Westport Fuel Systems Inc (WPRT) 2011 Q1 法說會逐字稿

Hello. This is the conference operator. Welcome to the Westport Innovations 2011 first quarter financial results conference call and webcast. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

(Operator Instructions.)

At this time, I'd like to turn the conference over to Darren Seed, Vice President of Investor Relations and Communications.

Thank you, and good afternoon. Welcome to our first quarter conference call for fiscal 2011. 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 at this call is open to the public and to media. But for the sake of brevity, we are restricting questions to analysts and institutional investors.

You are reminded that certain statements 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 are cautioned not to place undue reliance on any forward-looking statements.

Now, I'll turn the call over to David Demers.

Thanks, Darren; and good afternoon, everyone. As usual, I get to lead off with some comments about our strategic plan and the progress that we've made this quarter. And then I'll turn the call over to Bill for his discussion of the financial statements.

As you see, we had a very busy quarter, with several important transactions completed and announced either just within the quarter or after its conclusion. But before I turn to details by business units, I'll comment briefly on the results.

Remember that this quarter, for the first time, we're reporting in US dollars, rather than Canadian dollars, so the numbers aren't necessarily what you're used to. First quarter fiscal '11 came in as expected, good results on the top line, strong margins. Revenue growth year-over-year was 17%. This is under our notional 30% CAGR, of course. But because some of this has lagged due to timing of large shipments in China and India which are going to ship in second quarter, we don't see any material change in our outlook. Progress is as planned.

Gross margins have improved to 35%. Expenses are showing up about 10% year-over-year, but much of this is due to timing and some foreign exchange effects, rather than increases in underlying spending. We ended the quarter with about $98 million in cash. Of course, we used about $14 million of that in our acquisition of OMVL at the start of July.

Looking forward, don't see any major change in outlook. We have strong growth expected in all markets and in all segments. In the short term, our CWI and Heavy Duty GX units continue to see US truck fleets waiting for clarity on the proposed federal purchase incentives. Ironically, we've never been busier with fleet demonstrations and quote activity across the US. But the proposed incentives are simply too significant for fleets not to wait.

So let me move into the business units, starting with CWI. Shipments were up about 20% over the same quarter last year, although down from last quarter. This is primarily due to timing of orders. As I mentioned, those will ship in Q2. Also, though, there is a muting effect from the NATGAS Act incentives, as truck fleets, particularly long-haul fleets, are waiting for clarity from Washington.

CWI has seen good truck engine order flow in unique situations such as the Clean Cities project with Ryder. This could be as large as 150 trucks by early 2011. And there's been a number of port customer orders. Refuse truck shipments also continue to be strong. Although, in general, local government budgets have been severely impacted by the economic downturn, we are seeing some pockets of activity in school bus and transit bus markets in the US. So for example, we expect to see more than 400 new school buses shipped into Southern California this year.

Dallas, New York City are both proceeding with large CNG transit bus tenders. Those are each sort of 400 to 500 buses. We expect those to be awarded this year, and probably will ship over the next two to three years. Also seeing several major international opportunities developing for CWI in the transit bus market.

So overall, we expect CWI to continue its history of growth and strong profit leverage and performance this year.

Turning to our Heavy Duty segment and, in particular, the Westport GX engine business. As we warned last quarter, shipments to port customers have, for the most part, been completed. There will be a few more over the next few weeks and months, and there will be a few delivered through follow-on procurements at the port this year.

But with the complex transition to the 2010 diesel emission systems, our OEM partners have been busy and distracted away dealing with that. With our recent US EPA and CARB certification for our GX engines, production planning is just getting underway now. So availability of 2010 natural gas trucks from PACCAR and others will only begin later this year. In the near term, the GX orders in the US will be muted as we shift from port projects and specialized situations like that into the long-haul market.

These are going to be affected by the federal NATGAS Act incentives, as I mentioned earlier. Until we see clarity on the incentives, we expect fleets in the US will continue to wait. So in the short term, along we are still focused on projects like the port, we're moving outside the US. If and when the US federal incentives are in place, from the level of interest we're seeing from fleets, we expect much stronger order flow; but it's likely going to be over the next two to three years.

The apparent opportunity is creating broad interest from manufacturers and from service providers in all segments of the value chain. So we believe that the scale-up to meet any conceivable demand is now quite straightforward. We've spent, as you know, the last couple of years getting ready for this.

As the NATGAS Act incentive plans are circulating in Washington, we hope that we get clarity on this issue soon. It looks like this will be after the summer recess. But I must say it's still impossible to predict what Washington will do or when; or even, once the legislation rules are announced, it's impossible to predict how quickly the market can or will respond to these new incentives, too.

So we presume some of the pent-up purchase orders will commence almost immediately, but there will be some start-up confusion as fleets reconfirm their order configurations, pricing, and volumes. Manufacturers are going to need time to rebuild their supply chain and then respond with delivery schedules.

Of course, shipments to specific fleets and, hence, when we actually count the revenue are going to be paced by the development of refueling infrastructure, as well, for those fleets. So there will be an inevitable start-up lag; although, of course, the incentives are designed to deliver tens of thousands of vehicles in the US.

So although the US market remains muted, we've turned our focus for GX to projects in the short term in Canada and Australia, where, of course, US incentives are irrelevant. Each country does have economic drivers that are supporting the development of long-haul LNG infrastructure. And we expect to see material truck deliveries into these corridors before the end of the fiscal year, and growth continuing.

For example, in Quebec, Gaz Metro has signed a deal in principle now with Robert Trucking to supply LNG and build two LNG stations before the end of calendar 2010. Robert now has temporary refueling capabilities in place and its first LNG tractor in its fleet. Several more, of course, expected before the end of the year.

Once the LNG infrastructure in Quebec has been built, we would expect that several other fleets in Quebec will also commence LNG operations. LNG highway truck corridor projects in both BC and Alberta are also under development this year, and we are participating, along with many other industry participants, in a national policy initiative for LNG transportation led by Natural Resources Canada, which is a ministry of our federal government.

In Australia, there's been a number of LNG corridor projects announced in the quarter. In May, for example, BOC announced a $200 million, eight-station program on the east coast of Australia, using fuel from a new micro-LNG plant in Chinchilla, Queensland, which is going to use coal bed methane as the feed stock for LNG. BOC is also going to support this network with an expansion of their existing LNG facility in Dandenong, Victoria.

In western Australia, the Wesfarmers subsidiary Kleenheat Gas is also building infrastructure. And in Tasmania, a cooperative of several truck fleets has now developed an LNG supply corridor that will be fully operational early next year.

To support this emerging market, we've been working with a number of OEM truck manufacturers. And with the recent announcement of Australian ADR 80/03 certification for our GX 15-liter engine, we expect that more LNG truck options will be available in the Australian market as these corridors emerge.

Moving from the GX business, of course, as you know, we've been doing considerable work developing our presence in other markets, in Europe and in China, in partnership with Volvo and with Weichai. During the quarter, we completed our $4.2 million investment to form Weichai Westport, our joint venture. JV staff have now been appointed, and operations are well underway.

I said last quarter that the JV has seen strong growth in China, and we expected revenue in excess of RMB 100 million this calendar year. Since we're holding 35% of the equity, we will not be consolidating revenue. But I am pleased to report that the JV has, in fact, already exceeded that revenue target for the year and it is profitable. We will begin reporting the Weichai JV financial results in our second quarter.

As you saw, during the quarter we also expanded and enhanced our global relationship with Volvo Powertrain. And in particular, we've now agreed on what I think is a very exciting long-term business model for our relationship. Beginning in Q2, Volvo will pay 100% of our costs for product development of mutually agreed upon target Volvo engines that will be fueled by natural gas and/or biomethane. Westport will take on the overall project direction and responsibility for the product.

We expect to develop a range of gas engine products for specific global markets in partnership with Volvo. These projects will be jointly approved and, of course, jointly delivered. Westport will have overall responsibility for the future gas engine technology and research and, of course, engine development. But of course, for proprietary components such as fuel injectors, Westport will also continue to have responsibility for engineering and supplier development.

Once the engines are approved for commercial production, Volvo would take on all responsibility for production of natural gas and biomethane engines and vehicles, including supplier management inventory and field service. Westport will receive a per-engine payment and, of course, the revenue associated with proprietary components produced by our partners.

For obvious commercial reasons, we can't disclose the financial terms in detail. But I can assure you we're satisfied this is a fair and sustainable arrangement that positions us as the key partner for gas engines with one of the leading global vehicle manufacturers.

As with Weichai, the impact of this agreement will be seen in Q2, as we commence billing of our engineering and operational expenses. These will be treated as revenue; and therefore, some of what you currently see us report as R&D expenses will be reclassified into cost of sales.

Moving to the Light Duty sector and Juniper Engines. Of course, the big news has been the launch of engine production in Korea to support our first OEM, Clark, and their product launch; and at the end of the quarter, the acquisition of 100% of the JV and our former partner OMVL.

We covered the OMVL acquisition in our conference call in early July, so I won't repeat what was said at that time. But just as a reminder, we formerly held a 49% interest in Juniper, with OMVL holding 51%. And as a result of this transaction, we will now own 100% of both.

The strategic benefits of this combination are important to our overall strategy of being the global leader in advanced OEM quality alternative fuel engines and products. From our strong base in medium and heavy duty commercial vehicles, this now broadens our addressable market very considerably into light duty and industrial applications.

So during the quarter, as I said, Juniper commenced delivery of engines and engine systems to our launch OEM partner, and Clark is now delivering completed forklifts to North America and other global markets. This is an exciting milestone. The team's done an excellent job of demonstrating the high leverage potential in this largely outsourced business model.

Like any outsourced business model, though, we are dependent on our many partners and suppliers. We're working with Hyundia, our base engine partner with Clark, which has also seen rapid growth in its global markets, and all of our other suppliers to scale up supply as Clark's volumes expand.

Juniper has also launched a promising new product in the oil and gas sector, with a substantial field trial expected to complete at the end of our fiscal year. Now, the main news, of course, is the acquisition of OMVL, which clearly launches us into the global market for alternative fuel light duty vehicles, including passenger cars.

OMVL has several OEM relationships around the world. And we intend to grow this business aggressively. And in particular, we're seeing good opportunities in North America. Although we've focused on the medium and heavy duty market to date, Westport has been working with light duty OEMs such as Ford and Isuzu for more than ten years on the R&D side. For the most part, light duty vehicles, particularly passenger cars, have been served by a number of companies offering aftermarket conversion kits for popular vehicles.

Historically, this hasn't been a market that Westport has competed in. And as we said several times, our focus is on OEM production, with high levels of product integration and, of course, leading technology.

But with the introduction of policy initiatives around the world to encourage alternative fuels, including NATGAS incentives for light duty vehicles in the US, and the clear interest being demonstrated by infrastructure providers and gas producers, we're seeing more interest by North American and global automotive and light duty OEMs in our technology and in our capabilities that would support such a launch.

You should presume that this is the space that we've targeted for several years, and we are actively engaged with these prospective customers. The acquisition of OMVL gives us a strong entry product, global relationships, and new capabilities that will be critical to our light duty plans. Of course, we'll keep you posted.

Because the acquisition of Juniper and OMVL completed after the quarter, results aren't visible in financial statements today. In the call last month, I suggested that we're looking for roughly $25 million in incremental revenue through the end of the fiscal year. And overall, the Juniper/OMVL combination will be roughly break-even. We do plan several investments in new product and delivery capability, and the details will be apparent as we move forward.

Now, I need to wrap up and let Bill take the floor. But in closing, the theme that I can leave you with is that we are seeing a global and all-markets shift toward natural gas as a mainstream fuel. And looking at fiscal 2011, we're cautiously optimistic about revenue growth and earnings improvement and progress in our business plan.

It's also clear we have execution challenges in the marketplace, as well as many internal milestones to work through. Externally, we see many caution signals in the commercial vehicle market, with uncertainty rising from general economic conditions as well as the uncertainty around these market-transforming government programs.

All of this is having the effect of a market pause. At the same time, we believe that this fiscal year will be the one we look back on as the tipping point for natural gas in the transportation sector around the world. Whether or not the US Government passes its NATGAS Act incentives, we can see, over the past two years, a huge shift in market acceptance of CNG and LNG as viable fuels for light duty to heavy duty vehicles all over the world.

In medium and light duty fleets, natural gas has emerged as a primary strategy for insulating from oil price volatility. Given the relative energy costs in this energy-intensive market, we believe the transition to natural gas is now underway and, over the long term, it's going to be inevitable.

This is an unimaginably large opportunity for Westport. We do have no competition at this point, so we're working hard to support the many new partners and customers that are moving forward to make this a reality. In that context, it's critical for us to get the product right, to get the price right, and get distribution and support channels ready for this large growth opportunity.

As the dominant player in technology for commercial vehicles, Westport is the natural partner for many players in this industry. Our challenge is to deliver value to these major global OEMs and, at the same time, protect our leading IP position and create shareholder value.

I'll turn the floor over to Bill now, to take you through the quarter.

Thank you, David; and good afternoon, everyone.

The press release, financial statements, and management discussion analysis provide a considerable amount of detail regarding our first quarter of fiscal '11, ended June 30th, 2010, and are posted on our website.

This afternoon, I will focus on revenue, margins, and net loss. As a reminder, we are now reporting our financial figures in US dollars, unless otherwise indicated. For the first quarter, ended June 30th, 2010, consolidated revenues were $25.5 million, compared to $21.8 million in the prior year period, a 17% increase. This increase is primarily due to higher shipments of ISLG engines and increase in parts revenue.

CWI revenues were $24.3 million, up 19%, with 724 units shipped, compared to $20.4 million and 608 units shipped in the prior year period. CWI's parts revenue increased $1 million, to $5.8 million, due to an increase in the population of engines in service. During the quarter, we also shipped 6 Westport HD systems, compared to 14 units shipped in the prior year period, resulting in a decrease in non-CWI revenue of $1.2 million.

Consolidated gross margins for the three months ended June 30th, 2010, increased by $3.2 million, to $8.8 million, a gross margin percentage increase of 35% compared to 26% in the first quarter of last year. The year-over-year increase in gross margin is primarily due to more favorable warranty experience and lower warranty accruals recorded on the new ISLG units, as well as product and parts sales mix and lower selling costs on parts. Non-CWI gross margin and gross margin percentage for the first quarter of fiscal 2011 were $200,000 and 17%, respectively.

Total operating expenses, research and development, general, administrative, and sales and marketing for the three months ended June 30th, 2010, were $13 million, as compared to $11.3 million in the prior year period. CWI's operating expenses remained stable at $3.7 million. Non-CWI operating expenses increased by $1.6 million to $9.3 million. $1.1 million of this increase represents changes in foreign exchange rates, with the remaining $500,000 increase relating to increases in customer support and market development activities, as well as product testing and product certification programs.

Net loss for the three months ended June 30th, 2010, was $8.1 million, compared to a net loss of $7.9 million in the prior year period. Our share of CWI income, which is included in the net loss, increased by $900,000 or 159% to $1.5 million, which was primarily due to increased revenues and gross margin percentage.

Our cash, cash equivalents, and short-term investments balance at June 30th, 2010, was $98.3 million. This is down from $104.2 million at March 31st, 2010. During the quarter, we issued shares associated with the exercise of warrants and stock options, resulting in the generation of $10.6 million in cash for Westport.

For the quarter ended June 30th, 2010, cash used in operations and capital expenditures were $7.6 million and $600,000, respectively. Changes in non-cash working capital for the quarter resulted in a reduction of $2.4 million, negatively impacted by cash outflows for accounts payable and accrued liabilities of $6.2 million, which primarily represents CWI's tax installment payments during the quarter and timing of supplier payments, and also a decrease in our warranty liability.

During the quarter, we repaid $3.2 million outstanding on our demand installment loan. Currently, we do not have any amounts outstanding on our credit facility. Also, cash was negatively impacted by foreign exchange when translating from the Canadian dollar to US dollar by approximately $3 million.

Subsequent to June 30th, 2010, we funded our investment in Weichai Westport for $4.2 million, and the first payment of approximately $14.1 million or EUR 11.4 million for the acquisitions of OMVL and 100% of Juniper Engines. After funding these investments, we are in a strong cash position that allows us to respond to fast-changing markets and opportunities.

For further financial disclosure, 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?

Thank you. This is the conference operator. We will now begin the question and answer session.

(Operator Instructions.)

Your first question is from Graham Mattison of Lazard Capital Markets. Please go ahead.

Hi. Good afternoon, guys.

Hi, Graham.

How you doing?

Good. I had one question on the R&D. Now that we're beyond the GX certification in the US and with the Volvo coming up, should we see that meaningfully drop off in coming quarters?

Well, I think David had mentioned in his prepared remarks that we're currently evaluating the accounting for the Volvo relationship. And what we expect is those reimbursements for the costs we incurred for that program would record as revenues, and then those costs associated with that program, which have been typically characterized as R&D and operating expenses, will move up above the line in cost of sales.

So you're going to see a fairly substantial decrease in our R&D expenses in future periods.

All right, great. And then also just a question on -- recently, I guess last week, there was an announcement from El Paso and AGL that they're going to start a LNG fueling project for heavy duty trucks in the Southeast US. I was wondering if you've been in touch with them and if you can give any timing sense of when you might be -- if there are any engine demands down there and what you're seeing from customers in that area.

Yes. We certainly haven't been involved in that. I think what you are seeing, though, Graham, is really a shift worldwide in gas producers and distribution companies to get into this business. And pretty much everywhere we go, people are getting into this. People that are producing gas need to sop up all the gas they're producing, particularly out of gas shales. And people are quite enthused about the potential for trucking, because these are relatively large consumers of fuel with relatively small infrastructure investments.

So we are seeing it worldwide. We're probably getting at least one of these a week. I kind of chimed through four or five in my remarks, but there's a bunch more. So I think you should expect to see this as just a sign of the times, as the natural gas producers are looking to sell natural gas into transportation markets really for the first time.

So really good to see. I think all of these projects are independently operating and are going to create their own pockets of support for natural gas trucks.

All right, great. I'll jump back in queue. Thank you very much.

The next question comes from Rob Brown of Craig-Hallum Capital. Please go ahead.

Good afternoon. You talked a little bit about your CWI unit volumes, kind of some units pushed into Q2, and then you gave some color on your 30% CAGR growth rate. I just wonder if you could kind of reconcile a little bit about how things play out toward the rest of the year and whether it's really pushed into Q2 or is there some delay further into the year.

I'll start with it, Rob; and I'll let Bill come up with the definitive answer. But since I have the historical heritage here, I'm going to revise Elaine's term "lumpy," and remind anybody on the call -- when Elaine was at the other side of the table -- to remind people that we are still dependent on large orders. And so you shouldn't look at any particular quarter as being representative, because there's going to be big orders some quarters that ship, and other quarters where there just isn't one.

So this happened to be a time where shipments to India and China are -- got pushed into July, July/August. You'll see them in Q2. So we're saying it's lumpy. Don't worry about it. I think we are pleased. The China shipment, we've got an order going to Beijing Public Transit for the first time since the Olympics in Beijing, so that was a nice one to see. The India order, we've got -- still got a lot to ship for the Delhi project, so that will recommence in Q2.

So I think all you can take from it is that Q1 was a down quarter. You should take from that, that maybe Q2 and Q3 are going to be lumpy the other way. So we'll see how CWI plays out. Don't think that, in the context of the fiscal year, there's any surprises here.

Bill, do you want to add to that?

No. I think you covered it.

Okay, good. And maybe just clarifying your comments on the GX order flow, now that you have the 2010 cert in the US. You did mention some time lag to get the product to the market. But is that a --

Yes.

-- are you calling the time, like is that a quarter, or is that more into the next calendar year?

Oh, no. We've said -- I think we've been pretty consistent this year. The OEMs have had a lot of difficulty with the diesel emission integration, and getting those products ready. So there's been a lot of turmoil. And frankly, we just haven't had the traction and the attention, because our markets are not as big as the diesel market.

So whether or not our certification was late or not -- and we didn't get it until June. Is that -- I'm looking at Darren -- right? And so it is going to be a lag before we see OEMs ready to ship. And so what can I say? People are starting to take orders now. The truck guys have been collecting and issuing sort of prospective quotes and things, but they haven't been taking orders because they haven't been able to get delivery commitments.

I think we're seeing that now, and those deliveries are going to be pushed out until the end of the calendar year. I'd say last quarter calendar and fourth quarter -- our fourth fiscal quarter before we see shipments in the US.

Australia is different. Canada has similar rules to the US. And of course, the port trucks are still -- some of those, those 2009 model year trucks, were getting delivered as late as last quarter. So a complicated answer, I know. Short version is going to be we haven't seen a huge backlog of long-haulers anyway, because people are waiting for certainty on the NATGAS Act.

There's a lot of people getting quotes. There's a lot of people sitting on the sidelines. I think once that's clear, there will be a surge of order activity, and people are going to have to line up to get build slots. And we just don't know. We don't have that control of the truck OEM build schedule to know when they're going to be able to start to deliver.

But I wouldn't expect that this is going to be -- you're just not going to see a lot of deliveries in the next three to six months.

Okay, good. Thank you.

Your next question comes from Shawn Severson of ThinkEquity. Please go ahead.

Thank you. Good afternoon.

Hey, Shawn.

Hey, could you give a little color on Juniper, as it pertains to the light duty vehicle side and what you're doing as far as CARB certification, the development and timing, hopefully, of that? And when do you think you would really have a full-blown competitive product to go after OEM business in light duty vehicles in the US and, of course, worldwide?

I don't know. I'm looking at Bill. He's been pretty quiet.

I'm looking at David.

Okay. Well, I'll take a run at it. Remember, we're after OEM business, not really aftermarket. The components that OMVL has been building are being supplied to a number of OEMs internationally, not in the US. We don't really see the requirements in the US as being substantially different, but we want to come in with a differentiated product.

And I think the interest would be when OEMs like GM or Ford or Dodge start to get into fleet vehicles like pickup trucks and delivery vehicles. We would be proposing to them a complete integrated system that can be built on their line. And that's -- I think that's consistent with our strategy in the medium duty and heavy duty business.

So are we proposing those things today? Of course, we are. And we'll see what the OEM strategy is. Don't really intend to get into the aftermarket business in North America. We think that's -- it's an interesting business. There's lots of people doing it, though, and doing a reasonable job. So I think our focus is going to be on the OEM side and continue OMVL's pretty strong presence.

I think, last time I looked, OMVL is present in 40 countries around the world. I think that business has lots of potential to grow, both at the component level, but at the system level, as well. And we'll continue to develop the range of technology that we developed in the light duty space over the last decade, depending on the OEM partnerships that we can seal by next fall. It's not going to happen overnight, but we think it's a major strategic move and over the, say, next three to five years, we think it could be a very substantial business.

So kind of in the mix today, if GM was looking for having platforms out in 2012, which they are, I mean, are you able to compete with the fuel system, say, on that business today? Or is this something that would really be more applicable to kind of the 2013 -- 2012-2013 model years?

I'd certainly say that we are confident that we've got a lot to talk to OEMs about, and we are. And it's going to be up to them to decide what they want to buy and what level of technology they want.

Certainly, the level of technology that we have delivered on vehicles is as high or higher than anybody in the world. So we're not shy about pointing out our track record.

All right. And then from a housekeeping standpoint, will you be breaking out Juniper separately in the top line going forward? Should we put a line item for modeling there?

Yes. We will start presenting our numbers a little bit different and, as you said, and separating how we present the numbers by light duty, which will be the Juniper/OMVL business; the medium duty, the CWI business; and then the heavy duty business, which is the GX, Volvo, Weichai programs.

And that's starting next quarter?

Correct. So you'll start -- have more granular visibility to each of the different programs.

All right. Thank you.

Your next question comes from Rupert Merer of National Bank Financial. Please go ahead.

Good afternoon, gentlemen.

Hi, Rupert.

David, you mentioned a start-up lag that you anticipate with manufacturing and refueling infrastructure in the even the NATGAS Act is passed. If you look at the Senate version of the bill, it has about $3.8 billion to support NATGAS vehicles before 2013. How quickly do you think that funding could be deployed? Can you give a little more color on how you think the market could develop?

I think it's pretty clear from looking around at how these things have gone in the past that this is all going to be predicated on fleet-by-fleet decisions. So let's start with a fleet. And part of the reason I picked on some of the examples in the prepared remarks is just so you can see that pattern.

Typically, the fleet is going to make a decision. And the gating factor for actually deploying trucks is going to be infrastructure. Infrastructure -- I think most people would tell you that they can probably build anything you like in six to nine months, but that implies that there's going to be a six to nine-month lag before you're going to need trucks.

Now, typically, truck lead times, it got -- lead times got extended in 2006, in the pre-buy. But I don't think, right now, there is a six-month lag for trucks. So what we're going to see would be a fleet striking a deal with their local gas distributor or whoever is going to be constructing their fuel station, like Kleen Energy. And then they'll be placing the order for trucks, so that the trucks arrive after the infrastructure has been commissioned.

Now, there are some temporary refueling capabilities. We've seen some fleets start that way and take five or ten trucks. But that's really not all that material. We're going to see a number of those projects get going.

So there may be some vehicles trickling out quicker than that. But we would normally expect that you're going to see these projects take six to nine months to get going. That said, I think, given the activity that we've seen and the demonstrations and interest we've seen across the US, pretty much every sector -- every geographic area, that is, it's not just restricted to the emissions-sensitive areas like California, I think we're going to see a very large number of these projects and very large numbers of trucks.

So in aggregate, two years, three years from now, we could see tens of thousands of trucks on the road. Just don't expect us to be shipping 1,000 trucks the week after the NATGAS Act gets implemented, would be my comment.

I think we're going to see things get clarified after the Senate gets back from its recess. We'll get some clarity over whether those are going to pass. I think we may see some fleets jump the gun and, at least, place notional orders for infrastructure. Kind of what we're seeing happening, is getting organized on that.

But the actual hardware commitment for trucks really can't happen until their financial -- the financial case is going to be clear. So I realize it's a long-winded answer, but I hope it lays out how we see this playing out. It's likely going to be -- oh, I don't know -- probably 12 to 24 months from now before you really start to see some significant volume. But because those volumes are so significant, that's why we've spent so much time getting geared up for high scalability. And we think we're at that point now, where when the starting gun goes, the system should be ready.

Okay, great. It sounds like you feel the market could be going strong within the three-year period.

One more question. You had some good cost control in the quarter. And we just heard we expect a drop in R&D with the recent Volvo deal. How should we expect R&D, sales and marketing, and G&A to move with the OMVL and Juniper acquisitions?

Well, I think with the Juniper acquisition, you're bringing on just its own cost structure, with R&D, sales and marketing, and their G&A expenses. As I mentioned earlier with respect to the Volvo agreement, this is more geography, we expect those R&D costs incurred in support of that program will move above the line, so they'll go up in cost of sales. So we would expect a decrease in our research and development costs below the line. But --

It's going to be slightly different costs, as you can imagine. I think I'm probably going to get myself into trouble here, because I'm doing this on the fly. But we said in the call a few weeks ago that we're looking for sort of $25 million US in top line for the balance of the year, margins in the 25% to 30% range. So that's -- you can kind of get the cost structure there, if that's the break-even point.

So those costs will come in. Most of those are operating and sales and marketing costs. Relatively low R&D at OMVL. On the other hand, Juniper has been relatively high R&D, and not much else, because everything else is being outsourced. So you'll see some modest increases in our absolute numbers, but that's going to be swamped, frankly, by some of the other effects that we see with things like Volvo and Weichai coming in.

So I think the simplest thing to do would be to take what we've said over the past 12 months. We think costs are going to rise modestly, they're going to rise slower than revenue, but there's going to be a fair amount of sloshing around between sales and marketing, R&D, and just pure cost of sales and operating expenses over the next while.

Our goal is to, of course, see top line growth at a consistent 30% or better CAGR. And that will move each of these businesses into a high leverage profitability mold once they get to the break-even point. Hope that makes some sense. I haven't been hit by Bill yet, so I guess I didn't get any of the arithmetic too badly wrong.

That is helpful. Thank you.

Okay.

The next question comes from Laurence Alexander of Jefferies. Please go ahead.

Hi. This is Lucy Watson, on for Laurence this evening.

First question is about the new agreement with Volvo Powertrain. You referred to biogas in some of the language there, and referred to it on -- in your prepared remarks today, as well. I'm just wondering if you might be able to provide us with a little bit more color on the opportunity with biogas and if you've possibly quantified that opportunity in any way.

Yes. Obviously, we have. It's pretty exciting, actually. And it's doing nothing but really depress all our friends in the natural gas-producing community, of course. Because there's all of these new sources of methane hitting the market. So I mean, in my remarks, I mentioned coal bed methane in Australia. We're seeing a lot of these projects in China, as well.

And actually, surprisingly clean sources. A lot of the coal bed methane projects we're seeing are -- have got relatively low capital costs for cleaning up the gas. And it's pipeline-grade at a very, very low cost. Biomethane or landfill gas, things like that, needs more clean-up, but very prolific and very widespread. Of course, we've got landfills everywhere in the developed world. So there's been lots and lots of projects already underway on landfill and biomethane.

Volvo, in particular, is very excited about the biomethane opportunity, because there's such a great greenhouse gas benefit to capturing landfill gas, sequestering it, and reusing it in a carbon-intensive application like transport.

So some of the studies that we have seen in Europe and other markets suggest that biomethane could be up to 30% of the total natural gas use. And if you've done the math on what transportation use looks like, that says that almost all of the transportation supply could come from biomethane, in theory, which would be a pretty interesting number if you're in a carbon-centric economy or a place that's got a lot of reusable biomethane.

The wilder biofuels on the methane side -- there is, actually, quite a bit of R&D level work, I'd say, on things like wood waste and other cellulosic sources. It's actually pretty easy to make biomethane from wood waste and some of the other byproducts of extraction industries. So that's yet another source, all of which is, as I say, just adding to this ocean of excess natural gas that we've got.

But it is giving people a lot of comfort that the supply is going to be there at low cost. And in specific markets such as Western Europe, where they're really highly focused on carbon emissions, the biomethane system looks like it's going to be very economic.

Okay. Thanks.

And then also in your press release, you mentioned reaching high-volume scale production capability with Delphi for heavy duty injectors. Would you be able to quantify that?

Yes. Delphi, we've been working with for -- ooh, trying to think now -- yes. We announced the relationship at April. It's been some time. We'll be in production with Delphi before the end of the year, so it's going to come on just in time, as I said, for this hopefully large-scale opportunity that we're going to see as markets get started up.

Okay, great. And just one last one, if I might.

Would you mind just reviewing your priorities for cash and where share buybacks might fit in that pecking order?

Well, I sure hope that we've got so much excess cash we're going to have to start thinking about share buybacks. But I have to confess we haven't really talked about it much yet. And no plans to declare a dividend quite yet, either. Right, Bill?

So no. We've still got -- I mean, to be serious, we do have cash on the books, and probably more than we need. We do expect to be generating cash from all of our operations in the not-too-distant future. This -- it can't go on forever. But actually, we think each of the lines of business are positioned pretty well to start generating a lot of cash.

That said, if we are going to stay the dominant technology player and the dominant leader, we have to keep investing. There are lots of opportunities coming to us at every day. I think as we see good returns for shareholders, we're going to take those investment opportunities. So I don't think there's any belief that there's just no new opportunities in what we're doing.

So I don't think we're at a loss for uses of capital at this point. But ask us again in 6 months or 12 months. Maybe by then -- I'm looking at Bill here for -- no. He hasn't hit me yet, either, so -- you never know. We'll see.

Thank you.

Thanks, Lucy.

The next question comes from Matt Gowing of Mackie Research Capital. Please go ahead, sir.

Good afternoon, all, and thanks for taking my question.

David, you talked briefly about the -- this energy bill that's at Congress and how Westport could see volumes from that within 12 to 24 months. I'm interested to hear from you if you've made -- had any thoughts around, of the $3.8 billion, what would be kind of the deployment across light duty, medium duty, and heavy duty.

Or put another way, do you have any assumptions on what the average rebate per vehicle on that $3.8 billion -- just wondering if you have any thoughts around some of those things.

Yes. We have lots of thoughts and, as you can imagine, lots of spreadsheets. But it really depends on what your assumptions are. And somehow, reality is never quite what we model. So if you looked at what was in the -- Senator Reid's proposed bill, there were a few tweaks on the incentives. I think the light duty incentive was $10,000 per vehicle, up to $64,000 for heavy duty, and then a couple of midpoints.

So it really depends on what you think the mix is going to be. Frankly, I think that it's going to be top-heavy. I think the biggest demand is going to be where we see the most economic benefit. And that's clearly going to be in the high fuel use, long-haul fleets. The incentive for light duty fleets is pretty remarkable, too. But I think that it's going to be more challenging for those fleets to deploy infrastructure.

It's going to be specialized customers, things like the gas utilities or gas producers themselves. They're obvious candidates. But they're kind of obvious candidates to move without an incentive, too. So I'm not sure that the incentive is really going to change a lot of behavior there.

Other fleets are going to be more dependent on having a mesh of infrastructure being developed, and that will take some time. Whereas long-haul fleets and development of the corridors, I think, is relatively straightforward. And so we should be able to see relatively quick adoption with very high fuel use with a relatively small number of stations developed.

So I -- if I were going to bet, I'd suggest it's going to be 2/3 or 3/4 heavy duty vehicles. And it'd be pretty easy for them to chew up that $3 billion quickly. Now, that said, we've also said -- cautioned people that we don't think the business is absolutely dependent on this. It's going to, clearly, accelerate adoption. But the economic incentives are there.

And as we continue to improve reliability and show people the long-term viability of natural gas in trucking fleets, as time goes on, we think that the economic argument and the lifecycle cost argument, the financing options, the variety of truck and truck chassis that are available, all these things are going to happen naturally, and we will get to the same place eventually. It will take more years.

But we really see the incentives as a pull-ahead, not a binary off/on switch. I think we're planning to see a substantial portion of the truck industry move to natural gas around the world. And we think that's going to happen.

Thanks very much for that. A follow-on to that, if I may, on your competition.

I believe, in the past, you've said that internationally, specifically in Asia and the Far East, you are up against some more competition, more in the medium duty segment. But in the heavy duty segment, what you're doing in the US, there's really absent any meaningful competition.

I guess my question is, does that dynamic really change if this energy bill is implemented, put into law. Do you see new competitors come into the US market?

Yes. It's a really good question. And let me know when you've got the answer. I think we can see both factors. It's actually been quite interesting. And of course, everybody says they're unique. Let's be clear here. There are bound to be other people in the natural gas transportation space, of course. And suppliers and component manufacturers, all kinds of people that we work with today and that we may compete with in the future.

So when we say that we have no competition, really, what we're positioning ourselves as is that technology provider, Tier 1, dealing with the OEMs to help them craft a strategy for natural gas. And we really don't see anybody doing that.

The logical competitors to that would be the in-house engineers within the major OEMs, some of the major fuel systems companies. We would expect that they could start to play in this. But the more we look at this, we've seen most of these people come to visit us, anyway, to see about partnering with us. Because their sense is that the market's moving more quickly than they could respond.

So in a sense, the fast-moving market is helping us with this competitive stance, in that the major players that we would see that could emerge as competitors really see more advantage in getting to the market quickly by partnering with us in the short term. So we'll see how this all plays out. I think, inevitably, if the market develops the way we think, five to ten years from now, there's going to be a number of players.

Our goal or, certainly, what we're shooting for is to be the dominant player in this space. And I think we can protect that position with our technology, with our IP, with our current relationships.

Thanks. And just one more quick one, then I'll get back in the queue.

After my read, going through the act, I see that the $3.8 billion -- the earliest that could be deployed, be eligible, would be October. Could you just confirm that that's the way that you understand that, as well, if it's passed kind of as what is proposed?

Yes. That's our understanding, is that's what the plan is. That said, until the bill is passed, you never know. We'll just -- we'll see how it plays out.

Okay. Thanks very much.

Thanks.

The next question comes from Michael Willemse of CIBC World Markets. Please go ahead, sir.

Great. Thank you.

Just going back to your comments on the quoting activity you're doing. And it sounds like the majority, say 2/3, 3/4, are heavy duty vehicles. Now, CWI, I would think, still has a pretty big market. You're shipping 700, 800 a quarter.

I guess, what do you think -- what do you think needs to happen for CWI's shipments to jump, I guess -- or I guess, maybe, to put it another way, why do you think you're seeing more opportunities in the heavy duty side? I would think both markets are -- have good opportunities across the board.

Yes. No. Sorry. That was probably just a slip on my part. When we talk about heavy duty trucks, we -- that includes the CWI heavy duty engines, as well as the GX engines. So no. CWI is very much a significant beneficiary of this move to trucking. And at the same time, I think they're equally stalled by fleets that are waiting for clarity on the incentives.

Now, I think that there's lots of work to be done to get ready. CWI is doing -- as you've seen in the marketplace, they've been doing work with a number of OEMs to create a number of new truck chassis and options.

So there's still lots of activity happening, and business is pretty good. And that business could substantially grow with the introduction of incentives.

Okay. Also, just -- maybe I missed it. But just wondering if you could give an update on Weichai, what's -- like how are things progressing here.

Yes. I did touch on that, briefly. But underway, business is underway. People are at work. We actually have Westport employees working in the joint venture now, doing business planning. We're expecting the first joint venture board meeting in the next -- I'm looking at Bill --

30 days.

30 days?

Yes.

We'll have a board meeting. Business is booming in China for their natural gas engines. They've launched their current engine line into natural gas trucks. That's quite public now. So the truck business is underway in China. And at the half-year, they were at RMB 100 million in revenue, so it's doing very, very well.

Okay. Thank you.

The next question comes from Eric Stine of Northland Capital Markets. Please go ahead.

Hi, guys. Thanks for taking the questions.

Hi, Eric.

Well, most have been covered. But I was just wondering -- maybe I'll ask about -- you talked about Ryder and the Clean Cities program. I don't think you touched on UPS. Any thoughts on potential timing there? I have heard some indication that that one might be -- might move quicker than the Ryder program.

Yes. I think your sources are probably the same sources as we have. The -- those projects were funded as part of the stimulus bill. And they're all just tied up in government contracting. So they'll move, I think, as those contracts get let. And we'll be the last to know because, of course, those orders are going to flow through truck manufacturers. And we will just be delivering at the time the truck guys need us.

I think they're both looking good. And we expect that they're going to proceed to completion.

Okay. And that -- there's been no change. That's still -- UPS would be the 150, the GX?

Yes. And I think the Ryder one is about the same size, as I'm looking around. About 150 trucks? Yes. Mix of CWI and GX engines for Ryder.

Okay. And maybe just if you could talk about -- I know you've been involved in testing with Walmart for quite a while, a number of years. Is that testing done? And are they kind of indicative of a fleet that might be waiting for the legislation uncertainty to get cleared up?

Yes. I think Walmart's pretty representative of most of the trials that we've done. I think everybody's happy with the performance of the truck. What they want now is their truck, the brand, the chassis, the model that they're used to. We've done a bit of the, "You can have it, as long as you want this brand and this color." So we've got to broaden out the offerings.

They've got to build infrastructure. That was fairly clear feedback from everybody, that the economics are far, far more interesting if the fueling is in your yard and on your route, and you don't have to go out of your way for fueling. So infrastructure planning is critical to the success of these deals.

And I think Walmart's like everybody. They're smart businesspeople, and they want to negotiate with their suppliers and get the best possible price, so they're waiting to see what the price is going to be.

Okay. Maybe last question. I know you're sick of -- you're probably sick of questions about the legislation, but I'll get in one more.

Definitely great that the NATGAS Act provisions made it into the bill, but it certainly has -- kind of got muddied with some of the other topics in there. But it seemed like there was pretty widespread support. I mean, does that give you any hope that this can pass as a standalone bill, now that its visibility is higher, or maybe a part of other legislation, after the recess?

Yes. I'm not a -- I'm certainly not a Washington expert, so my opinion doesn't really matter. I think what did encourage us is that, as all of these other things were trimmed out of the energy bill -- and there was a lot of carnage that people were upset about -- as you looked at what was left, natural gas vehicles and heavy duty incentives were one of the things that were left, and not very controversial. I haven't seen a lot of argument about that.

So that does give us some comfort that, if there is an energy bill that moves forward in the near future, let's say, likely these provisions will get grandfathered in. But you never know. It's a pretty amazing political world out there. And we just have no certainty on timing or content.

I think you're quite right in saying that it was pretty bipartisan, everybody thinks this is a good thing to do. It just needs to get the momentum to get over the hump.

Okay. Appreciate the thoughts on that.

I guess, one last one, on OMVL. Are those dedicated fuel systems, or is there any bi-fuel capability?

Bi -- principally bi-fuel.

Principally bi-fuel. We have had lots of debates with the industry over dedicated versus bi-fuel. I think we're going to move toward dedicated. In the near term, bi-fuel makes some sense, so --

Okay. Thanks a lot.

Your next question comes from Ian Tharp of Dundee Securities. Please go ahead.

Good afternoon, gentlemen. I'd certainly say most questions have been asked. I won't go back to the NATGAS Act.

I'd go to Weichai, if I could. What we can expect in terms of the next six months to a year in terms of new product development, potentially, where the emphasis will be on sales through the joint venture, and also is there any color that you can give in terms of legislation and incentives that China is giving to incent the use of natural gas as a transport fuel would be helpful.

I think we can equally say that we're not experts in Beijing politics, either. The -- what we have seen, though, is that China has been allocating energy by sector. They've got even more of an energy problem than the US does, as you know. What we have seen happening is markets that are designated for natural gas. So things like transit buses in the City of Beijing, for example; taxis in Guangzhou; right?

Like it's really a much more directed energy strategy. And we are seeing LNG infrastructure being built now for trucks in places that have got access to natural gas. So it's kind of happening as we speak. We expect that the rollout will be paced with government directives and incentives, as China tries to get its energy policy under control, as well.

I think it's no secret that China's developing every possible energy source they've got. There is a lot of interest in coal bed methane. There's a lot of interest in landfill gas. There's a lot of interest in imported LNG. And all of these things are helping alleviate the pretty amazing growth in oil imports that China's seeing, as well.

So I think there's strong policy reasons for the Chinese Government to encourage the natural gas sector, as well. And as domestic producers like Weichai introduce products into the market, we expect that it's going to find a pretty natural home, just because of that disparity between imported oil and domestic gas.

So we'll how it plays out. Certainly, we don't see any impediment. And as we said, the joint venture is doing very well with its existing product lines. And as we launch new products, we expect they'll do well, as well.

And just on that last note, what can we expect over the next kind of six months to a year in terms of new products and kind of the efforts made by the joint venture to access the Chinese market?

Yes. I mean, I think the joint venture is like -- as we've said, wants to have a range of engines. The existing markets for these products are primarily buses and small trucks. That's what the existing product is.

We want to expand into Weichai's large, kind of state-of-the-art engines. Those will likely be our HPDI technology. And that will take some time, to get it launched -- tested and launched. The work is underway. You should assume that you'll see a range of products being launched by the joint venture. And that'll just evolve pretty naturally, based on where the markets are going.

Okay, great.

And then just changing direction. On Juniper, I think you mentioned that there was a trial going on that will end beginning of 2011.

Yes.

This is the oil field service trial. I wonder if you can give a sense of the opportunity there and what we might expect in terms of size versus the -- I guess, the other market, the forklifts, now.

Yes. Hard to get to exact numbers, because this is a new product. But if we look at what's going on in the oil fields today and the introduction of emission controls and energy efficiency, we think this product's pretty well-positioned to take a good chunk of it.

In this particular space, the kind of 2.0, 2.4 liter engine space, oil fields are probably 10% of the total global forklift market. That said, the oil field market in North America is -- chews up a lot of engines, and is willing to pay for high performance, high reliability, which is what we're targeting with this product.

And some of the unique characteristics in its ability to manage fuel and how it operates, we think is going to be very attractive. So I think the oil field market -- we normally say it's probably 15,000 to 20,000 engines a year of this class, and forklifts is probably ten times that big.

Great. That's all for me. Thank you.

Okay.

The next question comes from Dilip Warrier of Stifel Nicolaus. Please go ahead.

Thank you. I just have one question.

I was wondering -- I understand that the costs of complying to 2010 tenets on the diesel engine side were pretty significant, and I think truck manufacturers are passing the costs on to customers. So I guess the question is, has that reduced the premium on a LNG truck versus a diesel truck and if that's improved the value proposition you offer.

You've touched a sore point. The short answer is not really. And of course, we have seen pricing on the CWI side -- because CWI has been compliant for some time. So the trucks that we were shipping earlier this year kind of pre-2010 and post-2010 emission standards, you would expect them to be the same price; but in fact, the manufacturers have used the opportunity to raise their prices. That's been pretty much across the board.

The gap has shrunk a bit. You're right. But the price for the natural gas vehicles has also increased. So I think that's just the nature of business and margins and things are going to be priced to market demand, and everybody's in business to make a profit so pricing is not necessarily transparent.

We think this is going to naturally change over time, as we see more competition and more choice in the market and more transparency. Natural gas will have a benefit, and we'll see that gap continue to narrow. But from what we've seen this year, that's -- hasn't necessarily been what we've seen.

I got it. Thank you.

Okay.

This concludes the time we have for questions. Let me turn the call back over to Darren Seed, for closing comments.

Thank you very much, everyone. And we look forward to seeing everybody on the next quarterly conference call, which is expected in early November.

Ladies and gentlemen, the conference is now concluded. You may disconnect your telephones. Thank you for joining and have a pleasant day. Goodbye.