Westport Fuel Systems Inc (WPRT) 2011 Q3 法說會逐字稿

Hello. This is the conference operator. Welcome to the Westport Innovations 2011 third quarter financial results conference call and webcast. As a reminder, all participants are in a 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. Please go ahead, sir.

Thank you and good afternoon, everyone. Welcome to our third 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 the 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 law, and such forward-looking statements are made based on our current expectations and involve certain risks and uncertainties. Actual results may differ materially from those projected in the forward-looking statements.

Information contained in this 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 any undue reliance on any forward-looking statements.

Now I will turn the call over to David Demers.

Thanks, Darren, and good afternoon, everyone. As usual, I'll focus on the strategic plan and the progress we've made this quarter, and then Bill will discuss details of the financial results.

The market transformation that we spoke to you about last quarter continues to accelerate, and the reasons are simple. Oil prices and, hence, global gasoline and diesel prices are continuing to inexorably rise. And on the other hand, the supply picture for natural gas has dramatically improved all over the world. And in particular, many of the oil-importing countries are discovering they've got significant domestic gas resources. So the net result is that we've been very busy, and we continue to see many new, attractive opportunities for growth and improved shareholder value.

Last quarter I pointed out that we've moved this year from one major business unit to the Cummins Westport joint venture, plus this emerging business, the heavy-duty business. But we've added three new significant platforms for growth. We also moved this year from having one significant global OEM alliance with Cummins to three by adding Volvo in Europe and Weichai in China.

Now, in addition to the new OEM partnerships, our acquisition last summer of OMVL is emerging as a platform for expansion into the light-duty automotive and industrial markets. Now, this really positions us as the only company with a presence in light, medium, and heavy-duty engines for natural gas, and as a result, the addressable market that we are focused on has taken a material step up.

As we've said, our strategy is to continue to populate as much of the global market as we can, as well as broadening and strengthening our existing market coverage. To that effect, we've been working with several prospective OEM partners to deliver market analysis and business plans, technology and product proof-of-concept work, and to negotiate commercial alliance terms. We've opened new offices recently in France, Australia, and Detroit, and we continue to grow our capabilities in China, Canada, India, and in the US.

And last but not least, our strong cash position and relatively modest cash burn gives us high confidence and flexibility as we execute our strategic plan.

Now, if you'll just turn to the results this quarter, revenue continues to be lumpy quarter to quarter. This is pretty typical. Year to date, we are up about 26% compared to last year, so we're on track for the year.

I think we can say that growth would likely be even higher if we hadn't seen so much uncertainty about the US vehicle tax credit programs. As most of you know, this was off and on again all year, but in the end, at the end of December, the US government passed a fuel tax credit and let the vehicle tax credits expire. So fleets in the US are quite confused, and they will need some time to sort out what this means for them economically.

But frankly, as we've said all year, we don't think the vehicle credits are all that important in the short term. We have plenty of customers with sufficient economic pressure to move ahead anyway, as you've seen, and we are seeing traction in markets outside the US where, of course, this policy debate is irrelevant. I do think the US credits will ultimately determine the market penetration numbers, but we're a long way away from market saturation today, anyway.

Net loss is up compared to last year. This is planned and comes as we work on new product and market works to aggressively grow the market opportunities I spoke about earlier and to close off opportunities for new entrants.

That said, we believe each of our business units will generate significant and sustainable positive cash flow contributions in the near term. Four of our five units are already about cash flow breakeven or cash positive. The fifth, the heavy-duty GX business unit, we expect to move to positive cash within 12 to 18 months.

Let me just run through each of these units quickly. CWI had another strong quarter and for the year, delivered more than $20 million in after-tax cash flow to the parent, Cummins and Westport. For their full year ending December 31, CWI ended up with revenue of $117 million, which represents growth of 15% over 2009. Operating profit before tax for the quarter was $4.9 million, for the total fiscal year was $26.9 million, which is 23% operating earnings. It's consistent with what we've been seeing all year.

CWI continues to see good international opportunities, including in Europe and South America, but its core strength is in the US regional trucking and city bus markets. We expect continued profitable growth from CWI over the next few years.

The second quarter where we're reporting Weichai Westport JV results, for the full calendar year, the JV shipped 3,600 engines, which is up 114% year over year, for total revenue of RMB302 million, which is about $46 million at current exchange rates, up 133% year over year. Gross margins were in the 20% range, and net earnings was about $2.5 million. Our economic interest in the JV is 35%, so we just report our share of the profits as an equity pickup.

Now, these growth numbers are spectacular, of course, like a lot of stories you hear out of China, but remember that our primary investment with this JV is the introduction of our next-generation engines with our HPI technology on Weichai's high-performance diesel engines. We will see significantly different economic interest after the introduction of the first HPI product, where we will continue to see our equity interest in those engine margins, but also an economic interest from the sale of engine and LNG vehicle components.

Now, given the pace in China, we would expect to see this start in late calendar 2012 to early calendar 2013, so this is a critical period as we develop this business. As we reported, the engine development expenses are going to be contained within the JV, but Westport is committed to develop a specific fuel system and vehicle components and recover that investment through component sales after the launch.

I was in China last month and met with Mr. Tan, the Chairman of Weichai, and with Mr. Ma, who's our JV President and General Manager, and some of his key managers. Weichai Westport has seen strong demand for LNG trucks already in China, and in particular, high horsepower trucks used in the resource industries in Western China. This continues to be a very fast-growing opportunity. So already many companies building LNG infrastructure in China and many fleets that are operating their trucks on LNG from unconventional sources such as landfill gas and coal bed methane.

Westport has started meetings with Chinese truck OEMs to position the JV's next-generation engines, and it's clear that there's high market interest there due to the strong economic advantage of natural gas versus diesel fuel and the likelihood of a significant new domestic supply of natural gas in China in the coming years.

Turning to Volvo, our relationship continues to develop and strengthen. We've opened an office in France near Volvo's operations. We're seeing a lot of enthusiasm in Europe for LNG as a fuel for trucks due to the high price of diesel fuel, the focus on carbon reductions, and the strong interest from the transportation sector to just find a cheaper source of energy.

We're running the Volvo development program as a business unit. It is customer-focused, with revenue, margins, expenses, and operational management challenges. But again, I need to remind you that this going to evolve into a product business as well once the commercialization milestones are behind us. I think the global market opportunities for Volvo natural gas vehicles are increasing rapidly, and we've got the right product positioned at the right time.

Of course, our job in this relationship will be to develop a high degree of satisfaction and confidence within Volvo Powertrain and within its global vehicle brands.

Turning to Juniper, which is our third new venture this year, revenue for the quarter was $7.8 million, operating performance was about breakeven ahead of some significant R&D investments of about $1.8 million in the quarter. We said last quarter we're investing in Juniper to explore several new markets, including automotive opportunities with a number of global OEMs. We think significant change is coming in this market, and our experience with direct injection technologies is an important foundation for this growth.

Integration of OMVL has gone very well since July. In the near term we expect to move more of the product mix away from its low-margin component business to more systems and OEM business.

As you know, in heavy duty, 2010 was a transition year for us as we shifted from completion of the LA Ports project to a broadly targeted, long-haul truck program that's really focused on corridor development across North America and in Australia. We continue to believe that it's critically important for us to use this program as the bellwether for really creating the market for LNG as a truck fuel around the world. Although it doesn't show in the current quarter product shipments, which were zero, we've made significant progress in heavy-duty market development over the past few months.

Remember that considerable work is needed as we are moving into this economically challenging long-haul trucking role with a Westport-branded product. So it's complicated by the 2010 US truck emissions standards, which forced a delay in truck chassis availability until our fiscal Q2 with Kenworth and Peterbilt, which is just coming online in the next few weeks.

Low volumes, the uncertainty around US credits, and the startup nature of LNG infrastructure corridors have meant challenges as we coordinate complete solutions with our various partners and allies. That said, I think you can see evidence this is coming together with major new orders, such as Vedder in BC and Robert Trucking in Quebec.

We've introduced recently new pricing and financing opportunities that are going to create a compelling value proposition for long-haul fleets, even without vehicle incentives in the US. We're actively proposing deals to fleets in partnership with leasing companies that exploit the accelerated depreciation options, the long-term fuel price differential between diesel and LNG, and maintenance and warranty service offerings that are priced on a per-mile basis for the life of the truck. We're also pricing components that have longer life cycles, such as LNG tanks and pumps, with different amortization periods than the base truck chassis and the engine to optimize payback periods for fleets.

Our focus right now is on the leading fleets who have high-mileage operations and thus high fuel consumption, because these fleets can apply the economic benefits of natural gas to achieve immediate return on investment. Even without incentives, the total economics for these fleets now compares very favorably to diesel over the life cycle of the asset. And although incentives remain on the horizon, we believe there's enough momentum developing to get the market started now. This facilitates the development of LNG infrastructure through vehicle corridors and encourages in turn multiple fleets in each region to get started once the corridor is up and running.

So as you can see from the corridor, there's corridor development happening this year in both Eastern and Western Canada, and we expect further development in California to Colorado, through Nevada and Utah, in the Texas triangle, and in the Southeast US.

Although we're just getting started in this very large market, we're confident that the long-term economic advantages make this energy transition inevitable. In the short term, the pace is going to be determined by our ability to earn the confidence of fleet operators and to deliver the complete solution they need to make such a bold and disruptive jump from conventional fuels. So customer support does remain a primary focus for us. We are making significant headway as we upgrade hardware and software through the aggressive upgrade campaigns that we launched last summer.

I'll wrap up the overview with some comments on new opportunities beyond our existing portfolio. Of course, we don't yet have the product and market portfolio that completely matches conventional gasoline and diesel markets around the world. We expect to begin filling in this portfolio with existing and with new partners. We continue to look at ways we can develop supply chain efficiencies and lower the overall system cost.

Since our venture into smaller engines with Juniper, the last remaining market we have not developed a commercial alliance in is high horsepower, which would include things like mining, locomotives, shipping, and large industrial applications. I've been surprised by the global interest we see from customers in all of these segments over the past few months. These are complex industries, but I think virtually everyone we meet now accepts that there will be some portion of these markets moving to natural gas fueling. So this is an area where we see good future potential.

I'll turn the floor over to Bill now to take you through the specific financial results.

Okay, thank you, David, and good afternoon, everyone. The press release and financial statements and management's discussion and analysis provide a considerable amount of detail regarding our third quarter of fiscal 2011 ended December 31, 2010, and are posted on our website. This afternoon I'll focus on revenue, margins, operating expenses, and net loss. All our financial figures are in US dollars unless otherwise indicated.

For the third quarter ended December 31, 2010, consolidated revenues were $39.5 million compared to $36.4 million in the prior year period. Now, this represents an 8.5% increase year over year. CWI product revenue during the third quarter of fiscal '11 was $23 million, down $3.3 million or 13% as a result of lower engine shipments and mix of engines sold. CWI shipped 1,036 units during the quarter compared to 1,162 units in the third quarter of fiscal '10. This decrease in product revenue was offset by a $1.5 million increase to $8.1 million, or 22%, in CWI parts revenue. The number of engines in the field, their age, and their reliability all impact parts revenue each period.

Juniper contributed $7.8 million in revenue for 2011 third fiscal quarter. You are seeing changes in Juniper's product mix driven by its offerings in the industrial forklift markets and expansion into oilfield service pumps. We expect these product offerings, and the launch of several new products, will be a platform for growth.

Westport HD product revenue for the three months ended December 31, 2010, decreased to nil compared to $2.2 million, with 40 HD systems delivered in the prior year period. While no revenue was recognized in the quarter, we have announced orders for 230 HD trucks featuring our technology. Delivery of these engines to the truck OEMs and the related revenue will depend on the customers' fleet requirements and the truck OEMs' resources.

We also recognized $200,000 in HD parts revenue and $300,000 in other revenue generated from contract services and sales reported by our joint venture with BTIC in China.

Our engine development agreement with Volvo Powertrain is proceeding as planned. We report service revenue based on successful completion of milestones, which currently fall about every six months. Therefore, with no milestones scheduled for the third fiscal quarter of 2011, no service revenue was recorded. All costs associated with this development agreement are recorded as research and development expense as incurred, with reported expenses being reimbursable on completion of the next milestone. During this quarter, we incurred approximately $1.2 million in R&D costs related to this agreement.

For the three months ended December 31, 2010, our joint venture, Weichai Westport, generated approximately $15 million in revenue, representing a 69% increase over the prior year period. During the quarter, we reported approximately $200,000 of income from our 35% equity interest in the joint venture.

Consolidated gross margin for our third fiscal quarter of 2011 was $12.9 million, or 33% of total revenue, compared to $14.3 million, or 39% of total revenue, in the prior year period. CWI's product gross margin and gross margin percentage for the third fiscal quarter of 2011 decreased $8.2 million and 36% from $10.2 million and 39%, respectively, in the prior year period. The decline in gross margin percentage was primarily due to a $1 million campaign adjustment in the current year period and change in product mix. Juniper reported gross margin and gross margin percentage of $1.5 million and 19%.

For the three months ended December 31, 2010, operating expense -- this is research and development, general and administrative, and sales and marketing -- were $20.1 million compared to $13.7 million in the prior year period. During the third fiscal quarter of '11, we invested approximately $9.6 million in research and development, representing a $3.4 million, or a 55% increase over the prior year period. We invested approximately $1.8 million in research and development activity to expand our product offerings to light-duty automotive OEMs, in addition to investments in CWI new product developments, our effort under the Volvo development agreement, and supporting our Westport HD product.

Selling, general, and automotive costs for the third fiscal quarter of '11 increased approximately $3 million, or 40%. This increase was primarily driven by a $1.4 million increase in business development and marketing costs for our Westport HD product and $1.3 million for the addition of Juniper. Also, our operating expenses were negatively impacted by foreign exchange.

Our consolidated net loss for the three months ended December 31, 2010, was $13.5 million, or a loss of $0.31 per diluted share. This compared to a net loss of $6.9 million, or a loss of $0.20 per diluted share, in the prior year period. The $6.6 million increase in net loss relates primarily to a decrease in our 50% share of CWI's net income of $1.2 million due to lower revenues and higher investment in product development for new natural gas engines, higher Westport HD and corporate operating expenses of $2.4 million as a result of the engine development agreement with Volvo Powertrain, of which $1.2 million is reimbursable under the current agreement, and increased sales and marketing activities.

Now, Juniper operating losses of $1.6 million were primarily driven by $1.8 million in research and development activity to expand their product offerings to light-duty automotive OEMs, and net foreign exchange losses of approximately $1.2 million.

Our cash, cash equivalents, and short-term investments balance at December 31, 2010, was $185.7 million. This is up from $80.3 million at September 30, 2010. For our third fiscal quarter of 2011, cash used in operations was $7.2 million, with $9.1 million used for operating purposes, offset by an increase in working capital of $1.9 million. Cash used in investment activities included purchase of short-term investments of $27.2 million and property and equipment of $1.5 million during the quarter. This was offset by a net repayment of advances from CWI to Cummins of $3.8 million.

Cash flows from financing activities included $115.7 million. This is net of share issuance costs raised in the public offering in November, offset by $6 million in dividends paid by CWI to each parent company. Foreign exchange resulted in a negative adjustment of cash and cash equivalents of approximately $1.8 million, as a large portion of our cash balances are maintained in Canadian dollars and Euros.

Our cash used in operations increased, as we are investing in our current and new technology. We will continue to monitor the level of these investments and our cash position. 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.

Thank you. (Operator Instructions.) Robert Wertheimer, Morgan Stanley.

So the leasing setup sounds very interesting. I wanted to ask if there's a cap on the number of units, or whether it's just a trial or a test, if you've convinced the leasing entity of the durability of the product, or whether you'll have to hold some of the risk, and whether that would have book profit implications on when the profits actually come?

Yes, it's going to be -- obviously, if we're accepting a change in the cash flow of a transaction, we're going to see a change in the revenue model to be a little more sophisticated than just seeing one lump arriving when we delivered a truck. So we're going to be accepting payment over time. Obviously, you picked up on what I said about life of the truck, cost per mile. These are extended warranties which we are charging for but receiving payment for over the life of the lease. And we're allowing extended life on some of the long-life products like LNG tanks.

So it's created a very interesting scenario where we're able to go to fleets and say, here's a guaranteed lower cost per mile. And that's a very attractive option for fleets that are seeing the right fuel consumption, seeing the right price for fuel, and all the rest of this stuff. But it's really the first time we've been able to deliver that payback from Day 1 for fleets that are looking at financing and have the right combination.

So no, it's meant to be a permanent change. I think it's a really exciting offering, and we're seeing a lot of enthusiasm. Of course, people are trying to figure out where the holes are in this and where the catches are, so I wouldn't expect an instant take-up on this. But so far, the fleets we've showed it to are very enthused.

And is it meant to be a trial of a few units or 10 units or something? Or is there no -- ?

No, we don't see any problem in offering this generally. It's higher risk, but we're pretty confident that we know now what the reliability and durability numbers are, so we can take that risk. We're going to be paid for that life cycle warranty, and we think we know what the customer's going to be able to see in terms of component life. So, yes, we're spreading out a larger revenue stream over a larger time, but that's really the only risk we're taking with this.

Okay. And then if I could ask, just in North America, what you're seeing inside and outside (inaudible)? Are you seeing the budget pressures really hurt, bust fleets? And are you seeing -- you mentioned in your comments that people need to reevaluate with or without the vehicle credits. But do you think that's going to be on hold until we get legislation through, or do you think that people are going to make or break?

No, I think -- in a sense, I think people are relieved. We're certainly relieved to get the certainty out now. There's still lots of chatter, and we got some news this morning -- I'm sure you read it, too -- that there are some senators thinking they can reintroduce this idea in the spring. But honestly, most fleets are looking at the numbers as they sit now. And we've got people who are saying we may well see vehicle credits toward the end of the year, but we have to make decisions now. I think the economy's moving, people are buying trucks, they have to make some decisions. And if we can offer them a compelling financial opportunity, we think we'll make some sales, with or without the credit.

The credits are going to apply in all of these fleets anyway, because no one is going 100% natural gas on this decision anyway. So I think that the job that we have in front of us is to get these corridors developing, get these initial fleet experiences and make them positive, and then follow up with penetration of the fleet.

If the credits occur in the future, it's going to change the economics even better. But I think we'll see people making decisions now, now that it's not some sort of imminent packet that the people were hoping for in December.

Thank you.

Graham Mattison, Lazard Capital Markets.

Just following up on the financing program, how long has this been (inaudible)? When did you launch this? Has this been the last few weeks, or -- ?

The last few weeks. Yes, once it was clear that the nat gas, that vehicle credits, weren't there, that was really the big uncertainty. As you can imagine, it's a huge factor as you're looking at the life cycle cost of a vehicle. And with the vehicle credits gone as of December 31, but accelerated depreciation and a fuel tax credit, it just flipped the whole equation over into a vehicle life cycle discussion. And that's really when we were able to launch this with some certainty that there wasn't going to be some big surprise in the numbers. So no, it's been rolled out since early December. I guess in a way you can say this is what we've been doing in Canada as well, so you'll see this sort of financing option outside the US where the government incentives just don't play.

And is it too early to get a sense of when -- obviously, you've had some pretty positive discussions -- but when do you think you might see the first order from it? Or is that too specific a question?

Yes, that's a really specific question. Darren's shocked. Obviously, we're pleased with the order flow we've seen, so we're up, with the 230 units that went out, so that's more than double than what we shipped all last year. I think that the interest levels are high and the order volumes are building. Now we've got to start shipping some of this. As I said, we are now ready to start shipping Peterbilts, which seems to be the most popular chassis for the last couple of orders, anyway. And I expect we'll see more Kenworth orders as well.

But the challenge is really just getting through this uncertainty around the incentives, getting clear on what the economic offer can be, and then letting people make their minds up.

All right, I got it. And then are there still some orders left, or some trucks to be shipped, as part of the Clean Cities program? The stimulus money?

Yes, there's still a program -- I'm looking at Darren -- with UPS. Ryder, still, I think has some of that money. I think it's got to be contracted early this year. I'm looking at Darren.

Both second and third of the calendar year.

So, yes, there are still a few under that program. Obviously, that program has become much more valuable with the disappearance of the vehicle credits.

Got you. And then, just turning on Weichai, you mentioned that 3,600 engines were shipped in calendar 2010. Just before that part, you said that you expect 100% growth off of that number in calendar 2011, correct?

Actually, I don't think we said anything about what we expect, Graham, but -- .

That's what has been the pace.

Historically, it has been at 100%, yes.

Got you. And then, this you did say, when you expect to ship the first of the HPDI engines in China?

We're still probably a couple of years away. I'd say 18 months to 24 months. As usual, you'll see some field trial product, but commercial launch has been early 2013 for a while, and I don't see any reason to change that right now.

Got you. All right, I'll jump back in queue. Thanks very much, guys.

Laurence Alexander, Jefferies.

Just a couple of questions, first on the leasing program. What's the financing rate that you're using? And just to be clear, is there any default risk or recourse back to Westport?

That's a good question. It's not our offer, so I don't think we can really disclose the terms. I think we can tell you that, obviously, we're working with PacLease on this. That's the primary leasing offering for Peterbilt and Kenworth. So it's a traditional lease with the additional pricing features that we've been offering.

As I said, we're offering a residual value on the tank, we're offering longer residual values on components like pumps. So this is really just a tweak for what we've been doing for some time on the leasing arm. It's just moving some of the components around so that the life cycle payments under the lease would be lower than a diesel truck when you factor in the fuel price.

So I think that the issue was really just to get certainty around what those capital costs would have to be as we plug it into the formula. There's no other major change in what we're doing here. We've offered extended warranties for some time. The difference on this one is that we are allowing payment over the life of the lease on a per-mile basis rather than the usual upfront capital cost.

So I don't think there's a significant change in our economic interest. It will result in some -- I'm looking at Bill here -- some extension in recognition of revenue, but no major change in the overall economic interest.

And secondly, in the past you've talked about potentially needing to, as the industry scales up, potentially needing to back-stock some of the working capital build in the chain. Given the number of partners you've now accumulated, what's your thinking on that topic?

We're very well aware of trying to ramp up our purchases to support the orders that we have announced. As you know, a lot of these components -- the tanks, the pumps, and some other components -- there's long lead times. And so we've already started submitting those purchase orders for those components, and we should start seeing them, I would expect to ramp up our inventory in future quarters. The impact wasn't that significant for this quarter since we just started getting these purchase orders in.

The challenge is, in any of this, we've warned you for a while. So I think everybody should expect there is going to be lumpiness in all of this. Ultimately, we want to get to a more sophisticated supply chain. We're doing that right now by broadening our supply base. A big milestone was getting one supplier around every major component. We are now getting to multiple suppliers of key components. As the supply chain starts to get more sophisticated and we see more regular order flow, then there's going to be less need for inventory. But for now, yes, we are the last resort, and we've got to build our inventory levels so we can meet market demands.

Not trivial when we've seen this start-and-stop market interest, and as we're moving from a pretty well-defined project flow at the courts to this much more fluid long-haul business internationally. So no, there's going to be some inventory lumpiness and some supply chain issues that we need to manage until the market develops.

And then lastly, two quick updates. Can you give an update on Delphi and on the trend in average selling prices for Weichai over the course of the year and what you might think might happen next year?

I don't think there's really a significant update on Delphi. They are producing injectors for us, which is great. The quality and startup issues are through that. Obviously, developing a new supplier for a high-precision component does take a lot of work and back-and-forth. I'm pleased with the results so far, and they're certainly hitting their price targets. Things are going really well. As the market interest is expanding, clearly, that's creating more interest broadly in the fuel injector community, and it's great to have this partnership with Delphi up and running, because it really takes away any capacity concerns we've got. Clearly, lots of scope for that relationship to grow, too.

I'm looking at Bill on the ASP issues.

Probably all over the chart, because they did five with a 12-liter, and then did substantially -- .

I guess I'd say, and I know there are some pictures on our website -- I'm looking at Darren.

Are there pictures on our website?

Does he mean specifically the heavy-duty products or Weichai?

No, just on the overall Weichai portfolio.

I think if you look at what they've disclosed, they do have a pretty broad engine range. But as I mentioned, where we've seen the growth is in these very large resource haulers in the West. So coal and iron ore haulers, which are the high horsepower engines, which are the big ticket items. And anyway, they just really beat these trucks up. It's unbelievable, the duty cycle they put these under. And we saw some customers at one of the coal facilities. They just convoy these trucks and run them for a few hundred kilometers on dirt roads out of the far west of the nearest civilization point. But the duty cycle is pretty demanding.

So I'd say that the market for natural gas does look like it's going to be high horsepower trucks much more quickly than we thought. And certainly, that's where the growth is in that space. And that's also what's driving the pull for HPDI, frankly, is people want more and more power, more and more capacity, just because the loads are so high and I understand the fuel consumption is so high in these. So it's very interesting, and obviously, we've got high hopes for market development in China.

Great. Thank you.

Rob Brown, Craig-Hallum.

Could you just give us a little more color on the timing of the CWI shipments? Have you seen things settle out there in terms of decision-making happening? And do you still feel that you're on that 30% CAGR?

I'm looking at Darren here, because he likes the 30% CAGR, yes. Consolidated. And even CWI, although CWI's now at a pretty nice run rate. It's been making money for five or six years. I think we're going to see -- we're still not at market saturation, even with CWI. And CWI continues to see very significant orders that come and go, so I wouldn't expect smooth growth, even with CWI. It's going to plateau out, which growth this year was 15%. I'm looking for Bill. As we see new markets and new products introduced, obviously, that's when you see market growth pick up.

But we've seen a bunch of speculation, I guess, about US budgets. Frankly, we haven't really seen any evidence of that. There's significant transit orders continuing. That's usually federal money. The pressure on the refuse market, I think, is continuing to build just because the economics are so high. So yes, municipal budgets might be down, but people are looking for ways to save money, and so we're seeing continuing development in natural gas.

I think, generally, you're going to see turmoil. There's no doubt. People are looking for good deals, and they're looking for economic advantage now. And I think all of that are themes that are going to help as often as hurt us. But the business is going to continue to grow and continuing to spin a lot of cash for us.

Internationally, I think CWI is pretty well positioned with a very strong product offering, done well this year in India. I think we're seeing good growth for CWI in Europe and South America, as I said. So I think that global diversification is also going to help and continue to have sustained growth, even if there is some fallout from the municipal sector in the United States.

Okay, good. Thank you.

That's a bit of a non-answer, Rob. I hope it makes sense.

No, thank you. And then on the 200-and-some HD units you have in the backlog, when do you expect those to start shipping? What's the rough timeline on those going forward here?

Sorry, was that a question about how many more we're going to sell, Rob, or you just want the 230?

No, on the 230, when do they start shipping and how do they flow through going forward?

They're all Peterbilt. That's public. And we said we're going to be starting to ship Peterbilts this quarter. But it's just getting going, and it's really going to be paced on the development of infrastructure. So obviously, there's temporary infrastructure in place at Robert. Vedder, I think, is going to be taking -- I'm looking at Darren. Vedder's taking trucks -- .

Yes, with the bulk basically following in next year, Rob. Next fiscal year, sorry.

Okay, thank you.

Shawn Severson, ThinkEquity.

You have a lot of strategic balls in the air, so to speak, that you're juggling. And I was wondering, if you could narrow it down to two or three points that are critical, you think, strategically for Westport in calendar 2011. And then I assume there's some different ones in calendar 2012. But maybe just when you look internally and you look through your business, what are you really focused on for the next 12 months and then the next 12 months after that?

Boy, this could be fun. I don't think there's any secret about this. Now, it is a bit of a gold rush scenario. I've used this metaphor before, where we are trying to grab the OEM markets while they're thinking about it. And this pattern has been played out over the past few years. It's no secret that as we go talk to the OEMs about natural gas, the first reaction is there's no market. The second reaction is what do we need you for? And the third reaction is, oh, now we're in big trouble. We've got to get Westport in to help. That's usually the way the pattern rolls out.

Our challenge, we think these days, is not to convince people that there is a market. We're past that. Pretty much everyone believes they're going to need natural gas in their portfolio. So the challenge is going to be what product, what market, and what are the commercial terms for Westport, with or without?

I think our job and our strategic mission -- again, no secret here -- is that we want to maintain our dominant market position. We are really the only significant player in the medium and heavy-duty markets for the people who are in the markets. We've got about half of the diesel volumes are under the brand names of the OEMs that we're working with.

It doesn't mean that we've got natural gas product covering half the diesel market. It says we've got one product somewhere in the Cummins system, the Volvo system, the Weichai system. And so we want to broaden that out and cover their whole global product line, but we also want to move beyond that so we really have a dominant market share position among all the OEMs that are present in these markets.

The second theme is expanding beyond our core medium and heavy-duty space into light duty. We think there is a big transition happening this year in attitude around natural gas vehicles. I know there's lots and lots of chatter about electrification. Frankly, we think there's going to be a lot more market go to natural gas, particularly in fleet vehicles in the US and Europe. And so we think we're well positioned for where that industry's going, with direct injection technologies really becoming prevalent.

So we think light duty is a big focus for us this year. And as I said, we're starting to see real pressure on the high horsepower side. So off-road things like mining and locomotives and shipping, I think, are a very interesting near-term opportunity, and we want to make sure that we're present in that market as well and that our technologies are seen as adding value.

So lots of opportunity. I don't think there's any fundamental shift in strategy. It's broadening and deepening the product offerings across the board and establishing a technology standard across the industry around our core strength intellectual property.

So I think that's really this year and next. Once we establish those positions, the job is to get product into the market and start making people happy with what they bought. So pretty straightforward, I think.

Great, thank you. And just a quick follow-up. On the competitive environment in terms of either technology you've developed internally at the OEM, engine OEM or other competitors, have you seen anything that's different there or changed for you in the last 12 months as people have developed product?

No, not really. I think if you take a look at the patent filings -- this is all quite public, so we follow it pretty transparently -- there's just no doubt that Westport's got the, by far, the largest intellectual property portfolio and patent position in the world, including all of our OEM partners. So it's very clear that we've got the technology portfolio in the lead.

Now, it doesn't mean that we have necessarily all the answers, and it doesn't mean that there aren't other people who are in this industry who are doing good things. It's just that we do have a very broad portfolio and a lot of things to talk about. I think that where the industry's going, particularly on the light-duty side, we are seeing a technology transition worldwide to direct injection gasoline engines. And that's our space. We think there's a lot of synergy between what we've been doing with direct injection of gas and that technology shift on the gasoline side. And I think, if anything, that's going to help position us more competitively in that space.

On the heavy-duty side, again, lots of people who are getting into the market quickly and discovering that it's more challenging than they thought to do a high-quality, high-performance natural gas engine. So there are people who are introducing product, and then we find that they show up at our door to help diagnose it.

So I think that from a technology viewpoint, we're pretty comfortable that we've got a good position. We're continuing to invest heavily in R&D and technology development to maintain that position, and we haven't seen any significant suggestions that we're on the wrong track. So hopefully, we can use this to really establish the partnerships that we want to do in the near term.

Great. Thank you.

Eric Stine, Northland Capital Markets.

Most questions have been answered, but I'll get a few in. First, it would be helpful if you could just give us some of the feedback or an update on the testing with some of the high-profile fleets -- Walmart and some others?

Sure. I'm looking at Darren here on what we've said. I think when people ask about Walmart, Walmart has had four trucks for a while. Had some early operational challenges just because they didn't have refueling nearby, so if you're measuring fuel consumption and you have to drive 50 miles to refuel, there's some issues there. I think the experience has been good for them. I'm looking at Darren. Anything new there?

No.

We've got a number of fleets, including the existing customers, and we've got a fairly active fleet demonstration program going on in Nevada and California right now.

The most recent shipments on the East Coast, I think, are probably interesting. This was the fleet, Enviro Express in Bridgeport that was delivered in September. I think they're going very well. They've been quite public and had a big public event. So I think, generally, people are satisfied with the performance of the truck, the fuel economy. Lots of suggestions on how we can improve it, which of course is in the pipeline. We've got lots of work to do to improve reliability before it's going to match diesel. Diesel's been around for decades. We've got work to do on the complete system, but I think in general people are confident that they can do their job and see the economic returns that we're talking about.

So I think feedback has been pretty good, and we are continuing to focus on strong customer support. I mentioned that there is a strong upgrade campaign. We are taking care of our existing customers and making sure that they've got the latest technology. That's over and above the warranty support. So it's expensive, but important, we think, to give people the best possible experience, and that will continue this year.

Okay. It's safe to say that some of these large fleets, these are the ones that you're talking to with the lease program and that the feedback there has been pretty good? High interest level?

Yes, I think in any of the sophisticated fleets, particularly high fuel use fleets, there's no doubt in their minds that they're going to be moving to natural gas. The transportation sector has always moved to the lowest energy source. There's been a lot of focus on this since the oil spike in 2008. So I think all the sophisticated fleets are looking at this very seriously. The question is timing, how they do it, and of course, their economic muscle is high, and so they're trying to get the best possible deal they can.

And it's not just from us. It's from the truck vendors and the fuel vendors and the guys building infrastructure. So these are very complex deals with sophisticated players. So it's a lot of fun.

Okay. Just to clarify something from your prepared comments, you talked about on the heavy-duty side, thinking about breakeven in the next 12 to 18 months. That would seem to indicate that, from this leasing program, you expect a pretty meaningful volume ramp as you get into late fiscal year '12 and early '13?

Yes, although we've been saying this for a while, and I know people are probably getting tired of this same story, because we can pick on Elaine's time, when she was CFO, talking about 1,000 to 1,200 trucks a year was breakeven. It hasn't really changed. The business model that we're following is still relatively high leverage, and with margins and that kind of volume, we should see this business unit hit breakeven or positive.

Now, there's a few changes, as I said, on revenue recognition. We're continuing to push the prices down, but on the other hand, I think that we're seeing more cost efficiencies as well. So on balance, we haven't really changed that. We really need to get the business to 250 or 300 units a quarter to see some sustainable growth.

Clearly, lots more market opportunity than that. That's not a big market share. But it's a long way from where we are. So we need to buckle down and get that happening, get the volumes happening.

Our sense right now, as we said, with 230 orders announced, obviously, a lot more in the works, it's not impossible to see that 300 a quarter, 250 a quarter, in that 12- to 18-month timetable. It's not done yet. It's not clear that we're going to be successful. But that's where we're going.

Okay, thanks for that. Just two last questions. First, just related to operating expenses. You gave pretty good detail, but any one-time items in there? Or is this the kind of level we should think about going forward? And then secondly, just an update on the stationary engine oilfield testing within Juniper? Thanks a lot.

I'll address your operating expenses. Our operating expenses are going to vary based on our level of investments, as we mentioned. We invested roughly about $9.4 million in research and development, albeit some of that is attributed to Volvo in which we're going to be reimbursed. Our level of R&D expenses is going to be dependent upon to what level are we going to continue to invest in these programs, and if we're successful in establishing relationships with other OEMs, whether it's in the automotive industry or the heavy-duty industry. And so if we're successful, I would expect to see R&D expenses increase.

With respect to selling and marketing, yes, our selling and marketing expenses have gone up. We are trying to develop a market here in North America for our heavy-duty products, and I would say I wouldn't expect any significant increases in that run rate going forward unless there is significant changes in the market.

On Juniper?

I'll take that one. I thought Bill was going to take it, over this. But the quarter's gone very well, and I think the product has met or exceeded expectations in that industry. It's another very tough duty cycle. These engines are running constantly in a pretty harsh environment, and so there's a lot of them, surprisingly, a lot of them and a lot of them purchased every year.

I think we're at the point of seeing customer order and we'd like to expand that this year. So deliveries, I think -- I'm looking at Darren here. I think we said the second half of this calendar year is when we'll start to see significant deliveries of that product. So as we say, gone well. We'd like to expand that, and I think there's good opportunities in that industry for the technologies we're deploying.

Tom Daniels, Stifel Nicolaus.

First, I was just wondering about the CWI JV. Could you guys give us a sense of what percent of those engines go into the US versus international?

Oh, I think we have the breakdowns in the notes, but I don't have it real handy. So three months ended 201 -- it's on page 8 of the notes -- 61% was Americas, which is North and South -- mostly North, I would guess -- 17% Asia, 22% rest of the world. These numbers do move around, and so I caution you of making any conclusion from any specific quarter. Now, I'm probably misleading you, because just looking at the nine-month numbers are looking like 1% off. So it does look like it's two-thirds Americas, one-third rest of the world for most of 2010.

It's been as low as 50/50 and as high as 80/20, so it is going to move around. I think CWI's strength, as I said, has been, as you'd expect, where Cummins is strong, which is North America. So I think that's where you're going to see CWI's heartland. But lots of development in South America. Historically, we've seen good development in the transit market. We're starting to see more truck business. And I think CWI has actually seen good opportunities in Europe as well, which is new.

So I think lots of potential growth.

Okay, great. Part of the reason for the question is did you guys see any gross margin pressure from CWI in light of a non-subsidy environment, just because that's always been such a great gross margin business for you guys, looking at Cummins Company, high gross margins, more like 23%. I was just wondering how you guys are thinking about that going in the out years here?

Yes, that is a very good question. Pricing is always going to be subject to competitive pressure, and CWI generally has not seen any competitive pressure. But that said, we have to make it work for the customer. And in the overall scheme of things, if they're not seeing an economic advantage for natural gas, they're not going to move.

I think at this point, CWI still has a very strong sustainable advantage, and that is justifying a relatively robust margin in this business. And we're continuing to reinvest those margins in new product development and market development. So I don't think there's any tremendous pressure to push prices down.

As there's more competitive entrants and as there's more alternatives -- obviously, that's going to be inevitable -- but we want to see margins in the 30% to 35% range. We've been above that for several years now, and I think the suggestion we've been giving people is to model 33%, at least for the next few years. And I think there is upside from that.

A lot depends on product mix as well, and in some markets, margins are lower. The core business has been pretty good, though.

Okay, great. Thanks. That's it for me.

Michael Willemse, CIBC.

Great, thank you. Just wondering if you could give an update on the acquisition pipeline?

No.

As in nothing really seen at the current time?

I couldn't resist, sorry. OMVL has gone well. The acquisition concluded in early July, and I think integration's gone better than expected. And I think both the OMVL team and the Juniper team are really excited about the opportunities we're seeing. It's gone really well.

I think it's no secret that Elaine Wong moved into an M&A job. She tells me she's very busy. She claims to be busy. So I'm assuming that there's a large pipeline of deals that she's looking at. But obviously, it's not appropriate for us to comment on numbers or scope or what's up. I think that what we said last quarter still applies. I think there's good opportunities for supply chain efficiency and some synergies. So it's not just a case of acquiring companies. It may be investments or expansion or partnerships or alliances like that. I think there are some substantial opportunities in the light-duty space and in the off-road space, and we're looking for ways that we can enhance our offerings to the major OEMs.

So I think you should be able to draw whatever conclusion you like from that ramble. I think that over the next couple of years, there is going to be consolidation in the space, and there's good opportunities, we think, for our strategic plan to be advanced through an M&A strategy.

When there's a deal, you'll hear about it.

All right. And then another question on the light vehicle side at OMLV. Just wondering how we should look at this business growing. Is this going to be something that happens gradually as you get a few contracts, or is it going to happen overnight, like on a sudden basis through a large agreement with an OEM or maybe a Tier 1 auto supplier? What's the stepping stone on the growth of that business?

Good question. Again, it's one of these things where it's hard to really say until it's behind us. But the strategy has been to focus on OEM business. If you look at our experience in the medium and heavy-duty business, that does take some time. You can't turn a light switch and start to supply things. Our vision is that we're going to see a significant technology shift in the combustion chamber with direct injection, so developing the technologies, getting them into people's engines, getting them into vehicles, and then getting them into the market is not something that happens overnight.

That said, OMVL has seen some good OEM results. I think Darren mentioned in the press release that they started working with Fiat in South America. There is good OEM presence in Europe. That business is expanding, and that could grow very quickly, recognizing that OMVL is a relatively small base in that component business. Good scale-up potential. We think the market is going to be lumpy. We've seen some ups and downs, just based on things like incentives in Italy. But the overall trend in the light-duty market, I think, is very strong. And we think we're in a good position to take that business.

So I think you'll see a combination of major OEM initiatives for specific products and markets that, like our deal with Volvo or Weichai, are going to take some time to play out. There should be lots of notice, but very large potential market opportunities. But that's also going to be coupled with straight component sales that could be significant in the short term, depending on where the markets go.

The global presence that we've added has certainly helped OMVL's market presence, and I think that we will see some new opportunities over the next 12 to 24 months.

Just to follow up on that, when I look at OEMs and they introduce platforms with just different technologies, it's something that they usually prepare 18 to 24 months to get everything ready, and then if they go to, say, different types of engine technologies, then they'll provide that option. Is that what you're looking at? An OEM makes an announcement, but it will be for a vehicle program 18 to 24 months thereafter?

Yes, I think you've pegged it exactly. These are major investments in the long term. The trend that I was talking about of moving to direct injection is because we're seeing significant pressure around the world on higher fuel economy. Some, you can call that carbon limits, you can call it fuel economy standards, but there's no doubt that we're going to see higher performance engines in the automotive sector everywhere. And pretty much everybody we talk to is going to direct injection over the next 2 to 5 years, I would think.

So yes, these are not overnight substitutions of components. These are long lead time product development programs.

Okay, great. Thank you.

Matt Gowing, Mackie Research Capital.

Wondering if you could give us a little bit of color on the Weichai development program. Just wondering how many products you're in development with on various products for the marketplace? Is it just one heavy-duty application there?

Right now, it's one. We haven't specified what. I think, obviously, we've given you a pretty strong hint that it's going to be high-end, high-performance truck engines as the focus. Weichai's got five engine products in the market already, and they're going to be continuously updated. There is R&D going on in this market because China does change very quickly.

Our focus is to launch by far the highest performance engine in China. That is going to be the first of the direct injection technology engines. Obviously, we'd like to expand that. Once we've done the first base engine, the fuel system is going to be adapted to other engines. But right now, the plan and the commitment is to do one engine that will target high performance.

Great, thanks. So looking over to Juniper, just wondering now if your EPA certification as well as your carb emission compliance, wondering how the sales are ramping for your 2.4 liter? I don't think you quantified the number of units delivered to Clark in the quarter. Wondering if you could talk about how the deliveries ramp going out into future quarters.

Yes, it's really hard. I'm looking at Bill to jump in any time now. It's really hard because the business in a Tier 1 arrangement with someone like Clark is pretty custom, and you can't really count engines or units. It really depends on revenue recognition on exactly what's going on there. So we just don't give those numbers, because it's really difficult to draw many conclusions.

I think that there is lots of opportunity, let's say. We think the base engine from Hyundai has proven itself out in the market. It's performing very well with Clark. We'd like to expand to other OEMs. We'd like to expand to other opportunities. And that's why we invested in certification. So I think you should presume from that that we have big ambitions.

Great. And just one last group of questions here surrounding your negotiations with OEM partners on technology development agreements. Wondering if you could give us some color on how many OEM customers you're in discussions with, what you think the testing lead time is like with those OEM customers, and roughly when we could hear about a new technology development agreement being reached?

Yes, unfortunately, we're muted, because Darren just hit me. But I guess that would fall under the very bad forward-looking statements. But no, we're talking to the usual list. It's no secret. And we've published this before. If you look at the list of major vendors in heavy-duty and medium-duty diesel engines, if you look at off-road and you look at light-duty and look at the top 10 OEMs, that's our customer prospect list. We're talking to pretty much everybody on those lists.

I think that the mood has been pretty good over the last year in the sense of the future of natural gas is going to be important to everyone. I think you should presume that we have delivered various levels of technology and market information to those guys. Some guys are early on, and some guys are late cycle. When we get a decision, you'll know about it. And really, before then, it is still speculative, because it really depends on these very large corporations making a very significant commitment to their product line. So I think, hopefully, you've drawn the conclusion from our remarks that there's lots of action and that we think people are favorably disposed to natural gas, and it's up to us now to push some deals across the line.

Great. Thanks for the color.

This concludes the time we have for the question-and-answer session. I will turn the conference back to Darren Seed.

Thank you very much, everyone, and we look forward to seeing you on the next conference call for the year ended March 31, expected some time approximately in early June. Thank you.

Ladies and gentlemen, this concludes the conference. You may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.