Westport Fuel Systems Inc (WPRT) 2010 Q2 法說會逐字稿

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

Thank you and good afternoon. Welcome to our second quarter conference call for fiscal 2010. It 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 of this call is open the public and to the media, but for sake of (inaudible), we're restricting questions to analysts and institutional investors.

You are reminded that the service 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 in our current expectations and involve certain risks an uncertainties. Actual results my differ materially for those projected in 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 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 reliance on any forward looking statements. Now I will turn the call over to David Demers.

Thanks, Darren, and good afternoon, everyone. As usual, I will lead off with the strategic plan and progress we made over the quarter and then we'll turn the floor over Elaine, who will take you over through the financial details and Michael wrap up with his comments on major projects like ports.

Conditions for the commercial vehicle market remained very weak through September, which is our second quarter, but as you can see from the numbers, we saw a sequential growth, 27% growth over in the admitted weak Q1 this year. Year to date for the first six months, we are both 12% behind the first six months of last year which was a record year. However, this is in the context of the market drop averaging 50% or more in the on highway commercial vehicle markets around the world. So, relatively speaking, we're doing pretty well.

As we said last quarter, the market remains very challenging. And we expect this to continue for some time even pursuing better economic outlook and willing customers we see considerable credit challenges in many of our perspective fleets. On balance then, we continue to grow our market share and the deals are slow to close and we're certainly not out of this economic crisis yet. It seems clear that we still have some bumpy quarters ahead of us and we are tightly managing expenses and the burn rate. Looking up to the end of the year, of course I cannot give formal guidance and we do not do that,we have told you before that we are expecting to seek year-over-year revenue growth despite the economic down turn. And as economic improve in 2010, we will expect to return to are more robust usual growth rates. This means we have some catching up to do in the next half of the year. No doubt that we're going to see some turmoil with our suppliers and partners as we go through the complexities of 2010 emission regulation change, but I think we have enough near term opportunity to achieve that goal.

Looking beyond, we continue to see rapid acceleration of market awareness and interest in natural gas. Continuing our the short term thought, we continue to see rapid acceleration of market awareness and interest in natural gas as a transportation fuel in our segments. We're continuing our plan new product investment in all three business units. We do expect to see good returns from these investments and as major projects completed such as the 2010 certification program for the GX engine and as Junipers start shipping engines for the first time in early 2010, we expect to see new revenue and margin as the same time as the product development drop away.

As many of you are aware, we have been working with a leading European engine manufacturer for the last year to test are PDI technologies on their engine platforms. This program has met its goal to date and we expect to complete the proof of concept data collection before the end of the year. Our objective with this program of course it will to launch product development and collaboration with this leading manufacturer. We hope to be able to share some of those ideas with you in more detail soon.

So, if I just give you few specific comments on the three business units, comments Westport, or joint venture with Commons, the heavy-duty business which revolves around the API technology and the GX 15-liter LNG truck engine and third Juniper engines. CWI has done reasonably well. Elaine will give you more detail. Some of this is due to the large order in Delhi which has started to ship over the past years. Which has filled in some of the gaps cause by the drop in North American volumes. This project is going to continue well into 2010, so we think we are in reasonably good shape there. Bus CWI has a very strong backlog developing between the DOE stimulus contact in announced in August and pork truck deliveries that incorporate the ISLG engine which will be shipping in our Q4. We expect continued strength in 2010 for CWI. I will leave the details to Elaine.

Jupiter which is our youngest venture, has secured its first OEM customers and were negotiating final supply agreement as we speak. Juniper expects to be on track to ship beginning in mid 2010 to arrange industrial customers.

Now, Mike is going to spend more time on the heavy-duty business including what is going on at the ports. But I want to give you a minute to give you my perspective on this project. So, I have met with many of you. Many of that analysts and shareholders. I have met in person over the last few months over the summer. And the most common question I have been getting as whether or not we are disappointed about the delays and apparent downsizing of the cleaned truck program at the ports. My answers seams to surprise people so let me repeat it to this wider audience.

Frankly the ports have been a breakthrough in runaway success for us. We owe a great deal to the visionary leadership at the port, but took this risk of launching a brand new technology never seen before on the face of the Earth in the face of stiff resistance from many of their stakeholders. So, just compare where we stand today. L&D trucks are out there in the port as an international success story to the situation we had before the ports launched the clean trucks program two years ago.. There were not LNG trucks available in the market at that time. We now have a complete LNG eco system in Southern California. I know a number of people on this call have been see it. If you haven't, it's worth the trip. I can highly recommend it.

Because we have hundreds of trucks today and by the end of the year we have almost 1000 trucks in service at the port operating on liquefied natural gas. And anyone can see, that not only can the trucks do the job, they are a great product and a great solution. Now of course in once sense i would love to be shipping a few thousand more trucks at the port in the middle of this economic downturn. But you know that we will get those thousands LNG port grade edge trucks over time. Why do I believe that? Because as our customers at the port will tell you, they are great trucks and they're making money. Once we get past the noise of the market. There has been a bit of a gold rush mentality around the grand programs, of course there was a lot of disruption caused by the rapid economic down turn and a huge drop of good movement at the port,. This is layered on the top of credit crunch. I think it will see LNG trucks appear at one ports all over the world. Why? Because our customer using these trucks will make more money as well helping clean up the local error. And that's what's going to drive it's sustainable movement to our new fuel solution and have a sustainable business.

Now as I told you last quarter, despite the economic turmoil around us or maybe because of it, we have never been busy. The ports have been a great reference site for people and the idea of natural gas for fuel for commercial vehicles has never been more apparent. Awareness now of the broad range of commercial vehicles available with our engines and understanding their capabilities is spreading throughout the market. We are seeing great interest of all segments of trucking market, not just at the ports. And we continue to launch new products with new manufacturers, which are being sold everywhere, of course, which was further compound the awareness growth. Now naturally there is a lag between awareness of an idea and putting trucks in service.

Infrastructure needs to be planned and built, for example, but our goals are not modest and not short term after all. We want to see petroleum based fuels like diesel be replaced by natural gas. And have all of those hundreds of thousands of new vehicles incorporate our engine technology. So, this is a very large opportunity. It won't happen overnight. But now that the idea has been validated at the port and we have a complete system that is visible, we're seeing the idea spreading rapidly and a lot of enthusiasm. The idea of high-performance trucks built by manufacturers that use a cheap fuel, a cheap clean fuel, is inevitably getting attention at the time when fuel price and fuel price volatility are such big concerns.

So, let me close with a reminder of our three themes on our strategic plan. And think of these in the context of what is happening around the world in this economic downturn. And you'll understand why we have been so busy this, but the turmoil. First, we believe the long-term driver for adoption of alternative fuels is going to be conventional fuel scarcity and therefore high prices. It's not that we are going to run out of oil, but it will be very expensive. The IEA just released their annual energy outlook this week, which has continued their annual trent of continuing to drop the outlook for oil supply in the near and medium term. Also raising the visibility of long-term oversupply situation of natural gas.

Of course, we believe that all that excess natural gas will be a great fuel for transportation and that will stop it up. Second because no fuel needs new refueling infrastructure we believe the easiest path to market is high fuel use fleets like buses that are returned bays. Some deeper base or point to point operations are obviously the first place that we can start which what we have been doing. This does not mean weekend top can't tackle long-haul customers or more challenging infra structuring networks.

In fact as you saw in the DOE stimulus awards, during the quarter, blue corridors are an idea that are coming to true. We're seeing development of the infrastructure that we will need to see long-haul become a reality. Infrastructure's an obstacle and can and will be solved by a coordinated and thoughtful matching of customers who are ready to move to natural gas with the people who can supply the infrastructure and fuel. Our third, our last strategic pillar is to work with leading brands to help them introduce alternative fuel products. We used already established distribution systems and work with the world's best method manufactures to develop a scalable efficient and high quality supply chain.

This completely outsource model offers (inaudible) and it also gives as fast scalability as growth kicks in. Again, we have made great progress this year with the new vehicle engine and component production partnership. Momentum is building and I am convinced that we will see significant portions of these markets come our way as a result. I told you last quarter, the changes of leadership teams across of our business units to focus on market readiness. To recognize despite challenging market circumstance today in every one of our markets, there is the potential for substantial tipping point change in market dynamics that could swamp us with relatively rapid shift to alternative fuels.

Now, what could catalyze such a shift? I think of a few and I can assure you can think of a few more. If we see a sudden rise on fuel prices. I think that would create a lot of concern about a repeat of what happened in 2008, some change in government regulation.

As we saw In Delhi last year that requires the purchase of natural gas vehicles. Such as the stimulus programs we saw from the US Department of Energy this summer or that NAT Gas Security legislation that's in front of the House and Senate. We can launch new products or new entrance to the market which create broader awareness in availability, people that decided that they want to move. Last but not least, we can have leading customers decide that natural gas will create a competitive advantage and new dynamics in the market and decide they are ready to move. Now we're seeing all five of these factors at play this year and any one of them, we think, could have a sudden impact on volume.

So, we have 100% market share of most of our markets and as you know alternative fuels are still a tiny fraction of the total potential. So with a sudden shift in market preference for natural gas, we can conceivable see times growth or 100 times growth in our shipment volumes in a relatively short time period. Fortunately with our outsourcers strategies, scale up does not require massive investment, but we do need to it organize the entire ecosystem and make sure we can deliver in this demand no matter what happens. We made great progress already this year on this 10 times, 100 times strategy. And although we are not finished yet, we are making good progress.

So, to wrap up my portion of this call, within fiscal 2010 it is shaping up to be an excellent year in context of our long-term business plan, despite the challenging markets and despite short-term volatility on the revenue side. We're well positioned to see some significant breakthroughs in new market. And our current business remained relatively healthy and even growing compared to the incumbents, which is diesel fuel. We intend to use this economic formal to strengthen our competitive position while continuing to be prudent managers of our resources. So, I'll turn the floor over to Elaine now. Elaine?

Thanks, David, and good afternoon. The press release, management statements, and management discussion analysis provided considerable amounts of detail regarding our second quarter fiscal 2010. And (inaudible) results and MD&A are posted on our website. Unless otherwise noted, I'll be comparing the second quarter and year-to-date result at the same period of the prior fiscal year.

For the second quarter ended September 30, 2009, consolidated revenue was $31.7 million a decrease of 19% when compared to last year record quarter of $39 million. (inaudible) revenue of $30.1 million on a 1,039 unit shift compared to $33.3 million on 1,391 units shifts. Parts revenue increased by $2.3 million in the quarter and engine shipments to China increased as well, but these were offset by lower sales in North America where the weak economy has slowed the automotive sales as David noted. New stimulus money for commercial vehicles as Michael discussed, has been announced but we'll take some time to show. Parts revenue has increased within expanded parts list, field population and warranty parts. Non CWI revenues were $1.6 million with 14 LNG system shipped compared to $5.7 million on 69 LNG system shipped the prior year. Non CWI also included about $700,000 in the CWI cryogenics tanks deliveries. Average prices for HD LNG system in North America decreased with the shift from up the truck model and OEM at Kenworth this year.

For the six months ended September 30, 2009, consolidated revenue were down 12% to $56.6 million from 1,600 unit shipped compared to $64.5 million and 2,538 unit shift in the same period last year. In US dollar terms we redound 19% year over year. Revenues were down in North America for both (inaudible)system sales, but we saw higher parts revenues and are up $1.5 million on (inaudible) sales year to date in India. Net loss for three months ended September 3, 2009 was $9 million, or $0.28 per share compared to net income of $700,000, or $0.02 per share for the same quarter in the prior year.

The prior year results included a net after-tax gain on sales (inaudible) shares of $9.0 million compared to $0.2 million in the current fiscal year quarter. Net loss for the period with self inclusion of realized gains on the sales of investments were relatively flat at $9.2 million compared with $9.1 million in the comparative period. For the six months ended September 30 2009 and 2008, net loss was $18.2 million, or $0.56 per share, and $2.8 million, or $0.10 per share respectively. Excluding defects of the gains on the sale of investment net of related taxes or net loss for six months ended September 30, increased by $2.9 million from $15.5 million in the prior fiscal year to $18.4 million in the current fiscal year. $1.3 million of increase related drop in our 50% share of net income which increased from $3,0 million from $1.7 million primarily on lower revenue and gross margin percentages.

The remaining $1.6 million related to higher customer support costs and increased in stock-based compensation reduction of program funding and higher costs relating to professional, consulting and other public companies related expenditures offset by foreign exchange. Gross margin percentages on a consolidated basis were 25% for three months ended December 30, 2009, compared to 24% in the three month ended December 30, 2008. CWI gross margins were 25% in both the current and comparative period. Non-CWI margin increase from 14% to 29% due to higher price margin on CWI cryogenic tank sale which included a onetime cost of sales adjustment relating to recovery of value added taxes in China. Non-CWI product margins was impacted by foreign exchange as inventory was acquired when the US dollar high relative to (inaudible)our second quarter when the exchange rate was closer to par.

,For the six months ended December 30 2009 and 2008 consolidated gross margin percentages were 25% and 27% respectively. For common Westport gross margins were 25% and 28% respectively and for non CWI including (inaudible) gross margins were 24% and 16% respectively. Our research and development expenses were relatively flat year over year at $17.1 million and $13.9 million for the three and six months ended December 30, 2009, compared to $7.1 million and $14.3 million for the same period for the prior year. Funding for the quarter was down $0.5 million for the three months ended September 30, 2009 and $0.9 million for the six months year to date. (inaudible) R&D expenses were down $0.4 million in the quarter but up $0.2 million year to date. A drop in the technology royalty fees (inaudible) was offset by higher material spending related to primary timing of the spend. Non-CWI R&D expenses for three and six months ended September 30, 2009 were up $0.3 million and down $0.6 million respectively.

Over all costs are trending flat or slightly down year over year; however, we do expect some cost increase over the latter half of the year as we complete our (inaudible) enrollment program. Consolidated SG&A cost were relatively flat as $65 million dollars this quarter compared to the quarter last quarter but up $2.5 million to $12.9 million from $10.4 million on a year-to-date basis. The CWI up $0.6 million. Stock based compensation up $0.5 million and non CWI SG&A up $1.4 million excluding stock base compensation. Again these costs were up due to an increase customer support costs, a consulting travel, facility and reallocation of internal charges. Our cash and short-term investment balances September 30, 2009 was $57.7 million compared to $82.6 million as of March 30, 2009.

For the six months ended September 30, 2009, cash use and operations was $16.7 million to $40 million used in operations and $2.7 million used for working capital purposes including $6.3 million associated with the timing of settlement of accounts payable during the first quarter. Foreign-exchange negatively impacted cash and cash influence by $5 million as a relative value of change or increase relative to the US dollar by 15%. However we also saw offsetting positive impact on foreign-exchange related to warranties and deferred revenues in US dollar denominated tray tables. In closing, as David noted, the current has been challenging for many companies including our partners and customers financially and economically. However, we are seeing signals as the markets are improving particularly in the US stimulus money announced and legislation making its way through Washington. And now over to Mike to discuss these in more detail.

Thank you, Elaine, and good afternoon, everyone. I want to update you in the latest development and the ports of L.A. and Long Beach. And I believe there's more interest also growing now outside of the ports than ever before. I am happy to report that are traction is starting to build for LNG trucks both our CWI, ISL G engines and our Westport heavy-duty systems. And an area to declare a reserve to the loyal diesel customers such as Utah, Arizona and Texas. As you have heard from Elaine and read in the news release, we shipped 14 new Westport heavy-duty systems this quarter if that brings our total number of heavy duty trucks on the road since we launched the product a little over 18 months ago to 210 units. These trucks continued to perform very well and receive high customer satisfaction reports. And they are generating a wealth of validating data and experience which now totals more than six million miles, which is providing the platform for further heavy-duty business expansion, both at the ports, but throughout California nationally and globally.

Looking beyond the past quarter's numbers, we ran heavy-duty demonstration trucks up in Utah recently hauling of all things another fuel, coal. Delivering the heavy tonnage bit great performance and success helped us build a new markets with new customers. The more we can demonstrate the performance in fuel cost savings in comparison to diesel, the more positive feedback and referrals we receive. We're also working hard to reduce cost to second suppliers and through automotive scale production capabilities such as the assembly line production of heavy-duty trucks (unaudible) and Mexicali which is now producing trucks as we speak. In the meantime, if a few notable incentive programs that Dave mentioned are providing new business opportunities and captured the attention of the entire trucking industry.

The DOE Clean Cities funding program which was announced in August awarded $300 million in funding for 25 separate cost share projects throughout the United States that will deploy more than 9000 alternative fuel and energy efficient vehicles and build many new refueling stations, as well. Based on the DOE's announcement, funding for approximately 500 L&D trucks and 2,300 CNG vehicle including refuse trucks and shuttle buses have been awarded. And Westport anticipates that a significant portion of these vehicles will be sourced from manufacturers incorporating our heavy-duty system or our 8.9 letter CWI engine. It is not 100% clear when all of these orders will firm up into orders for trucks and systems, but I can say that a number of the awardees in the different regions are looking to act and moving a portion of their fleets off oil and onto clean burning natural gas.

On the national and legislation front, we are of course watching closely the developments around the US Nat Gas Act in Washington. It is receiving broad support in both the House and the Senate. The bill now has 120 sponsors in the House. And in the Senate the bill has bipartisan support as well as the stewardship of senators Larsen and read and the ongoing support of Boone Pickens of advocacy campaigns. We believe it has that good chance of success. There is a significant potential for this bill to positively affect our business both in Westport and Cummins Westport as it proposes to double the existing federal investment tax credit for LNG trucks to a maximum of $64,000 and extend these credits for several more years.

Lastly, the AQMD procurement for hundreds of LNG trucks at the ports has crossed another major hurdle as recently as Friday. Originally the procurement was based on the September approval of 448 LNG trucks. But as it stands now, there are upwards of 500 LNG trucks approved for funding under this program. In an effort to accommodate the great interest in the time for production orders, AQMD and carb has extended the delivery deadline from December 31 out to March 31 for truck deliveries. All of these port LNG trucks are based on the sport engines. The majority of them SCWI, ISL G engines with a significant amount of Westport heavy-duty trucks also. We are working hard to prepare the engine systems in advance of year end and to meet the March 31 truck delivery schedules. And it's a very busy time for manufacturers with a lot of year end engine pre-buy engine activity as well. In the meantime, we continue to develop our products and move forward our programs to meet the new 2010 standards early next year. I am encouraged by our team's effort to lower the cost of heavy-duty systems and the customer response to our vehicles. Thank you for your interest in Westport and I will now pass the call to the operator, who will open the call to your questions.

Thank you. (Operator Instructions). The first question is from Laurence Alexander from Jefferies & Company.

Good afternoon. A couple of questions to start off. First, you talked about the possibility for significant ramp in LNG orders and how you needed to prepare for that. Do you feel is the supply chain flexible enough to support that or will there be a capital requirement potentially to support weaker links along the supply chain?

That is a really good question, Laurence. One of the themes that we have been hitting on all year -- I think what I was trying to hint at is that we have plug the most of those holes successfully. We still have a few final links to patch but I don't think there will be material capital investment required to make a very significant scale possible. As you know, this is not -- you cannot just turn the tap and make these things happened. We are hurting people to look at the big opportunity that is in front of them at the time where we are in tried and tough economic conditions. It has been a challenge, but we have made great progress.

As Dave said that we are communicating closely with all these suppliers to keep them apprised of the prospects and timing so that they can be ready as possible.

It is no secret that we have been focused on fuel injectors as the major weak link, both from cost and scalability challenge fuel tanks. We have been working on fuel pumps and probably the third on the list of issues. And we have been working with all of our suppliers and a number of new suppliers to make sure the we could meet any conceivable demand. And also have a plan to scale it up and be able to give them enough notice to be able to meet any supply requirement that we might expect. Lots of progress and will be able to share details as they emerge.

Secondly, as you discussed briefly, to new funding at the ports, which has been extended through March, how does that interact with your filing for the EPA approval for the 2010 regulations? The you expect the orders to be tilted disproportionately in favor of the SCW I it in the short-term ?

Yes, Laurence as I said, we would expect the majority of this around orders to be CWI just around the incentive programs, very attractive economics, meet the port needs. The 2010 certification program is really independent of that port procurement. This procurement will order engines that are available certified now. They'll be the 2009 certifications were ordered. Any future procurements will look to the 2010 product lines once it's certified.

Okay. Just last one and then I will pop back into queue. How much of the India contract had been shipped today?

Probably going 2/3 to date, Laurence.

Thank you.

Thank you. The next question is from Graham Mattison from Lazard Capital Markets.

The evening, guys.

Hi, Grahm.

Quick qualification. So of the CWI units you shipped, really, there is nothing in there for the ports or the DOE Clean Cities awards. Or just clarify the second round of port trucks.

That is right.

There is nothing in the current procurement. There has been a few shipped around that earlier port of Long Beach lottery that we talked about a quarter or two ago.

Got you. And then terms of looking at the breakdown of where the sales coming from the CWI side, can you give as more clarity in terms of parts of the world and what types of customers they are coming from?

And the financial statements, MDWA, we have a products revenue by the geographic region chart that gives a breakdown.

Yes.

But what you will see Grahm is this year compared to last year there will be a lot more international sales to Asia and the rest of the world. You can read Asia and the rest of the world as India and China of course. Those two. What happened with China, is we export the engines to China. They go into China's buses and some make their way down to South America. And India. (inaudible) We're seeing from other activities as well and other parts of the world.

Do those tend to be the (inaudible) as opposed to the ISL G.

Well actually ISL G are going to China believe it or not. The are taking larger buses so they're not quite as prevalent as the B's, but we are started to see ISLG's now starting to ship.

Got you. And just clarification, on the coal holdings demo that you mentioned, that was with the GS15 leader ?

Correct.

Got you. Okay, great. I'll jump back in queue. Thank you.

The next question is from David Woodburn from ThinkEquity. Please go ahead.

Thanks, everybody. CWI volumes look great. Can you, just following up on Graham's question, is the large number there showing one particular order or is it more indicative of a trend. I was going to say in China, but maybe time and Latin America as well.

I have always said quarters are lumpier. Any quarter, it could be going anywhere in the world. What you do have in terms of (inaudible). I think (inaudible) has done a good job. They've been in China for a while and growing their customer base. South America is also a growing region for them. North America is still their primary market. Depending on transit fleet are taking orders et cetera. There are doing more and trucks especially as well. Mike want to speak about it.

Yes, I think it is a pretty broad based strength that you're seeing across CWI both regionally and market segments. But as Elaine said, in North America, we are seeing substantial incremental growth in LNG trucks in the midrange truck area both at the ports and elsewhere which is a new ingredient in the CWI strength.

Okay. In terms of, I know you had a number of pilot with the IFX engine around the US. Are some of those coming to a close now. And if so, are the customers actually moving ahead. You have progressed in talks or are they saying the pilot went fine and we need to sit for a while because we are not buying new trucks.

It is interesting. We have seen a phenomenal interest in the last three of four months in guys wanting to try out the trucks in short demonstrations. This Utah experience that I mentioned actually ended up serving a half dozen different customers for anywhere from a couple days to a week or 10 days. We got some longer terms demonstrations like the ones we talked about at Wal-Mart in California going on for a few months and nearing completion. Generally, we're getting grade marks on performance and fuel economy, power, tork, range, things like that. Technically, the products are getting validated in ways that make us very pleased. We are still, these guys are still trying to come out of the recession, these fleets. Many of them have credit issues that they are struggling with. Many of them have a fleet that do not require new trucks until their business rebounds. Many of them are watching the economy and the strengthening of the economy and waiting to see what the right time is for them. But I would say the intensity of discussions built around specific discussions and around national feet fleet looking a product has never been greater.

Perfect. That was going to be my next question. Thanks very much.

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

Good afternoon. You mentioned a little bit about your European engine partner having the end of the year. To give more color on where that is at and how that starts to roll out in calendar 2010.

Probably not, Rob.

I thought I would ask anyway.

Good try. Sincerely, I will elaborate. Sorry, I could not resist . It is a project that we have talked a bit about. Should be no surprise that we are working with as many engine platforms as we can. There are other engine platforms that have been in and out of our labs. And we've been other people's labs. There's a lot of interest in natural gas around the world. I am not kidding.

People are intrigued about the technology and promise. So everyone is playing catch up. And in this particular project, this is a project that has been going on for some time. And we announced it last week because it was a formal proof of concept program and we are investing pretty substantial resources in a pretty detailed project that is going to lead to commercial engines. We are reaching the end of that. I can tell you we are very pleased with the results. As is our customers. There is a great prospect to move ahead. The details are still pending. And we still got a couple up more data points the tape before the program is done. I think we are hopeful for launch of commercial product with that customer if we can work out the details.

Okay. Great. So, once the proof of concept is done then you would, effectively the next step would be a commercial product launch announcement with the time from around it. Is that the idea?

Yes.

Okay, great. I want to confirm the 14 units. the LNG units, were those are all port related business or are there any nine port related?

Those are port related, coming out of the Port of Long Beach lottery that I referred to a moment ago.

Okay. Thank you very much.

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

Good afternoon everyone. Thanks for taking my questions.

Hi, Eric.

I was wondering if we can touch on the engine pricing. If I'm doing my math right. It looks like on the heavy duty side, the price per unit came down pretty significantly?

That is right. Yes. Remember, we're shifting our model. Right? So a couple of years when we first launched the product, we were on a purely upset model and we were selling it for $8,000 (inaudible) per year. We dropped that price as we went to the OEM model. And we've been working with Kenworth. So our price with Kenworth is a lot lower the (unaudible) $8,000 per year.and we've always been publicly. It's that $50,000 to $60,000 US range.

Okay. It seems like this may be a little sooner than maybe you had discussed or anticipated.

I will take that one because Elaine is looking worried. I will take the response. Our strategy on this Eric is to get market penetration. And we think it is a right price point for this product. And as fast as we can get the price down, while still preserving reasonable margins of course for us, we think that is a good thing. You should expect to see as push the prices down as fast as we can and until we have the price that's going to give us market dominance.

And I'd say we used the port beachhead process to drive that price down to market levels where we can begin to penetrate. And we're just essentially taking that strategy and taking it elsewhere where we go. So we have been at a point for several months around that that pricing strategy.

A little hard to see that now. And I don't expect it to take it out of the number because there has been such and a confusion on inventory and foreign-exchange and price and all this stuff. I can assure you that we are dropping prices because we are dropping our costs. We are improving our reliability and all of that allows us to maintain margins and hit that market penetration point. At the ports, because there is a heavy ports of subsidy, pricing wasn't all that relevant. Frankly, we have not a lot of control with pricing because of our production partners were setting the price of the trucks and the context of what the market would bear anyway. But as we get outside of the ports and into the markets that are much more economic, the pricing discussion will be much more critical. And particularly as we see more and more trucks (inaudible) launching products, and as we see different applications, we are going to want get prices down to a point where there is an economic payback and that is what we are trying to do.

Eric, let just to let you know I always look worried. It's because I'm a CFO. So that's the job description.

Okay. Thanks

Was that helpful or confusing ?

No, That was very helpful. I appreciate it. Maybe we can switch gears to Weichai. Maybe let us know where things stand as far as the government approval. Do they still view that I think they said as a $20,000 per year opportunity.

Yes. I think that still stands. Government approval is pending I understand. Weichai is very busy. I'm sure if you do a Google search on them you will see that they just completed an acquisition in Europe and they're very busy. In China, the China's market have rebounded substantially this year. Weichai sent a team to North America. They've been visiting the port. We have regular conversations. So I think the program itself is still healthy. But they have not got the government approval to go ahead and there's some question about what the process actually is. We did not have any better data than you do at this point. I think we are fine with the relationship. They are fine with the relationship. We've got both got work to do in the context of this market. And we are going to have to let the lawyers get this behind us before we can proceed legally. Sorry, I realize that talk a lot and said nothing. But there ago.

So, to be continued the. Last question and I will jump off. There has been some feedback from fleets whether through testing or in lieu of deployment, said natural gas engines are either close or cheaper cost per mile. If you could just talk about where you think things stand in the process.

Well, of course central part of our value proposition has always been essentially lower operating costs around fuel cost advantage. That remains as true today as it ever has. And any upward movement on oil prices further improves that. In fact, over the last three or four months there has been a widening of that fuel cost benefit. The different fleets are all looking at how they roll all this in the lifecycle cost, payback periods with their own accounting equation and calculus around amortization and what not. You hear different things from different fleets. We are definitely seeing movement toward improving economic propositions. Dave if you want to add anything.

Yes, there's no doubt that people are surprised at the fuel economy that the trucks are delivering. We made a lot of believers about natural gas in the last year because expectations have been so low. But with that said, the fuel price differential of a dollar a gallon and an average truck burning 20,000 gallons a year, that is a substantial chunk of money for a high fuel use fleets. So we are getting a lot of people doing the arithmetic because this is such a big number compared to the prospects of any other fuel cost or operating cost savings available to fleets. Any of the easy things that could have been done had been done long ago. Coming up with a major breakthrough in fuel prices has gotten people excited. Now that said, there is a higher capital costs and much complexity around government grants. And so people are looking at it in a lot more detail. But I think over all the fundamental premise is sound. Is that we're going to see fuel cost savings over the life of a truck. And that's going to be enough to off set the increment particularly if our government incentives of some kind.

The growing natural gas supply access is just driving that equation even further.

The challenge is always being what is that fuel prices, Delta that, we still see a lot of concerns about this. Where is the relative price of diesel and gas going to go. Certainly in the last few months, over the summer, so much press with gas shales an oversupply of gas, that people are getting a lot more comfortable that this might be real and sustainable. And also more anxiety about we'll prices. So I think that people are getting pretty serious in doing the modeling. And that's why as Mike said, people want to try the trucks and measure in their own duty cycle. Because everybody is different.

Okay. That is very helpful. Thanks again.

Thank you . The next question is from Delip Werrier from Suisse and Partners Group. Please go ahead.

Just a general question. Clearly there's a lot of momentum growing here. And I was wondering on the DOE Clean Cities, do you get a sense of the beneficiaries are waiting on passing of the Nat. Gas Act, and that could potentially result in an avalanche of orders next year Is that the thinking ?

The DOE guys already got their money.The DOE grants were very generous. Those programs are going to get contract, Contracting is not completed yet. We'll see a lot of those guys contract and proceed under any circumstances. Yes, there is a lot of interest in the Nat Gas Act Act, emission credits and other incentives that are out there. I think generally the over riding condition that we are seeing is just general economic weakness and lack of credit. So I think those things need to get solved to. But, you're absolutely right. We are hoping to build a large backlog of interest and enthusiasm and when we see the starting gun go off in the economy or some trigger like the Nat. Gas Act passing or some other catalyst like the others I mentioned, I think we will see some real momentum develop on orders. But until then we are continuing to tell the story and meet as many people as we can.

I think you'll see the big impact of the Nat. Gas Act on those feet fleets that don't have access to current incentives from DOE or the ports. All the rest of the fleets that will response to the passage of the Natural Gas Act.

Got you. Makes sense. And then a question for Elaine if I may. The CWI, the average selling pricing to have reduced a little bit this quarter. I was wondering if that was product mix. And Elaine, I also missed the comment you made about the (inaudible) over to Delhi.

Good question. Delip. On the average price. Both your questions are related. The average price dropped this quarter compared to last quarter because there actually is a few hours shipment to Delhi, there was actually no shipment to Delhi this quarter. Delhi took a large amount of inventory in the previous quarters and they are actually behind in deliveries to Delhi transit. So we don't expect the entire shipment to still ship. And as David said, it might take little longer, but we're still expecting the full order to ship. And it's just a matter of taking a pause what they catch up on their deliveries to the customers. And that's why you can see the average price. Because remember we include the revenue for the kits that we don't show the units in the units line.

Thank you. And then one last question, the gross margin on the non-CWI business obviously had a big improvement here. I am wondering if you take away the revenue from the cryogenic tanks and then I think there was a one time adjustment. I was wondering about the margin improvement on the heavy-duty units were.

The margin section on the quarter on the HD units was not very good because of the impact of foreign exchange. The inventory was bought when the Canadian dollar was weak compared to the US dollars. And we sold it when the Canadian dollar was strong. And we saw relatively low margins for this quarter.

Got it. Thank you. Thank you. The next question is from David (inaudible) of CIBC World Market. Please go ahead.

Great. Good evening guys. If we can go back to the DOE awards. You had mentioned that you thought a significant portion of that natural gas potential would come toward Westport. do you have any idea of what that percentage was? Maybe 50%, 75%, 90% or less?

We did not have a precise percentage yet. But on the order of half or so might not be a bad way by the way to summarize how it may evolve. Waiting for all the guys as Dave says, to contract with the DOE. And then they got to contract with the OEM and pick their technology as they go. That is how we are tracking it.

Okay, great, thanks. Now when you are looking at the, when do you think penetration for the heavy-duty might start to pick up? Do you have a feel for that? Just in general?

Dave, we think about catalyst.

I think the ports really have open eyes. It's surprising how many people have been to L.A. to see that. For one thing, I think most people in the industry thought it was a science project and did not believe it was going to work, which is why we saw some skepticism when the ports announced that they were going to put thousand of LNG trucks on the road. But now that it's out there and people are saying that there is a lot of curiosity and interest. So people are have been to see it and going home and telling people about it. So we are seeing a lot of interest in it. I think it is fair to say that fuel price and fuel price volatility is in the minds of at absolutely every fleet in the world and certainly in North America, so the prospect of cheaper fuel does have everybody talking. We are in this awareness phase with people are suddenly saying that there is something new that we need to see and we need understand it and we need to get to know it, but it is completely new.

How long will it take people to evaluate? Some people will quickly and some people are going to take a long time before it is proven. That is how it is going to be. But certainly if you talk to the fleets at the port, and I encourage you to do that. They seemed quite happy to chat with visitors. They will tell you that they did it for competitive advantage. And they are making money. And they have happy drivers. The early adapters have been successful and they and we want to continue to spread that success to the people that are going to try it early. There is planning to be done. We have to plan the infrastructure deployment. It is not our job, but we have to make sure that that is done. And we cannot deliver a truck until there is fuel.

So, there's a lot of work to be done. But this is not something that needs years. It's probably on the order of six months from the time that someone says I want to go before they'll have trucks running. So, when will we see that tipping point? Honestly your guess is as good as ours. Certainly, we are seeing very high activity levels. We're getting very good feedback from our existing customers. We are seeing a lot of new applications. If you see CWI for the quarter, the have launched a number of the new truck chassis, including things like cement mixers that we have never done before. And a lot of refuse trucks applications. So, across the board, we are seeing a number of the markets looking seriously at natural gas. And they are going to will be moving this way. So we will see it and I cannot tell you which week or which quarter we're going to see that tipping point.

One more question if I could. You'd mentioned some of the, from an operating stand point. some of the benefits and feedback that you are receiving from the CWI and heavy-duty engines. Is there any feedback that you have received maybe some of the challenges that these operators have been switching?

Always a challenge as you will roll out new technologies, but this is going smoothly. As opposed I suppose, if we are to pick one topic, we questions about the fuel. The rollout of the fueling infrastructure. Issues are around monitoring fuel with different kinds of gauges. So there isn't education process that goes with deployment. As we say, it is going very smoothly.

Okay, great. That is all I have.

Thank you. The next question is from John Roy from Janney Montgomery Scott. Please go ahead.

Thanks for taking my call. Can you hear me?

Yes,

Great. One of the things they talked about on the Clean call was the natural gas guys, the Chesapeake of the world were starting to try look longer term for new markets. Have you been in touch with those guys and are they looking forward to that with you. And are they actually a potential customer?

Yes, yes, yes. How's that?

Can you give any more color?

I think it's pretty obvious. Boone has done a great job of advertising the idea of displacing importer oil with natural gas. At a time when everybody produces gas has a surplus a substantial surplus of gas. And they are looking for ways to use that up. And if you're in those shoes. And by the way, all of this is a public, I am not giving you a big secret. Go to their investor relations page and you'll see the presentations. If you have a lot of gas, a power plant would be a nice application, but power plants are taking decades to get approved these days. And a lot of opposition from other fuels and other energy sources. So natural gas,a big combined cycle turbine plant is not something that is going to be a near-term opportunity to sop up Gas. But you look around at the number of trucks on the road and how much fuel they could consume, you can put a big dent in that surplus gas if you start running trucks on natural gas. So it got people quite excited about.

They're excited about this story, the promise of natural gas for transportation which has been a market they could not enter before. But they are looking at Westport essentially as an enabler of new markets for these companies which is very exciting development.

The new factor for them, cause everybody thinks of them as passenger car. They have to build thousands of stations and see at see a slow ramp up over a decade. But the idea that Boone has popularized input a few hundred trucks in the road people can get at their heads around. It is not that big of a number, but a lot of fuel. And it's a very lucrative customer base to establish. So we can confirm what our friends at the Clean had been saying. The gas producers themselves are looking at this very seriously as a way to find a new high value market for their commodity and that is what they do.

Great. One last color question if he can remind me. With the Wal-Mart effort you're going through right now, the demo, is that CWI, HD or both?

That is heavy duty, the 15-liter engine for Peterbilt trucks.

Thank you so much.

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

Good afternoon, or should I say good evening, everyone. These calls are getting long. A few follow-up questions. You talked about the progress on the heavy duty, you're down to $50,000 to $60,000 per engine. Is that Canadian or US dollars.

US.

The same these days.

If you look forward to the 2010 GX, do you anticipate any impact on that cost from the 2010 certification?

Yes, We haven't completed our pricing for 2010 product, but we do use the Cummins based diesel engine and the Cummins SCR after treatment system which flow through as cost to the OEM. Wouldn't directly impact the cost of our fuel system, although which would track separately.

Okay, great. About some follow ups on some of the market developments. So it sounds like we are going to see another 500 trucks to the ports fairly soon. Do you expect any of the orders in calendar 2009 or will that be predominantly in Q1 of next year.

Most of the deliveries will be Q1, but I would expect to see some of the purchase orders starting to roll in December.

Okay, great. And then just one more. Going back to the Clean CDs. You think you have a good shot of maybe 50% of the orders. Is that for the 2,300 CNG vehicles, are they going to be able to size that you think will be adjustable by your product line?

And number of the CNGs will be addressable. The percentage will be higher for as if the LNG segment than on the CNG, but there is it substantial CNG opportunity, as well for Cummins Westport.

Okay. And one more. Dallas transit announcement was very positive for the sector. Are you talking to them now. Do you have any color on the end when they might be purchase orders?

I did not think timing has been specified. They decided to go natural-gas or be going through their specification processed. Cummins Westport is in close communication with them. But I haven't heard any specific timing.

I think the process has been quite confused because a lot of this is conducted in the press. The reports variously reports that they tender immediately in 2010. And they want deliveries to start in 2010, which is a pretty aggressive delivery cycle for a bus tender. But now, they have not awarded the business to a manufacturer yet, so of course we have not seen an order from a manufacturer yet. And we really don't have any clear direction on when that happens. But It is a great win. It's another major visible city going to natural gas in a big way. And of course we would expect to get with a large percentage of those orders. How's that.

Sounds good. That is a great outlet. Thanks very much.

Thank you. The last question is from Laurence Alexander from Jefferies & Company. Please go ahead.

A couple of last ones. As you pushed down your FPs on the HPDI side, how do you change your unit level break-even?

I guess it is always the dollar gross margin, we want to talk about, right? So, as I push down my AST, I sure hope I can sell more. So that's one. Number two, as you can see from our expense run rates, we are holding our expenses study. And we said publicly as well that we will manage your expenses to the business. And we are not going to go crazy and spend a lot of money if the unit volumes are not there to support it. Having said that, we are not going to prematurely cut anything and cut off potential for growth. The short answer is that we will sell more at the lower FP and we'll manage your expenses.

And I think it was Dave commented that we're drive the product cost at the same time which is helping.

I think that is what I am going trying to get a sense are you driving down the cost enough that the ESP required isn't moving that much? Or is there going to be a much slower cost reduction in the (inaudible) the ESP?

We're trying to drive down the cost aggressively and in a way that would protect Elaine's break even calculation.

And one of the things that David talk about, we are working with suppliers and talked about this publicly a number of times, that we are looking at a larger OEM suppliers and so on. And as we get those (inaudible) scales, you will see our cost of good sold drop versus on the smaller suppliers we are using today.

And then lastly, a question about the MD&A. What factors require or motivate you to move something up into the risk category? There's new risk item about, risk of acquisition. Can you clarify what prompted that addition?

We look at out risk factors every quarter. I wouldn't say that anything specific prompted it, but one of the things, I think in the August press release, we announced that the audit was going to move away of the CFO position and look at MNA's. And so it seemed like a normal thing to do. So, if we're going to look at MNA's more proactively, maybe we should have a risk factor that's a risk. Having said that, that do not read that that's a signal that something imenent that is going on or anything like that.

We call it the Elaine a risk factor.

Fair enough. Good to have more things to worry about.

Again, another example of me being worried, right? Thanks, Laurence.

Thank you. The call has now ended. Please disconnect your lines at this time and we thank you for your participation.