Westport Fuel Systems Inc (WPRT) 2011 Q2 法說會逐字稿

Thank you, sir. (OPERATOR INSTRUCTIONS.) Your first question comes from Graham Mattison of Lazard Capital Markets. Please go ahead, sir.

Hi, good afternoon, guys.

Hi, Graham.

A question on the financing--rather, the announcement you put out. Now, is this just an extension of the shelf, or is there anything imminent? And in terms of the size of a new relationship, if you were to do one, would it be similar to the type of raise that you did for Volvo?

Graham, obviously, this is a very awkward subject because of the legal complexity. There's all kinds of factors, as you know, that are going into our discussions of strategy going forward, so there's lots of factors that we have to consider before we would proceed. If we were going to proceed and if there was a deal, you'd know about it. But at the same time, given the strength of the quarter and what we've just said, I think it's only fair to our shareholders to let them know that we are considering an equity financing. The timing is not established, the amount is not established, there's no plan, there's no if. And when there is, you'll know. But there isn't a plan today, so we can't tell you.

So yes, it's an awkward statement, but we just thought it was fair to our shareholders to tell them that we are considering this for almost exactly the same reasons as we talked about last year. Last year, if you read the discussion and what we said in the quarters, it was that we are proposing to put up our balance sheet with our OEM partners. We do want to make some pretty serious bets that these markets are developing quickly. And with the type of partners that we're talking about, these are not insignificant projects.

At the same time, we're not looking at $0.5 billion plant investments, either. These are R&D and program expenses that are pretty predictable, and they aren't all that much different, whether we're in a passenger car market or a heavy truck market. It's an engine development program and a vehicle engineering program and testing and certification.

So you know the story. I think all we can do further is say that there's lots of prospective partners now. Things are moving really quickly, and we just wanted to give our shareholders a head's-up before things got a little too exuberant.

So I know that's a bit of an unknown answer, but that's really all we can say at this point.

But again, similar to the Volvo type of thing, where the opportunity's out there, you do it just to keep your negotiating position and powder dry. It may be that you do it, it may be that you not, and even if you do raise the capital, it's not necessarily that you'd put it into a joint venture.

Right. So it's pretty fuzzy, but as you've seen, and you've been into enough detail with us that you know how this worked last year. We need to have the credibility when we're talking with partners like Volvo and Cummins and Weichai. We need to be able to say, "Yes, we're in for it. Any deal you like, we're prepared to do," and having a strong balance sheet gives us the credibility to get into serious discussions.

Now, as it turned out, the Volvo deal evolved into something that we think is even better, and we didn't need to use all of that capital, but we had to use it effectively in expanding into light-duty and into other areas in heavy-duty. So we think that it was the right decision last year, and we see the same sort of factors, a confluence of different issues coming together, that are suggesting that the same thing is happening this year.

Obviously, as you've seen, cash used this quarter, as Bill just said, was $1.7 million for operating. We used a chunk of cash for the acquisition. We've got enough capital in our balance sheet for our existing business by a long shot. We are expanding rapidly in that business. I think it's going to do well. But it's funded primarily from ongoing operations and cash flow.

So our existing business is well funded, and this is not as if we're about to go run out of cash. This is more if there are new opportunities that are emerging quickly and we need it for negotiating strength, we just want to give people the head's-up that we would plan to go and do that if the deals look attractive and if we think we can deliver shareholder value.

All right, great. And then just turning to the HD engines, it looks like the cost per engine came down. I know that you guys have done a lot of work in terms of taking the cost out, and we'll probably see more of that as the lower-cost fuel injectors are in there. How much do you think that you could, if we'd look out into calendar 2011, the incremental cost per engine, the overall cost of an HD engine, and how to think about that going forward?

That's another really good question, and I'm going to have to give you another waffle answer, with Darren with a two-by-four at the back of my head if I get too specific. So the party line is unchanged. You've heard me do this for at least two years now, that we are determined to get the incremental cost down to as low as possible. And what is as low as possible? We're always going to have an incremental cost for fuel storage, just because it's going to be more expensive to have an LNG tank than a steel diesel tank.

But all things considered, we think that we can get within a much closer fraction of the price of a diesel vehicle today than we are. We want to move that down quickly. So you're seeing the results of some of that cost reduction. On top of that, there is pricing actions. This is really marketing decisions on how we price and how we operate, and so you're going to see margins moving around independently from two forces. One is lower cost, higher reliability, lower warranty costs, which are going to improve our margin performance. But I can tell you the marketing guys are going to be shifting around price as well.

Now, we don't control the price of trucks or vehicles. That's another story we've tried to tell. We need to work with our partners to maximize market penetration and see where things go. But I think you will see that retail prices for vehicles are coming down quickly as well.

Within the next year--you talked about next year--we've talked about seeing paybacks between 12 and 24 months in all our key markets, regardless of any sort of government incentives or programs. You can see that we've moved a major order to Robert Transport in Quebec. There's no Nat Gas Act incentives in Canada. We are selling product in Australia.

We intend to work with our partners to get an economic picture that gives truck fleets a 12- to 24-month payback. We think 24 months is marginally attractive. It sounds, actually, really good, but there's always uncertainty and there's risk around building infrastructure. So all of this stuff says I think two years is pretty compelling. A one-year payback is absolutely compelling and would create a big competitive advantage. So that's the boundaries of what we're trying to work with.

A year from now, we would like to see a 12-month payback being well established in key markets like the US.

All right, great. This was very helpful. I'll jump back in queue. Thank you.

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

Good afternoon. And just quickly, another question on the equity potential deal. Are we to read that that, if you go out to think about that, does that imply you have things in mind in terms of strategic deals?

Yes.

Okay.

I hope, come on. I would hope that we'd have a few ideas.

Right, right. But sort of into that, I mean more than ideas. But does that imply you have things really on the front burner that you're doing it for a reason?

I think that we've told this story at conferences and at other conference calls. You've seen our lists of who the major engine OEMs are. You've just heard me say that we are seeing activity in high-horsepower and in light-duty. So you can imagine who those players might be.

I think it's pretty unusual these days to have people not accept that there's going to be natural gas in their market space. So there are a lot of people we're talking to. Some of them are just getting their head around the idea that there will be a new fuel, and others are people who we've been talking to for years and are now starting to say it's time to get moving.

So no, we've got a good prospect list of people that we think are serious and at various stages, and some of them are at the point where we are making offers. Of course we are. That shouldn't be a surprise to anybody.

Okay, great. Thank you. And then just in terms of your heavy-duty pipeline, now that you've got 2010 certification, Robert was a nice announcement, but just could you give us some color on how the pipeline looks? Are you seeing that build more internationally, or is the US starting to come on as well, even though there's the incentive uncertainty out there?

Yes, I was maybe a little oblique in my comments about saying that there are fleets, regardless of incentives, that are moving. I think that we will see things that we talked about before, like the Clean Cities projects. I think those will be contracted that will get corridors moving in the Southwest. Ryder's a project that's public. Enviro Express is in Connecticut, which some people are surprised. I've seen actually a lot of interest in the East Coast. We're seeing projects in other parts of Canada, which is also really nice, because we've never sold anything in Canada until now.

So no, I think the idea has taken a while for people to do their work. I think, as you'd expect, you're going to see fleets that have the most incentive, the highest fuel use, the most to gain, are going to be willing to take more risk. And as the product matures and risk is obviously getting lowered and more and more people do this, as the infrastructure becomes more clear on how it's going to get rolled out, it will become more and more easy for the middle fleets to jump on the bandwagon. So I think there's going to be a natural flow of early adopters to more kind of "business as usual" main markets.

But no, we're seeing those early adopters move now, and we can't wait anymore. There's lots of clarity now with the high-mileage fleets and the gas providers and what needs to be done to get them on the road.

Okay, thank you.

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

Good afternoon, gentlemen.

Hey, Rupert.

So of course, there's still a great expectation for the Nat Gas Act in the Senate. Can you give some color on your expectations for a bill in this lame duck session and beyond, and maybe a little on how important subsidies are for your sales today?

Yes, it's a question that comes up all the time, and I think we've been pretty consistent all year in saying that the business model that we're following presumes no Nat Gas Act. It would be great if it happened. There's no doubt that it would accelerate things in the US quickly, but we're not counting on it. Honestly, I think that the odds are low in a lame duck session, but that's just a personal view. There's other people who disagree with me.

There is a vote scheduled, I think, on the 17th, which will be a preliminary procedural vote. But we haven't seen any Republican co-sponsors. I'm look at Darren. I don't think there's any will to get this done in this session. And yet there's a high level of interest in getting it done on both sides of the political spectrum. So we're assured that people want to get something done early in the New Year.

But that said, I don't think it's all that critical. Just stepping back, don't forget that our business is more than the US. As we've seen, this is a global market, and we're seeing China and Europe moving, we're seeing even Canada moving. So the Nat Gas Act has no relevance to the global market, and that's a good chunk of our business going forward.

Within the US, half our business has been public sector historically, or more, and that, of course, doesn't have anything to do with these incentives. So really, we only see 20% to 25% of our sales are exposed to these incentives anyway. And even within those spaces, we think that there are people who are motivated, and we've got the economic case that will get them moving.

So I don't think it's relevant in the short term to our business, and of course, we're watching it with interest. But if and when there are some significant incentives from Washington, we think that will be a catalyst for much more rapid adoption.

Okay, great. Thanks. And just one other question. Can you remind me what the business model you're expecting at Volvo, what that might look like, how it might evolve--meaning, for example, if you can give us an idea of what sort of revenue you would expect to recognize on sales through Volvo or what sort of margin you might expect?

We haven't--we're trying to stick to the script on what we said in the past, because for commercial reasons, obviously, we don't want to expose too much of the plans. We have said that what we've worked on with Volvo is a plan for a specific engine in specific markets, which we haven't disclosed, that we're developing that according to all the usual internal milestone procedures--full certification and testing that a full OEM product launch would have. And that will reach commercial launch sometime within three years of the start of the program. So we're a couple of years away from that now.

Now, how we would see that in the end game is that, of course, vehicles are going to be built in Volvo plants and shipped and supported and produced through the Volvo distribution system, as we've always talked about. Westport will see revenue flow from proprietary components that we've arranged to have delivered to those plants.

So as you saw earlier, we did a deal with Delphi to produce fuel injectors. While Delphi will ship injectors to a Volvo power train engine plant, we would see revenue flow from component flow for that and things like LNG tanks that are proprietary.

We would also see a per-vehicle fee paid to Westport as part of our participation in the margin of the vehicle. We haven't said what that is. We have said, "Look at what CWI brings in, and that's a model you could expect to see us try and replicate worldwide," is somewhere between $1,000 and $5,000 per vehicle as a bottom line contribution.

The Weichai model is similar but slightly different. I'll just go on to Weichai just so it's clear, because then, of course, the CWI model is different again. The Weichai model, we are an equity stake in the joint venture, which is producing all fuel engines with Weichai, so we participate in the full business to our equity stake. We also supply components to the joint venture.

Now, we're not in commercial release of an HPDI engine yet, so you're not seeing those commercial sales. The product's in development. When it's in commercial release, the same situation. There will be a shipment of components. We'll see revenue. We also see a royalty from the joint venture as an override.

So again, we add it up, and you think about how those markets might be penetrated with natural gas, I think you'll see, it could emerge into something pretty interesting for us.

Okay, great. That's it. Thanks.

Thanks, Rupert.

The next question is from Lawrence Alexander of Jefferies and Company. Please go ahead.

Hi, this is Rob Walker on for Lawrence. How are you guys?

Hi, Rob, good.

Hi, just give an update on Delphi. You haven't mentioned much on that. Just an update on your progress there?

Bill, do you want to say anything?

I think that the progress is as expected. We said that we were moving from--I don't want to say "hand-built"--but a complex custom-machined process with a fair amount of labor involved in assembly and test of fuel injectors into a high-volume production line with Delphi. And that will be delivering fuel injectors to customers at the end of this year. Obviously, we've been testing and working with Delphi people, but they have all of the gear now. They are manufacturing, assembling, and testing fuel systems for us, and they will be the major commercial supplier through next year.

Okay. And then in terms of the 30% CAGR you mentioned, given the progress you've made without incentives in Quebec, even if the tax incentives go away and S3815 doesn't pass, are you still comfortable with the 30% CAGR target?

Yes. As I said, we've been pretty consistent, I think, in saying that we built the business where we think it's not needed, and if it happens, it will be better. So our 30% CAGR is the presumption of no Nat Gas Act.

Okay, great.

And we're still--it's not a laydown. I mean, 30% CAGR is not trivial. But we think at the end of the day, and the other caveat--Darren's whacking me again--the other caveat on that, of course, is it's not every quarter and it's not every year. If you look back, it's probably a three-year CAGR is probably the minimum you want to look at.

So if you do 30% out over three years, that's our target three years out. It doesn't necessarily say that next year is 30% up for the year and after that is 30% up. But we've been able to maintain that for six or seven years now. We think there's enough market ahead of us without any change in incentives. Obviously, lots of things can happen in the market. Who knows what the economy's doing? Who knows? But we're going to do our best to maintain that 30% CAGR.

Great, thanks. And then just a quick clarification. On the new Quebec order, when will you likely be shipping those vehicles and recording the revenue? I'm wondering how lumpy it will be.

I think that--they have trucks today. I can tell you there are LNG trucks in Quebec. There will be a few more delivered before the end of the year, but the gating factor is going to be delivery of full fueling infrastructure, which is probably, I would guess, six to nine months out before the three stations are out there. So there's going to be deliveries of trucks paced by availability of infrastructure. It's as simple as that. It's somewhat out of our control.

I think that the bulk of the order would be shipped next fiscal year, but the timing within the year is really anybody's guess.

Okay, thank you.

Okay.

Your next question is from Eric Stine of Northland Capital Markets. Please go ahead.

Hi, thanks for taking the questions.

Eric, hi.

I just wanted to clarify on Volvo. So it sounds like next quarter, we should not expect you to hit any date there, and that maybe that picks up either in Q4 or in Q1, depending on timing. I think you said March.

Yes, that's correct.

Okay, okay. Is it easy to say what the amount is when you hit those milestones, or do they vary by milestone?

They're going to vary by milestone, by timing throughout the year, what the deliverables are. We will record the expense in our R&D as part of our R&D expenses, Eric. It's just in terms of the engineering service revenue against those R&D expenses may be recognized in association with the--and whenever they are.

Right, okay. Okay. No, that's helpful. Then maybe back to Robert Transport. It's helpful to give us some guidance on when the deliveries may be. But just wondering how, now that this Eastern Canada Corridor is being built out, how that's helped discussions with fleets.

Yes, obviously, it's critical. And Robert are a very well respected fleet, probably 2,000 trucks, big operation, very successful, always been a technology leader and an industry leader, and very well respected. So no, this has been big news, that they've committed for this level to LNG. And frankly, we're getting a lot of response as a result of that. So we've got lots of action happening on the East Coast.

The Corridor, by the way, is really meant to anchor Quebec City and go to Detroit, so Windsor side. But that's the bulk of truck traffic in Canada, so there is a lot of trucks that run up and down the 401. And I think that LNG is going to be a very interesting story for a lot of those fleets, and so yes, lots of action. We certainly don't expect that they'll be the only fleet on that corridor.

Okay. Maybe just switching gears to Australia, I think in the release you talked about four of six stations opening in, there will be 19 trucks in service. Can you just talk about the size of the fleets that are deploying those trucks and what the potential opportunity is in Australia?

The Australian market is obviously much smaller than North America. What's intriguing to us about Australia has been the--this is probably the toughest duty cycle in the world. These are road trains with four trailers--three, four, or five trailers running at high speeds. So these trucks put on very large mileage in a year. And because their loads are so high, they burn a lot of fuel. So there are no incentives in Australia. It's just straight based on the economics of the fuel. It's a tough duty cycle, so it's a great place to test new technology.

So a small market, but very high economic argument and a good place to test. Now, we've been disrupted a bit by the economic mess over the past couple of years. There's been substantial gyrations in foreign exchange, and the Australian dollar has been up and down. I'm looking at Bill--40% to 45% up and down? It's hugely volatile. And that's been very difficult for our partner, Kenworth, because, of course, these are trucks that are built and sold in US dollars.

So the pricing model has been difficult. Things have stabilized over the last few months. I think that's why we've said, "Yes, we see Australia opening up again." And I think you'll see more rational behavior over the next year or two.

It is a small market, but as I said, a great test of the economics of LNG and a very tough duty cycle.

Okay. Maybe a last question and I'll jump back into line. Just related to Juniper, can you just give us an update on the stationary engine, the testing in the oilfield applications? And then maybe you can't answer this, because it goes along with your plans for the offering, but last call you talked about finalizing relationships in power gen and agriculture. Wondering what the timing there looks like.

The oilfield test has gone really well, and we have it in several wells. Just to bring everybody else up to speed if you're not aware of it, we've been working with a packaged system that operates the well on well gas, which is a challenge in itself, because this isn't pure natural gas. And it will switch to a propane bottle that's in the shed as a backup if it runs into trouble with the gas.

So it's a fully automated, quite intelligent system, high efficiency, high performance, so it's not just an engine sale, it's a package sale. We've been partnered with the Cummins distributors in North America to launch the product. It's on a one-year test in the oilfields. Results are going well. Officially, that test period ends April next year, March or April. And at that point, if things have gone well, we would expect to see significant orders. It isn't a gigantic market, but it's a market in the tens of thousands a year, so it's not something insignificant, either.

I think what's more interesting is that we are seeing a number of these value-added packaging opportunities with engines of this size, and we think the engine packaging that Juniper is doing will be attractive in other markets. So that shouldn't be any big surprise. We are looking at other forklifts. We'd like to expand that offering. And, of course, we would like to expand on deals totaled in the OEM markets in Europe into other OEMs around the world.

Okay, thanks. Congrats on the quarter.

Thank you.

The next question is from Matt Gowing of Mackie Research Capital. Please go ahead.

Thanks, and hello, everyone. David, you talked briefly about a large bulk of your orders coming from the municipal segment. And previously on other conference calls, you've also talked about this New York City Transit, Metro Transit Authority spend program, which amounts to, I believe $2 billion, and calls for potentially 2,400 new environmentally friendly trucks. My question is two parts. The first part is when do you think that spending is going to begin, or has it already? And through the 2010 to 2014 period, do you think that's going to be front-end or back-end loaded?

The second part of my question is how many competitors do you think you have that are going for that potential order? Like who else out there has an "environmentally friendly bus"? Thanks.

Yes, that could take a while to get into. And I have to caveat all of these answers by saying remember that we don't necessarily take direct orders from customers. We talked about the Robert transport order. In fact, our customer is Peterbilt, the manufacturer of the truck, and that's what we see as an order. We don't necessarily know the end user. Now, lots of hand-waving. We know the way a lot of things go because we end up creating these markets.

On the New York side, again, we're not selling directly to the customer. We are supporting vehicle manufacturers who we know are active there. We know that there is a decision to buy 400 or 500 natural gas buses in New York. I think that order has been awarded and maybe not contracted. It likely would flow in fiscal '12 for us, so that's the next 18 months, let's say.

Lots of truck activity that I talked about. I think that Dallas DART is another one we've talked about. I know Dallas is ordering hundreds of buses. We're still seeing lots of action in school buses this year, which has been a bit of a surprise, frankly, but welcome. And I think we're going to continue to see very strong growth in the refuse sector with municipal fleets as well as the private fleets that serve that space.

So I think that CWI generally is seeing natural gas accepted as a way to reduce fuel bills at a time when cities are seeing great pressure to find savings. So it's a bit counterintuitive, but I think we will see good adoption rates, even in a time of stressed budgets.

Bigger programs, how that all plays out, I really can't give you a lot more detail on that except to say watch for the order flow, and certainly, that's the stuff we're looking at.

In terms of competition, I'm not aware of anybody at the OEM level in the medium and heavy-duty space. I believe there's a couple of new entrants on the conversion front. But you can tell this by watching the EPA website and seeing what engines are certified and available. And right now, it's dominated by Cummins Westport and Westport. So I think in North America for natural gas, I think we do have the dominant position.

Great. And switching over to this quarter but staying with the municipal theme, the last conference call you talked about the timing of a large Asian order impacting the Q1 results. I believe that was Beijing Public Transit. Could you quantify how large that order, what impact that had on Q2 results and how large that could get, how many follow-on orders you could potentially have related to Beijing Public Transit, please?

I can talk about the number of units that were shifted from last quarter to this quarter. It was approximately about between 100 and 150 units that ended up and were delivered during this quarter. In terms of follow-on, I'm not aware of--.

Yes, I wouldn't get too excited. The bulk of what we're seeing from CWI in China these days, by the way, is for export. And yes, we're seeing follow-ons from Beijing Public Transit, but a lot of what we ship to China ends up in Chinese buses that get exported back to places like Lima and other South American cities. The advantage, of course, is the global Cummins support and distribution channel for these Chinese OEMs who are just getting started. So I think that there's a growing market there. But in terms of the domestic business in India and China, those have been single large orders, and they're going to show up, get delivered, and then there will be a follow-on later.

I think that if you're expecting us to show up with another mega order, we'll certainly tell you when we get one. How's that?

That's great, thanks. And one more really quick question and I'll get back in the queue. A really strong gross margin performance out of both CWI and HD. And then looking at CWI, the 42%, I know you had a few more or less one-time items this quarter, but we've seen a string of quarters reported with higher gross margins than your 30% long-term guidance. Should we start thinking about a different paradigm for gross margin performance from CWI?

No, no. We set the bar at 35%, and which we think that is sustainable. You can think about it, I guess.

Great, I will. Thank you.

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

Thanks. I was just wondering. If you look at your next fiscal year, on the heavy-duty side, do you see more of the revenue coming from outside the US, like primarily Canada or Australia, or do you see the US being a more substantial portion?

I'm looking at Bill. Do you want to do that one now? Go ahead. I think that the short answer--I'll let Bill collect his thoughts, and he'll weigh in, no doubt--I think the short answer is we do see growth opportunities in all of our markets. I was serious. There's a lot of opportunity. There's nowhere near market saturation or penetration rate in the heavy-duty side. We're just getting started.

And as a result, you're going to see real lumpiness as things pick up and get going. I would think that things would be stable and predictable once you see penetration the way we've developed in things like transit buses or refuse. Where you've got 10% of the market or better running on natural gas, you're going to start to see a more predictable order flow. But we're way under 1% market penetration on the heavy-duty front at this point. So it's still going to be very lumpy in each of our geographic markets.

That said, I think you should see growth in all of those markets, because there's enough discrete opportunity with those early adopters to swing things a lot next year in any market. So we may see an order for 180 trucks in Quebec this quarter, which I'm not sure anybody foresaw, even though Robert's been pretty public that they are looking seriously at it. You'll see other major fleets doing significant things like that over the next year, but I can't really tell you that there will be a steady flow from one geography or another.

So, Bill, do you want to add to that?

No, I don't have anything to add.

And David, did you mention your expectation for the heavy-duty revenue to double this fiscal year? I'm not sure if I caught that right.

No, that was in reference to Weichai. And again, it's not our business, but Weichai has been pretty public. Weichai Westport, the joint venture, has been pretty public that they're growing 100% this year over last year, and they want that growth to continue next year. And much as Darren thinks that I am over-optimistic, we're sticking to our 30% CAGR line. And if our business units overachieve, that would be wonderful.

All right, got it. One last question. On the OMVL revenue of about $8 million or so, was the Juniper part of it significant this quarter?

Well, Juniper started shipping this quarter, so yes, there is revenue in there from Juniper. I'm not sure if we got that in the MD&A results.

Yes, I think we did have a breakout. The majority of that was derived from the existing OMVL business.

Thank you.

It is broken out. It was the first quarter. I think you should expect that the Juniper segment will grow quickly, but we also want the OMVL side of the business to grow quickly, too.

Very good. Thank you.

The next question comes from Michael Willemse of CIBC. Please go ahead.

Good afternoon. Thanks for taking my call. On the Juniper, the gross margin indicates the gross margin was $2.1 million and 26%. I thought when the acquisition was completed, the thinking was that the inventory would be marked up and that there would be almost no margin on the sales in the first quarter, and then the margin would go up after that. Was there any impact from that in the quarter?

Yes, there was some pull-down on the gross margin. At the end of the day, the markup and the inventory we went through, the purchase accounting and the valuation of all the individual assets, that markup was not significant. And so at the end of the day where they came in, their margin was consistent with what we expected for this quarter.

Okay, so 26% is probably a reasonable number for this business?

Yes, and we've been open about it. We communicated we expect the margins to be anywhere from 25% and 30% for this business.

Yes, probably slightly lower than our medium and heavy-duty, but obviously, we want to navigate to that 30% to 35% range. But given the early nature of a lot of these markets and some of the work that we're doing, we're not going to walk away from business that's lower margin, either. So we're not trying to evade the question. I think that a stable plateau would see the business evolve into that 30% to 35% business, much like heavy-duty. And that's going to take some volume to get there.

Okay, and then just another question on competition. With the changes you're seeing in the market and more and more signal that's changing to natural gas, have you seen any other potential competitors emerge, or is everyone still pretty far behind the ball?

Yes, another question we could go on at some length. I think we've been consistently saying that there's two factors that we work with, and we're being quite open here. I probably shouldn't say this on a public call. But when we talk to our partners, they're really the logical competitors. If you look at people who make engines, or people like Delphi, who make fuel systems, they would be the logical people to be launching a natural gas product. So our challenge is to convince people that they can do it better and faster and cheaper by working with us than trying to do it themselves.

The pressure on the OEM these days is substantial. They've got problems of their own with conventional markets, as you've seen through our fuel economy and carbon emission standards that are hitting everybody all over the world. So people are very busy with their current business, so there's this tradeoff between, "Is natural gas interesting enough to do anything, and if we do decide we need to do something, do we do it internally or do we do it with Westport?" Those are the tradeoffs.

And we feel that, as the market develops more quickly, that helps people get around to saying, "Well, we should work with Westport because they'll be better and faster," and we have the IP and the experience. And in some ways, if the market goes slower, that also plays into our hand, because then it becomes less urgent.

So I think that we're in a pretty good position. We haven't seen anyone else really follow this same business model. I think that the package of services we offer is unique. Certainly, the technology has a strong base. And so we're not seeing a lot of people show up as direct competition. So the competition is really with an internal development team with our partners today, or not do it at all. So in other words, just stick with their conventional product.

So I think that we do have a bit of a window. I think that we believe the market's moving quickly and that natural gas penetration could be substantial in 10 years. So that window of opportunity is going to close pretty quickly, and we will see more competition.

Okay, that's great. Thank you.

This concludes the time for questions. I will turn the conference over to Mr. Seed for concluding remarks.

Thank you very much, everyone, and we look forward to seeing everybody on the next Q3 conference call, anticipated somewhere around early February. Thank you very much.

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