Westport Fuel Systems Inc (WPRT) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Westport Innovations' 2010 first quarter financial results conference call. Introducing the speakers today will be Mr. Darren Seed. Please note that this call will be recorded and is available on webcast. There will be a question and answer period at the end of the presentation. Please go ahead, Mr. Seed.

Thank you and good afternoon. Welcome to our first quarter conference call for fiscal 2010. It is being held to coincide with the disclosure of our financial statements 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 of this call is open to the public and to media. But for the sake of brevity, we are restricting questions to analysts and institutional investors.

You are reminded that certain statements may be made in this conference call and our 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 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 law, we do not have any intention or obligation to update forward-looking information after the conference call. You are cautioned not to place undue -- any reliance on any forward-looking statements. Now I'll turn the call over to David Demers.

Thanks, Darren and good afternoon, everyone. I'm just scrubbing my comments to see what is not a forward-looking statement, so we could be in trouble here.

As expected, as you can see from the numbers, fiscal 2010 is off to a relatively quiet start. Revenue is about flat year-over-year for our first quarter. Of course, our whole sector has seen catastrophic shrinkage in markets around the world since the economic collapse last fall. And even in June, the industry outlook through the rest of the year was very cautious, although there are some industry analysts who are expressing a little more bullish outlook possibly by the end of 2009.

Our fiscal '09 year end call went through this in some detail, though, so I won't reiterate what we've said just a few weeks ago. But I guess, under these circumstances, about flat, we think, is a good result, probably as good as we could expect. If you look at the business in more detail, which Elaine will do for us in a few minutes, there are some pretty interesting signals here. You can see that CWI in US dollars saw engine shipments in the US drop by about 40% year-over-year, but CWI clawed its way back up through strength in India and Europe and 30% growth in the parts business. Heavy-duty sales also increased year-over-year, although this is still a very small business for us. And with the volatility in foreign exchange, we ended up in relatively good shape for the quarter compared to the economy and other people in this industry generally.

Sentiment about US economic recovery does seem to be significantly more optimistic over the past few weeks and if the economy stabilizes and begins to revive, we would expect shipment rates in the US to bounce back quickly. In the near-term we have seen a lot of enthusiasm from fleets for the many stimulus and grant programs that have been announced by various levels of government over the past few months, so we may see the strong subsidy investment drive a substantial lump of new business at the same time as general economic recovery delivers a strong rebound in core traditional fleets. We should begin to see order flow from the ports, from US federal stimulus programs such as Clean Cities and general emissions programs over the course of the summer and early fall.

Our international business continues to show strength, and we see a number of good prospects for continued growth there.

On balance, then, we are cautiously optimistic about the short-term business prospects although there's still a high level of uncertainty about the timing of orders from stimulus programs and strong growth will only return after the economic signals are unequivocal.

In any case, as we said in our last call, we believe that fiscal 2010 will show good growth over fiscal 2009 despite the market turmoil. We're working hard to achieve our financial goals, and I think they are realistic, from what we can see today. Of course, I want to remind you that our current financial results are simply waypoints as we further build our Company. Our goal is to help catalyze a broad global shift to natural gas from diesel fuel, which is an opportunity several orders of magnitude bigger than our current business.

Looking past current turbulence, we are seeing considerable interest in the potential impact of the US nat gas act market incentives. Mike, I think, is going to touch on that in detail. Of course, the rise in oil prices is reinforcing last year's anxiety about fuel price volatility and the potential for an oil shock scenario. Either factor could create game-changing conditions for us and drive a sudden shift in market behavior.

Before Elaine and Mike start into their discussions of the quarter and operational results, I wanted to share some of the steps we're taking to position Westport for either this longer-term 10 times business expansion or a sudden game-changing factor such as an oil shock. Most of you have heard me talk about our three strategic assumptions, so I'll use that as a framework to explain what we are seeing.

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 transport will be natural gas and bio methane, other versions of natural gas. As Boone Pickens has said all year, natural gas is cheap, it's clean, it's domestically available.

This belief is seeing considerable support these days with even general business media picking up on the theme of limited oil supply, large new reserves of low-cost domestic natural gas and natural gas being cleaner. We're also seeing talk by natural gas producers and natural gas distribution companies about the opportunity they see in the transportation business for natural gas, for their product. So this is a global mood shift that is developing real momentum everywhere for natural gas, particularly as a fuel for commercial fleets that seems to be pretty well accepted now.

Of course, that's what we focus on is large fuel use fleets operating from central depots -- buses, refuse trucks, port dredge, regional trucking. These are all prime targets for us. The obstacles to other markets, though, like long-haul trucking and off-road applications, aren't insurmountable, either. We just think that our first focus has allowed us to get a toehold in these key markets and prove our case. We believe that if we can deliver factory-produced vehicles with state-of-the-art performance, quality, emissions and reliability at a competitive price to diesel, we will see widespread adoption in every application. We continue to be the only provider of natural gas engines in North America and, frankly, the only significant player worldwide that are really pursuing this opportunity.

We want to build on this leadership position by securing new alliances and partnerships in as many market segments as we can. Our business model relies on alliances and partnerships with companies that have 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 using their current suppliers and partners. Where we have to plug a gap in the value chain, of course, Westport will have to step up and do that. But we want to relinquish that cost and responsibility as soon as a reliable partner can be recruited for it.

The reason we focus on partners is for their ability to rapidly and inexpensively scale up our business by those several orders of magnitude and also to create partners out of potential competitors. Now, these three concepts aren't new. What does seem to be new, though, is this emerging consensus from many different stakeholders that the time to shift away from petroleum is here or it's coming very soon. And we are seeing many more people show up to talk to us about our view of the future.

Over the past year we have seen wide acceptance that the logical solution for commercial vehicles like trucks and buses would be natural gas in all of the major markets around the world. We've been very busy, despite the economic turbulence, and we continue to meet with new OEMs, new suppliers, governments, energy producers to talk about views and to discuss strategy and how this dramatic change in the energy markets might affect their business plans and what we can do for them. Frankly, once we get past the current economic turbulence, we think momentum is developing very nicely.

Although we can't get too far ahead of our realistic short-term markets, we have been rethinking our near and midterm strategy, and we want to position ourselves for continued progress with all of this new momentum. As a result, we're shifting priorities. We've moved some of our leadership team to help focus resources on what we think are the best opportunities. As you've seen, our CWI joint venture announced Roe East's appointment as President in June. Roe will be based at Cummins' headquarters in Columbus, Indiana. And his mission is clear -- continued profitable growth for CWI around the world.

Mike Gallagher has taken on the role of CWI Board Chair this year, and he is our lead for how we can help CWI with that growth mission. Mel Ogmen, who was formerly operations in the heavy-duty business and was responsible for achieving our supplier certification with PACAR last year, has accepted a new role as head of our off-engine fuel systems business, which will include everything that goes on a Westport-equipped vehicle that sits between the fuel station and the engine on the vehicle -- so tanks, pumps and all that intervening equipment. Mel has sent three missions -- increased supply chain scalability, reduced cost and increased reliability and functionality of those fuel storage and delivery systems.

Brad Douville, who was formerly VP Strategic Development with CWI, has accepted another new position as head of all of our engine development and fuel systems relationships. Like Mel, Brad's job is to reduce cost, increase performance and reliability and make sure that we can scale up engine and fuel system production to meet any foreseeable demand.

Nic Sonntag, who was formerly in Beijing as president of Westport Asia, has moved to Vancouver to head up global market development and sales. Nic is responsible for market creation and development from strategy to new OEM relationships to demand creation programs in our core markets.

Bruce Hodgins has taken on our heavy-duty product delivery mission, which is everything we need to do to ensure that we can get trucks successfully shipped through our partners like Kenworth and Peterbilt to customers and then keep our customers happy. We want to improve supply chain responsiveness, improve product quality and reduce cost.

Elaine Wong, our CFO, as you've probably seen from the press release, has accepted a new role heading up what we are calling transformational or strategic development. How are we going to manage our way from where we are to a 10 times growth? We want to use the 10 times number to make it clear that this isn't just business as usual. There's going to be significant change in all of our business to achieve this level of growth.

We also continue to see interesting and potentially synergistic merger and acquisition opportunities; and, although we don't have any transactions underway at this time, we have asked Elaine to bring some focus and discipline to this mission on a full-time basis. We have an external search underway for someone to take over Elaine's CFO responsibilities, but in the near-term she'll be wearing two hats.

What all of this will help us do is position for rapid scale-up in a timely and responsive fashion if and when the markets and the economy recovers, with products that are appropriately priced and appropriately supported through our OEM partnerships. Our goal, as I said, is for rapid penetration of these diesel markets around the world with natural gas as a viable solution.

So, to wrap up my piece of this call, we believe we're on a very interesting path. We are well-positioned to see significant breakthroughs in new markets. Our current business remains healthy. We intend to use this period of economic turmoil to continue to strengthen our competitive position, of course, while we continue to be prudent managers of our resources. As we see the economy recovering, we expect strong growth in alternative fuel product sales, both as a result of government incentives and because of the core economic advantages of natural gas over oil.

So with that, I'll turn the floor over to Elaine to take you through the financials.

Thanks, David, good afternoon, everyone. The press release, financial statements and management's discussion and analysis provide a considerable amount of detail regarding our first quarter fiscal 2010, ended June 30, 2009, and are posted on our website. This afternoon I will focus on revenue, margins, cash and net loss.

For the first quarter, ended June 30 2009, consolidated revenues were CAD24.9 million compared to CAD25.5 million in the previous fiscal year, a 2.4% decrease. That's effectively relatively flat year-over-year in the face of this economic climate.

CWI unit shipments were down from 1077 units to 608 units, but CWI revenues were only down $1.7 million with the Delhi transport order from [CIL], parts revenue and foreign exchange offsetting the decline in units shipped. CWI parts revenue were up CAD1.3 million to CAD5.4 million from CAD4.1 million, and kits-related revenues increased by CAD3 million. Foreign exchange contributed approximately 16%.

We also shipped 14 Westport heavy-duty units during the quarter compared to one unit shipped in the same quarter of last year, resulting in an increase in non-CWI revenues of about CAD1.5 million.

Consolidated gross margins decreased by CAD1.9 million as gross margin percentages decreased to 26% from 33% in the first quarter of last year, but were consistent with margins seen the last quarter. The year-over-year reduction in gross margins is primarily because of an increase in warranty reserves and a higher accrual right taken on new ISL G units shipped in the period relative to the same period in the prior year.

Our warranty accruals can and do vary from quarter to quarter based on historical claims experience, and we've also seen our warranty balance increase with increased revenues. As a reminder, the increase in accrual is maintained on our balance sheet as warranty liability and is drawn down if and when related claims are made. CWI management philosophy is to be proactive to maximize customer satisfaction and to continuously improve engines in the field and on the production line. Various improvements to the products have already been made or are planned, and CWI expects to see these improvements manifest themselves in the field and in the warranty experience over time.

Net loss for the three months ended June 30, 2009, was CAD9.2 million compared to a net loss of CAD3.5 million in the three months ended June 30, 2008. Excluding the net gain on the sale of Clean Energy shares in the previous quarter of the previous fiscal year, the difference is CAD2.9 million year-over-year.

Our share of CWI income included in the net loss decreased by approximately CAD900,000, which was mainly as a result of lower revenue and a decline in gross margins, as previously discussed. Non-CWI operating expenses increased by CAD1.2 million with higher customer support costs, increased stock-based compensation expense and higher general and administrative expenses.

Our cash and short-term investments balance at June 30, 2009, was CAD63.5 million, down from CAD82.6 million as of March 31, 2009. Cash used in the quarter was approximately CAD19 million with CAD7.1 million of it used for operations before working capital and CAD5 million used to pay down accounts payable from March 31, which consisted primarily of CWI installment taxes.

Other working capital consumed CAD2.2 million, and we also advanced Cummins CAD2.1 million in the period and were also negatively impacted by foreign exchange of CAD2.5 million.

Much of the cash used this quarter related to the timing of payments and receivables, and we did not expect cash used to continue at this level. Cash used in the previous quarter or Q4 fiscal '09 was CAD6.2 million.

On a related note on organizational changes, I am pleased to be moving into a strategic development role here at Westport, focusing initially on mergers and acquisitions and organizational effectiveness. After six years as CFO, the new role will allow me to be more operationally hands-on in helping grow the business. The current economic conditions, while challenging, represent a strategic window to help position our operations for future growth and to accelerate our profitability.

The Company is in great shape to take control of its own destiny in both revenue and cost management and its transition towards profitability. I would like to take this opportunity to thank you, the shareholders and the broader investment community for your support, and I look forward to continuing to help grow the Company. For further financial disclosure, please see your MD&A and financial statements as filed and posted on the Company's website for more details.

Now over to Mike for our operating results and plans.

Good afternoon, everyone. I'm going to focus on the progress and development of the San Pedro Bay Ports, namely the ports of LA and Long Beach and elsewhere, including the overall rollout of LNG trucks using both our CWI ISL G engines and our Westport heavy-duty engines.

As you've heard from Elaine and read in the news release, we did ship 14 new Westport heavy-duty systems this quarter for revenue of about CAD1.5 million. This brings our total number of heavy-duty LNG trucks on the road since we launched the product a little over a year ago to 196 units.

These trucks continue to perform well and receive high customer satisfaction reports and they are generating a wealth of operating data and experience which is providing the platform for further heavy-duty business expansion, both at the ports in California but also nationally and globally.

Looking at the ports, we have now deployed in the past 12 months about 300 LNG clean trucks powered by either the Westport GX or the CWI ISL G. In fact, every single LNG truck operating at the ports is powered by one of these Westport engines. Going forward, the Port of Long Beach last month completed its lottery of 100 clean trucks, and it went overwhelmingly LNG, as you may have heard. They have announced the awards now, and 96 of the new 100 are our LNG trucks, mostly Sterling trucks with ISL G engines. The trucks were selected in lottery draws from the more than 1200 applicants that had been approved for financing and submitted proposals.

As a result of this recent award alone, or natural gas truck population at the ports featuring both Westport heavy duty and CWI engines will increase by a third in the next 90 days or so to approximately 400 trucks.

With the order visibility at the ports and elsewhere, I'm also pleased that Kenworth will be commissioning assembly line production of heavy-duty LNG trucks at their Ken-Mex facility in Mexicali. You may recall that Kenworth closed their Renton, Washington facility earlier as part of their reaction to the downturn. So this move to Mexicali is very important.

In addition to this news and since our last conference call just two months ago, the ports have also significantly reworked and accelerated their clean truck procurement plans with an infusion of $47 million in state monies from the California Air Resources Board. This is the so-called Prop 1-B money that we've talked about previously. The ports have now elected to partner with both CARB and the AQMD, the South Coast air quality regulator, to prepare, issue and recently close just two weeks ago on July 24 a new RFP process which has a stated goal of deploying up to 500 new LNG trucks by December 31.

AQMD is administering this procurement, and its governing board is expected to approve the selected fleets for grants in September. A total of CAD72 million will be allotted under this procurement for these deployments, and we now know that every single one of the LNG trucks submitted two weeks ago as part of the procurement contained one of the Westport or CWI engines.

So, assuming that the AQMD ports achieve their stated procurement goals and including those Long Beach rollout numbers I just mentioned, our current port deployment of about 300 LNG trucks could increase significantly to roughly triple that number in the coming months.

These developments, which are leading to growing acceptance of LNG as an attractive fuel for trucking operations, highlight the importance of recent announcements from Freightliner and MACK Truck to offer new LNG trucks with the ISL G engine. And on the Westport heavy-duty GX product side, we will transition to certification of 2010 engines this current fiscal year. We have a large development team fully engaged in working with both Cummins and Kenworth as we achieve various technical milestones along the way.

On the national and legislation front, as David mentioned, we are all watching closely the US Nat Gas Act. It is receiving broad support in both the House and the Senate. The Senate Bill 1408 was introduced a month ago, on July 8, and proposes to double the existing federal investment tax credit for LNG trucks to a maximum of $64,000 and further extend these credits another decade or so to December 31, 2019. The House Bill extends them even further, by the way.

We believe this increased buydown incentive would make our heavy-duty LNG trucks and our medium-range CWI-powered vehicles price competitive with standard diesel trucks. And this, in turn, we think, can create a large national market for our products based on the beachhead success we have had at the ports and throughout California. The Nat Gas Act would be a game changer for Westport as well as for our fuel infrastructure and OEM partners, and we will be watching Washington closely for progress on this bill after the August recess.

Before that time, we do expect to hear news of awards from other US federal initiatives, in particular, the DOE Clean Cities Funding program. We talked about that at the last call, as I recall. This program has CAD300 million to award to clean alt fuel initiatives, and we've participated in fleet and partner proposal submissions which total hundreds of natural gas trucks and buses. So we'll keep you informed as events transpire on that one, also.

So you can see that we're working hard to build our business and we have some specific events and possible legislation in the near-term that may have a significant and positive impact on our business. Outside of the ports and the legislation news, I believe it is also worth mentioning in closing the real interest we are now seeing from national commercial fleets who are investigating their transportation options and plans. The recent fuel price volatility and sharp increase in oil and diesel prices, combined with the development of gas shale plays that have kept natural gas fuel prices at a significant discount have positioned us to grow significantly beyond the ports in California with greater confidence.

Thank you for your interest in Westport, and I will now pass the call back to the operator, who will open the call to your questions.

(Operator instructions) David Woodburn, ThinkEquity.

Elaine, can you talk a little bit about the R&D spending level that we saw in this past quarter? It's lower than what we've seen in at least a year. Is this sort of just a catch-up for what was spent in the last quarter, or do you think that we are seeing a new level of R&D for a while?

I think with R&D -- one of the things I'll caution you, everything is volatile and sometimes it just depends on timing and where we're at in terms of our testing and where we're at with our engineering programs and so on. So I'll put that caveat out, that quarters are volatile.

Having said that, we have seen a couple of things. We have completed a couple of things, so our Kenworth integration, some of the other programs we're working on -- we are progressing along that. And so you've seen some of that drop off. We have also redirected some of our engineering resources to more current product support, more customer-facing initiatives and activities. And so the R&D is down. But you can see sales and marketing was up, and some of that was an offset of the resources.

Can you give us an update on the Juniper joint venture? And is the full expense load of this effort already in, let's say, this quarter's numbers, and we just have to wait for sales to start? Or will expenses grow further when revenues first kick in as well?

I think that's a good lead-in -- sorry for not touching on Juniper. Juniper is doing great. We are actually really excited by the response in the marketplace since we announced these engines in January. I think I said last time that we launched the program publicly in January at the (inaudible) conferences in Chicago and clearly targeted at forklift manufacturers. I think we'll be in a position to give you some insight as to where that's going. Response has been really good.

What has surprised us is the interest outside those core markets. There's obviously lots of applications for alternative fuel, 2 and 2.4 liter engines. And we've had a lot of people to come through to talk to us about using that engine. So we're actually feeling very bullish about a high-performance, low-cost, well engineered alternative fuel engine under the Juniper label.

So I think, as we said, we're going to be ready to start shipping that later in calendar year 2009. So we should see some revenue from Juniper this fiscal year, but really it's 2010 calendar year that we are expecting to see material volumes emerge. So we won't be able to update you on what that (inaudible) once we see some public disclosure. We can't, obviously, said what's going on until those partners have gone public.

Graham Mattison, Lazard Capital.

A question on the CWI sales. Obviously, the quarter, this being a pretty weak spot in the economy here -- but just from reading some of the press and other trends out there, it seems like there have been some pretty positive announcements of buses converting over, garbage truck fleets. What is your outlook? Is there a pent-up demand? This is outside of the potential stimulus funding, but what's the outlook that you are seeing there? Have you seen a pickup in inquiries?

I'll start, and then maybe Elaine and Dave can jump in as well. It's hard to get too specific in terms of forecast going forward, but I think it's fair to say that we do see some bottoming of the economic trough that has affected some of the CWI markets, and combined with the various stimulus proposals, both some at the transit levels, but also the DOE Clean Cities procurement I mentioned. We are seeing the opportunity for various moves on the CWI side, which we would hope would lead to stronger numbers and stronger growth over time.

And in fact, as time goes on, we fully expect to grow CWI substantially. We don't see it anywhere near maturation in terms of volumes in the current business level.

The only thing I'd add to that, Graham, is just -- we don't give guidance, but one of the things I can say is this government stimulus has been a bit of a double-aged sword in the sense that we are seeing customers who are saying we just want to wait and see what the government's going to do, and can I get a grant from them before I make any firm commitments. But that money, as Mike pointed out and as David alluded to in his speech, is beginning to slow. And so we would expect to see some of that demand open up towards the latter half of this year, hopefully.

I think I'll just wrap. That's what I was alluding to in my comments, that we are seeing -- it's been very tough last nine months. I think people are in shock, and we saw a lot of people just stop or shrink, even, and try and cancel existing orders and programs. And then, as Elaine says, people started to get their head up, say the world hasn't ended, we better start thinking things through. Well, it looks like all this money is going to rain down from the sky from government, so let's not do anything until we see how much money we get.

But as business picks back up, there's going to be a strong rebound effect, I think, particularly in the US market, because it was so fast to shrink they are going to have to recover and put trucks back on the road, put buses back on the road, depending on how fast the economy moves.

So I think we are pretty optimistic that we're going to see a fast rebound with stimulus added on top of what I'd call core business. And then just the general flow of business -- I think what we've been saying for years, penetration in the bus market continues, penetration in refuse trucks is going really well. So I think all those trends are going to layer on strong growth. So we're reasonably bullish.

Can I tell you it's going to be next quarter or Q1 of 2010? I don't really know. But certainly, over the next 12 to 18 months, we would expect things to get back on a nice growth path.

And just a question on the heavy duty side -- did you mentioned when the Kenworth Mexicali plan is going to start up?

I didn't give a date, but what I was suggesting is that the orders that are coming out of this Long Beach lottery, which the paperwork is not completely final but it's a matter of days, I think, for a number of new GX's, is going to be -- plus the visibility beyond that has caused Kenworth to basically pull the trigger and move Mexicali into go mode. So they are doing the engineering wrap-up right now, waiting for paperwork to come from Kenworth corporate to start producing the first trucks.

And I think I said in my remarks, trucks within the next 90 days. So that would be a good ballpark to look at ribbon-cutting opportunity ceremony with the first trucks coming out of Mexicali.

And then just on that, looking at the ports with 500 trucks, LNG trucks, assuming half of that is going to be the heavy-duty side, is there a challenge? Do you need to add overhead or other things to get to that number to be able to deliver 250 trucks in the next --

No; 250 is well within our capacity limits, assembly center in Kenworth (multiple speakers) --

Yes; we built up the systems, really, last year to get ready for ports' needs, as you know. And we are ready. It's just a matter of procuring inventory and assembling them into systems and shipping them off to Kenworth.

And we've got inventory in our books already to do that, so that would cover most of that.

So really, it's just a matter of waiting for the orders to come in for the ramp?

Yes; we don't need to do much before that. As I say, we'll get Ken-Mex up and running, which was a key step. And we are watching our inventory balances to make sure we've got the right level in hand balanced against expected timing of possible orders.

Rob Brown, Craig-Hallum.

Could you just give us an update on the timing of the clean cities? I think they are set to announce awards in September, but how long would it take for you to see revenue, in your estimation?

The only clean cities, Rob, is -- the information we've got is that they are going to announce awards in September, I think, as you mentioned. So it will become public very shortly thereafter. We'll know where the orders are, who has been successful, who hasn't, which technologies -- hybrids, batteries, natural gas, etc. I think it will take a little while to convert the DOE news to firm orders, to get the money flowing from DOE to those fleets and get money flowing from those fleets to ourselves and CWI.

But September -- and they frankly haven't given a specific date in September. So September some time, expect to start seeing some news flow on that.

I'll just add my two bits on this. Part of the problem with any federal government program is that it does take a while. And I think the DOE program, the last time I remembered it, said you had to take delivery of the vehicles within 12 months of the contract award. So it could take all the way through calendar 2010 for that stimulus money to start to get paid out. So, as I say, we are not counting on it for our business. I see it as a layer up with some new customers that otherwise might not have happened. But it's not going to all hit in a quarter; it's just going to be a prevailing wind for some extended period of time, where people are getting extra money from the federal government.

And I think you mentioned the 100 or 96 trucks in the lottery, mostly Sterling. Do you have a sense of how many heavy-duty are in that mix? Is it less than 10? Is it -- kind of a sense in numbers?

Well, it's -- I said they were mostly Sterling ISL G's, and the reason for that is that they had a bunch of Sterlings still available from last year; they had 47 in a parking lot in Fontana, so they auctioned those off separately and first. And then, of the remaining 53, four were diesel, the rest were ISL Gs and heavy duties. Something on the order of a quarter, 20% to 25% of that second batch would be heavy-duty.

Laurence Alexander, Jefferies.

First question for Mike -- can you discuss progress being made bringing down the ASPs for the heavy-duty vehicles?

The selling price?

Right.

Well, we've been pricing it pretty aggressively for the cost structure we started with, with a launch, you know, supply chain, which was being brought up from its infancy as we go. All I can say is -- and I think we've gone public previously that that price is in the 50 to 60-K range, currently. But all I can say is that we've got a tremendous amount of energy going toward reduced product cost. Selling price is a separate issue that I won't get into too much today, but we think if we can bring the cost down -- the injectors, the pumps, the tanks, fuel conditioning modules, etc. -- that that can help us bring this product costs down, which, coupled with the incentives that are out there, can move us closer to price competition with diesel.

I'm not in a position to make any real forecasts on how fast we'll get to this number or that number. But I can just tell you we're working on it very hard and it's a key priority at Westport right now.

And is price the only factor that's driving the mix between your heavy-duty engines and the CWI ISL Gs? Or, are you getting feedback that there's other issues that are driving customer preference?

It's price combined with incentive structures. Right? So it's essentially net price after you look at the different situations. So there's two things going on. One, there are two different sized engines. So if somebody can use a smaller engine, the ISL G, they are going to because it's cheaper to start with, and then it's even cheaper on a net level after these incentives. So there's a group of people that could kind of go either way; but if they can go with a smaller engine, they will.

In terms of performance -- and when you say other issues, frankly, it's pretty early to be immodest. But frankly, we are getting very, very good reports back from customers running the heavy-duty trucks. And, all other things being equal, they would be quite happy to double up on those orders and their operations of those vehicles.

So yes; I would say it's coming down to the fact, smaller engine, smaller truck with a smaller price. And then, when you look at a number of these incentive programs, they tend to be coming out with the same incentive for any LNG truck, regardless of its price. So the net price on that CWI truck gets extremely attractive under some of these programs.

I might just close by saying the Nat Gas Act, I think, should that pass, there may be some differential incentive favoring heavy-duty because there's a cap in the proposed legislation at 80% of the price difference between the alt fuel truck and diesel. So you might start to see some differential incentive coming out of that.

I'll take it on a bit, too, Laurence, because it's an issue that is obviously critical to our business model. But it's also very complex with a lot of moving pieces and a lot of things that aren't really in our control. So we're trying to pull a lot of strings and make things happen in such a way as to get people a really amazing lifecycle cost on their new trucks, and at the same time hit our relatively modest expectations on bottom-line contribution to Westport.

I think the issue with Long Beach was, they've done a remarkable lease program they've put together. I assume you have been through this, but for the benefit of anybody that didn't look at it, I think the Long Beach program ended up being CAD7 a day to lease on natural gas for CWI trucks.

Pretty close. They had a lease grant incentive of -- I think Laurence probably knows, but CAD137,000, which played into this lease of CAD7 a day.

So it's effectively a free truck. So pretty much everybody -- that's why there was so many applications. When people looked at the numbers, they said, well, if somebody is going to hand me a Sterling or a Freightliner truck for CAD7 a day, I'll take as many of those as I can get.

The heavy-duty side is just, the numbers just didn't work out quite that well. They were still remarkable numbers; but, but because the program was constrained to 100 trucks, it just got overwhelmed by people saying, give me those free trucks.

To Dave's point, we had several hundred trucks, heavy-duty, proposed on that lottery. But they only picked 100 out of the 1200.

So I guess the advice I would give you is, short-term, probably for the next year at least, we are still going to see very distorted markets. These markets can't be looked at as something you can model going forward because it's so distorted by strange incentive programs and unique deals and strange pricing. So I know it's going to make it hard for you and your peers to model this intelligently. But it's all about trying to create a sustainable business model where people are seeing the effective capital investment to get into LNG about the same as diesel. We want it to be pretty close to diesel, and then they have cheaper fuel and cheaper operating costs.

So if we are close, very visible payback on the upfront cost, and then I've got cheaper fuel, we think we'll get higher market penetration. So that's what we are trying to put together.

Now, how we deliver that to the customers is challenging. Mike alluded to this. We are out of the ports now, talking to national fleets. We are looking at long-haul fleets. There's a lot of different issues with those guys than the emissions-motivated, very kind of unique circumstances at the ports. But we are getting some really encouraging signs. I think we can put together offerings that make a lot of sense for these guys, but it has to end up being a good economic deal for them. And right now, there are lots of levers to pull and lots of things we need to put together.

Overall, I think we are very encouraged by the opportunity. The main thing we wanted to do at the ports was prove that LNG trucks can do the job. I think, if you've visited there and talked to customers, I'd be very surprised if you got anybody telling you that they aren't very happy with LNG as a fuel. The trucks are performing well, they are getting good fuel economy and good reliability and good performance. And then the fuel is cheaper and the trucks are greener. So all of that stuff, I think, is the solid foundation we need to penetrate the wider markets.

Lastly, I guess for Mike, can you give us an update on where you are for meeting the 2010 EPA standards and if you have enough of a backlog to stay busy if there's a delay meeting those?

The programs, as I mentioned, got a team of engineers going. We expect to submit all our work to formal certification testing before the end of this year and receive certifications early in the new year. Backlog -- hard to say yet. Kind of like the inventory question, we are tracking backlog as it comes in, and we are watching the overlap between the '09 and 2010 products.

Michael Willemse, CIBC World Markets.

First of all, just wondering with the BTIC venture have you gotten approval from the Chinese government to go ahead with that?

Oh, yes; we've had that for a couple of years.

BTIC is the --

The funding.

-- (inaudible) for China. You are probably referring to Weichai, is that right?

Weichai, sorry.

The Weichai joint venture, we are still awaiting government approvals from the Chinese government.

Any sense on timing?

It's hard to say. I can tell you, BTIC took us a year to get the approval, and that was a pure startup. And so things move as they move in China, unfortunately.

Just, Elaine, on your moves to more strategic initiatives, I also -- when you look at the shelf prospectus that was filed, I'm just wondering do you see something happening in the next six months, 12 months? Or, is this more like something maybe in the next two years?

As David has remarked, we don't have anything in mind right now. What we want to do is just really step back and take a look at what's out there and how things will fit strategically with where we are going. So it's hard to answer that question. If something interesting comes up in the near-term, we'll take a look at it. If nothing interesting comes up, we won't.

The shelf is good for 24 months. I think it's just a prudent thing to do. Most companies are doing that today, and it's just there for in case you need it kind of thing, down the road. But there's no plans to use it.

And just on where strategic initiatives might take you, Westport has got a pretty good, diverse product mix now, medium-, heavy-duty engines, the Juniper. Where else would Westport be looking at?

I think we'd be looking at things that accelerate our market penetration. So we will look up and down the verticals. So if there's something in our supply chain where, by acquiring it, we can increase capacity or get our costs down, we'll look at that. The same thing with up market, anything that helps us get closer to the customer or to accelerate sales, we'll take a look at that as well.

And the other thing we would look at is adjacent markets, so anything where we can apply our technologies and sell more product, so whether that's bigger engines or smaller engines or different applications, we will take a look at that as

One comment on Weichai; Darren has reminded me I probably skipped over that one a little bit too quick. One of the things I can't remember if David mentioned this in his opening remarks, but Patric Ouellette, our CTO, we have moved him to China. And he's spearheading our engineering efforts from China. And he's working that with Weichai and be helping them develop HPDI on their engines.

Just going back to the ports and the AQMD projects, in the MD&A it states that you expect to ship 500 -- or that each program expects to ship about 500 trucks in total. Is that including the 96 that have already been awarded?

No.

So this would be another 500?

It's on top of the 96. It's the AQMD goal to ship 500 additional LNG.

With Daimler and Freightliner, any sense on when they would start selling trucks with the LNG?

They are offering them now. How many would you like?

I'll give them a call.

They are very pretty, available in the color of your choice, too.

We've got photos.

Rupert Merer, NBF.

I just wanted to revisit the cash burn quickly. It looks like you had about $19 million of cash and short-term investments spent in the last quarter. Can you tell us again what we might expect on a go-forward basis for cash burn?

Definitely not CAD19 million per quarter, Rupert, let's start with that. It was an unusual quarter. A lot of that was just timing. With year end there's always extra things that get accrued at year end. One of them was (inaudible) tax installments. We also had year-end bonuses and restructuring costs that got paid in the quarter as well.

So it's just -- a lot of that's timing, so let's start with that. I think, going forward, what you would expect to see is our cash burn decrease back to more traditional levels and maybe even to a little bit lower. As Mike has alluded to, there are opportunities with increasing revenues and some other things that they're hoping to see in the latter part of this year. So definitely expect that cash burn number to come down.

I will point out again that the last quarter it was CAD6 million. And so you can see the difference and you can see it does bounce around, depending on working capital.

And maybe one more kick at the heavy-duty can here. Any activity outside the ports here in the US with customers like Wal-Mart you can update us on or with the Australian market? And in general, if you are looking at a cost reduction on heavy-duty, how important is the success of Weichai for driving down the cost?

I'll start on the heavy-duty, I guess, outside the ports. So a couple of things -- elsewhere in Southern California we've got some opportunities, particularly enhanced by some incentive monies available to us separately from AQMD, their so-called MSRC fund, the Mobile Source Reduction fund, and we are seeing a lot of interest in that. And Dave and I both have talked a little bit about growing national fleet interest. We don't have a lot of news yet, Rupert, but we're just saying growing interest, growing communications.

Wal-Mart is nearing completion on its six-month demonstration project with us on the four trucks in Southern California. That's gone very well, and get very good reports from their drivers on the performance and reliability of those trucks. So I'll just leave it at that, I think. Anybody want to jump in, either on the national fleet or on the Weichai cost side?

You were a little fuzzy; Rupert, but as I heard the question, it was, is cost reduction important to Weichai and our other OEMs?

Will Weichai help you drive them down?

I think it's a bit of a -- this is always a recursive process. You keep going around and around and around and you keep grinding stuff off. I think our first step is just getting to higher-volume, automotive-oriented suppliers. Our first products, as you know -- you've been around long enough, Rupert. You know that the first products are from prototype suppliers that are high cost, high quality, custom-built Swiss watches, literally. Now we are getting it to factory production in much bigger, broader automotive suppliers. And actually, prices are going to come down a lot for our input costs.

Are we going to do this in China? Well, we are going to work with the suppliers that our customers want. So we're working with Kenworth, and we are going to be working with a group of suppliers that are qualified to be PACCAR suppliers. And when we are working in Europe, it's likely going to be a slightly different set, and in China it may be a third set.

So there's going to be some overlaps, and there's going to be some differences. But I think, in principle, what we want to do is get the price of those components down to look a lot like diesel. You'll never get an LNG tank to be the price of a diesel tank. But if you look overall on the vehicle systems these days, there's some room for savings on LNG and there's some places where were just going to have more expense. So our job with these new teams that I talked about is to really deep dive on what can be done on design, supply chain and volume commitments to get our costs down. And then we can set the price and service levels the way we want.

I think the other factor that we didn't touch on but I'll remind you of -- I think we have talked to you about it, Rupert -- is that, as we reduce component costs, that obviously reduces our warranty and part costs as well. So there's a real benefit to us to get our supply chain to a much more efficient level, and we have been working really hard on that.

Eric Stine, Northland Securities.

First, I just wanted to get an update on Cummins India, on the kit sales. Can you just give us the amount in the quarter?

Yes. The amount in the quarter, I think we said, was about $3 million in kits and kit-related revenue. The (inaudible) is kit and kit-related, because there's also a license that forms part of that number.

And if memory serves, that's expected to go on for another two quarters?

Yes; they are hoping to take delivery by -- having taken full delivery by April 2010. So it will go on until then.

And then I'll just quick turn to the ports, although most of this has been covered. You alluded to this next -- the AQMD funding, and that you expected to be more of a 50-50 split. Is that based on conversations or maybe the structure of the funding that might be a little different than what Long Beach was?

Yes, I can comment. No; it wasn't us that mentioned the split. One of the earlier questioners hypothesized that it might be a 50-50 split. But there's no telling, frankly, what the split is going to be. AQMD has got lots of proposals in, but they're going through a process of evaluating them, ranking them all. They're going to rank the first 940, both LNG and diesel, and then we'll see what the mix is both for diesel versus LNG and then, with an LNG, between CWI and Westport heavy-duty.

But it's fair to say, along with your comments, that a lot of this is dependent on the economy? An improvement in economic conditions would certainly help that mix.

On this particular procurement, the incentive structure was set up, all the bidders knew about it. It was a CAD50,000 grant if you want a new diesel truck and CAD100,000 grant if you want a new LNG truck. So that has played into all these fleet calculations already. Any further -- the procurement results will be independent of anything going on in the economy, but just dependent on how the fleets reacted to that incentive structure.

I think I'd just remind you again that port drayage at the ports in LA is a pretty unique trucking application that really depends on who you are and what you are hauling and whether or not you've got to get out of the LA basin or not. So these are slightly -- they are unique circumstances where each individual fleet is going to decide whether or not they're going to be able to get by with a small truck or a big truck. We are just happy that, no matter what they pick, it's going to be one of ours.

Frankly, if we're going to cover the whole trucking universe, as you know, people expect a much broader range of engine choices. We are going to have to fill in our range between small and large with some medium-sized small engines and then some larger medium-sized engines and then some larger large engines. So it is that there's a product book-end scenario we've got today. We've got to fill it in, too.

So over time, I think we will have a product for everybody. But today, people are stuck to either getting a small truck or a big truck. And they are struggling to see what they can shoehorn into their business.

John Roy, Janney Montgomery.

I know one key issue that comes up again and again is the Natural Gas Act. And I know you were expecting them to come back from the August recess with something. Can you give us any idea what you see might be the next milestone that we might see as a committee vote and what the timing might be on that? I know that they are running up against the end of the year for the fuel subsidies.

I think your guess is as good as ours, frankly. Everybody subscribes to Twitter these days, and everybody comments on every move that every senator or congressman makes. We've had all kinds of rumors, positive and negative. But as far as I can tell, they're rumors. I don't think anybody has really spoken definitively what the plans are. Last rumor we heard was that there was a plan to introduce the bill as a separate bill, which would allow it to fast-track through and get done. Then they have to reconcile between the House and the Senate bill because they are quite different, still, mostly --

Well, they are both great but they are different.

-- both great, but they are different. So they need to reconcile. So everybody is aware of this year-end deadline. They don't want to see a gap after they've year end where the subsidies have expired and there's no replacement. So I think everyone is aware of the timing.

There's a few other things on the minds of Senators and Congress. I see there's a new Supreme Court justice today, so that's behind us. We'll get some work done, but your guess is as good as ours as to when this is actually going to happen.

In terms of milestones, Dave alluded to one that I'm watching, and that's really just what sort of build the Nat Gas Act gets attached to or not. So if it goes independent, as Dave mentioned, things could move pretty quickly. But failing that, does it get attached as a rider to the energy and climate bill or to a transportation bill or to some broader energy bill? That's going to be a key milestone in terms of dictating the legislative process. I think, if it went separate on its own, we would all be very happy.

Jason Zandberg, PI Financial.

I wanted to ask a question on your R&D expenditure, spending about CAD30 million annually. I just wanted to get to a couple comments -- one, just on the pace of investment going forward. Do you expect that to stay steady or decline? I see it's come down a little bit this quarter, but I'm not sure if that's a trend. And also, just generally, what is the focus of that expenditure? I imagine a good portion of that, or not a good portion, but a portion of that is on the certification program. But can you give any more areas of focus for your R&D spend?

Yes, just a couple of quick comments around R&D. One is keep in mind, when you say CAD30 million, about a third of that is coming to Westport, and two thirds is Westport. So you are looking at a consolidated number. The other thing I would say is quarters are lumpy, and so you can't tell from one quarter what the trend is going to be.

Where most of our R&D spending is going today is on product development -- truck integration programs, etc. And the major programs we have -- CWI has some product development programs that they are working on. As Mike mentioned in his remarks, 2010 is definitely our biggest engineering program right now. And so those are our main R&D expenditures are going there right now.

Over time, as you would expect, as Mike also said on this call, we expect 2010 to be completed early next year. And you would expect to see R&D decrease at that time as we finish off that program.

[Robert Wallace], Raymond James.

Congratulations, Elaine. Congratulations, Michael. And I take it you've still got your job, David.

(inaudible) for me to ask, but one I wanted to ask was on the currency. What is your go forward policy on hedging/not hedging?

We don't hedge, as you know. We don't have a formal policy for hedging. A lot of things were naturally hedged, so Cummins Westport is almost completely hedged. Their revenues, cost of sales, two thirds of their expenses are all US dollars. And so we are fairly naturally hedged there.

On the Westport side, in terms of our balance sheet, again, you will see, even though we had some major currency movement in the quarter, our foreign exchange loss is relatively small in the quarter. Again, we've got some US dollar cash, but we also hold US dollar liabilities as well. So we try and hedge it that way. Most of it's just a natural hedge, given our revenues, again, are US dollars. But at least half of the cost of sales on the Westport side are also USD.

But when you sell in other jurisdictions, is it denominated in US dollars?

On Cummins Westport side, it's almost always still denominated in US dollars. On the Westport side, the majority of our sales are still in North America and in Australia. We will look at the pricing in USD even if we are billing it in Australian dollars. But we do try to match our currency with where our cost of sales are so that we can get it hedged there.

And the warranty --

Warranty liability is US dollar denominated.

And basically that would be for your currency that you have in -- now in US dollars. But the warranty costs on [AHPDI] versus [ACWI] are significantly different?

We don't really talk about it in that level of detail, I guess. I'm not sure if Mike is going to want me to go there.

Well, I was just going to --

Well, I mean, because the price of the units are quite different, so it's a rhetorical question, I guess.

You might be surprised at how close the warranty numbers are, given that heavy duty is a much more expensive product, as you say.

What we are talking about is currency. Everything is US dollars, anyway. Most of our components are built outside Canada, as you know. So we have euro exposure. There's Chinese currency exposure, US dollar exposure. And, as Elaine said, we have stopped trying to speculate on where currency is going to go because we are never right. Unfortunately, not many people seem to be right, either, on these projections.

So the currencies are going to be volatile, but we think we've got enough natural hedging that we can just deal with it. Certainly, the warranty liability, the fact that we have to restate that in Canadian dollars is a paper transaction.

That's what I thought. And also, the fact that you get back as the warranties are not used; correct?

Yes, and we get back parts revenue in US dollars when we do it, anyway. So it's somewhat irrelevant. It's a bit of an accounting fiction to be restating that.

Like all Canadian exporters, we prefer to see a strong US dollar because ultimately that helps the revenue number and your bottom line. But overall, I think that we are fairly well hedged right now.

But basically just on the fact that it makes it a [on a sale] price. More on China, which the other gentleman asked about the Weichai is that the tanks are -- is a joint venture; correct? And everything that you've done so far is joint venture?

Yes.

So that with the filing that you have, the shelf, I take it, Elaine, that you'll be off with a large purse making joint ventures all around the world. Is that correct?

Nice try, Bob.

Tell me where. Okay, that was, again, just a silly question. Congratulations.

We really can't comment.

I know, I know that. Thank you very much.

There are no further questions registered at this time. I'd now like to turn the meeting back over to Mr. Seed.

I'd like to thank everybody, and we will look forward to seeing them on the next conference call slated probably sometime in November.

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