Westport Fuel Systems Inc (WPRT) 2009 Q4 法說會逐字稿

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

Thank you. Good afternoon. Welcome to our fourth quarter and year-end conference call for fiscal 2009 that is being held to coincide with the disclosure of our financial results earlier this afternoon. 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 the media. But for the sake of brevity we are restricting questions to analysts and institutional investors.

You are reminded that certain statements made in this conference call and/ or responses to various questions may constitute forward-looking statements within the meaning of US and applicable Canadian securities law and such forward-looking statements are made based on our current expectations and involve certain risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements. Information contained in this conference call is subject to and qualified in its entirety by information contained in the Company's public filings and except as required by applicable securities laws we do not have any intention or obligation to update forward-looking information after this conference call. You are cautioned not place undue reliance on any forward-looking statements.

Now I will turn the call over to David Demers.

Thanks, Darren. Good afternoon, everyone. I think we can say without any fear of contradiction that fiscal '09 was a very interesting year for Westport as well as for our entire sector. In the first six months, we saw the successful launch of natural gas heavy duty trucks from Sterling and Kenworth, the rapid rise in oil prices brought many new fleets to try natural gas, and things were pretty interesting. Westport listed on NASDAQ in August, with Clean Energy, we launched LNG trucks for port drainage applications at the port of Los Angeles and Long Beach under their clean truck program and I think we have got about 225 LNG trucks now in daily operations at the ports by the way.

But then in the second half of the year came the financial collapse which has taken a terrible toll on both the transport industry and suppliers to the transport industry. Trucking businesses shrank more quickly than any time in history. Many fleets didn't survive. Truck production, as you have seen, has shrunk to levels not seen since the early 1970s, major brands like Sterling were closed completely. On top though crisis, the credit crunch made it difficult if not impossible for many fleets to buy new trucks at all even if they wanted to. Around the world, major manufacturers have seen drops of 50% to 70% in year-over-year volumes. Oil prices collapsed in the fall creating further confusion and sending confusing price signals. On top of that, global currency swung violently creating some problems in supply chain and product pricing.

Nevertheless as you can see, Westport has set another record year for sales despite all of the confusion and we're well positioned for further strong growth. Q4 revenues were up 72% over Q4 last year and overall during the year we saw 70% revenue growth in fiscal '09 over fiscal '08. Despite the financial downturn, our Q4 revenue was the third best quarter in our history with three of our best quarters being in fiscal '09. Revenue for the new GX heavy duty engines rose from C$3 million in fiscal '08 to C$11 million in fiscal '09. Frankly we planned for even stronger growth in heavy duty, but the combined obstacles of litigation at the ports, the credit crunch, the collapse of the North American economy and the associated trucking business meant we simply lost all momentum in this product over the last few months. We believe this has turned up again though and Mike will tell you about progress at the ports with their 2009 program.

During the year, we signed engine development programs with leading European manufacturers and launched new products for small industrial applications in partnership with OMVL out of Italy and Hyundai under the Juniper Engines brand. With production of engines in India, we won our largest order in history for bus engines in Delhi in partnership with Cummins India Limited, which we are shipping now. We continue to add new track and bus brands who are using our alternative fuel engines in their products. It has been an interesting year and overall, despite the tremendous turmoil in the markets, a very successful one for us.

Looking ahead though, we are positioned for what we believe is a historic shift in global energy use, recall we have been saying consistently about our long-term strategy. First, we believe that the long-term driver for adoption of alternative fuels will be conventional fuel scarcity and corresponding high gasoline and diesel fuel prices. We believe that the dominant alternative fuel for transportation will be natural gas and increasingly that includes bio methane. Second, we believe that the early and most important markets for alternative fuel vehicles will be large fuel use applications operating from central depots, where we can build infrastructure easily, buses, refuse trucks, port drainage, regional trucking, these are all prime targets. We want to deliver factory vehicles with state of the art performance, quality, emissions and reliability, and we want to do that in all the major markets around the world. Third, Westport's top to market will be through partnerships with companies with existing production and distribution assets, and we will work with them to develop new alternative fuel products based on their current conventional fuel offerings and with their current suppliers and partners. And obviously for example our historic relationship with Cummins and Cummins Westport is a good example of that.

Now what do we see ahead for fiscal 2010, the shift to alternative fuels is happening as we speak. As we move into what appears the be the early stages of economic recovery, we have seen oil prices rebound sharply; gasoline and diesel are ticking up strongly around the world despite continuing economic weakness. Fleet customers tell us that fuel price volatility continues to be their biggest management problem, despite the introduction of fuel price surcharges throughout the industry which of course doesn't make shippers happy. As natural gas prices continue to be dampened by the large new supplies that are coming on stream at low cost, the expectation is that the price gap between diesel and natural gas will continue to widen. This should encourage faster adoption of natural gas vehicles in fleets and it will encourage our OEM partners to expand their commitment to alternative fuel products with us. Clearly we haven't yet run out of market. There's still millions of diesel vehicles in the current markets that we address. CWI and Westport heavy duty unit shipped only a few thousand engines together in 2008, we see considerable increase in capacity demand in transit fleets around the world and several Government infrastructure announcements are suggesting support for deployment of new transit buses this year.

On the trucking side, CWI has established in strong market presence in refuse and delivery vehicles and this shows strong and good long-term promise. We also want to examine new potential market niches, and if they have what we feel are the right partners and the right opportunity, we will pursue new ideas to enter new markets, an example this year being the Juniper initiative. In the near term, we expect continued weakness and uncertainty in the trucking industry at least in North America and the challenging credit markets are likely going to mean the trick shipments will be slow to rebound. We expect most of our trucking business with the GX product will come from special situations like the ports, where we are now working with our partners to get the 2009 Clean Truck Program moving, which was just announced a few weeks ago. As the economic recovery develops of course, both the credit problems and the weakness in the trucking industry should rebound and that's when we would expect to see wider adoption in other fleets.

On the other hand, we expect strength in the bus markets this year as various global government stimulus packages begin to flow. We've seen specific proposals for new natural gas busses across the US and in India. Refuse trucks, we expect will also show strength this year. So, overall, I would say we are cautiously optimistic about continued strong revenue growth in fiscal 2010. Although we are budgeting more conservatively, of course, than the 70% growth we posted for fiscal 2009. We are going to continue to focus on our expenses and as revenue and gross margins grow, we will eventually tip over into a sustainable profit position.

Now there are a couple of wild cards for our business prospects this year. First there appears to be widespread support for a new US Government stimulus incentive targeting energy security including shifting heavy duty vehicles to natural gas. The NATGAS act, which is HR1835, has been introduced in the House of Representatives, and would offer substantial tax credits for the purchase of natural gas trucks through the year 2027. The Senate version of this bill is expected to be tabled some time this month. Of course, such a substantial incentive program should encourage more rapid adoption of our products and at this point we have no competition in the heavy duty engine market in the US. Second, with the progress on low carbon fuel standards in California and with the proposed cap and trade system for carbon emissions working its way through Washington, we expect the further new interest in natural gas as a fuel for transportation fleets is driven by these carbon initiatives. Carbon caps are clearly going to establish significant new global opportunities for natural gas vehicles and Westport in particular.

So to wrap up, despite the turmoil we believe we are on the right track, we are well positioned to scale up deliveries in a number of key global markets. We have the right partners, we intend to use this period of turmoil to continue to strengthen our competitive position, while continuing to be prudent managers of our resources. As the economy recovers, we expect strong growth in alternative fuel product sales, both as a result of Government incentives and because of the economic advantages of natural gas over oil.

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

Thank, David. Good afternoon, everyone. The Press Release financial statements and management's discussion and analysis provide a considerable amount of details regarding our fiscal year ended March 31, 2009 and they are posted on our website. This afternoon I will focus on revenue margins and net loss.

Turning to the fourth quarter first, for the fourth quarter ended March 31st, 2009, revenues were C$26.3 million compared to C$15.3 million in the previous fiscal year, a 72% increase. CWI product revenues were up C$10.7 million with increased shipments of the ISL G sales in the quarter and a C$3.3 million increase in kit revenue related to the Delhi transport order. During the quarter, we also shipped five Westport HD GX engines. Gross margins increased by C$2.4 million on higher revenues, while gross margin percentages decreased from 3% in the fourth quarter of last year to 26% in fiscal 2009. CWI gross margin percentage in Q4 was 29%. Net loss for the three months ended March 31st, 2009 was C$12.7 million compared to net loss of C$8.1 million in the three months ended March 31st, 2008. Non CWI net less increased by C$5.8 million while our share of CWI income improved by C$1.2 million. CWI went from a loss of C$400,000 in Q4 2008 to a contribution of C$800,000, primarily because of increased revenues and lower sales and marketing expenses in the period offset by increased taxes. In the fourth quarter of fiscal 2008, CWI had made a special C$1.4 had million accrual to support customer operational issues, associated with the discontinued product. Also, CWI fully utilized its remaining tax loss carry forwards during fiscal 2009 resulting in recognition of a tax expense of C$1.6 million versus a tax recovery of C$400,000 in the fourth quarter of last year.

Our non-CWI net loss in the fourth quarter of fiscal 2009 increased to C$13.5 million compared to net loss of C$7.7 million in fiscal 2008. We incurred additional costs relating to R&D of C$1.8 million with reduced government funding and increases in production, OEM integration costs and 2010 product initiatives. We also saw an increase in sales and marketing of C$1.5 million for customer OEM and product support and increased sales expenses. We also accrued bonuses and severance in the period. In addition our interest expense increased by approximately C$700,000 as a result of our C$16 million in subordinated debenture units.

Turning to the full year results, consolidated revenues increased C$121.8 million from C$71.5 million in fiscal 2008, a year-over-year increase of 70% on 4,038 units shipped compared to 2,720 units shipped in the prior fiscal year. The increase is based primarily on increased sales on CWI's ISL G and Westport's HD systems. CWI revenues increased from C$67.3 million in fiscal 2008 to C$109.9 million in fiscal 2009, an increase of 63% on higher engine and kit shipments and with parts revenue up C$2.7 million. Non-CWI revenues increased from C$4.2 million to C$11.9 million on 131 Westport HD units shipped in fiscal 2009, compared to 36 in the prior year. Westport shipments were primarily to customers associated with the ports of Los Angeles and Long Beach and in US dollars terms, consolidated revenues increased by approximately 57%.

Gross margin was C$30.8 million and C$22.5 million or 25% and 31% for the years ended March 31st, 2009 and 2008 respectively. CWI's gross margin and gross margin percentage were C$28.6 million and 26% in fiscal 2009 compared to C$21.8 million and 32% in fiscal 2008. Gross margin percentage declined primarily because of higher warranty reserves taken, a higher warranty accrual taken in the ISL G and the higher warranty accrual on the new ISL G units shipped in the year. Non-CWI gross margin and gross margin percentages were C$2.2 million and 19% in fiscal 2009 compared to C$700,000 and 17% in fiscal 2008. Gross margins fluctuate with foreign exchange, warranty, inventory adjustments and product mix. CWI gross margins in Q4 2009, as mentioned earlier, were 29% and based on the claims experienced in the quarter we would expect to see margin percentages continue in this range and stabilize over time as historically warranty tends to be highest and most volatile at launch. During fiscal 2009, warranty contributed approximately C$12 million in cash to our operating cash flow.

Moving on to our net results, our net consolidated loss for the year ended March 31, 2009 was C$24.4 million or C$0.81 loss per share compared to C$10.3 million or C$0.41 loss per share for the year ended March 31st, 2008. Our non-CWI loss increased by C$12.2 million while our share of CWI net income decreased by C$1.9 million. Non-CWI net loss increased from C$16.1 million to C$28.3 million with non-CWI operating expenses up C$12.6 million compared to fiscal 2008. Breaking down these expenses further, the increase is related to launching Westport HD into the heavy duty market, Kenworth integration costs and production related operating costs, increased customer-related costs including sales and marketing and current product support, NASDAQ listing expenses, accruing approximately C$1.4 million in royalties payable in Canada's industrial technology losses, whereas funding associated with this program was recognized in prior years, a C$900,000 increase in interest expense and amortization of long-term debt, stock-based compensation was C$1.6 million higher year-over-year and offsetting some of these expenses was a year-over-year increase of C$2.5 million of gains net of taxes from sale of long term investments. Our share of CWI's income decreased C$1.9 million from C$5.8 million in fiscal 2008 to C$3.9 million in fiscal 2009 primarily because of income taxes. As mentioned earlier, CWI utilized its remaining loss carry forwards for the year and the effect for fiscal 2009 was an income tax expense of C$4.2 million compared to tax recovery of C$5.6 million in the prior year. On a pretax basis, however, CWI doubled income to C$12 million from C$6 million in fiscal 2008.

Westport continues to maintain a solid cash balance. As of March 31st, 2009 our cash and short term investments balance was C$82.6 million compared to C$22.8 million at March 31st, 2008. The increase relates to funding generated from approximately C$53 million in net proceeds from our NASDAQ IPO, C$14 million net of expenses from the issuance of the venture units, and C$19.4 million from the sale of shares in Clean Energy. Cash used in operations and for capital expenditures was C$15.2 million with C$9.3 million used in operations and C$5.9 million in capital expenditures associated primarily with establishments of our assembly center and expansion of office facilities.

Finally, on an accounting note, as Canada will be moving from Canadian GAAP to IFRS in 2011, we have been evaluating our options and have determined that in the interest of our investors and shareholders the most cost effective and expedient move for us would be to move to US GAAP instead of IFRS, as we already provide a reconciliation to US GAAP in our financial statements. In addition we expect to start reporting in US dollars concurrent with our move to US GAAP and plan to have this transition ready for our fiscal year starting April 1st, 2010. As mentioned earlier, please see our 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. Good afternoon, everyone. As you can see and hear from our financial results, the demand for natural gas engines continues to build with a 70% increase over last year in total revenue. We have just completed also Westport's first ever C$100 million year. Obviously a huge milestone in our Company's history. During 2009, we achieved a number of business and operational milestones that have prepared further for growth in demand as well as helping the reduced product costs and expanding our sales opportunities. They include completing the Westport Assembly Center, or WAC, here in Vancouver, delivering 131 new heavy duty LNG systems for C$11 million in revenues, that's a 255% increase over the prior year's C$3.1 million on 36 units. The San Pedro Bay ports selecting us as the only natural gas engine provider for their clean truck program, Peterbilt Motors Company, a division of Paccar announcing the company will offer three new LNG configurations on its models 387, 386 and 367 in 2009. And Paccar Australia announcing they will also develop and commercialize LNG Kenworth trucks for the Australian market. On the Cummins Westport side, the lasat 12 months have provided significant growth as well as the single biggest order in our history. As Elaine pointed out, CWI revenues jumped 63% year-over-year, and in October 2008, CWI and Cummins India announced that the Delhi transport corporation had ordered 3,125 new natural gas buses equipped with CWI's B gas plus engines. Orders from buses in Peru, L. A. Metro and San Diego MTS highlight just a few of the distinguished fleets that are helping make CWI the market leader.

On the heavy duty side, we are now approaching 200 LNG heavy duty trucks operating in the marketplace on our Westport systems. This will include 13 systems now being prepared at Inland Kenworth for the pack 9 fleet for use for the ports of L.A. and Long Beach. Our customers now number more than two dozen fleets and they and their drivers are reporting very high satisfaction with the performance of our technology.

Looking ahead, there continue to be significant opportunities both at the ports and elsewhere. The L.A. and Long Beach ports have both announced their 2009 natural gas truck programs in recent weeks and have generated significant funding toward incentives to purchase LNG and CNG trucks. At the port of L.A. on May 5th, their Board approved a plan to subsidize the purchase of up to 900 new natural gas trucks to the tune of over C$88 million in incentive money. The first tranche will be 450 LNG trucks based on the C$44 million they have set aside, and then the second 450 would be funded by an additional C$44 million that they plan to generate through federal and state funding sources over the summer. The port of Long Beach has also publicly approved on May 18th, just three weeks ago in their case, their funding incentive monies of over C$42 million for this year, and Long Beach has just received proposals from various fleets for this incentive money just last Friday on June 5th. Together the L.A. and Long Beach ports have clearly established the requirements for both CWI and Westport heavy duty engines.

Looking outside the ports, the DOE and clean cities organizations have also established quite a large new C$300 million stimulus fund aimed at deployment of all fuel vehicles, this is part of the petroleum reduction program. We are now part of many proposals that were submitted across the United States just ten days ago, when the procurement closed on May 29th for deployment of significant numbers of additional Westport and CWI LNG systems in truck fleets as part of that procurement. As we look at the trucking markets generally, despite the overall worst market for new truck purchases in a very long time, Dave commented on that, we are making great inroads both in Westport heavy duty systems and in CWI refuse and commercial trucks. UPS recently announced plans to deploy another large fleet of CWI systems in delivery trucks continuing their build out at close to 200 annually the past three years. UPS by the way has also submitted a proposal for our heavy duty systems as part of the above noted DOE procurement. And we are very pleased to see the large increase in penetration in CWI's natural gas engines for the refuse truck market, a trend that accelerated this past year. Natural gas is now capturing 15% of the refuse fleet annually, starting really from zero just a few years ago.

Finally I would like to note the planned rotation that occurred in leadership at Cummins Westport a week ago. After four very successful years as President, Guan Saw has turned the reigns over to Roe East. We are excited to see Roe diving in to his new responsibilities and we fully expect to see continuing great results, capitalizing on his years of managing Cummins Global Bus business as well as hybrid markets and strategic marketing assignments there.

As you can see, this is an exciting time to be involved with Westport, with many growth opportunities in front of us. I will now pass the call back to the operator, who will open the conference to your questions.

Thank you. (Operator Instructions). There will be a brief pause while the participants register for questions. Thank you for your patience. The first question is from Graham Mattison from Lazard Capital Markets.

Good afternoon, everyone.

Hi, Graham.

Hey, Graham.

A question on the CWI margins, which definitely recovered from prior quarters, but are you still accruing warranty reserves for the ISL G's there?

We still take a look at our warranty accruals every quarter as you know, Graham. And in the Q4, the claims experience was much better than Q3, so we still had a small adjustment that was really more of a carry-forward from Q3, but for the most part what you see in Q4 is probably your the normal accrual. Let's put it that way.

Okay. And then can you give a little more color on the C$1.4 million charge that you took or for the customer and product going in.

That was Q4 '08. If you remember, you may or may not remember from last year, that's not, that was the last year kind of March 2008. They had, they took a policy pretty much and sales guys decided they were going to help fix the customer problem. It was a very large customer, one of their largest customers, and they decided to make the investment. As far as I know, most of those problems have now been resolved.

Got you. Thanks. Can you give an update on some of your joint ventures, particularly where you stand with Weichai with that investment and your European partner?

We are all pointing at each other. So I guess I get it. It is David. The Weichai business license has still not be issued. We have not yet invested in the new Weichai joint venture. The technical program is underway. We have moved people at our CTO to Beijing to assist with that. So the engineering team is, you know is moving around.

The business license, as I said, is not in place. So technically the joint venture isn't in place. We still have the money sitting on our balance sheet. Same thing with all of our other kind of emerging programs, I would say we made good progress with a number of different engine platforms and OEMs. We are seeing a lot of interest in the industry worldwide in, in what we are doing with alternative fuels and I think that is reflected in what you are seeing with our engineering costs and stay tuned as we discuss that.

Okay. Great. I will jump back in queue. Thank you very much.

Thank you. The next question is from David Woodburn from Think Equity. Please go ahead.

Hi, everybody. Elaine, I guess this one I will send to you. It is on R&D expense in Q4, it looks like it is a bit higher than preceding quarters. I am wondering if this is just sort of a use it or lose it type of thing at the end of the year, or if it is part of a trend.

Yes. Q4 is always a tricky quarter because you have all of the year-end adjustments. So some of the things that we have put into Q4 that you wouldn't have seen in prior quarters are things like year-end bonus accruals, any other year-end adjustments. We have also had some restructuring costs that occurred in the fourth quarter as well. Some of that flowed into R&D.

The other thing I'd say about R&D, it's always volatile, depending on when people buy materials. We are wrought with some of our projects. Q4 is probably not a great quarter to, for modeling purposes. I think Q3 is probably a little bit more indicative. The other thing I would say about kind of the R&D numbers going forward is given that most of our OEM integration costs are now behind us, and based on some of the restructuring we did in Q4 I would expect R&D to look more like Q3 or even potentially a little bit lower.

Okay. I guess for Mike with the ports program and let's to the port of Long Beach in particular I know they have got their lottery scheduled for early July. How long do you think until Westport actually feeds and fills some of those orders?

Port of Long Beach as you say is in the middle of a pretty intense procurement. They have the submittals coming in from the fleet just last Friday, and as you highlight they're talking -- they're expecting I guess one bit of good news is that they are expecting it to be oversubscribed in terms of proposals for natural gas.

That's why they set up this lottery process for early July to allocate those available monies to different fleets. They haven't laid out the exact timing from lottery time to each step in the process, but basically how I would see that working is the lottery will let the different fleets know which ones have been successful in securing incentive money and for how many trucks and whether they are a CWI 8.9 Liter engines or Westport 15 Liter engines, those fleets will then be contacting the truck OEMs, Kenworth, Peterbilt, et cetera. Around production of those numbers of trucks and then the purchase orders will start coming our way from the OEMs. Timing is not clear yet, but I would expect over a 90 day period or so we would see that rolling out because once they make the lottery awards it will take the uncertainty out of the process. So things should move reasonably quickly, I think.

Okay. Great. I will get back in queue. Thank you.

Thank, David.

Thank you. The next question is from Rob Brown from Craig-Hallum. Please go ahead.

Good afternoon. Could you provide an update on what's going on on your Kenworth OEM production, are they ready to roll when these come through from the ports?

Ken, the OEM agreement is in place. They have got the Mexi-Cali facility gearing up to produce trucks and just as we are waiting for blocks of orders to come to make that production move forward. So they're watching as we are the port of Long Beach procurement this month, the port of L.A. activity which is developing this month and next as well. And also possible outcomes from this DOE stimulus set of proposals I mentioned earlier.

Great. Thank you. And then on those DOE proposals how many sort of HD engines could that be? Is there a range of size?

Yes, it is a little tough to put a precise number on it because there are so many proposals going into DOE from all over the country. These proposals are being sponsored by regulatory authorities, HMDs and association with different clean cities organizations. But from what I have seen and from fleets we have directly talked to we can tell that there are a few hundred heavy duty engines involved in those proposals and probably a similar number of CWI engines involved in those proposals.

Great. Thank you.

What remains to be seen again is which of those proposals are successful as the DOE goes through their evaluation criteria and they have suggested they will be announcing awards in the August/early September time frame.

Okay. Thank you. I will turn it over.

Thank you. The next question is from Eric Stine from Northland Securities. Please do ahead.

Good afternoon.

Hey, Eric.

I was just wondering if you could give us an update on the heavy duty side, the process of meeting EPA 2010 standards?

Yes. This is Mike again, Eric. I can give you a quick update. The process has been underway for some time, several quarters really. So we have a development team here engaged in taking the existing '07 heavy duty product and its certification and adapting that architecture and system to be prepared to meet the January 2010 standards. The process that's underway is an engineering effort, which will progress into a certification testing program later this year, likely an expected outcome of which is certification by both EPA and CARB that our engine is certified for 2010 program, and then orders, orders to follow.

Okay. That's helpful. And I was just wondering if you could talk about at Los Angeles and the impact that the C$80,000 grant has had on maybe some of your discussions given that that is kind of the number that people thought needed to be offered to make a difference for you guys.

Yes. Port of L.A. has been a long time coming, that program has been in a bit of limbo since October 1 or so last year when the last round of diesel truck bans went into place. So L.A. has been in the process of putting their funding mechanisms in place. Getting their cargo fees implemented.

That happened on February 18th you may recall and deciding exactly how they wanted to incentivize trucks. So they finally not finally but four weeks ago announced their '09 program finally in the sense it is four months into the year I guess, the 900 truck goal as you say, they have talked about providing C$80,000 per LNG truck to incentivize fleets to go all fuel and in terms of our discussions with fleets, that has opened up the discussions enormously in the last four weeks because over the first quarter of the calendar year fleets have been suggesting they couldn't say much until they saw the particular incentive that was going to be put forward, now that that C$80,000 figure is out there, and this 900 truck figure is out there. We are seeing a big increase in interest and discussions with candidate fleets who service the port of L.A. and who are talking both ourselves, the OEMs and the ports about how to get in position for securing this incentive money.

Okay. Is that pretty much mixed between trucking companies that already have LNG and new people who would be new to it? Or is it a mix of both?

Yes. It would be a mix of both. I mentioned we got close to two dozen customers that now have our heavy duty systems out there. Those early adopters, those that service the ports of L.A. and Long Beach are generally stepping up to get additional numbers of trucks both heavy duty and CWI systems but there are some new customers that are appearing and showing interest in significant numbers of trucks as well that have not previously deployed LNG trucks.

Okay. Thanks on that. And just last thing and then I will jump into the line. Can you give us an update on the Jupiter joint venture?

Juniper.

I apologize. Juniper, yes.

I like the name but somebody took it already. Yes, we had rolled out Juniper in January at the big (inaudible) trade show, and just to remind everybody, Juniper's target was 2.0 and 2.4-liter engines for industrial applications which includes forklifts. We are marketing this to OEMs so people who make new forklifts and sell them but also other industrial applications and you know, offered equipment let's just say. Response has been great.

The goods movement industry is being hammered. If you think the truck market looks bad, you should take a look at the warehousing and forklift business. But like everyone else, there's an emissions transition coming, and in the middle of this terrible downturn, these companies have all got to come up with a new strategy where they can offer emissions certified equipment. It was really the opportunity we saw for Juniper. So Juniper has been marketing around the world to OEMs and has been quite successful frankly. We are very happy; we expect Juniper to be shipping engines later this year. And when the economy picks up of course that's when we would expect to see volumes. Ready to produce likely production is going to be with facilities in Korea, with Hyundai support. So you can take it from there in terms of where we are. What else can I say? I would say the engines have been well received.

They have them operating already in equipment. People are testing them in their production lines. I'm very happy with performance emissions, light weight, and obviously the quality and technology in that base engine. So we are optimistic about Juniper's prospects and we think there's lots of opportunities for it to expand into other adjacent markets too.

Those will meet tier four emission standards?

Yep. That's the whole idea is to come up with a very high performance, very, price advantage. We obviously want to offer a great engine package but it takes away the emission certification worry for a lot of these OEMs that are new at it.

Okay. Thanks a lot.

Thank you. The next question is from Rupert Merer from National Bank Financial. Please go ahead.

Good afternoon, everyone.

Hi, Rupert.

Mike, if I could go back to the DOE clean city procurement, do you have a sense for the timing of awards and ultimately for deliveries under the procurement?

What's the, first of all this is so-called round one of a possible two round solicitation, might be the first thing I'd say. Although I think it is possible that it would be so heavily subscribed that they might find it in their interest to allocate all C$300 million in round one. We will see how that goes. What they're saying about timing on round one is award announcements in August with conversion to contracts with the proposers in September. So that's kind of the general timing. That then these proposers are a bit complicated I might say.

As I said earlier, the proposers are sort of the quasi Governmental agencies, regulatory authorities, joint ventures with clean cities organizations, so that might suggest that it might take a month or two after those awards for them to get their all of their programs figured out and money to start flowing to people like ourselves. But that timetable might suggest a September contract estimate. August information, at the end of August, if they stay on track. I don't know who has been awarded money and how much, and we ought to be able to figure out how many Westport and CWI engines are in those winners and 30 to 90 days I would say converting to contracts and purchase orders from there.

What's your sense of the makeup of the proposals? We're going to see some natural gas vehicles here. Are there going to be a large number of biofuel proposals and maybe some other fuels hydrogen --

It looks to be pretty wide open in terms of types of all fuel that can apply, although it is things [at] petroleum reduction. I don't think you will see much bio diesel maybe a little bit, but I think you see natural gas, hybrids anything that can kind of remotely qualify under the criteria. So I think it will give the DOE a fair amount of stuff to sort out once those are, once they start going through them.

I will jump in. What we have seen too is that this is through clean city, clean cities of course have been a strong, strong friends of natural gas vehicles, including buses and garbage trucks. These proposals were meant to be, I don't want to use the word shovel ready but it is probably the best one, want they want are things that really work they can deploy in volume and clearly get benefits immediately.

So I think you are going to see a bias toward existing fleets that are expanding. So this isn't about R&D. It is not about new initiatives. It is about taking thing that have worked and immediately putting new things on the road.

Your point on large fleets is important I think too. We have seen a lot of pretty big numbers in some of these proposals, fleets going in for 75, 50, 150 trucks versus the three, and the seven, and the ten we used to see.

So I think that certainly positions CWI well for the bus initiative. There's lots of bus fleets expecting to see some very nice Christmas bonuses, let's say, in the form of new buses from this initiative. And I think the refuse fleets are feeling pretty good about it.

A bunch of other people who have been looking at heavy duty or trying heavy duty, now that the technology is quite well proven as Mike said, you know we had pretty quiet last couple of quarters on heavy duty, but we haven't been wasting it. Trucks are on the road; we've had a lot of people go to the ports to see trucks and drive trucks and see the stations. Certainly at the port, I would say that the mood is much more accepting that this is business as usual, the technology works and it works as well as anybody could hope. I think all of those things give people comfort when they are looking at these proposals and it gives people some confidence they can go and put dozens or hundreds of trucks into operation at their fleet. So I think the timing of these stimulus packages has been really lucky.

The port of Long Beach is separate from the stimulus but a similar point, kind of an interesting case in point. Dave and I had dinner with some senior port people a week or so ago, and they made the point that a year ago they weren't seeing this kind of interest from their customers in the heavy duty systems, they were seeing a lot of interest in the mid range stuff because it had a longer track record, but over the course of the last six to nine months, as our fleets have been out there in the L.A. basin, they're starting to get very good reports from the drivers and the fleet owners, which is working its way through the marketplace so that the port of Long Beach is people are much more enthused and confident that they can go larger heavy duty systems this year and do it comfortably and have plenty of people interested in it.

So the delay in the new orders actually had a couple of effects. One of them was to allow time for the existing trucks that were out there to generate data and experience, get some champions talking to each other, and we're seeing a a bit of a ripple effect in interest down there right now.

Great. Thanks. One more then, you David you mentioned there are 225 LNG trucks at the ports roughly. How many of those would be CWI engines do you think?

Oh, I would have to -- I am looking at the (multiple speakers).

Close to 1/2.

Close to half. There's more than 100 of each. Pretty close to half.

Would you expect a similar ratio going forward?

Yes. That's the $64,000 question because we are, it is tough to guess how this fleet mix will work out, the lottery systems et cetera, et cetera, but it is probably not a bad bogey for the short term. It could, it could move toward heavy duty as you get fleets in looking for longer range. In fact in the stimulus proposals we were informed by the south coast AQMD last week that in the AQMD submissions they submitted only for heavy duty systems because they were working with fleets that were interested, needed the longer range capability.

It is I mean the mix is, is, you know, it is pointless to try and predict. We are seeing a lot more interest in heavy duty. As Mike said I think it is a lot of show me attitude a year ago and people have now had a chance to get a lot more comfortable with the heavy duty technology, the ISL G has been out for a few years. It was new in some of these truck chassis. But Sterling has done a great job of promoting that with some, with some large fleets. So that's why the Sterling numbers were so high.

I think the, I guess I would be surprised if it is 50/50 this year, I suspect we'll see a lot more take on heavy duty, just from my own discussions with people. I think there is relatively small numbers of short range, lighter duty cycle trucks operating at the port and I think we will get more of the heavy duty guys jumping on the band wagon this year. We will wait and see. Either way we will get all of the business so we're not all that unhappy.

Great. Thanks very much.

Thank you. The next question is from Laurence Alexander from Jefferies & Co. Please go ahead.

Good afternoon. First can you give an update on the Australia opportunity and how you see the order pattern there evolving over the next couple of years?

Hey. This is Mike again. I am starting to feel guilty because I am taking up too much air space here. But Australia we haven't said a lot about recently and partly because things are a little quiet there. I would say that among other heavily influenced by some of the factors they talked about, the drop in oil price which and the drop in differential price, but also foreign exchange effects have been really significant there.

But we do have ten trucks on the road with a few customers. We are supporting them. We have gotten through the shake down period. They're putting a ton of kilometers on these trucks even though in some cases they're sort of so-called demonstration trucks, and the mood is pretty positive about the performance of the technology and the vehicles. When the economic, unlike most of what we talked about here in North America, we are not looking at massive government subsidy opportunities around the natural gas truck procurement.

The opportunity at the moment is being driven largely by economics with some growing government interest in carbon climate change and things like that. But so we are watching that, there are discussions going on with some interested fleets right now, and the Kenworth Australia movement into the program is helping, but it is difficult to predict, I think when we might see significant orders coming out of that program. But we are taking the posture of let's make sure we take care of the customers we have and that the trucks deliver performance that they're expected and then let's see where the market takes us.

Then when you look at the raft of subsidy proposals in the US is the Government balancing the infrastructure needs with the fleet subsidies in the right way so that's everybody who gets -- purchases vehicles will have adequate access to fuel in the right geographies?

Want that one, Dave?

Yes. Mike is giving me the air time. I think the answer is yes because if we focus in our remarks on what's going to directly affect us. There's equally compelling incentives for both fuel and fuel infrastructure development. It is a pretty well thought through program.

I think there's a lot of innovative features, certainly in the House of Representatives bill. We haven't seen the Senate draft yet. But it is clearly designed to build heavy duty LNG vehicles in the United States and clearly the goal is to eliminate oil imports or reduce oil imports as much as possible so infrastructure is critical and there's a number of incentives there. I think, obviously we are working with our friends at Clean Energy. We need to, we need to plan that but I think there's every expectation that, that as people want trucks in operation, the infrastructure will be there. There's capacity in the system.

We are seeing a lot of interest in the natural gas producers because as you know prices for natural gas have been disappointing let's say if you own natural gas. They're looking for new markets, they're keen to see infrastructure development. I think all of this, this time period over the last six months has really focused people's attention on what is going to happen when the economy starts to rebound and how people can position to take advantage of these movements and I think the expectation is pretty high. We are going to see relatively fast penetration of the heavy duty truck business which is thousands of trucks; all of that is speculative but that's what we are trying to get positioned for and be ready for.

On the DOE side, I would mention specifically also those proposals do in fact have an infrastructure component in many cases so people are proposing funding of infrastructure projects station development, and net corridor networking of fueling stations et cetera. So I would expect some of that C$300 million to go to infrastructure.

And lastly could you give a little more detail on your R&D spending or at least what you are focusing on? How much of it is allocated toward near-term projects as opposed to longer term opportunities that might be in adjacent markets.

Just looking around that's probably getting into sensitive territory but we can -- We can take a whack at it. (multiple speakers) looking brave.

R&D, I mean it is well balanced. Let's put it that way. We do (multiple speakers).

Well balanced.

But there's a number of things in the R&D line. Some of it is current product support. As you find problems in the field you have to fix them as they come back in so the sales and marketing guys and the field service guys will throw things back to the engineers and they will fix those problems, so anything that's customer facing has high priority. Secondly 2010 product development, that's another large project that's underway and finally, we do have longer term development agreements in place with our European partner as well as just looking at cost reduction activities and some other things as well. So it is a process we look at as part of our annual planning process and we will balance it as needed.

That was a great (multiple speakers) answer. Good job.

Thank you. The next question is from Michael Willemse from CIBC World Markets, please go ahead.

If we could just review the Long Beach port program, what kind of numbers of trucks are we looking at with that program?

Michael, this is Mike. The port of Long Beach, they've set aside a little over C$42 million of their own money and they have indicated that grants in the amount of C$105,000 are available to the natural gas truck guys.

So, they say they think they have got money for about 400 trucks, 400 natural gas trucks there this year; that could increase as they get access to other moneys in particular California state so-called Prop. 1B money, which has been tied up for some time around budget problems at the state level, is in the process of being unblocked as we speak, a bit surprising because California still has plenty of enormous fiscal problems, but it looks like C$49 million or so of Prop. 1B money are getting ready to be allocated to the two southern California ports in the not too distant future for them to throw into their clean truck program. It is a bit of a moving target but start with 400 based on the funds they have themselves and that might increase a bit with these incremental funds.

But the fleets have access to the C$42 million regardless of the rest of the funding is matched?

That's the way it looks like it will play out.

Yes the C$42 million is port money, that doesn't depend on anybody else.

I was just wondering if you can comment on order activity on a month to month basis. If you look at May versus April and April versus March, is the momentum starting to pick up?

I think it is I will take that one because everyone is looking terrified again. So I will stick my neck out. I think what you are asking is are we seeing the economic bottom. If that's what you are asking I would say there's really no evidence either way. We have always been volatile quarter to quarter, month to month really depends on such single large orders, then it really becomes hard to draw a real pattern statistically. I would say we have seen infrastructure investments around the world kicking in. So we are seeing international orders get unblocked.

We have seen activity from fleets as Mike mentioned UPS people like that. So there's certainly economic activity. As you can see we had a pretty good quarter even in the depths of what most people thought was the bottom. So we are still seeing strong orders. We are still seeing flow of product, and still seeing lots of opportunities, and probably more opportunities now than we are on hold for sure, they were on hold three to six months ago. They have coming unblocked, and people are back to normal. I would say we are seeing the hopeful signs but can't draw any conclusions from an order book or an order rate. Elaine, do you want to comment?

No, I think that's a fair comment.

Okay. And just another question on CNG prices, we track it from Clean Energy systems, it looks like the last update we got was around C$2.14 which is still above where we were a few months ago even though natural gas is still it has weakened quite a bit. Any thoughts on why we haven't seen a descent size decline on the CNG price.

You should probably call Clean Energy and ask them. I will say that, if you are looking at their public access stations they paid in CNG to the price of gasoline, they don't, you know it is not a cost plus sort of thing. They peg it at a discount to gasoline. They think that's what the market wants to see in California. So that doesn't reflect what they're signing for fleet customers.

Okay. Okay. Helpful. Thanks very much.

Thank you.

Thank you. The final question for today is from Bob Wallace from Raymond James. Please go ahead.

Aloha.

Hey, Bob. What are you doing?

It is nice to have some separation of speeches, David. Anyway, on the HR 1835, a number of close sponsors that I last had was moved up from 38 to 55. Have you heard of any revision on that?

I have seen a little it higher number, I saw a number of 59 the last few days, Bob.

Okay. My question really has to do with Juniper, when David at the very beginning in your speech you were talking, concerning about the combination of Juniper at Hyundai; correct?

Yep.

And Europe; correct?

Europe, well our partner is in Italy for the fuel systems.

But the Hyundai, what is therefore the connection with Hyundai is indirect?

Well, Hyundai is the engine supplier for Juniper and we will likely be actually manufacturing the systems in Korea.

I see.

They will be marketed around the world but the engines themselves will be built in Korea.

These are for the forklift.

Forklifts and other industrial applications, yes.

Because I noticed in the report from Singapore they were mentioning other equipment for their airport. Is that, is that?

Yes. It is a lot of surprising things that popped up, Bob. You are right. So even things like water pumps and hydraulic systems and things in the oil and gas market. There has been a lot of interest in this new engine. It looks like we have hit an interesting spot in the market at a time when they're all looking for lower emissions and better integration. So it is early days. But I think Juniper has got lots of opportunity.

So these are stationary applications (multiple speakers) wheels.

Yep.

Is that correct?

Yes.

That would be worldwide through Hyundai or Juniper or both.

Sold through Juniper. So much like CWI, everything is outsourced but the manufacturer of record will be Juniper. If you go to the EPA website, you'll see Juniper, you won't see Hyundai or OMVL or Westport.

So that is a, have you got an idea because we have sort of a general idea of the market capability for the Westport and Cummins engines, or Westport engines. Any idea of the scope of the market availability of these types of products?

It is actually a very big market and again the economic melt down has really, really changed everybody in that business. If you go back to a going rate, in 2008, 2007 we were looking at I am looking at Elaine. I think it's in the low six figures 110,000, 120,000 alternative fuel engines were shipped in that segment. So it is already all alternative fuel, LPG or natural gas, and it is almost all after market. So they take gasoline engines and convert them. So what we are sighing is a transition to OEM and OEM quality. That's really what we are looking at. It is a market of potentially tens of thousands of hundreds of thousands of units. So it is a very big deal to go after.

Is that going to be added on the same way, and quoting back having a reserve for a warranty type of thing.

Oh yes. It will be just the same as CWI. You will see revenue, you will see cost of goods.

But it's a model after CWI.

It should look like CWI.

The business model looks like CWI, but the accounting is a little bit different because Juniper is an equity investment. You only see the one line loss [rate] come from Juniper but the business model is basically the same.

While I have you got Elaine, the switch to the in US funds, you went over that fairly quickly, is you basically have that in place, and all of the bits and pieces that is are needed which I applaud by the way.

Thank you, Bob.

Yes, we think it will be a relatively straightforward exercise for us to go to US GAAP and start reporting in US dollars. We won't do it this year. This is the last year we will do Canadian dollars and Canadian GAAP but starting next fiscal year, next April 1, we will go US.

Okay.

That will save time around what growth was in US dollars versus Canadian dollars.

Being lazy here because I am looking out over the ocean. The total, there were some extraordinary costs last year Elaine, how much would they have totaled, especially the listing and underwriting et cetera? Just in a ball park figure.

Sorry for the NASDAQ.

Yes, that's. The combination of all the various.

If you look at increased costs in D&O insurance, we had to dig our board some other listing fees et cetera. We are probably looking at I think about still over C$0.5 million, C$0.75 million that kind of range.

One other question, David. There has been a move to basically equate the amount of dollars spent in marketing and research. Just by the raw number I see. So that means there has to be an increase in the number of marketing people. Do you expect to continue to increase that from the Westport Innovations point of view?

Yes, it could be a bit misleading. There's a lot of things that go into the marketing line. As you know our plan, our business model is to work with a pretty highly leveraged distribution channel. We work through the dealers and through Cummins and through our friends like at Clean Energy. It is not our intend to ramp up to have a massive global sales force but we are spending more on marketing and marketing programs and that would include a number of initiatives on both CWI and heavy duty so yes you will see a ramp up of the sales and marking line but it is not directly related to the number of people.

We have to establish a sales and marketing team to help train pack our sales people. It's a new product, but as David said, as we grow revenues, we don't expect that sales and marketing line to grow in line with the revenue.

The number of shares, as this goes up.

I think we cut you off.

We will follow up after. Sorry about that.

Thank you. This concludes today's question-and-answer period.

Thank you for joining us today. Feel free to contact us after the call to follow up on any questions and lastly we look forward to seeing you on the next quarterly call.

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