Westport Fuel Systems Inc (WPRT) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Westport Innovations 2009 second-quarter financial results conference call. I would now like to turn the meeting over to Mr. Darren Seed, Westport's Director of Investor Relations. Please go ahead, Mr. Seed.

Thank you and good afternoon. Welcome to our second-quarter conference call for fiscal 2009. It is being held to coincide with the disclosure of our financial results earlier today. 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 at this call is open to the public and to the media, but, for the sake of brevity, we are restricting questions to analysts and institutional investors.

This conference 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 regulatory authorities. Now I will turn the call over to David Demers.

Thanks, Darren. Good afternoon, everyone. As usual, I'll make a few introductory comments and then I'll turn the call over to Elaine for her review of the financial statements and Cummins Westport's business unit. Mike will give you an update on the heavy truck business unit and then we'll be able to open it up for questions.

You have our Q2 numbers now, so you can see it was a tremendous quarter for us. We smashed our previous revenue record set just last quarter by a very large margin and we made advances in many important markets. When we last talked to you, upon release of our Q1 results, we were just embarking on our road show to support listing on the NASDAQ exchange which we successfully completed in August. As a result of that financing and the other work we've done to strengthen our balance sheet this year we ended the second-quarter with a very strong cash position, over $90 million.

As it turned out this was a very good thing to have behind us. But obviously the world has changed around us over the past few weeks. I think it would be foolhardy to suggest that any company can simply proceed with their business plan unchanged in the midst of this financial hurricane.

Mike, Elaine and I have spent the past several weeks reviewing our short- and long-term strategy and meeting with customers and partners as this crisis has unfolded. Over the same period we met with several of our institutional shareholders and we participated in two investment conferences where we were able to talk to other companies in the clean technology sector. We spent all of last week in Europe with our Board of Directors where we met with them of our partners and exchanged views on markets and opportunities.

So let me just review some of the facts. Over the past year or so car and truck manufacturers have seen declining sales and last quarter saw crashing sales in many markets. Plants are closing and industry leaders are scrambling to restructure their product lines to deliver products that people want to buy now, not what they were buying last year. But over the same period we at Westport have been setting sales records for our natural gas vehicles and we just announced our single largest order in our history.

Fuel price volatility has become front-page news all this year. Some economists, such as Jeff Rubin at CIBC, have actually blamed the oil spike for tipping the global economy into recession. Energy security and in particular reduced dependence on oil from the Middle East has become a major policy issue in the US and in some of the leading Asian economies. Rubin and others have warned that the worst possible thing to do now is for oil producers to do further capital investment.

Yesterday the Financial Times reported that the International Energy Administration in their World Energy Outlook which is going to be published next week has concluded that the natural decline rate in conventional oil fields exceeds 9%. To create new oil production to meet demand the industry is going to have to invest more than $350 billion annually over the next 25 years. But in fact, as you've seen, producers are scrabbling to defer major capital projects in the face of the global credit crunch and in collapsing oil prices.

The result according to many oil watchers is that production will continue to decline and the minute that demand picks back up we'll be into a harsh and painful supply crunch. Rubin predicts that oil prices will be back over $100 as soon as the economy recovers.

Third, environmental concerns continue to plague the world's major cities. With the election of Barack Obama who has committed the US to significant action on climate change we should expect some global action on this file too.

So overall we conclude that our fundamental business strategy is sound. The prospects for a major shift in the transportation sector to natural gas are stronger than ever. We intend to use this period of turmoil to strengthen our competitive position and to prepare for new opportunities.

Now what does all of this mean? As we've said for years, our goal is to introduce, as quickly as is practical, high-performance, high-quality vehicles in partnership with the world's leading manufacturers in as many major global markets as we can. We want to be able to scale up production as demand develops. This will inevitably take time and it will be based by the development of fuel infrastructure.

But we also want to pursue a business model that can respond quickly to new orders and avoid the cost and delay of heavy capital investments for production. This means working with existing capacity and partners who have in-place distribution and support channels. And that's what we've been doing.

You can see that this quarter we successfully completed production readiness work with Kenworth and all of our suppliers in our new Westport assembly center in Vancouver have been improved by Kenworth. Test production of trucks has met their objectives and truck production is on track for Q1 2009. Kenworth of course could produce tens of thousands of such trucks if the demand appears, but for now we have a business model that will see us making money on the first trucks.

This quarter we announced a parallel deal with Peterbilt. They will be ready for [O&D] truck production in mid-2009. In fact, if you look back, the transformation in the truck market in North America over the past year has been quite remarkable. Today most of the major truck manufacturers offer a natural gas project incorporating a Westport or a Cummins Westport engine and I can tell you that all the rest are talking about it. This is a very encouraging sign and it reflects the strong market interest in high-performance alternative fuel products.

Interest doesn't necessarily translate into orders of course, but we think that the strong evidence of market interest is very encouraging. The first step is product availability and that's our priority. Market penetration will come if we've done our job that well.

After the end of the quarter we announced our single largest order in history from Delhi Transit for more than 3,000 engines. These engines will be manufactured under license by Cummins India and they follow a previous order from DTC for 500 engines which we announced in April '07. This is also a new product in a new market that was formerly challenging for us to penetrate, so we believe that this is a milestone deal aside from its size and the timing.

We've received some questions about this announcement, so let me explain a few more details. Yes, it's true, when we said largest ever we meant both the unit count, over 3,000 engines in a single order, and also the expected contract revenue. Of course, our usual engine sales profile in Asia is our smaller engines, so average sales prices and margins are lower than our global average.

But this arrangement with Cummins India allows CWI to supply engine components and have the engine built in India rather than in North America, thus avoiding a very significant import tariff that has made our typical business model uncompetitive in that important growth market. Because CWI is not delivering the completed engine the revenue that we see from the component parts is going to be lower than the price we would charge for a completed engine.

But because of the per engine royalty payments made to Cummins Westport by Cummins India, the result to CWI is nearly equivalent gross margin dollars and a higher gross margin percent than if we had sold a North American built engine into India. We see this deal as a win-win for both Cummins India and Cummins Westport and, in any event, it's a practical and elegant approach to a high-growth market for natural gas buses where we were really formerly shut out.

During the quarter we announced two significant global partnerships, one in China, a new joint venture with Weichai, one of the largest and fastest-growing diesel engine companies in the world, and the other a technology agreement to develop heavy duty HPDI engines with a leading European vehicle manufacturer.

We've discussed the origins and some of the details of those partnerships before, so I won't repeat that today, just to remind you that it happened last quarter. I can tell you today that the Weichai joint venture is up and running, we're working together on an aggressive timetable to introduce a range of new products and we expect to see revenue from that joint venture in 2009.

Our European program is also working to deliver engine performance data and marketing studies in 2009 and we're working towards what we hope will be a comprehensive project plan and an agreement on commercial collaboration. Although both partners in this deal are paying their own cost during this period, our agreement requires our partner to reimburse us for our expenses if we achieve the technical milestones that they've set and there's no commitment to production as a result.

A few months ago we told you we formed a new joint venture to produce small displacement engines with OMVL of Italy, a private natural gas and LPG automotive components company owned by the SIT Group who are a large gas products manufacturer. Although for commercial reasons we haven't yet disclosed the product plan for Juniper engines, as this new company is called, I'm pleased to report that progress has been good on both the technical and the marketing fronts.

We expect to be shipping product in volume in 2009. Our current plan is to launch our products publicly in the next few weeks. We should be able to tell you more details about Juniper before our next quarterly call. We expect considerable synergy between all of these programs and with our existing commercial pillars. With alliances in place in all of the leading global markets we believe we are well positioned for continued strong growth and good market penetration.

So where do we stand today? We have by far the strongest market position in the world in natural gas engines for buses and trucks. We're in production and selling in several global markets. In 2009 we will see substantial expansion of our product availability and we will further establish our market leadership in these segments. Our partners are the leading global OEMs and our business model allows for fast scalability.

We do expect continued turmoil and there's no doubt going to be work to be done. For example, Daimler has announced the Sterling brand, who are manufacturers of a popular truck that began to offer our natural gas engines just this year, will be closed in 2010. We're told by Daimler that the products will be transferred to the Freightliner brand and Sterling natural gas trucks will be built for sometime and supported for the next 10 years.

Many of our OEM partners and prospective customers are in financial stress. This may change the competitive map and it may create both risks and opportunities for Westport as we move forward. But overall we believe that the turmoil on balance creates opportunity for Westport, it reduces competitive risk, it will allow us to build our business more effectively and quickly than otherwise.

Another benefit is that because of the new situation we believe we can increase our focus and reduce our expense growth by negotiating better terms with partners, sharing risk with suppliers and prioritizing the most immediate and most promising programs. We're determined to achieve our cash flow breakeven targets in the Heavy Duty Business Unit and our global financial performance goals.

This will take focus and persistence and, at the same time, we need to be both wary of sudden changes in market conditions and receptive to sudden new opportunities. Fortunately our balance sheet is strong and we believe we are ready for the challenges ahead. We remain optimistic that we're on track to create a substantial global company. We have the resources, the management team and the partners to achieve that while providing economic benefits to our customers and environmental benefits to the world.

I just want to close with a comment to our shareholders. We know that recent market volatility, including the volatility in Westport stock, has created some great distress. We've seen the forced sales of share positions and we've seen painful restructurings by the investment community. No one has been immune to this; everyone I talk to is worried about the future.

I can't give you any useful advice on the short term. All that I can commit to you, our shareholders, is that we're doing our best, we're going to build a strong company and we're confident that we're going to come through this global crisis stronger, better positioned with a strong product line and following a plan to achieve some very ambitious goals. Over time our share price will reflect our work and not the market situation.

In the meantime, please feel free to call or visit if you have any questions or suggestions. Thank you again for your patience and support and I'll let Elaine take over and give you the numbers.

Thanks, Dave, and good afternoon, everyone. The press release, financial statements and management's discussion and analysis provide a considerable amount of detail regarding our second-quarter fiscal 2009 financial results and are posted on our website.

For the second quarter ended September 30, 2008 consolidated revenue was $39 million compared to $21.2 million in the prior year, an increase of 84% and another record revenue quarter. The increase in revenue is primarily the result of CWI's revenue growing by $14.3 million to $33.3 million on 1,391 units shipped in Q2 '09 in comparison to $19 million on 845 units shipped in Q2 '08.

Decreased shipments to Asia and Europe were more than offset by increased shipments of the ISL G in North America with approximately 900 ISL Gs shipped in the quarter. Non-CWI revenues were $5.7 million on 69 LNG systems shipped in the quarter compared to $2.2 million in the prior year when 22 LNG systems were shipped.

For the six months ended September 30, 2008 consolidated revenues were up 75% to $64.5 million on 2,538 units shipped in comparison to $36.9 million on 1,400 units shipped in the same period in the prior fiscal year, well ahead of our targeted CAGR of 30% per year. However, I'll just remind everyone that quarters can be lumpy and that a longer term multiyear view would be more appropriate for modeling purposes.

We reported net income of $0.7 million or $0.02 earnings per share for the period ending September 30, 2008 compared to a net loss of $4.9 million or $0.19 loss per share for the three months ended September 30, 2007. During the quarter we recognized $9.8 million in investment gains net of taxes on the sale of 790,800 clean energy shares for net proceeds of $14.2 million.

For the six months ended September 30, 2008 and 2007 net loss was $2.8 million or $0.10 per share and $9.6 million or $0.41 per share respectively with (inaudible) percent share of (inaudible) value income after taxes for those periods being $3 million and $1.8 million respectively. Fiscal year to date we have recognized $12.7 million in gains net of taxes primarily from the sale of Clean Energy shares compared to $0.7 million in the prior year.

CWI margins were down in the quarter, affected primarily by warranty adjustments. CWI increased its warranty reserves for the L Gas and C Gas plus in Europe. CWI also increased its warranty accrual for the ISL G. Upon launch new engines generally experience higher warranty claims with warranty experience improving over time.

However, given the strong demand for the ISL G upon launch, CWI thought it prudent to increase the warranty accrual rate, particularly as much of the demand we're seeing for the ISL G is coming from new truck applications whereas our historical field experience has been in transit. If reliability improves overtime as expected warranty balances and rates will be adjusted downwards.

Non-CWI revenue margins were about 14% in the period on a relatively low number of units produced under our upset model. We expect margins will improve both volume and with factory production. However, we are also aggressively pursuing cost reduction initiatives as well as reducing product price for truck OEMs. So margins are likely going to be lumpy for least a few more quarters until the product is more mature.

Non-CWI R&D and SG&A expenses were up $3.8 million in Q2 '09 versus Q2 '08. The increase relates primarily to higher expenses associated with launching our LNG systems for the heavy-duty market, integration costs, production readiness costs, costs associated with our NASDAQ listing, customer support and general sales and marketing expenses. During the period we reclassed some costs previously associated with R&D to sales and marketing, reflecting the fact that some of our activities have successfully moved from development into the field.

We have been increasing expenses in anticipation of OEM product launch with Kenworth in early 2009, developments of our 2010 and other OEM engine products and to support customers. Looking ahead we expect expense growth and cash usage to moderate as we pursue the following initiatives.

For R&D expenses we are seeking third-party development funding from existing partners and governments to offset our own. We also expect to be able to leverage partner sales, distribution and service channels as sales increase enabling us to grow revenues without growing expenses.

From a capital expenditure standpoint our Westport Assembly Center, in which we have invested approximately $3.5 million, is nearly complete reducing our capital spending significantly.

Lastly, we have been managing our inventory balances in the $10 million to $15 million range and we'll be matching any future inventory spending to order growth and supply chain optimization.

One quick word about taxes. We recognized consolidated taxes of $2.3 million in the quarter and $5 million year to date, significant increases for the prior year. However, as both Westport and CWI still have tax losses available; our actual tax bill is not the $5 million but the amount showing as being current tax expense which is only about $300,000 year to date. The future income tax expense is primarily the draw down to tax (inaudible) on the balance sheet and won't require any cash outlays on our part.

Our cash and short-term investment balance at September 30, 2008 was $96.8 million compared to $[22.8] million as at March 31, 2008. In the six months ended September 30, 2008 we raised approximately $52.4 million in net proceeds from our NASDAQ IPO, $14 million in net proceeds from the issuance of debenture units, and $19.4 million from the sale of shares in Clean Energy. Cash used in operations and for capital expenditures was $2.9 million. Of the $4 million within capital expenditures the majority of the costs related to our Assembly Center and expansion of office facilities, both of which are now substantially complete.

As David noted, like all of you, we have been watching the markets and general economy with keen interest. However, we feel that our diversified markets and OEM relationships, our stable customer base, our strong balance sheet with almost $100 million in cash as at September 30th, and the flexibility in our expense and cash management leave us well-positioned to weather the economic turmoil in the markets and to progress along our business plan.

Before handing the call over to Mike, I'd like to remind you that our MD&A and financial statements are filed and posted on the Company's website if you require more information. Now over to Mike for a discussion of our operating results and plans.

Thank you, Elaine, and good afternoon, everyone. As reported in today's financial statements, we have had a record quarter in terms of heavy-duty revenue and experienced a significant increase in shipments for our heavy-duty LNG systems. We delivered 69 units in the quarter and recognized $5.4 million in heavy-duty revenue. That is 92% more units than we shipped all last year and, in fact, more revenue than generated to date since we launched the business about 18 months ago.

We're quite pleased with this launch progress and it is a testament to the early market demand that as developing at the ports and elsewhere and the abilities of our early production team to meet that product demand in advance of the Kenworth and Peterbilt production facilities coming online next year.

A number of customers have taken delivery and are now operating new LNG trucks this quarter. They include Southern Counties Express, Cal Cartage and Hey Day Farms among others in North America and Mitchell's, Sam's and Murray Goulburn in Australia. Most of the North American deliveries were related to the Port programs and we are also seeing increasing interest from the commercial sector.

Of particular note, I can report that Southern Counties has now taken delivery of all 50 of their Port funded trucks; the last 20 of these were delivered after quarter close within the past week after they received new monies from the Port. The San Pedro bay Ports have in fact also now taken a huge additional step in launching the clean truck program by implementing on schedule their announced ban on older pre '89 vintage diesel trucks on October 1st.

And just this week they've announced that they will move forward with the second part of the program, the historic Clean Truck Cargo Fee, which they will implement in two weeks or less than two weeks now on November 17th. It is this fee, you'll recall, which will generate the monies to incentivize the Port fleets to buy the new clean trucks.

The big story for us in heavy-duty this year has been the new deal with Kenworth and the enormous effort to organize for factory production of LNG trucks in early calendar in '09. I can't over emphasize how much effort we are both putting into getting that integration program right and it is with great pride that I can say today we remain on track to be ready to go early next year, both here in B.C. and in Renton, geared up and ready to deliver the next round of orders.

We have moved into our new Westport Assembly Center, or WAC for W-A-C as our engineers lovingly refer to it. We have built out the facility from scratch. We've installed our new production engine commissioning test cell. We have begun receiving engines, injectors, tanks and pumps from all over the world into it. And we have now integrated the first full Westport LNG systems at it.

And while all that physical effort has been going on we've also been engaged in an equally intensive effort along with our key suppliers around the world in a Kenworth supplier readiness program. That has also gone well and I am proud to tell you today that Westport and our key suppliers have now been approved as official PACCAR suppliers.

So with Kenworth on stage and getting ready to go, it is with great excitement also that we have added another PACCAR name to the OEM partner list. From our last conference call you were aware of discussions we had ongoing Peterbilt and so now, as we have announced on October 14th, we are moving ahead with factory production of three new LNG truck models from Peterbilt. Working with Peterbilt not only adds production capability, but also helps establish our LNG systems as the alternative fuel solution for the trucking industry.

We have received some questions related to government funding initiatives including, but not limited to, federal investment tax credits, fuel credits and the recent Prop 10 in California. The federal incentives remain in place; however, as you know, the California Prop 10 initiative, which was to fund renewable energy and alternative fuel vehicles, did not pass. We had not counted on Prop 10's passage in our plans, but of course over time we could have benefited had it been implemented.

David and Elaine have both talked some about the overall global economic conditions and how they may or may not affect our business and operations, and there are in fact major reductions being announced in new truck order books already. In fact, just today Navistar announced the closing of an international truck manufacturing facility in Ontario, Canada and that followed Daimler's recent news on Sterling which Dave mentioned.

But our heavy-duty math here at Westport is pretty simple and pretty compelling I think. The size of the LNG truck market opportunity we're targeting is beyond scale and really just beginning. Furthermore, we are targeting customers who have access to alt fuel incentives or are environmentally encouraged to go with alternate fuels such as LNG or, as in the case of Wal-Mart, maybe more insulated financially from the weaker markets than some other commercial outfits.

So it may be reasonable to expect that tighter restrictions on credit and the overall recessionary factors may slow decisions some, but overall we are continuing to see a lot of interest in our LNG systems. And of course, the basic drivers of our business, energy security and the need to reduce air emissions and greenhouse gases, will continue for the long-term. The dawn of a new administration in Washington this week with President-elect Obama is also likely to strengthen the force of these business drivers and the push for transportation alternate fuels like natural gas.

So as we look around our world of heavy-duty solutions, we have now announced new partnerships and development agreements this quarter with leaders of the engine industry in China and in Europe and we've also announced another new OEM partnership in North America. These new developments, along with the market segments we have positioned ourselves in, the strength of our partnerships, these global energy security programs I've mentioned, the strong environmental benefits of our technologies and the breadth of our intellectual property portfolio will, we believe, help provide a long-term and sustainable business to the benefit of our customers and investors.

So looking at the overall Westport position today, as you can see with our growing CWI and now the heavy-duty business, we have just received another record quarter that exceeded our previous high, which was just last quarter, by 56% from $25 million to $39 million in total recognized revenues. And we have made significant additions to our partner base in Asia, Europe and North America.

We have accomplished all this, as you know, in the midst of some of the biggest global economic volatility of our lifetimes. That set of accomplishments combined with our strong new cash position gives us confidence that we have a robust platform for continued growth and advancement as a corporation. I will now pass the call over to the operator who will open the call to your questions.

(Operator Instructions). David Woodburn.

Thanks for taking the question and congratulations on just a fantastic revenue line. But that takes me then down to the expenses and can you give us a little bit more color on what you're targeting for gross margins going forward based on the changes that you're making to the reserves and the accruals?

Warranty is something we look at every quarter and if you go back historically our gross margins have fluctuated. In the past they've been kind of the 30%, 35% range. This quarter they were down to about 24%, 25%. Some of that is the warranty, some of that's also the margin against the heavy-duty product.

I think going forward -- what we should probably do going forward again is just probably take an average of what's been going on in the last couple quarters. Again, the ISL G is a new product, the warranty period is two years. It's going to take us some time to work through the warranty periods before we fully understand what the proper accrual is going to be. So you'll probably still see it fluctuate for the next four quarters at least I would say.

Okay. And can you give us some similar comments on SG&A going forward?

Yes, SG&A, as I think David and I both said in our scripts, we are looking to moderate the expenses on SG&A and R&D. We have -- as part of our plans we have been increasing that spending to launch product -- with the launch at Kenworth in early 2009 and as we get more product in the field and work with the Kenworth distributors and so on we do expect to see that expense line moderate.

Okay, great. I've got some more, but I'll get back in line.

Laurence Alexander, Jefferies & Co.

Good afternoon. I guess first question is on the JVs that you have, both the new ones and OMVL, can you give some sense for how you're looking at possible capital investments that might be needed in those JVs to bring them up to commercialization?

Hi, Laurence. It's Elaine again. OMVL, the Juniper joint venture, we have invested $1.5 million on April 1st, so that investment has been made. In Weichai we are committed to investing $4.5 million and we expect to make that investment any day. What we're waiting for right now really is government approvals in China.

But just to be clear, are those your expected total investments or how are you viewing as the possibility over the next 12 to 18 months of additional investments?

Those are our stated investments. I think what we ultimately need to invest in will sort of depend on how things go over the next little while. As David said in his speech, with Juniper I'd say just wait and see. We'll come out with a little bit more on that in the next few weeks.

Hi, Laurence. It's David. I'll go further than Elaine and just say that it's likely that both joint ventures are going to require more capital going forward, but not a significant order of magnitude difference and that capital is going to be for market expansion, not really R&D. I think that we're going to see -- as I said in my speech, we're going to see revenue in both those joint ventures which will contribute gross margin.

We want to use those gross margins to have these guys stand on their own feet and pay for new R&D. But depending on how things go, there are always going to be new projects and potentially the partners will commit cash. So we'll see how it goes. I think we're very optimistic about both companies and so I can tell you that we would likely respond to a cash call if the Board came to us and did that.

But in the meantime it's not going to be tens of millions of dollars that we're going to put into these things. We think we can lever what we've done and the product development programs are pretty well articulated.

And then just one follow-up is -- how are you thinking about efforts to reduce the cash burn if the current volatility in the end markets continues? And specifically, are you thinking about it in terms of -- do you have a cash burn target or do you think about it just in terms of reducing the breakeven rate that you need for the Westport heavy-duty side of the business?

Mostly looking at the breakeven points for heavy-duty.

We have an expense plan and I think it's fair to say we're watching pretty carefully right now the expense growth items that are in there and watching the signals in the marketplace as it may affect our various businesses as we go.

Thank you. I'll drop back in the queue.

Yes, again I'll elaborate a bit, Laurence. I skated over it pretty quickly, but I wanted to reiterate that we are still committed to the breakeven point that we said we were on heavy-duty and kind of regardless of what the markets do to us, regardless of volume. And the levers we have to play with are obviously how fast we reduce product cost, which has an impact on margin. We've been planning to aggressively cut price and reduce cost, but that's going to reduce gross margin contribution.

So that's a lever to play. If the market is not developing maybe we can keep prices high and volumes low. We can obviously change the pace at which we add new headcount and add new expense. We're not about to build new plants or have big capital commitments on that front, so it's really traditional expense management and we think we've got a lot of control over that. But the plan is to hit the breakeven targets that we've talked about and we think we're capable of doing that no matter what the markets throw at us.

In the heavy-duty case, I'd just add a note that we'll get some help by virtue of the fact that the Kenworth integration program is sort of a one-time fiscal '09 significant expense item for us which will naturally downgrade substantially as we go into the end of the year and beyond.

Thank you.

Grand Mattison, Lazard Capital.

Good afternoon, everyone. Congratulations on the traction you guys are getting in the market. I was wondering if you could give a little bit more color on the Australian market in terms of the size of the opportunity you think you could see there.

I'll jump in initially and Dave or Elaine can add if they'd like. But Australia for heavy-duty has been kind of the other geographic market that we've targeted with the existing product, the ISX engine adapted to our LNG product. It's a smaller market, of course, than North America, but they run about 10,000 trucks a year sales there. We are hoping and planning that we could grow from a market entry position up to 10%, 20% of that market in a reasonable period of time.

And we believe that the natural economic equation actually works better for us there given the stronger fuel price differential, the advantage of natural gas and the very long mileages that fleets typically run their trucks there. So that's why we've been working hard to get established there and in fact are working to extend our Kenworth integration program into Australia over time.

Great. And then also just looking at the California market. Did you see any delays of customers sort of waiting to see what the outcome of Prop 10 would be before they made a decision on moving forward with the heavy-duty truck, or is it a --?

It's maybe surprising, but I'd have to say, no, it wasn't very apparent. I think those of us in the business were pretty tuned to what was going on there, but I think the fleets and potential customers were less tuned in frankly. As I said in my remarks, I think had it passed we would have been able to start getting some traction around that. Of course we would have had to wait for the state to figure out how to implement it and get financial mechanisms in place, etc. But it didn't seem to be playing real heavily on customer discussions as we talked to people.

I don't think it ever came up in any of the chats I had. Most people saw it as something that might show up in a couple of years. As Mike said, the state would have to get their head around what to do and how to do it and then put it in place. None of these things happen overnight. So for people who are looking at LNG trucks now, it just doesn't come into the equation now. And I'm not sure anybody was really counting on it either. If that was what it was going to take to make or break the decision then it wasn't likely going to work.

I have to point out that there are still other California state programs that were -- that did originate with state agencies. So there are still several emission credits programs. The Port has launched their funding programs, none of which are -- the Moyer program -- these things are all fairly robust credits, the federal tax credit I think is through -- I'm looking at Mike now, it got extended.

That came in through the DOE and Energy Act of August '05. The investment tax credit is in force at the moment through December of 2010 with some significant likelihood of extension beyond that. The fuel credits are through the end of '09, the credits that go to people like Clean Energy and others.

So what people that we're talking to now are looking at is the basket of opportunity they have today and what other jurisdictions outside California are doing because there were similar sorts of programs in Texas. So it's a pretty complicated basket; there are lots of incentives that create, we think, a good working model anyway going forward and Prop 10 would have just added another element. Clearly a very interesting element, but it creates a lot more scale.

If you just do the math on Prop 10, it would have subsidized 100,000 trucks at 50,000 per, which is far beyond the scale that we've been fantasizing about recently. So I think the existing programs are adequate to support our business plan and get us launched. Our goal is to get a sustainable price point and expense point for these trucks that doesn't have any sort of government subsidy and do that in a reasonable time period. So that's still the plan and we're pushing forward.

Great. I'll jump back in queue. Thank you very much.

Rupert Merer, National Bank Financial.

Good afternoon, congratulations on the results. So it looks like the HPDI you were selling for something around the $80,000 range with I think about a 14% gross margin if I'm correct -- how should we look at that going forward as you start ramping up production with Kenworth? How fast do you think the pricing cost should come down?

We're just getting started obviously, and it's pretty hard for me to sit here today and be very proscriptive about exact price points and margin targets over the next one to five years. But I will say that we intend to continue to price the product aggressively as we move into market entry with a view that building market share is going to be very important to us, establishing toehold, getting trucks on the road so we can establish comfort and familiarity among potential customers and so that the California interest can then spread beyond that.

So I'm not looking to take that margin percent up aggressively real fast, but we will do what we can. As Dave I think mentioned, we're looking pretty hard at cost reduction, we're working with all our suppliers on that and price points will perhaps move around a bit, but we would expect obviously the Westport package that goes to Kenworth to be substantially less expensive than that 80,000 number that we were offering to the market when we were having to outfit the trucks ourselves and do all the labor and do everything really.

So there will be a step change when production starts at Kenworth and Peterbilt next year, though?

Yes, on the price itself, yes.

Yes, you'll see quite a bit of change. We have to -- we're cautious on all this because we don't disclose prices for obvious reasons. We're selling to multiple people and we don't necessarily have a catalog price that's on the Internet. But I think we've said several times in meetings that we're looking to take the price from $80,000 down to the $50,000 range, but improve margins to something that's more historical like CWI.

This is going to take some time and then past that, and certainly I know you know this, Rupert. If you look at the lifecycle cost model, we have to take our price point down below $50,000 as well. Presumably that's going to come with substantial volume and it's going to come when there's some more predictability on fuel prices.

So we're working hard on cost reduction and that's going to be our major margin advantage. The other margin improvement is going to come as we reduce -- there are some fixed costs associated with the program today that get burdened over 50 or 60 trucks, it starts to add up. Those fixed costs will be a lot cheaper once we have (multiple speakers).

You'll have some cost in here today just around early launch kinds of things that go on. So we would expect to see some improvements around efficiencies and one-off costs as the volume grows as well.

Can you discuss some of your efforts on the supply chain side and how you think the prices could come down on the supplies chain and (multiple speakers)?

There are price breaks, Rupert, on different volume levels, so that's an easy one.

And I would say that we've gone to our key suppliers and we're asking them to price -- at least let us know how the prices will look at much higher volumes. By much higher volumes I mean as compared to dozens, up in the 1,000, 2,000, 3,000 range at least for starters. And we can't get firm price commitments from people until we've got firm purchase orders for those systems. But we are beginning to get some understanding of how that may look, as Elaine mentioned.

A number of your components are really specialty items for this market how ready is short supply chain to ramp up with HPDI production and how knowledgeable do you think they are about the supply chain price breaks that you might see (inaudible)?

Sorry, about the supply chain --?

How knowledgeable do you think they are about the price breaks that they can see with various volumes? They probably don't necessarily have experience with high volume production I imagine.

No, these guys are all volume production of other things. I'll come back over it to ways, Rupert. The first is, as Mike said, we have gone through a very extensive supplier qualification process with PACCAR with all of our suppliers. So that's all been signed off and then they signed off on us. Everybody passed, it's been a very intensive relationship. All of our suppliers are very excited, there is just no other word for it. this is a really exciting opportunity for all of them.

As I alluded to, this is really a good time for Westport to be talking to these people, every truck manufacturer that we talk to -- two years ago they were running at capacity, today talk of an order for 100 trucks gets very senior, very prompt attention. Similarly on the supply chain side all of our partners are -- they're seeing big concerns in the marketplace.

So all of a sudden a growth opportunity like this takes on even more substantial power. Everybody is very excited about the opportunity to work with PACCAR, they're seeing our progress in other markets. So we've had really good relationship development over the last 90 days. I think we're much more confident, they're much more confident, we're united in what we've got to do.

One of the other things that has happened is, as we've discussed, the single most expensive component on our bill of materials is that LNG fuel tank and the stainless steel goes into that tank and with the drop in commodities prices that alone is going to have a material impact.

There are a number of other factors that I think are going to help us get more efficient. And of course our engineering team is working hard to engineer cost out as we collaborate with our production partners. So I think it all bodes well. There are lots of things that we're working on, it's not five ideas, there are literally hundreds of cost reduction initiatives and we're pretty confident that it's going to get us where we need to get.

On the ramp up I'll just add that ever since we signed the Kenworth production agreement in mid January we've been talking to all of these suppliers about the need to get in position to ramp up to where Kenworth wanted to be, which was 100 a month coming out of the gate if the demand were there, growing to 200 a month if the demand materialized. So we've had close to a year now of working with these guys around getting them in position to be thinking about those kinds of numbers.

We're confident that they can do those kinds of numbers given adequate lead times on the purchase orders which are measured in the three-, four- to six-month time frame, not in years and longer time frame. So they will be ready with us as we develop the market, as the demands and purchase orders materialize and we will together be in position to supply those kinds of numbers to Kenworth and then Peterbilt as the demand materializes.

Great, thank you very much. That's all we have for now.

Ron Oster, Broadpoint AmTech.

Good afternoon. I wanted to ask real quickly about some of the comments in the press release. You noted with some of your sales channels being focused on the government and muni fleets and how this is a bit insulated from some of the difficult economic conditions. I wonder if you could just provide a little more color on that. It seems like those entities would also be subject to some of the same distress that the corporations are facing as well. I just wanted to understand that a little better.

It's something we've been watching pretty carefully, Ron. On the surface you would expect that cities and government would be seeing financial stress too. And they are, there's no doubt. But capital budgets for things like transit are established many, many months and years in advance. In fact, we're seeing really great pressure pretty much everywhere in the world for increased transit. The oil price spike really helped this, but every transit agency we've been talking to is talking about the need for more buses, not fewer -- new buses. The order to Delhi, clearly 3,000 new buses in Delhi is not the end of what's going to go on in India.

So we're going to see, I think, market dynamics, because of the economic downturn, that are actually good for our customers and they're going to find new infrastructure funding to be able to support that. Mike also commented that a lot of our trucking customers are pretty well established. Our partners, PACCAR has their own leasing program which they assure us is doing fine.

There are a number of facilities that we can use around the world to try and make sure that the relatively small number of customers that we're talking about here aren't impacted by this and we just haven't seen any evidence. Not to say that we're not going to see government pressure. On balance though from what we're hearing in most of our markets in Asia, in Europe and in North America, most governments seem to be talking very significant stimulus spending on infrastructure projects like this.

So on balance we just don't know what to conclude. We're going to have to see how it plays out. We haven't seen yet any customers' significant orders getting canceled or deferred because they've got credit problems, so we'll see how it plays out.

Okay, great. Thanks. And then also I was wondering, David, I think in your prepared remarks you mentioned obviously the OEM partners are under financial stress as well and there are some risks and opportunities that arise from this. Just wondering if you could kind of maybe quantify or take a guess at what the incremental cost to an OEM is to establish the infrastructure to complement your engines. What's that incremental cost for them to set up shop and begin producing your engines if you knew any details or anything you could shed on that?

It's a really good question and it's one of the things that we're working out today with a lot of different OEMs I can tell you. Two sides to this -- again, it's a bit perverse, but things are actually playing out pretty well for us. All the OEMs have seen a real crash in volumes and primarily that was because 2006 was such a great year. Everybody expected that 2007 would be smaller, 2006 was an emissions pre buy in North America, so everybody had great record volumes. But I don't think anybody expected 2008 to continue to see that real sharp reduction.

Now it's not as bad as the press might have you believe, frankly. We talk to our partners, they're still selling lots of trucks. So let's not get too apocalyptic. But there's no doubt that R&D budgets are getting stressed, new product budgets are getting scrutinized. The industry is facing another introduction of emission control technology in 2010, that's not going to get deferred just because there's a financial crisis.

So there's a lot of angst about how they manage the R&D budget pressure and do what they need to do, but also recognize the fact that there are these new markets developing for alternative fuel. So it plays pretty well into our story. We come and say we can get you there quickly, we can get you there with relatively modest investment. A $20 million to $50 million product investment for our OEM partners is not particularly material and we certainly wouldn't need to spend that to get engines running and trucks running, that's just validating the product through their product introduction process.

So we think that we're looking at maybe -- I don't know -- $20 million is probably a reasonable estimate for a typical OEM to from scratch get an LNG truck product out the door with our help. And most people see that as a pretty realistic number in this climate at a time when their own engineering resources are under a lot of pressure.

I'd say a word about the truck OEMs also. I think the estimates Dave has given you refer to engine development programs largely.

So they will be brand-new in-house engine programs.

But I might just comment, from the truck OEM side the agreements we have with Kenworth, now Peterbilt, perhaps others in the future -- assuming that these guys have a production facility in place, and they do, for diesel trucks with diesel engines in them, and assuming that they're set up to put the ISX diesel engine into those trucks -- and of course the guys we're talking to do as well -- then the investments are much, much smaller on the truck chassis side or the truck OEM side than those kinds of numbers.

So if you look at the Kenworth program, we signed the deal in January where they're going to be online early next year, so call it 12 months or so. Peterbilt just signed a deal talking about being online in nine months or so. So those are pretty modest programs by their standards and the dollars involved are, I think, quite modest by their standards as well.

Okay, thanks. That's helpful. And then lastly for me, with the Juniper JV, I know it's smaller engines, is that still the truck market or is that going to be more focused on the passenger vehicle market?

No, actually we have not said at all what it's about and for what we think are good solid competitive reasons. It is an engine company so that can give you a hint that there are engines involved here, not just components, and we haven't said what it's going to be for. So we'll tell you soon. We think it's a great opportunity.

As you can see from what Elaine has said about the money, it's a very highly levered and we think a very exciting way to get into a large new market with relatively small capital investment. So we think it's pretty cool. But sorry we can't tell you where it's starting and where it's going. But as we have said, it's smaller engines and OMVL is an automotive supplier so that should give you some hints.

Okay, thank you.

Robert Wallace, Raymond James.

Thanks very much and, Elaine, very well done. So you look at the cost side and you look at the PO side, so the thing is that the (technical difficulty) and you slightly mentioned the 2010 compliance is still in place. I notice that the R&D has gone up and you've explained partly that that is ferreted into lots of different places. But how does it look for 2010? Are we still on schedule for having that certified?

Bob, this is Mike. And I'd say yes, we are. We've got a team in place cranking away meeting early milestones. We've still got another year, 15 months to go on the program, so we've still got a lot of work to do. But we're tracking with our intent to have a product certified and ready to go by January 2010 if not sooner.

And that incremental cost in that, is that going to be a positive or negative going forward for the purchaser?

Well, we haven't priced it yet, but we do have some new systems on that engine -- catalytic reaction SCR systems, for example, to get down 2.2 g NOx. So there are some pressures there. But the key thing to look at will be the differential cost relative to the 2010 diesel product and its cost will be rising as well. So we don't really have a good fix yet until both products are further along and kind of ready to launch.

So you're looking -- you're hopefully at the same spread?

Something like that.

The same spread or better. Some of our cost reduction programs are geared towards 2010 as well.

Another factor on 2010, Bob, is -- because this has just come up in the last few months. Cummins now has gone public that they are using SCR on their diesel products for 2010 compliance. And so that's partly why we haven't been able to say what we're up to either but it's now clear. SCR is a complex technology, but it is where the world is going. All of the major OEMs are going to use SCR in Europe and in North America and in Asia.

And as we expect those systems to come down in cost over time, it makes sense for us to use the technology. But with SCR we can improve fuel economy. So part of our 2010 program will be to see how much we can improve combustion and fuel economy. And clearly that's front of mind for truck customers. So we're actually quite encouraged by what that product looks like now.

And Elaine made a valid point to, Bob, which was all of the work we're doing with the existing product around volumes, price reductions, cost reductions will roll right into that 2010 program because it's an evolution of that same product, not a brand-new totally different product.

Two other quick questions. One is that I noticed that the Prime Minister today was talking about -- talking to President-elect Obama concerning environmental and I do notice that we are bereft of many of our products in Canada. Do we see any changes from Ottawa or from Vancouver, Victoria I guess, on that, on picking up some more homegrown product?

I don't know, Bob, you must be getting the vibrations, you're a lot closer to legislature then we are.

Well, I can look out the window and see it, as you know.

Exactly. So are you seeing green balloons going up?

We see lots of green, but we don't see any cash. This is the problem.

This has been a long-standing concern of everybody's and -- let me just say three things. We have had dozens of high-level meetings with senior people in Ottawa, in Toronto, Queens Park and the city of Toronto and in Victoria over the last quarter. There's a lot of activity, there's a lot of interest.

The Pickens plan -- publicity has caught fire all over the world frankly and a lot of people have really got engaged in the issue for the first time. I think Boone's presentation of it has really been fabulous. And people understand it in a way that they never did before. And everybody says well, of course, how obvious, we've got to do something about oil consumption in transportation, that's the critical issue. And we're not going to fix it with ethanol, everybody has got that one too.

So a lot of policymakers have been educated over the last two or three years on the complexity of the issue, but they're also now much more engaged in the urgency of the issue. I think -- I'm always an optimist, but I think we are going to see some major developments in Canada soon.

We're also going to see some major developments in other countries and that is as a result of the failure of some of the other alternatives like the biofuels and the recognition that oil prices are really linked to everybody's economic well-being and we have to do something about dependence on imported oil for everybody.

One of those places to watch over the next six months is Washington, DC interestingly enough. I mentioned Obama's alt fuel inclinations, but it's pretty interesting to note that as of today with Senator Obama as President-elect and Congressman Rahm Emanuel as the new Chief of Staff of the new President, you have the guy on the House side, Emanuel, who introduced natural gas vehicle legislation a couple months ago and you've got Senator Obama, President-elect, who did the same thing on the Senate side six weeks ago now sitting there in the Oval Office talking about energy security policy and carbon policy for the United States. So I think that's going to be very interesting to watch going forward.

Maybe we could get them a bus (inaudible) fuel instead of one of their big limos.

Well, Washington, DC is a customer, as you know.

I know that, but getting back to the thing. The spread on nat gas to crude has been basically much in our favor; it is starting to narrow. Is there any concern on that?

There are two answers to that one, Bob. I alluded to this in my speech. All of the fleets we talk to, and I hear it on the radio and I hear people talking about gasoline prices. Everybody says it's great that it's down, but how fast is it going to go back up? So I don't think anybody has the illusion that this is a permanent change, aside from a few people. I just don't understand where they're getting their facts.

Everybody we talk to is concerned. Everyone we talk to in the fleets expects oil prices to rise substantially when the economy picks up. How high, how fast who knows? But no one thinks we're going to see $50 oil soon or for very long. So people are planning to use this time to diversify. What they're looking at on natural gas is historical gaps. Historical gaps are wider than they've ever been. One of the advantages that we are able to offer fleets is fixed prices and we have offered fixed prices with clean energy to some of our fleet customers. So if you want a 10-year fixed price guarantee that's very attractive --.

How many years?

10 years. You want a fixed-price contract, it's very reassuring to people. No one believes they're going to get their fleets 100% to natural gas any time soon. But moderating the risk through some sort of long-term fixed price guaranteed saving is very attractive. So I think the spread is going to be volatile. Most people expect that long-term, even short-term, three to six months from now it's more likely that diesel prices will be higher and natural gas price spreads will continue to be wide.

Just a final question. Because of the fact that we now appear to be past the cusp and on the upslope of getting there, I'm very concerned about somebody making an offer for the Company. That would be ridiculous in my opinion. Is there any process that we've got in place, just to refresh my memory on it, to look at anything that might come out of the blue?

I think the laws on takeover bids are pretty clear, Bob, and we're a public company and if there's a takeover bid there's a takeover bid. Honestly we're not as worried about it as you might think. Obviously it's pretty interesting at the current market cap with our cash position and assets and businesses. But we're a little tougher to digest maybe with our joint ventures and alliances than you just look at it first blush.

And I don't think there are many shareholders like you that are going to just accept willy-nilly a traditional 40% premium over the current share price. So I'm not all that worried. If something shows up we will deal with it to the best we can for our shareholders. That's all we can say.

(inaudible).

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

Thank you, everyone. We look forward to seeing you in early February for our third-quarter conference call.

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