenworth detached tractor and the Sterling truck, which if you have seen the pictures, is a pretty conventional, you know, truck that's got a body.

And so you can haul containers with a Sterling truck just fine and it's going to be a great application. For those fleets probably that are closest to the port and aren't, you know, aren't moving out into the mountains or something, shuttling containers around, in the nearby warehouse and distribution system, it will probably be a great solution. But other fleets that are actually taking containers out of the port and some distance away to a distribution center or even outside the city are likely going to need the ISX. Not quite true that Kenworth has exclusivity. Mike mentioned there were five bidders. Three of them were ISX's. Two of them were ISLs. Kenworth has the production line exclusivity. In fact, it's the PACCAR parent that has that exclusivity. So PACCAR could extend that to Peterbilt and other manufacturers are allowed to do the dealer upfit process because, you know, it's going to take a while to get the chassis engineered anyway. So I think we are going to see other brands show up at the port. The port's pretty agnostic on what's out there, just looking for the best value for this program and they want to see as many trucks replaced as possible. But I think looming over the whole program is the price of oil. It started out as an environmental story and it's being heavily promoted to reduce emissions from the port, but oil prices are also going to play a big factor in transforming this industry.

I would just add a quick point on Dave's CWI, ISL-G and Westport heavy duty mix, and the way I'm looking at that is we think is for the appropriate application, in the case of the CWI engine, it would be shorter haul applications. We think the port's going to be able to move more natural gas engines into the mix sooner and higher with the combination of Westport and CWI. I don't worry too much about our capacity to deploy the ISX because once our Kenworth Westport system is up and running, we're going to be able to generate very significant deployment numbers in a very short period of time. And that, as we said, targeted for early '09 up and running.

Okay, and then I should probably pass it off to somebody else but I'll ask one, one final question. Could you just -- I mean this is my belief, but confirm whether there's anything that would prevent you from doing this as freely as you want, but, there's nothing stopping you from applying your HPDI technology platform to a non-Cummins, non-Cummins Engine in the same sort of 15-liter category. Is that correct so, you know, because I would assume everyone's got an interest in this, if the interest is going the way you are describing.

That's absolutely correct, and you're also correct that there's a tremendous level of interest from the other engine guys today in talking to us about that.

So could I ask a philosophical, kind of strategic question, do you worry that Cummins or somebody else says, you know what, this is finally taking hold, we're seeing the momentum, do they feel a threat of not having that technology to themselves, or do they think it's one that should be broadly adopted by everyone? I mean it would be a competitive advantage to have that all to themselves. Does that worry you? Is that something that's not likely to be going through their heads? I hate to ask you but I'm curious on your thoughts yourself.

Yeah, Dave, I'm sure will have some, too. I would just say I don't worry too much about that, just to give you my personal view. We are encouraging the interest in us and talking to the people that want to talk to us. We're going to be thoughtful about making any commitments. We want to make sure we understand what it means, make sure we can deliver. But we are encouraging the interests. What's going through their minds, you know, I wouldn't really try to speak for others. But, Dave, you may want to put a broader touch on that.

I think clearly it's, you know, it's been a great relationship, so I think we've been really pleased with how we've worked with Cummins over the past few years and I think they are pleased with how this little business has grown and demonstrated the market opportunity for them as well. So as I try to allude in my notes, there's a big world in transportation. We certainly don't have it covered now, so you know, I can tell you there are priorities where we have any influence or choice in the smarty to encourage filling in that picture with smaller engines and bigger engines. We've highlighted today there's a gap between the 8.9-liter ISL and the 15-liter ISX. There's a lot of trucks sold around the world with engines sold between those two size points so. Filling that in would be a nice thing to do, rather than trying to create a direct competitor in a market niche that we've already covered with an existing product.

So, so, no, it's -- it is a big world. We think we can expand. We've talked about non-road applications, off-road applications, industrial application. We don't really have a product platform there yet. So lots to do and lots of people that we think we can work with. In terms of somebody controlling the technology, you know, that becomes a bit of a mixed bag. You have to assume that you're going to get a very sizable global market share to really justify that expense, and nobody in this industry really dominates. I think even the biggest manufacturer in the world is about 20% market share. So you really, really have to want to control it. So, I guess I can say that when we get the phone call, you'll be the first to know.

Thanks, David.

Thanks, Sarah.

Thanks, Sarah.

Thank you. The following question is from Philip Tulk of PI Financial. Please go ahead.

Good morning.

Hi, Phil.

Hi, guys. And Elaine. Question, first question, CWI, David, I guess can you give us a little more color on the, I guess the reasons why things slipped? I mentioned you were talking about CWI when you were talking about letters of credit. Were we talking about one customer, one country, one product, or, you know, give us a little more color on CWI?

Yeah, it's nothing magic, Philip. Things slip in and slip out of quarters. And if you look at the track record over the last, you know, kind of 12 or 13 quarters, it's been up or down. So things do come in and go out. This quarter just happened to be one where CWI was launching new product, the ISL. You don't tend to move things up. Things tend to get delayed and so one of the major OEMs with order backlog did shift and that shift started in April. So that slipped out.

The international orders, yeah, we do require letters of credit for international orders. That's just standard business practice. It's not our practice. It's a Cummins practice. They apply that pretty religiously and, again, we're not in any position really to argue with that policy because we're not putting up any of the working capital either. So letter of credit process did get more bureaucratic over the past few weeks and as I'm sure you've read, there have been a few disorganizations in the global financial systems. So letter of credit validation and checking has taken longer and as a result, getting orders certified for international sites took longer that quarter. But again, I think that's cleared up and we'll see those orders ship this fiscal year. So no big magic. Just if you look at the, , a number of trends toward the end of last year, sort of conspired to make this quarter see more than it's fair share of slow-downs.

Okay.

Long-term trend, I don't think it's any big deal. Demand is strong. I guess the other point that we could make is that CWI's order period is usually 6 to 18 months, so the orders you're seeing now are, or the shipments you saw that quarter were ordered quite a while ago and, you know, the uptick in oil prices really started last fall. So you shouldn't expect to see any dramatic change in, you know, what we saw in early part of 2007 or the last half of 2006. Takes a while for this stuff to work its way through the system. But it's very visible now.

Okay. That's, that sounds fair. Second question, maybe Michael, what's the current production capacity of, of the LNG truck system for Westport, and what would it jump to when Kenworth comes in in January of next year?

The current capacity is I think we said a quarter or two ago that we were at 6 to 8 per week in terms of upfit vehicles. We can do a little more than that today, if I need to. And frankly, I could expand that upfit capacity pretty substantially, if I had demand for it with some visibility, even couple months ahead of time by working with our primary upfit capacity partner, Inland Kenworth and just getting them to find some more space, a little more space, a little more base, couple extra technicians. So, so we're currently, you know, at 8 to 10 a week, but as I say, I could go to two to three times that if I need to later this year around demand. Once Kenworth production line comes online, we move sort of immediately from 100 a quarter today to 100 a month with the opportunity to go to twice that really pretty readily if we need to and beyond, depending on the pace of large block orders coming out of this port and other programs.

Okay, thanks for that reminder. Thanks, guys. I'll get in the queue.

Thank you. The following question is from Robert Wallace of Raymond James. Please go ahead.

Thank you very much. Several things. First of all, what -- is the infrastructure in place, I know it is in the ports, et cetera, but there's been a lot of work being done in other areas. Is there -- are we coordinating our efforts in, say, New York and Arizona as well as the ports?

Yeah, Bob, as you know, we work with all the fuel providers, Clean Energy by far being the dominant one. Infrastructure growth has been pretty spectacular. You should probably check in with them, but, you know, from New York to Los Angeles, there's been a real jump in demand and infrastructure growth is happening kind of as we speak. If you look around the world at the same story. Lot of countries are starting to see natural gas as a very viable alternative and gas producers and distributors are building infrastructure in those places very quickly. So we don't see infrastructure really as a barrier. There is, yes, a time delay between a fleet saying yes, let's go natural gas and actually getting their own station. There are some temporary expedients that can be put in place to speed that up. But generally it's not a barrier anymore.

Okay. Second question, in the Sterling, do they have the capacity to use, for the T-800, the ISX engine, would they consider that -- because I noticed it was the other engine that they used.

Sterling is part of the Daimler group, if you look at their product line, the Sterling truck -- I don't think any of the Sterling trucks use the 15-liter.

No, I don't think so.

They do offer--

They could go heavier duty across the Daimler line, but with respect to ISX, know, they would have some time factors involved, both on the effort to get that engineered, but also around this partial exclusivity period we talked about earlier with Kenworth on the ISX.

Okay. The other question is on the ISX engine, we are compliant for 2010. How is that coming?

Yeah, I mentioned, Bob, that that program's well under way. We've got the $2.25 million from four separate agencies, including the two Southern California ports. It's on track as we go through the technical program, but we still have a year and change of technical effort ahead of us before we've, we would expect to be certification testing for that program.

Okay. You mentioned, David, new directors, and you indicated that you were looking for something of, to expand -- is that on a worldwide basis, then, rather than North American?

Yes, and, we're just in the final stages of that work, Bob, and you'll see that toward the annual meeting, I'm sure.

Okay, and then for the people in Europe, in the name of the Italian company, is that basically aimed at cars and small trucks?

Really can't comment on that, Bob. There's lots of competitive action in that part of the market right now. OMVL, if you take a look at their website, you'll see the customers that they work with and what they and do that's primarily automotive. And the joint venture, as you can imagine is focused a more comprehensive, fully integrated engine solution and it's going to go after multiple markets.

The BMW is still showing as a partner on your website.

Yeah, BMW is still working with us on their hydrogen vehicle program.

And how is that going?

It's going fine. I haven't seen a lot of hydrogen infrastructure getting built, though, Bob. So it's still in the research stage.

Pretty low level activity, I guess we would have to say.

So in other words, you've kept the burner on low.

We're trying to stay focused on the main priorities, which is natural gas engines, heavy duty and medium duty.

The other thing, on a more pragmatic, it is rumored on the street that you're going for a NASDAQ listing. Can you deny or comment on that at all?

I think -- Bob, you've talked with us over the years, so this is no surprise. I think any company is always looking at how to source lower cost capital and where to get lower cost capital for growth. and so it's just prudent to always be looking at things. And over the years, we've looked at AIM and we've looked at AMEX and we've looked at NASDAQ. There's all kinds of possible things we could do on the capital side, so I can tell you that we continue to try and look at all of our options going forward, but there's no, there's no listing application today. There's no big plan. So--

But you are saying the only reason from capital requirements would be an expansion of business, is that correct?

Yeah, and I think we continue to say that. If you deconstruct what I said--

I did.

-- the end of my speech, I think we are seeing the world as changing rapidly, and, we talked about investing in a truck program that would get us to 1000 trucks a year. We've got the capital to do that and we're monetizing clean shares to provide additional cash and capital. So there's no immediate need for additional cash for the programs that we've laid out, but the world is changing fast and you just never know. It would be silly for any company to say we're never going to raise capital again for any purpose. It depends on the opportunities. It depends on the availability of capital and it depends on what our board thinks are our strategic priorities. So we're looking at lots of stuff these days. Obviously we're seeing a lot of new opportunities with the dramatic change in energy markets, and so all I can say is stay tuned and we'll keep you posted.

Okay. Then the final thing is there's been zero comment about Asia, other than your joint partnership, which at one time was a feature for the company. Is that -- are things going well? I see--

Yeah, it's no -- there's actually lots going on. We just didn't make the time cut. So I think the JV in Beijing is, was the big story last year for us, getting that up and running has been a big focus and I think it's going well. We're seeing tanks show up in containers and there's lots of expansion work to be done to get that business up and going. We continue to see orders out of Chinese bus fleets. We had the premier of the province, as you might have seen in Beijing, I think it was last week or week before, just after I was there and -- was there, so they all got a nice photo op in front of Beijing buses. So the business is just kind of business as usual at this point.

Mr. Emerson is now also the minister of foreign affairs, as you know, Bob, as well as international trade.

And also hydrogen highway.

True.

Okay. Any comment?

Bob, just on the final note of Asia, Cummins Westport, their revenues were up something like 79% in Asia. As you can imagine, it's still a huge market for us and things are going well there.

Reserves comment, okay. Thank you very much.

Thanks, Bob.

Thank you. There are no further questions registered at this time. I would like to turn the meeting back over to Mr. Thompson.

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 August for the disclosure of our first quarter results for fiscal 2009. Thank you.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.