Westport Fuel Systems Inc (WPRT) 2010 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Westport Innovations 2010 fourth quarter and year-end financial results conference call. Introducing the speakers today will be Mr. Darren Seed. Please note 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, everyone and good afternoon. Welcome to our fourth quarter and year-end 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, and Westport's Chief Financial Officer, Bill Larkin. Attendance of this call is open to the public and to media but for the sake of brevity, we're restricting questions to analysts and institutional investors.

You are reminded that certain statements 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 laws, and such forward-looking statements are made based on our current expectations and involve certain risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements. Information contained in this conference call is subject to and qualified in its entirety by information contained in the company's public filings and except as required by applicable securities laws we do not have any intention or obligation to update forward-looking information after the conference call. You're 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'll lead off with some comments about our strategic plan and the progress we made this quarter, and because it's a year-end we always tend to look back a bit and look forward a bit in terms of years. And then of course I'll turn the floor over to Bill for his presentation of the financial statements.

Starting with top line, consolidated revenues for the quarter were CAD35.7 million which is up coincidentally 35.7% compared to Q4 last year. And for the full fiscal year revenue was up 7.3% compared to fiscal 2009 which was in line with the guidance and expectations that we've been setting for single digit growth for the year as a result of the financial market collapse last year. That said, we feel pretty good about the year and the single digit growth is in the context of a very significant downturn in the rest of the industry, so we think this has done pretty well. Fiscal 2010 marked our seventh consecutive year of revenue growth. And looking back our three year average growth rate has been 29% on a compound growth basis and we've used this number for years so even though we're at 7.3% this year we're still in line on CAGR. Our strategic plan calls for continued strong growth on that order of magnitude as we launch new products and new alliances and we see increased market penetration for natural gas products around the world. CWI also continues to demonstrate strong earnings leverage with our share of the joint venture's net income rising by 95% year-over-year to CAD7.6 million.

Looking forward I'm going to talk to you in five lines of business which is a bit of a departure for us. You've seen CWI revenue and earnings growth for several years now so that part of the business should be no surprise but as we look at the other four units they are either new or there's some significant uncertainties, both upside and delays that I'll try to outline for you. As we've consistently advised, we use a three year rolling compound growth rate of approximately 30% in our business modeling, so this would suggest that over the next few years that Westport including CWI should grow substantially if we're going to achieve those goals. This growth will come from further growth in market penetration of existing markets such as transit and refuse fleets around the world but also from new products and new markets such as regional and long haul trucking business in several geographic areas that's developed over the past year. But I'd caution that any time we talk about new market creation we need to all understand that there's no straightforward path. Our plans need to be flexible, accretive and a bit opportunistic depending on how things develop.

Starting with CWI, we've seen strong growth in the North American refuse and regional trucking markets this year, some of which, such as the San Bernadino contract with Ryder that you've heard about recently, having been driven by federal stimulus contracts. The transit market also has a few major deals this year which of course typically would ship in 2011 or 2012. Internationally we continue to see strong potential in India and in China, to serve export markets. CWI is also benefiting from our new relationship with Volvo and CWI has engines that are now available in several of the Volvo brands including Mac and rental around the world. CWI does face some uncertainty this year despite the sunny climate and the return to growth. This year and next in North America, there's a lot of focus on the natural gas vehicle incentives for commercial vehicles. And technically, the ones we have on the books today expire at the end of calendar 2010. Now as you all know and as our customers understand, there is good momentum behind new proposals in the NATGAS Act that would double this existing tax credit for natural gas trucks including those with CWI engines. So we're facing a bit of a binary situation with CWI where if incentives expire as scheduled at the end of this year we would normally expect a rush to order before the deadline followed by a dead period, or alternatively we could see a transformative market that suddenly makes natural gas trucks an economic must have for fleets. In the short-term, until we see clarity on incentives and their timing, we expect to see fleets in the United States take a more cautious wait and see stance. This won't affect CWI's business around the world, of course.

The second business area I want to highlight and talk about is our high performance heavy duty truck engine, the Westport GX engine which is a available in Kenworth and Peterbilt trucks in North America and Australia. As you know, GX product was launched at the ports in Los Angeles and Long Beach and GX product revenue, as you can see from our financial statements, tailed off slightly this fiscal year with 114 units shipped in the year versus 131 in fiscal '09. As we pointed out during the year this drop was expected. We launched to support the clean trucks program at the ports and as expected the first phase of the ports program began to wind down in late 2009 and with significantly lower port volumes following the 2008 economic collapse the clean truck program volumes were lower than anticipated when the program was first announced. That said, we think the program has been very successful and our customers are of course well entrenched now with natural gas. During 2009 we began to reposition this product for both the new 2010 emission standard that would apply to the GX product and the reconfiguring of our market effort from supporting this local specialized environmental project at the port in Los Angeles to a much more complex and larger opportunity to address the long haul trucking market across the US and around the world. We've invested significant time and effort with our partners over the past year to prepare for this new opportunity.

If you look at the numbers you can see directly the impact of our work to reduce our cost and to pass this through as price reductions. Year-over-year you can see our average selling price in the Westport HD business has dropped from around CAD84,000 to approximately CAD63,000 over the course of the last year. Margins have been moving around a bit, but we expect to reestablish gross margins in the 20% range as we complete our transition to new suppliers and new components. As you can see we took some adjustment at the end of the year to our inventory to insure we're properly positioned going forward. Now for penetration of the long haul market successfully we believe we need to show a 12 to 18 month pay back from fuel price savings. The outlook for diesel and LNG price ratios has been going our way this year with the apparent success of gas shale production on the long term, giving us confidence and our customers confidence that we have long term supply at good prices of natural gas in our key markets and the return to oil price increases over the past year. Of course both commodities are volatile and the ratio changes daily but the long term trends are giving fleets confidence that there will be a significant fuel price advantage by moving to natural gas. For planning purposes, we've historically been using a saving of CAD1 per gallon in the US, potentially higher outside the US in some markets and we've seen wholesale pricing recently of up to CAD2 per gallon savings for LNG over diesel fuel in some markets. This adds up to a big benefit. Typical fleets we are targeting consume more than 20,000-gallons per truck per year so you can see we would be talking CAD20,000 to CAD40,000 in fuel savings.

So as we work through this economics and as we launch this complex new system technology with our partners, with LNG refueling corridors being developed and many new entrants and partners and suppliers getting involved in this big opportunity, delivering that payback to customers is a complex undertaking. Our priority last year was to improve reliability on new components and also deliver cost reductions through a combination of work with suppliers and redesign to reduce manufacturing costs. Reduced costs also reduces the price of service parts and in combination with increased durability and reliability we see a double impact on warranty costs which of course have been high as we launch the new product such as the GX. Now we've seen excellent progress during the year on both fronts and as we transition to some of our new suppliers such as Delphi, which we announced earlier this year, we would expect to be able to deliver around 30% reduction in the cost of our product which will improve our margins as well as give us more pricing flexibility around the world. The next step is to insure that our customers see that payback in the field and see the benefit of our higher reliability parts by moving older trucks to the new component levels and by insuring that our distribution and support channels are fully aware of the progress we're making on this front.

We've also seen a major emissions level change at the start of 2010 and the associated regulatory approval process for our new products has been surprisingly slow. We'll not be shipping 2010 equipment in the US until certification is complete, of course. As always it's impossible to forecast this type of process but we do have some indication from the EPA that we may have our approvals by the end of the month. In the meantime we've seen fleets in the US paused while waiting for clarity on the NATGAS Act timing and the details of these subsidies in any event. Neither factor affects our sales in Australia or in Canada of course and as you can see, we continued to ship into Australia.

Looking forward though, I have to remind people of the actual number of engines shipped in this quarter or the next is not important strategically. We have a sufficient field population in various duty cycles in service with our customers around the world and this is delivering us invaluable performance data. We're using this feedback to rapidly improve the product and to position us properly for what we think the market expectations will be. We expect that 2010 model year trucks when they are delivered will have better fuel economy and performance than 2009, with high reliability and durability. We intend to continue to continuously improve the product and continuously reduce our costs. Independent of the progress of incentives such as the NATGAS Act, over the past two years, we've seen a significant shift in market acceptance of LNG as a viable truck fuel all over the world. Given the relative energy costs and this energy intensive marketplace, we believe that the transition to natural gas will be inevitable. This is an unimaginably large opportunity for Westport and for our partners and we have virtually no competition for our technology at this point. So we're working hard to support the many new partners and customers that are examining this with us and moving forward to make this reality come true. In that context it's critical for us to get the product right, to get the price and to get the distribution and support channels ready for very large scale up.

One point that I can point you to recently, we've seen announcements by the Quebec government, by Gaz Metro and Robert Transport in Quebec that they will launch an LNG incentive program and build infrastructure along the Quebec to Detroit highway corridor. It seems you'd be interested the Quebec story because this is a very new market for us and it's outside the US and outside the conventional incentives. The Quebec government has come up with some very interesting new ways to do this. Why are they supporting it or what's the reason behind the policy? Because LNG trucks align with the government's strategic objectives. Development of the large gas shale that's being recently developed in Quebec, the Utica shale. Carbon emissions reductions in transportation. Quebec has been very supportive of carbon reductions. The development and support of leading Quebec companies like Robert and Gaz Metro. And of course technological leadership and innovation. So we hit a number of different fronts on government policy and as a result the Quebec government has introduced very significant economic incentives to encourage the adoption of LNG in the trucking industry. And we see many governments around the world looking at LNG trucks in the same light as strong implementation of a policy direction that meets their objectives. So this is what lets us reach the conclusion that this market is going to develop with or without the immediate incentives proposed in the US, although of course if we see the NATGAS Act incentives passed, you would have a very transformative effect and move things along much more quickly than without it.

Now on that issue you've seen the introduction recently of the American Power Act. This is the Kerry Lieberman Bill in the Senate and all of the discussions on its prospects. There's no doubt the situation in the Gulf of Mexico has complicated the discussion around the APA and US energy policy but we see a number of paths forward for these particular incentives. And under the circumstances I think we can all agree that the domestic natural gas industry is looking better all the time compared to continuing reliance on oil and offshore drilling. So the NATGAS incentives may come under the American Power Act soon or under another piece of legislation or perhaps an amended APA to get it passed early in the summer. We'll just have to wait and see.

So concluding on the GX business, we have to launch the 2010 engine in trucks. We're shifting to new high volume suppliers, we're rapidly improving product quality and product reliability. We will be in a position to rapidly scale up production if the market reacts to the new incentives brought in place by various governments and if the price spread continues to encourage adoption of natural gas as a truck fuel we would expect to see that growth develop. So we're confident this is an attractive business with very large potential returns.

I've spent a lot of time on the GX, but I'd like to turn to three other businesses that we see as being very significant starting this year. First, Juniper Engines which I told you last quarter we were preparing to launch production in Korea in support of our first contract with Clark Forklifts and I'm pleased to report we began to ship engines on schedule in April and so far the launch has proceeded successfully. Our focus for the near term of course is to support Clark and to insure we can scale up production smoothly and with high quality and meet their expectations. However we are actively pursuing several new market opportunities with Juniper and the market feedback on our value proposition has been very encouraging, frankly. Juniper is offering the market the first fully engineered systems in this engine class based on advanced Hyundai gasoline engines that are optimized for natural gas, propane and other fuels, and all doing it at a very competitive price. So we think the progress has been very satisfactory in Juniper and with its radically outsourced project team we think there's considerable room for new investment in this model and in the market for light duty engines. We'll keep you posted on our progress of course.

Now the fourth and fifth business lines aren't news either but we are kicking off these businesses and they are quite different so I want to highlight how they are going to develop in 2011 and beyond. Of course I'm speaking of our alliances with Weichai and Volvo. I think it's important to remember that we've now covered a very significant part of the global diesel truck engine business with Weichai Volvo and our GX business in North America. So we've covered the three major markets with leading engine companies and we intend to continue to expand this but these three do give us a very broad market coverage. With Weichai, we've announced this new joint venture with Weichai some time ago but I'm pleased to report that the JV has now completed government approval processes. We expect to make our planned investment of US $4.5 million which will give us a 35% position and this will be complete before the end of June. This JV does commence with an existing natural gas engine product that's targeted at the Chinese domestic market so we will see sales immediately in the JV. And the JV has been profitable. Of course we also intend to launch a new line of our direct injection technology engines that will target the truck market in the Chinese domestic market and for export. We believe this is a very exciting project, we're looking forward to be underway and to be working with our new partners at Weichai.

Also, you've heard that we announced that Westport and Volvo will be working together to launch new direct injection product lines based on Volvo diesel engines. We haven't disclosed our business model or the financial arrangements but this will be becoming clearer obviously over the course of this year as you see the financial statements. This is a very exciting relationship and we expect with Volvo to demonstrate that LNG vehicles are mainstream commercial products that will be a high growth market over the next decade around the world. Westport will contribute engineering and product development services as well as components and technology, and of course our market development experience is guiding the teams market and product priorities. We've established challenging cost and performance targets but if we're successful I've got no doubt that with Volvo's global market position, we can establish a very significant market momentum towards natural gas. While I can't give you the details today I can tell you that we'll be significantly ramping up the Westport engineering work with Volvo this year and the costs will be shared by Volvo and Westport under this total program. In fact, most of the product development costs will be covered by Volvo.

Now I'm about to wrap up and let Bill take the floor. I've spent some time now with the theme that we're now seeing a global and all market shift toward natural gas as a mainstream fuel. There's no longer a niche environmental play. As the dominant player in the technology for commercial vehicles, Westport is the natural partner for many players in this existing industry. Our challenge is to deliver value to the major global OEMs and at the same time protect our leading IP position by advancing our research programs and creating shareholder value. Looking ahead, we're optimistic about sales growth in fiscal 2011 but it's clear that we still have challenges in the marketplace as well as our own internal milestones to work through. We still see caution signals in many segments of the commercial vehicle market with uncertainty rising from general economic conditions as well as the disruption or the transforming effect of government programs and incentives which is having the effect of having the market pause while people wait and see.

On balance then we're continuing to grow our market share but deals continue to remain slow to move to purchase order points. Nevertheless we believe those decision points are approaching and unless we see a significant negative event in the economy we think sustainable strong growth will emerge in fiscal '11. Fiscal 2010 is behind us. I think we'll look back on it as the tipping point for our business and for our industry. This year we expect to see evidence of growing enthusiasm for natural gas as a fuel with the development of refueling corridors for long haul trucking and several product announcements that reinforce the mainstreaming of this technology. We're well positioned to see significant breakthroughs in new markets. Our current business remains healthy and growing. We intend to work quickly to strengthen our competitive position while continuing to be prudent managers of our resources as this industry unfolds.

So that's enough from me. I'll turn the floor over to Bill to take you through the fourth quarter and year-end numbers.

Thank you, David, and good afternoon everyone. The press release, financial statements and management's discussion analysis provide a considerable amount of detail regarding our fiscal year ended March 31, 2010, and are posted on our website. This afternoon I will focus on relative changes in revenues, margin and net loss.

Turning to the fourth quarter first. For the fourth quarter ending March 31, 2010, revenues were CAD35.7 million compared to CAD26.3 million for the previous fiscal year, a 35.7% increase. CWI product revenue was up CAD4.6 million and has seen its sales increase from 671 units to 998 units primarily from increased volume of ISLG sales. CWI parts revenue also increased by CAD1.7 million quarter-over-quarter due to an increase in units in service and price increases on certain parts. Non-CWI product revenues increased by CAD2.4 million with 46 HD systems shipped in the fourth quarter of fiscal 2010 compared with five in the comparative quarter. Consolidated gross margin for the fourth quarter ended March 31, 2010, increased by approximately CAD5 million on higher revenues while gross margin percentages increased from 26% in the fourth quarter of last year to 34% in fiscal 2010. CWI gross margin percentages alone increased from 29% in the fourth quarter of fiscal 2009 to 40% in fiscal 2010 as a result of more favorable warranty experience and an increase in parts margin from CWI negotiating lower expenses on certain parts. While we experienced a significant increase in margin percentages for CWI, going forward we would expect normalized margin to be in the traditional 30% range.

Net loss for the three months ended March 31, 2010 was CAD12.2 million or CAD0.32 per share compared to a net loss of CAD12.7 million or CAD0.43 per share in the three months ended March 31, 2009. Our share of CWI net income increased CAD2.1 million from CAD800,000 to CAD2.9 million primarily because of increased revenues and the higher gross margin percentage. The increase in CWI's net income as it relates to our consolidated earnings was primarily offset by CWI's income tax expense increase of CAD1.7 million and effects from non-CWI operating expenses and certain charges recorded during the period.

Turning to the full year results. For the year ended March 31, 2010, consolidated revenues were CAD130.7 million, an increase of CAD8.9 million or 7.3% from CAD121.8 million for the ame period last year. We shipped 3,921 units in fiscal 2010 compared to 4,038 units shipped in fiscal 2009. The increase in revenues is primarily due to a 9.5% increase in CWI revenues to CAD120.3 million from CAD109.9 million in the year ended March 31, 2009. The increase in CWI sales was primarily related to increased sales of CWI's ISLG engine. Non-CWI revenues decreased 12.6% from CAD11.9 million in fiscal year 2009 on 131 Westport HD systems shipped compared to CAD10.4 million in fiscal year 2010 on 114 Westport HD systems shipped. While CWI unit sales decreased from 3,907 in fiscal 2009 to 3,807 in fiscal 2010, CWI product revenue increased CAD3.7 million or 4.1% to CAD94.6 million primarily due to product mix.

Contributing to the increase in consolidated revenue, parts revenue increased CAD6.6 million or 34.7% to CAD25.6 million in fiscal year 2010 due to an increase in units in service. Consolidated gross margin was CAD41.4 million and CAD30.8 million or 32% and 25% for the years ended March 31, 2010 and 2009, respectively. CWI gross margin and gross margin percentages were CAD41.4 million and 34% in fiscal 2010 compared with CAD28.6 million and 26% in fiscal 2009. Non-CWI gross margin was slightly below breakeven for fiscal 2010 compared with CAD2.2 million in fiscal 2009. The decrease in gross margin percentage was driven by changes in our inventory provisions and campaign charges of CAD1.8 million and CAD200,000, respectively.

Moving on to our net results. Our consolidated net loss for the year ended March 31, 2010 was CAD37.6 million or CAD1.10 per share compared to a net loss of CAD24.4 million or CAD0.81 per share for the year ended March 31, 2009. On a comparative basis results for the year ended March 31, 2009 included approximately CAD11.9 million in net gains on the sale of investments versus CAD2.9 million for the year ended March 31, 2010. Therefore our net loss for the year ended March 31, 2009, excluding gains on the sale of investments was CAD36.3 million or CAD1.20 per share compared to CAD40.5 million or CAD1.19 per share for the year ended March 31, 2010. The increase in net loss excluding net gains on the sale of investments is primarily due to an increase of CAD3.6 million in non-CWI operating expenses such as G&A and sales and marketing. Contributing to the consolidated net loss was a CAD1.8 million increase in inventory obsolescence provisions for non-CWI products, an increase in interest expense of CAD900,000, a reduction in investment income of CAD700,000, and an increase in net foreign exchange losses of CAD500,000.

Helping offset non-CWI net losses, CWI's net income increased CAD7.3 million from CAD7.8 million in fiscal 2009 to CAD15.1 million in fiscal 2010. The increase was driven primarily by higher product and parts revenue and an increase in gross margin percentage as a result of more favorable warranty experience compared with the prior year. For the year ended March 31, 2010, our share of CWI's net income increased by CAD3.6 million to CAD7.6 million. As of March 31, 2010, our cash, cash equivalents and short-term investments balance was CAD105.9 million compared to CAD82.6 million at March 31, 2009. For the year ended March 31, 2010, we raised approximately US $54.2 million in net proceeds from a public offering in December 2009, $2.5 million from the exercise of stock options and $3.8 million from the sale of shares of clean energy in Wild River resources.

For the year ended March 31, 2010, cash used in operations and capital expenditures were CAD22 million and CAD300,000, respectively. Subsequent to March 31, we added approximately CAD8.4 million to our bank on the exercise of warrants previously issued to Industry of Canada. As stated on our last conference call we will be moving to US GAAP in fiscal year 2012 instead of IFRS as we already provide a reconciliation to US GAAP. In addition we'll start reporting in US dollars beginning with our first quarter of fiscal 2011 ending June 30th which is expected to be reported in early August. As mentioned earlier, please see our MD&A and financial statements as filed and posted on the Company's website for more details.

I will now pass the call back to the Operator to open the call for questions. Operator?

(Operator Instructions). The first question is from Graham Mattison from Lazard Capital Markets. Please go ahead.

Hi, good afternoon guys. I was wondering if you could just comment a little bit more on the Australian market and also Canada just to get a sense of how big those markets could potentially be or the overall size of Class A trucks you're going after and potential penetration rates there.

Obviously they are both much smaller than the US market so if you just look at truck populations both Australia and Canada are about 10% the size of the US market but you add them together and that's 20% so it's not insignificant. A couple of different features. Clearly diesel fuel is more expensive in Canada, we have higher taxes. And with governments promoting the adoption of natural gas because of these local productions, surprising shales are popping up in previously unknown jurisdictions like Quebec and recently New Brunswick. So these governments are keen to become petro states and encourage it and they are being told by the natural gas industry that the fastest way to develop this asset is to get this new high value project on the road. So there's actually a very high concentration of trucks along the 401 corridor in Eastern Canada and there's been another announcement of activity in western Canada between Alberta and Vancouver. So as these emerge over the course of the year and with the support of market leaders like Robert Transport and Canadian Trucking Association I think Canada is looking very interesting which is a huge change because we've never sold anything in Canada before to speak of, as you know. So I think that's an interesting development and I think it can have a very significant effect.

The Quebec governments incentive by the way is a new one. They are offering 145% capital cost allowance which is pretty attractive to a trucking fleet as opposed to a direct cash rebate or a tax credit of some kind. So that's an interesting idea and I think other Canadian jurisdictions are looking at that model as being interesting. Australia is also different because they have got a very low cost supply of natural gas. We've told you this story before. It's been held up over the last couple of years because of the volatility of foreign exchange and the presence of US companies selling US product into the Australia market in US dollars has made it really difficult as the Australian dollar has moved by 30%, 40%. So that's settled down now, we're starting to see prices be a little more realistic and we've also used the last year, year and a half to develop corridors in Australia. For example, I think BOC has launched a major corridor in Eastern Australia and the price of fuel is really what's driving it. It's very high fuel use, high mileage trucks, multiple trailers, with very cheap LNG. So we think both markets have unique characteristics. We have to get the right product, the right partners, the right distribution, the right product price. All that stuff applies there just as it does in the long haul trucking business in the US, but I think it's also further evidence that we're seeing global take up for this as a concept and although the details are going to be different, it's going to be a trend everywhere driven by the economics.

So do you potentially see this contributing to the remaining calendar part of the year?

Yes, I think fiscal '11 we're going to see good sales in both countries which again highlights that it's not just all about waiting for NATGAS Act stimulus.

Great, and just another question, on the GX engine. You mentioned you could probably expect to get the certification some time this month. What are the opportunities in terms of working with other non-PACCAR truck companies?

We love to work with anybody, I guess is the official answer. In the strict sense, we have committed to PACCAR that production line trucks, they've got an exclusivity period that expires in 2010. We all are typically doing an early upfit model with other truck brands, as you know, Graham, so this exclusivity period isn't really restricting us from talking to other people and I expect that in calendar 2011 you will see other brands of trucks with the GX engine.

All right, great. Thanks, I'll jump back in queue.

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

Good afternoon. You mentioned Weichai starting to see revenue. Can you just give us a little color on how you think that rolls out and then remind us again how that joint venture works through your business model?

Yes. We've gone over this in exhaustive detail in terms of the pain we've had on government registration. The good news is that the business actually has been developing quite well over the last 18 months. Weichai is producing natural gas engines in a new plant for the domestic bus business primarily, a little bit of export, and we'll disclose full financials next quarter. You'll see this in the notes. It's not huge but it's not immaterial and I can say it's on the order of $20 million US in sales last calendar year and they are going to show strong growth this year.

Now we have a 35% share so the bottom line contribution isn't material but it's also a very strong base to be building on and we think a strong brand. Weichai has emerged as the number one diesel company in the world just in selling diesel engines in the truck market. So we think we've got a very strong partner and this alliance is well positioned with the production capacity and experience to really make natural gas happen in China. So I think you will see some positive contribution from the joint venture to our consolidated statements this year but more importantly, it's giving us some confidence that this business can develop very quickly.

Okay, great. And then a second question on your operating expense run rate in the quarter, were there any one-time items in the quarter we should note and how do you see the expense level going forward here for the next few quarters?

I'll look at Bill. Do you want to comment? Yes, there's a whole bunch of one-time items that you can pull out, Rob, and I think they are all pretty clearly described in the MD&A and notes. We haven't seen any significant change in our basic expense run rate. I'm looking across the table at Bill. Some of the one-time issues were adjustments to warranty and to inventory. As you know Mike Gallagher retired so there's some stock based comp that hit the P&L as a result of that transaction. There's sale of clean energy shares that we've been undertaking over the last couple of years since their IPO. As you wash that out, I think if you look at it, you'll see a pretty constant base run rate on the normal sales, administrative cost, R&D.

Now I think you will see, I'm rambling here waiting for Bill to jump in here, but I think there's a lot of language around some of the shift over the last year between product development and sales expenses. The aggregate total is about the same but there's been a lot more emphasis on sales and marketing primarily field support, frankly, customer support. Remember, we're working on a channel strategy where we're working with truck dealers and distributors to do direct sales but those expenses are rising and product development expenses are falling leaving about a constant amount of investment. Do you want to add anything, Bill?

No.

All right, thank you.

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

Good afternoon. First question is as you look across your various partners on the LNG engine side, if they were all running full out currently what would be the total capacity that's currently in place?

Their total diesel capacity?

No, the LNG capacity.

Oh, LNG capacity.

Right so if your partners were all running full out how much could they be doing?

Are you looking for our supply chain partners or Volvo and Weichai?

Sorry, I'm thinking PACCAR. Obviously you can't speak to Volvo and Weichai at this point.

Yes, what I can say because we've talked about this in the past, the focus over the last year was to get our capacity restrictions removed, and the main restriction on the build of LNG trucks has been the proprietary unique components. Things like tanks, cryogenic pumps, fuel injectors. The major issue there was fuel injectors and by moving to Delphi and the Delphi capabilities, global capabilities, we really have no limitation anymore on production injectors. Delphi produces millions of diesel injectors and we've got access to all of that capacity. So that really becomes a demand driven issue once that plant is up and running and delivering which will happen later in 2010. We're just undergoing the start up and testing of that production capacity.

Tanks, little different story. We've been working in China with BCIC who are a major manufacturer. They're putting new capacity in place as we speak with new plants. We've also developed second suppliers in North America, so we feel we have good capacity for any foreseeable demand and the ability to ramp production up on reasonable notice, probably six months notice, to any reasonable demand. So I think we can declare victory on this. The goal that we told you last year was that we wanted to be able to deliver 10,000 trucks a year which is a long way from 100 trucks a year but we think we've got that capacity in place. We have quotes in place and visible capacity to be able to do that, with reasonable notice of course. It's not something that we can deliver in a week.

That said, the total market potential is much bigger than that so we aren't downing tools. I think we have to continue to develop quality, capacity and cost in the entire supply chain and make sure there is no single limitation on our ability to grow and to cover the potential demand that we would see from partners like Volvo and Weichai once they get into the business. Does that make sense?

Yes, that's very helpful. Could you also address where you think you need to get to on bringing down the average selling prices? I know you're thinking about it in terms of pay backs and that's going to vary by region but just if you can give a bit of a timeline and when you expect to get where?

We've talked, Laurence, I'm sure I've been boring with everybody else too. The trouble with a question like that is it is all in the eyes of the beholder and every fleet has their own view of total life cycle costs and fuel savings, and all the rest of this stuff, so it's a bit of a moving target. As we abstract it to segments of the market though, I said we're looking for the higher mileage fleets that are probably doing 20,000 gallons per truck per year. And at CAD1.00 or CAD2.00 in fuel savings, that gets us pretty good cover for an ASP in the CAD40,000 to CAD50,000 range which was where we're closing in. I said that for fiscal 2010 I think we were averaging in the low CAD60,000. We've talked in the past we're getting that down to the low CAD50,000. If there's any sort of environmental credits or incentives or carbon credits or something like that, that puts us right in range of a 12 to 18 month pay back with someone doing 20,000 gallons a year.

Now on the other hand if we see significant incentives as we saw at the port or with the NATGAS Act, that gives the whole supply chain a whole bunch more margin to work with. We want to see that passed back to the customer to encourage fast adoption and we've got to make sure that actually happens. So we think that we are getting our price and cost into the zone that we want to see. I think I talked about another 30% drop in costs as we get Delphi and other people out. That's a realistic target I think as we see improvements in warranty. So you can kind of do the math on where that gets us, and the pricing capability that that gives us in these markets. So we'll have to wait and see how some of these other things move out. Right now, one of the big unknowns is the relative price of fuel. We're seeing some pretty big movements in markets like China as they lift some of their energy pricing controls which I think is helpful to us. We're seeing a lot of more support from the gas producers to supply gas directly at a low price to big applications like fleets. So there's still lots of moving parts that are going to have to come together next year but I think everything is moving in the right direction.

And lastly as you've been discussing the end market trends with your partners and customers, do you have any rough sense for what the backlog? I realize it's lumpy in the near term but if you think over the next 12 to 18 months the size of bids that you have in North America that would have normally been hitting the market if the NATGAS Act weren't there to muddy the water.

Yes, it's a good question. Remember, we do work through distributors and it's their business you probably need to check on. But I know that at some of the conferences recently we've seen Kenworth and Peterbilt talking with about backlog, talking about the fact that this has become a mainstream product and that they are seeing demand across the US. It's not just a California phenomenon. And the quote activity is in the thousands, not in the tens. I can tell you that we do have a demo truck we put on the road recently and it's booked through September in three day slots, so there's a lot of interest around the US. It's been in a lot of fleets. We're seeing a lot of demand. In terms of absolute orders, frankly, everybody we see in the US is waiting. Aside from the stimulus contracts with things you've seen like Ryder and UPS, I think those are going to go independently. I think the short-term action is going to be in Canada with people like Robert and some of the other Quebec fleets in support of this new Quebec program and in Australia. I think we've got good demand in both places developing to keep us busy.

Thank you.

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

Thank you. A couple quick questions. Are you guys planning to break out Juniper and Weichai next quarter or are you going to consolidate that for a while?

As those businesses continue to develop and become a more significant piece of our business, we will start probably looking at our business by the Weichai Juniper, hopefully provide more clarity into our business and how those relationships are progressing.

Yes, I think we have to follow GAAP unfortunately and they are real spoil sports sometimes but we're going to try and disclose as much as we can in notes. It is important I think for people to be able to see how the historical businesses are doing and growing and the leverage we're getting on profitability and how we're investing in new businesses so we'll have to try and communicate this as the business gets more and more complicated in these multiple lines of business.

And one other quick question. We've been hearing a little bit out of China about marine engines and barges up and down the Yellow River. Are you guys expecting that to happen? Is that something that you've even heard talked about?

Yes, you'd be surprised at what we're hearing. We're hearing it from all kinds of places that I didn't expect either frankly. Off road in particular is a high fuel use application. So we're hearing from rail operators. Of course we've talked about mine trucks in the past but mining and industrial applications like that. Anywhere where you see high fuel use, people are keen to talk about going to lower cost fuel so I think we will see marine engines. I think we will see more off road and the bigger the better.

If that were to occur would that go through the Weichai joint venture?

Yes, Weichai makes a very broad range of engines. I think there's a pretty good description on their web page but they go up to I think 90-liter capacity in terms of their current production and down quite a ways as well in the product line so they got a very broad diesel product line. The joint venture has access to all of that product and technology and I think it's clear that the first opportunity is going to be on road vehicles but if there's market demand you should expect industrial engines to follow quickly. Volvo has an industrial engine business. Of course Juniper is after this too, so I think there's a good opportunity for us as those customers start to look at alternative fuels.

One last question on that. In terms of the geographics of where they can go, where Weichai can go, are there any limitations?

No restrictions on anybody although from a practical viewpoint, as you know, the industry is segmented by regulation and customer practice. And we see a little more coherence between Asia and Europe just because they do have common emission standards and a pretty common business model. But China and India are emerging as discrete markets with their own domestic supplier. And the Europeans of course are active in both places trying to grab market share. So Europe and Asia are two markets that have strong inter connections but are developing independently. North America has historically been different suppliers, different characteristics and different regulations so it's a bit discrete which is why we worked hard to try and get coverage and partnership in each of those markets with leading players. But I think you'll see a lot more commonality because of the global industry is driven by energy and energy is a global commodity so we're going to see convergence on some of this.

Great. Thank you much.

Thank you. The next question is from Eric Stine with Northland Capital Markets.

Everyone, thanks for taking the questions. Most of the questions have been answered or asked but maybe we could touch on India and if you could just give the KIT revenue in the quarter?

I'm looking at Bill whose pulling the paper out. I'm not sure we disclose, did we disclose India discretely? I can give you the number but I'll probably get hit. I'll ramble a bit while Bill decides what he can say. The short answer is I think the India program is going to continue for several quarters yet at a pretty constant rate. That contract was originally for a few thousand engines, 3,100 engines, and I think there's been some add-ons to it. Do you want to comment?

Yes, just looking, we disclose more detail in our financial statements, KIT revenue increased of CAD6.3 million from CAD1.4 million during the year.

Okay, and I know your recent orders were for customers outside of Delhi. Should we expect there's a potential for a follow on order from Delhi Transport?

We sure hope so.

Okay, that's good to hear.

It's a very competitive business. I don't know if you've been to India. There's a ton of new entrants in the transport sector and the automotive sector, very high quality, really interesting times. And the whole industry is growing really rapidly. So transit buses in particular, natural gas transit buses are seen as a very high growth area, very competitive. I think we've got the leading market position with the order in Delhi. Some of the follow ons we've got leading partners, so we feel like we're in good shape but it's certainly a very active and competitive market.

And this goes back, I probably asked this on the last conference call but at the time, CIL was in talks with Volvo to be the preferred engine supplier for their new CNG bus.

Yes.

Anything you can share there?

I mentioned that CWI has benefited from our alliance with Volvo in that Volvo brands like Mac truck and rental are selling CWI engines. And we would expect over time that Volvo engines are going to emerge as well but in the near term I think it suggests that the Volvo brands are seeing opportunity for natural gas vehicles and CWI offers them a good product. That's a round about answer. I think your suggestion that Volvo bus is bidding projects as well is pretty public but that's their business and you'll just have to keep your eye on it.

Okay, fair enough. And maybe just to clarify on the EPA 2010 certification, is it fair to say that you've already met the testing parameters and now you're just in that waiting, waiting for the actual parchment?

I wouldn't say it's waiting. It's been a very thorough process, much more challenging than previous certification processes frankly. Some of this is because this has been such a controversial year and as you probably know there's been a bunch of litigation with the EPA around this so I suspect there's just a very thorough analysis. The issue is not really with the test results because no one is questioning those results. We're legally bound to deliver the numbers and the right numbers, so it's not whether or not we qualify. It involves more things like the lifetime warranty for emission gear and what the deterioration factors are on emissions products and with these engines. So former practice on these regulations and approval of certifications have changed and so that's where we're in negotiations with the EPA and with CARB is to get clear on exactly what they expect on these issues and for them to get comfortable with our procedures. So it's been a very thorough process, taking time. We're confident that certification will result, but as you saw Cummins didn't get certification of their engine until the end of January. We couldn't start until then, so it's to be expected there will be some examination of this. It has gone on longer than we expected. I think we're near the end but we can't be certain there won't be another question or round of document exchange.

Okay, that's helpful. And then last and just on the CWI side, the sequential down tick in units, should I just think of that as more normal volatility or is there anything in a specific segment that I should think about that?

It's product mix as well and so you can see revenue's up and units are down. It's some of what we count, we don't count units shipped to India for example. Those are KIT t revenue which I guess is in the other revenue bucket somewhere. Revenue is revenue. But engine units really vary quarter to quarter and year to year depending on product mix.

Okay, and I was just trying to back into just the geographic number for the fourth quarter and maybe I'm wrong but did Asia drop, was Asia a low number in the fourth quarter?

Yes, Asia is always very volatile. It depends on a few major orders and so it depends if we're shipping to Beijing, for example,, of if they have a major order. A lot of our China business these days is for export by the way, it gets reexported to South America or Africa or the Middle East by Chinese manufactures. So it really depends on their order flow and where things are, so I wouldn't draw too many conclusions by the volatility in either the unit number or the geographic spread.

Okay, just normal course of business.

Yes.

All right, thanks, everyone.

The next question is from Dilip Warrior with Thomas Weisel Partners. Please go ahead.

Thank you for taking my question. I was wondering if you could provide an update on the flow of fund from the Clean Cities awards, have you seen any orders materialize yet? I think we've seen a couple of positive press releases from Ryder and a couple of other companies but I was just wondering if it's wait and see if the NATGAS Act gets passed or we can see orders here?

If you're talking about the Clean Cities -- sorry, you're breaking up a little bit and I wasn't sure if I got all of the details -- I think some of that is behind us, a lot of the contracts have been left. A number of projects in the refuse business for example, and bus business. So we'll see that flow over the course of the next probably 12 to 18 months. Some of the higher profile projects, things like the UPS and Ryder, have taken some time frankly because it's been dependent on the development of infrastructure and there's been a little bit of jurisdiction shopping frankly by some customers, shopping around to see what the better deal might be, if they wait for NATGAS Act, if they do this or that. So the money I am confident will be spent by the Clean Cities organization. Negotiating the exact details of where that last dollar goes and who gets it is up to them, but I expect it will all be spent on schedule.

Okay, and when you talk of HD units at an ASP of CAD40,000 to CAD50,000 are you still expecting gross margins in the 30% range?

Yes, we've been using 20% as, I don't want to say guidance because that's too strong but we were suggesting that as we continue to develop the product and move the price it's going to be hard to maintain a mature margin like 30%. If you look at our experience with Cummins Westport typically margins do go through a life cycle where they start low 20s, high teens, and they evolve over time to be high 30s maybe low 40s as markets mature, products mature and warranty accruals drop. I think you'll see the same pattern once we settle down at a final price point on heavy duty but we are working hard to make sure warranty accruals are conservative and that we've got great customer experience. So margin optimization is frankly not the focus right now. Over fiscal '11 I think what I suggested was margins will build back to 20%, low 20s, high teens, in most markets and then likely we will move toward the 30% gross margin as the market develops. Obviously, new suppliers like Delphi are going to help and you'll have to see some of our current inventory flow through the system to see that margin improvement. We are taking the price actions now with the 2010 product and as these new suppliers and new pricing experience shows up, you'll see the margins improve.

Got it. One last question. Of the thousand units you shipped this past quarter, how many went to the ports?

Port trucks, actually I'm not sure of that. I'm looking at Bill. I think in fact most of the shipments last quarter were Australian. I think the port programs they've still got a few more weeks to take delivery of 2009. I know there was some delay in contract so we can get back to you on that if you like. The port program first phase is wrapping up. We are hearing that there will be another procurement in 2010 for more LNG trucks, but I think we'll be topping out in the, I'm looking at Darren and Bill, 1,000 or 1,100 LNG trucks over the next few weeks.

Okay, thank you very much.

Thank you. The next question is from Matt Galling with Mackey Research.

Good afternoon. I'm very interested to see in the release, comments on the Juniper engines and where you see that join venture going, work on the oilfield applications as well as the stationary power market. On the stationary power market side I'm just wondering, how large potentially could you see that market?

Part of the story behind Juniper is that there is an existing fuel market that's well developed and the change that we're exploiting is this move from a market that's been dominated by relatively simple after-market conversion kits on a gasoline engine to a more fully engineered, fully integrated engine product from Juniper. And so the market today is on the order of 100,000 to 150,000 engines a year in this class, the 2.4-liter class that we've launched in. And of that, probably half of it is good movement. forklifts and things like that. and the other half are the industrial engines in all kinds of places, power generation, other off road equipment, oilfield service and pumps, things like that. So they aren't gigantic markets but they are significant, and they are significant because they are year in and year out, and we think if we can capture a customer with this value proposition, we'll become their supplier. So it's not selling a consumer product in quantity one, it's capturing a customer that will buy thousands of engines from us.

And in terms of the price point strategy, should we think about it as similar to the case of Westport HD units selling at a bit of a premium but the proposition being that the spread, the savings between what they had been using either gasoline or diesel is there so you're able to get that price premium?

Juniper has actually been contrarian, and I guess you can think of this as a portfolio approach where they are coming in as the price and performance leader both. I think they've got a better product at a lower price, and obviously we think that should be a winning proposition if we can prove it.

Great, and just questions around your comments around 2011. Talking about a sustainable growth number. When we think about that sustainable growth number, should we think about that in terms of your 30% three year compound annual revenue growth number, or is it the fiscal 2009 number, or is it somewhere in between? Just looking for a little bit more color on that, please?

Yes, we use a three year CAGR. I think that's the easiest thing to do because it smooths out. It's impossible to draw many conclusions from a year that we had 7% growth that followed a year where we had 50% growth that followed a year with 35% or whatever the number was in '08. Looking back, I was pleased to see that our three year CAGR turned out exactly 29% and our five year CAGR I think is still 33% or 34%, so I think it's reasonable going forward. Now we didn't pull this out of the air, frankly. We have done some analysis of a lot of other companies in many industries and other companies in the green space including stuff that you wouldn't think is necessarily comparable. But it's very rare, I think it's probably above 75th percentile to see anybody able to sustain more than 25% growth for very long. So we think, much as people would love to see 100% compound growth, we're not sure that's realistic. And I'm an optimistic guy, as you know, but we do need to be tempered with reality. I think that setting the bar at 30% compound growth from where we are for the next three years is a challenging goal but I think it's achievable and if we achieve it our shareholders should be pretty happy with us so that's how we set it. Is there more market potential? Absolutely. And can we deliver it? That's what remains to be seen.

So on the 30% growth, out three years, do you envision that being in the near term, specifically 2011 below the 2011 or below the 30% number and then accelerating above the 30% number in the years or is it going to be even keel 30%, 30%, 30%?

Yes, we really can't say, but I think if you look at the Q4, Q4 was at 35% year-over-year, so it should give us maybe some confidence that growth this year is back to normal. It really depends on whether we see another collapse in the economy. But can we pull off a sustained three year CAGR? I think so.

Great. Thanks a lot for taking my questions.

Thank you. The next question is from Ian Tharp with Dundee Securities.

Thanks, everyone, and good results over the year, lots accomplished. Going back to Weichai, China, we spent a lot of time on questions, and David your commentary. Just to recap, the license really just formalizes by the payment of the CAD4.5 million within the month, is that right?

Yes.

And then I just wondered, you talked about natural gas engine sales that will happen now. Is it as billed in terms of the proportion of the JV, you would just see that proportion of revenues coming toward Westport for your share of the joint venture?

Because we're a 35% partner you'll likely just see an income from joint venture line where we'll consolidate all of the joint ventures. In the notes I suspect we'll have to report the major balance sheet and P&L numbers from the JV, so you'll see the assets, the revenue. I'm looking at Bill, are we going to disclose gross profit? Probably not. You'll probably see major expense lines broken out and then in our P&L you'll just see the 35% interest in after-tax income.

And so they're selling a natural gas engine product now and just to clarify, is that based on Westport HD at this point?

No. This is pretty traditional spark ignited bus engine I happen to think the product is pretty good. We've been working with them for some time so we kept in touch but this is a Weichai development. And obviously we'll come in and provide some advice on the product line as we speak. But the Chinese natural gas domestic market is emerging quickly as you know, Cummins Westport has been there for I guess eight years now. There are other domestic manufactures in the bus business and we're starting to see that move into trucks and other applications, so I think our timing is pretty good. We do want to broaden the product line with a range of technologies. We also think there's a good opportunity for our HPDI technology in the Chinese market but it certainly won't be the only product that the joint venture does.

Okay, but the initial units that are recognized within the joint venture, they aren't split in any different proportion than those that are based specifically on HD or other Westport born technologies?

We bought an interest in a business and happen to think it's a really good business and happen to think that the valuation is attractive and has lots of opportunity. But it's a business on its own, it has a board. It will make its own decisions on what businesses to enter, and some of those will have Westport technology and some will have Weichai technology and some of them might be things we haven't invented yet. So it's an exciting business, it's a good team, strong support from Weichai, and we think it's got a bright future.

Okay and you alluded to incentives in legislation in China. They've been very active in other parts of the renewables market in enabling growth in those industries. What, David, do you see now or on the horizon within China that could really accelerate the growth within the country?

I think the transport policy and energy policy is central to China's economic growth and I'm not going to be stupid enough to try and tell you what China's government policy is. What you can see publicly is that they've been moving closer to market pricing for fuels including natural gas, most recently. We just got that note this morning. People have been talking for some time that China needs to get to those global pricing to set a coherent energy policy and I think that's consistent with that push. So there have been very large increases in prices for conventional fuels and natural gas as they remove those government subsidies which are really market distorting. Over time it's clear that transportation fuel is a critical strategic issue and I think you will see China moving towards natural gas in commercial vehicles, at least I would hope that we see that as a policy push. It's been mentioned in their government policies and so I think you can see these steps as being consistent with that.

Okay. And then just moving on, if I may. You alluded to the carbon credits business and that you've got some registration that's happened there. Any further data points as to how we see that business roll out for Westport?

Yes, really good question. I'm surprised no one else raised it because I'm really pleased with this. The program is the first global transportation initiative so we have a verified transportation carbon credit program now under the voluntary carbon standard regime which is really the only independent regime that's out there other than the Kyoto clean development mechanism. So we are now in a position to offer our customers carbon certificates. This will have to be verified and there's a verified protocol and if you go into the website for VCS, you'll see our standard that's been approved now. So there will be a mechanism of documenting mileage, fuel consumption, what was done, and we'll be able to print carbon certificates. Our intent here is to really aggregate this on behalf of our customers. No individual fleet has the mass to go through this hassle to get a standard registered internationally and to comply. So that's partly why we're the first one but there's no obligation. Our customers can sell their carbon to anybody. If they can come up with a one on one deal or something people can independently verify, they can go sell their carbon to the highest bidder.

I think the good news is we are demonstrating that there's a significant carbon saving to operate on our vehicles. This is Cummins Westport, Westport and any future vehicles from Weichai or Volvo, they'll all fall under this standard and we can pass those credits to our customers for use in wherever they want. Sometimes it may just be to comply with regulation or maybe they want to sell them on the market. Market for carbon is still emerging. We've seen prices in isolated markets for well over CAD100 a ton which is really interesting, and the wholesale price in bigger markets is CAD7 to CAD20. It's hard to say what the monetary value of this, it's not going to buy people free trucks but it is going to give them significant emissions regulatory compliance and some benefits. Starts next January by the way.

That's it for me. I'll go back in queue.

Thank you. I'd now like to turn the meeting back over to Mr. Darren Seed.

Thank you very much everyone. This concludes our call and we'll see you all in August for the next Q1 fiscal '11. Thank you, Operator.

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