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Hydrogenics Corporation (NASDAQ:HYGS)

Q4 2012 Earnings Conference Call

March 8, 2013 10:00 ET

Executives

Daryl Wilson - President and Chief Executive Officer

Bob Motz - Chief Financial Officer

Analysts

Phillip Shen - Roth Capital

George Santana - Ascendiant

John-Marc Bunce - Nomura

Colin Rusch - Northland Capital Markets

Jeff Osborne - Stifel Nicolaus

Mac Whale - Cormark Securities

Operator

Good day, ladies and gentlemen, and welcome to the Hydrogenics’ 2012 Fourth Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.

I would now like to turn the conference over to your host for today, Mr. Bob Motz. Sir, you may begin.

Bob Motz

Thank you, Mary and hello. Welcome to the Hydrogenics fourth quarter 2012 conference call. With me today is Daryl Wilson, President and Chief Executive Officer.

The company’s fourth quarter press release and PowerPoint presentation are available on our website under the Investor page at www.hydrogenics.com. We also uploaded the annual report this morning on both SEDAR and EDGAR and would refer you to those sites for our financial disclosures.

As indicated in our press release this morning, all financial references are in U.S. dollars unless otherwise indicated. I would like to now provide you with a brief Safe Harbor statement. This call and the accompanying presentation may contain statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk and uncertainty.

Actual results could differ materially because of factors discussed in today’s press release in the MD&A section of our interim and most recent annual financial statements or in other reports or filings with the Securities and Exchange Commission and applicable Canadian securities regulators. We do not undertake any duty to update any forward-looking statements.

With that, I’ll turn the call over to Daryl Wilson. Please go ahead, Daryl.

Daryl Wilson

Thank you, Bob. Good morning and thanks everyone for joining Hydrogenics for our 2012 fourth quarter conference call. Today, I will review our operations and outlook and after which Bob will discuss our financial results in some detail. Please refer to the presentation on our website for today’s discussion.

Beginning with slide three, let me review the highlights for 2012 truly a turning point in our history. The company reported total revenue of $31.8 million, up 33% over 2011 highlighting strength across our entire portfolio. As I will review more in a moment, we are seeing an increasing demand for energy storage solutions, telecom backup applications, and industrial electrolysers. We booked orders in aggregate of close to $63 million in 2012 and ended the year with a backlog of confirmed orders at $60 million, a record level. We also installed on schedule a 2-megawatt energy storage system for E.ON in December and started delivery that same month of our first fuel cell power modules for CommScope under the commercial order which was announced December 5, 2012. And our balance sheet is strong. At year end, we had $16.8 million of cash and equivalents and we firmly believe that the company is on track to reach profitability in the coming quarters, as I will review further in a minute.

Now, turning to slide four let me give just a high-level overview of the markets we serve, which is particularly important for some of our newer investors. First, Hydrogenics provides electrolyser-based energy storage systems in a global segment estimated to be worth between $10 billion and $15 billion. This is a recent market, but one that’s growing very rapidly. And Hydrogenics is playing a leading part in promoting Hydrogenics as a clean and cost effective way of storing energy. Our technology affected to none. We have strong partners such as Enbridge, which owns 14% of Hydrogenics and operates into those largest natural gas pipelines. And we have already demonstrated our systems to customers such as EON, one of the largest utilities in the world.

Our pipeline in the Energy Storage segment remained strong and there are numerous projects currently in the bid stage, which we expect to be awarded in 2013. We have previously highlighted the German market. However, we are now seeing other markets in Europe, Japan, and North America showing interest as well.

In our Power Systems segment, we supply fuel cell based power solutions to several markets, primarily in the backup power and transportation sectors. Last year, we saw two significant developments be awarded a $90 million multi-year contract for fuel cell based power modules to be used in a propulsion application. And our first contract for backup power system is from CommScope, a leading telecom equipment provider who owns 28% of Hydrogenics. The power systems market we serve is estimated to be worth $2 billion to $3 billion and our backlog here was $41 million at year end. And lastly, our industrial OnSite Hydrogen Generation business provides electrolysers for a number of applications and also supplies a growing number of fueling stations in Germany and elsewhere. Revenue grew 35% within this segment during 2012 and we see continued robust demand going forward. Our backlog at year end was approximately $19 million.

Turning to slide five, let me review some of the mechanics behind hydrogen, which makes us such a powerful solution for energy storage, as depicted here, a growing number of nations are turning to clean renewable energy, such as wind and solar power for the generation needs. However, as we said in the past, such sources of energy can lead to large variances in the amount of electricity produced and supplied to the grid based on environmental factors and seasonal conditions. Without a way to capture excess energy when it’s produced, this forces utilities to give away energy for free or even at negative pricing. This is a very destructive on economical approach and which is why energy storage is one of the very compelling solutions to the problem.

Electrolyser-based systems such as ours can efficiently take excess energy converted into hydrogen, which then can be stored easily in the country’s existing natural gas system or kept separate for powering hydrogen based fuel cell application such as buses, trucks, and cars. Hydrogen within the natural gas network can be stored in huge quantities for long periods of time and burned along with existing gas for heat, water or power generation. There are many options for hydrogen once it’s being created or stored from excess energy.

Slide six shows more precisely what I am talking about when I say energy generation is often not in sink with the needs of the community. Looking at Ontario, where we are based in Canada energy usage in 2011, we see the power generated from nuclear plants, wind and hydro sources is clearly not well-matched to daily energy use. This causes waste and destructions on the grid and the utility must dispatch the energy elsewhere during periods of excess, essentially asking other areas to the south of us in the U.S. to take the power off our hands, obviously not an attractive use of resources.

Slide seven sums things up more succinctly. Here you can see that nearly 50% of the time there is excess power in Ontario, this is what’s been driving the growth and interest in energy storage. The current situation is not only wasteful and inefficient, it’s not sustainable. In December, we announced the award of a major energy storage demonstration project in Belgium called Don Quichote. This will link integrated hydrogen storage system to a refueling facility that Don Quichote project seeks increased renewable based electricity, grid balancing, sustainable mobility, and the use of clean hydrogen. It will leverage our technology and promotes fuel cell based transportation at the same time. These are the types of opportunities that we are now seeing on a regular basis.

Turning to slide eight, I would like to drive home the value of power-to-gas energy storage technology when compared to a wind farm could cost roughly the same to build in this case a $125 million. The level of investment will be sufficient to construct a wind facility generating 55 megawatts of electricity, which had a 29% capacity factor would be approximately 140,000 megawatt hours of clean electric power. At commercial production of electrolysers, the same $125 million investment would be enough to build a 100 megawatt power-to-gas project absorbing approximately a third of a million of megawatt hours of surplus electricity, which when turned into hydrogen utilized this part of an existing natural gas infrastructure could also provide a 140,000 megawatt hours of clean electricity. So, as we build out sustainable renewable energy infrastructure, it becomes clear that wind and solar energy need to be complemented by effective storage resources, so that electrical grids can operate in balance. We are not making the case here against wind energy, but rather suggesting that wind and storage resources must move together and trying to show they are complementary.

In addition on slide nine, you can see that a 100 megawatt power-to-gas project would also deliver other benefits, which would significantly improve the flexibility of the grid using alternative energy resources. It would be a dynamic resource to load follow renewable energy, absorb surplus generation, relieve congestion on the grid, and provide for energy storage of nearly unlimited duration and will allow this renewable natural gas to be used to provide dispatchable power when and where it’s needed. In essence, it would facilitate a more efficient power production and grid utilization.

As shown on slide 10, it’s estimated that total system-wide energy benefit of a 100 megawatt power-to-gas facility is approximately $25 million per year in this particular case. This includes the value of replacing gas-fired generators to load follow renewables that turn at times to surplus power, a reduction in congestion payments, incremental value from the power which will be otherwise wasted, now purchased by the power-to-gas developer. The value of the hydrogen or renewable gas, which is produced and the awarded cost is not having to pay for wind power thereby deferring a 55 megawatt wind farm. This value proposition is easy for grid operators and utilities to understand, which is precisely why we have been seeing growing demand for hydrogen-based energy storage today.

Slide 11 is the photo of our 2 megawatt E.ON facility that we just delivered in Falkenhagen, Germany. You can see the snow on the ground in December there. Again it’s just the beginning of what we see as numerous similar facilities in Europe and elsewhere growing in size up to 10 megawatts and larger. We firmly believe that energy storage is on the cost of mass acceptance and implementation. We are very proud of this instillation. This project generated lower than the normal return for our company as evidenced by our gross margins in this quarter.

We occasionally use very competitive pricing when introducing new technology that requires a lead adopter or a lighthouse project. Once identified, Hydrogenics will assist lead adopters in such markets by strategically lowering the hurdle rate to use our technology and thereby accelerating the demonstration of the pilot phase of the application. We do this from time-to-time targeting new and attractive markets be they geographic based or application based, and the adoption by a lead company that will materially move the market in our favor.

This is not usually material to our quarterly results. However, in the case of the larger projects, we have seen some fluctuation in margin volatility on this quarter. From a timing perspective, the fourth quarter of 2012 also had the confluence of receding of a new project as well the impact of material cost increases on our OnSite Generation business. We have mentioned that previously in Q3 and communicated that we expected this problem to be overcome with cost reduction initiatives. And in fact as we look forward to Q1, we foresee a much better picture from the margins in this particular business. So, the impact to our business is temporary and we do have a disciplined approach for moving ahead. We have price points and cost reductions that will result in healthy business margins as the market develops and matures.

Now turning to our Power Systems business on slide 12, I would like to give a brief update on many developments here. As I mentioned earlier in 2012, we booked a major $90 million multi-year order for fuel cell based propulsion systems and we are awarded our first contract from CommScope fuel cell backup power systems used by a leading North American cell phone operator. We began production on the CommScope order and expect to complete shipping of all the associated systems within the first quarter of this year.

Doing so, we have accomplished a great deal demonstrating that we have the resources to successfully build and ship mass quantities of our fuel cell power systems and work with our supplier base to ensure a seamless production and delivery. We have additional field deployments currently in process and expect more orders from CommScope in the future. With regard to our large propulsion order, we are now fully engaged in delivering this contract and expect to see revenues posted in the first quarter of 2013.

Slide 13 shows how we see the company as it stands today. We are at an inflection point. In the middle of the chart with our rapidly expanding energy storage and power systems operations coming to represent a much larger value share within Hydrogenics’ business. Based on everything that I’ve discussed in our current backlog, we will soon be a company with roughly three equal proportions on solid platforms energy storage, power systems, and hydrogen generation. We remain on track to become profitable at around $50 million of revenue run rate and believe that 30% gross margins are clearly achievable as we reach that revenue level. We have the facilities in place to support our rapid growth and we expect stronger margins and economies of scale as we achieve operating level at higher output levels.

Before turning the call over to Bob, let me just wrap up with slide 14. Hydrogenics had a great year in terms of revenue racking up $32 million in sales and stands in an excellent position with regard to total backlog at some $60 million. Our leading-edge technology is being accepted and sought after by an expanding number of customers in Europe, North America and elsewhere around the globe. They understand the economic benefits of hydrogen. At the same time, our balance sheet is strong with $16.8 million in cash and we clearly see a path to profitability in the quarters to come. While we don’t yet give guidance due to the some of the lumpy nature of our business, our backlog and current funnel of good opportunities would indicate net revenues should grow this year somewhat in excess of 30% and gross margins will improve.

Both the economic environments and interest in energy storage are boosting demand for our products and services and we see the trend accelerating in the future given the many factors that I have discussed here today. So, again I would like to thank our investors for their patience and our employees for their hard work and dedication. Hydrogenics has come a long way, but I still think the best is yet to come.

I will turn it over now to Bob, our Chief Financial Officer who will overview our financial results in detail. Bob?

Bob Motz

Thanks Daryl. Good morning everyone. So, to briefly summarize the financial results for the fourth quarter and 12 months ended December 31, 2012. Turning to slide 15 and 16 we posted revenue of $9.9 million and $31.8 million for the fourth quarter and year ended December 31, 2012 respectively, which represented increases of 30% and 33% respectively over the prior year period. The strong top line improvement was fueled by higher demand within our industrial end markets along with growth in energy storage partially offset by weakening of the euro relative to the U.S. dollar.

Our gross profit shown on slide 17 was 13.2% for the fourth quarter, a decrease of 13.9 percentage points versus 2011 reflecting the combination of first strategic pricing on key energy storage sale in the quarter as Daryl has previously indicated and two ongoing supplier cost pressures. For the full year on slide 18, the company’s gross margin was 16.4%, a decrease of 6.6 percentage points primarily reflecting the margin issues noticed for the fourth quarter. Cost reduction efforts are continuing through the supply chain management and product design innovation in order to restore margins to target levels and then grow them going forward.

Turning to slide 19, Hydrogenics cash operating costs were $3.5 million for the quarter versus $3.2 million in the fourth quarter of 2011. This slight increase actually reflected $1.3 million in higher R&D expenditures largely offset by $1 million decrease in selling, general and administrative expenses. In both cases the variances are timing related as the fourth quarter of 2011 had a significant amount of externally funded R&D, our higher SG&A costs due to certain expenses that were higher than the normal quarterly run rate.

For the full year on slide 20, cash operating costs were $15.3 million versus $12.3 million in 2011 where costs fall as the percentage of sales falling 4%. The year-over-year change reflects planned increases in research and development efforts focused on next generation energy storage product development, additional marketing costs and increased staffing and related compensation costs.

Turning to slide 21 and 22, our adjusted EBITDA loss was $2.6 million for the fourth quarter and $11.2 million for the full fiscal year reflecting the met revenue margins and expenses previously discussed. Slide 23 and 24 shows the company’s order backlog as of December 31, 2012, which was $60.0 million, up nearly 106% year-over-year. During the fourth quarter we received $8.5 million in new orders.

On slide 25 our cash reserves as of December 31, 2012 were $16.8 million, an increase of $7.5 million as compared to the third quarter. This increase reflects $2.4 million of cash used in operations partially offset by a $9.9 million increase in non-cash working capital reflecting to previously announced $10 million payment from a customer in the quarter, $0.3 million of proceeds from loan advances, $0.3 million of proceeds from exercise warrants and $0.6 million in operating line and loan repayments. There are additional reconciliations for our investors on the remaining slides of the presentation.

With that, we will now turn over the call to our operator for questions. Please go ahead operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Phillip Shen from Roth Capital. Your line is open.

Phillip Shen - Roth Capital

Good morning. Thank you for taking my questions.

Daryl Wilson

Good morning Phil, good to hear your voice.

Phillip Shen - Roth Capital

So, in terms of the outlook I want to confirm I think the guidance that you were referring to in your prepared remarks, do you expect revenues to increased by 30% in 2013 is that right?

Daryl Wilson

Yeah we’ve said for a while now when you look at the backlog and the pipeline of prospects that we have that we can sustain revenue growth at 30% or better and we’re fairly confident about that.

Phillip Shen - Roth Capital

Great. And then on I know margins were impacted in the 2 megawatt E.ON shipments and how do you expect margins to trend as we go through 2013?

Daryl Wilson

So, again on that particular job, we looked at the total opportunity with that customer there were certain constraints around funding from the company and government funding the project and we decided that we participate and support the project with E.ON. There is a pending service contract that will support us in our overall realization on the project. But looking forward we have some new features in our mix because we are growing. So, we have the uptake in output from CommScope which is production volume that we have not previously had. We also have revenue starting to move with our large $90 million propulsion order as early as Q1.

So, our feeling, our belief as we look at everything here is very much in the positive direction in terms of margin improvement. We also I mentioned that we have been working on some sourcing issues for our OnSite Generation business and our team over in Belgium has done very good job of overcoming some of the problems we had with Chinese and European suppliers. So, we are looking in improvements. I don’t have all of the numbers of course together for Q1. Yes, but overall I think an improving perspective. And we have also mentioned our target several times that as the business grows we want to hold in on 30% gross margin as the target.

Phillip Shen - Roth Capital

Great, that’s really helpful. Thanks for the color. Getting back to the revenue outlook for 2013, can you give us a sense for what how much of the backlog do you expect to realize over 12 months?

Daryl Wilson

That’s a little bit difficult you’ll recall we took in the $90 million and it’s September and stated $36 million of that was firm to be delivered somewhat over the next couple of years. Just how far we got on that work during 2013 is still unclear this early in the year. So, yeah it’s a little bit hard to call right now because as I say we have these growth factors which are all very positive, but somewhat new for us and the pace is yet to be determined.

Phillip Shen - Roth Capital

Okay and one last one from me here. And then I will jump back in queue. I think you talked about new activity and robust activity in North America as well as Japan for your storage sourcing. Given what’s going on with the CPUC in California mandating SC to procure 50 megawatts of storage. Can you talk to us or tell us about your business development efforts here and how you compete relative to conventional technologies seems like this could be a good opportunity for you?

Daryl Wilson

Absolutely and we are on it. Historically, California start to mediate the impact of renewables by spending a lot on stiffening the grid in fact that amount is $7 billion over the last 10 years. So, it was a very substantial investment. I think to the surprise of Kelso, it has not remedy all of the issues that show up with renewable generation. And so now there is a more sincere interest in moving ahead with energy storage. The state is also moving ahead with regulation and supportive programs for storage a little bit more mature than many of the other places in North America. So, we have had some preliminary discussions with Kelso and utilities in California. We are attracting opportunities there and we hope and expect to the part of whatever happens there. But we will have to follow whatever process the state decides in terms of what mix of technology will support for that 50 megawatt block.

Phillip Shen - Roth Capital

Great, and that’s helpful. Thank you and look forward to speaking with you.

Daryl Wilson

Okay. Thanks Phil.

Operator

Thank you. Our next question comes from George Santana from Ascendiant. Your line is open.

George Santana - Ascendiant

Thank you. Good morning Daryl and Bob. Can you give us an idea of RFP activity particularly in the power-to-gas segment?

Daryl Wilson

Sorry, RFP meaning?

George Santana - Ascendiant

Request for proposal activity, you provided a nice overview last quarter of what was going on in Germany with all the new projects?

Daryl Wilson

Yeah. We are a market leader here and we are tracking quite a large number of opportunities we tend be a little bit quite on what they are until we tend to be a little bit quiet on what they are until we win. I think you can understand that. What I can say is the number of requests are going up, and the size of the projects are going up, because we are working in the utility space, which is often conservative and a little bit slow. It takes time for these things to actually close, but I am very optimistic and very positive about the kind of things that we are seeing. I was in Japan last week and had several discussions about several projects in Europe this week. And again from very promising and positive developments in Europe, it seems that areas, where the renewable generation has moved ahead fairly quickly are now – those areas are now researching and investigating storage as an option. So, we are very active and busy with these and the trend is often the right direction, that’s probably all I am happy to say right now.

George Santana - Ascendiant

Okay. What was the E.ON project that you delivered incorporating alkaline or PEM electrolysers?

Daryl Wilson

E.ON was in a quite a hurry for that project, that also puts some pressure on us. They wanted it delivered by December. They have actually had public news media about this particular project and solution. So, there is a lot of attention on the project. So, we delivered our existing industrial outgoing technology, which we have been putting out for industrial customers for some years. We have previously disclosed that we have a major development underway for PEM technology and we expect some announcements in the near future around the first deployment of megawatt PEM technology. Hydrogenics has had both PEM and alkaline technology electrolysis for quite a number of years. It’s more than 12 years ago. We first started producing PEM electrolysers as well as alkaline electrolysers. We have a very deep understanding about the respective merits and cost profiles of those two technologies. And we think there is an ongoing place for both technologies, but in the large scale size, particularly PEM technology, we think we’ll be a positive position for the future.

George Santana - Ascendiant

Is that something that we could see this year, the first power to gas projects incorporating PEM electrolysers or is it just too early for that?

Daryl Wilson

No, we have been determined to be the leader in terms of deploying projects – size of projects, appropriate technology scale to the utility industry. And yes, I think we’ll be hearing some announcement in the future.

George Santana - Ascendiant

I am wondering what that does from a cost than an ROI perspective for the project?

Daryl Wilson

Each one of these have to be carefully evaluated on its own merits. One of the realities of renewable generation is the cost profile and the value profile varies from region to region. So, it’s hard to make generalizations about any one project. They are also I mentioned before that governments are asking and funding these projects. And so there is various profiles of revenue R&D support, etcetera that come up. So, it’s hard to give a straightforward answer there, but I think the key thing is that this market is absolutely moving. We are leading in the segment and that will be a good positive news flow through this year, because of those things.

George Santana - Ascendiant

Okay. I was just wondering if the – we all understand the E.ON project wanted to be installed very quickly right. So, you take the existing technology you put it there, but I am wondering if as the market switches to more of the PEM electrolyser in that technology, if that’s really a driver for increased sales, because you are now, for example, able to locate these plants in city centers, where the alkaline electrolysers would be too large for an instillation or is the cost better or what or is it no change really is one or the other, it’s the same to you guys?

Daryl Wilson

Yeah, it’s not particularly a change. In fact, we have customers still asking for both solutions of some preference for one over the other, but the main factor that we are looking toward in terms of the large scale PEM technology is to have a platform that can still scale to many multiples of megawatts, and initially 5 to 10 megawatts and even on beyond that. So, the compact nature of the PEM technology makes it very scalable for large size project. George, I see the queues fairly long this morning. So, I am going to have to move on. Thanks.

George Santana - Ascendiant

Right, thank you.

Operator

Thank you. Our next question comes from John-Marc Bunce from Nomura. Your line is open.

John-Marc Bunce - Nomura

Hi, good morning Daryl, good morning Bob. Firstly from me just on the pricing cost pressure on the OnSite Generation business that I am wondering if you can give some more detail that in terms of costs is that sort of temporary supply issues. And then on the pricing issues is that sort of due to a changing competitive landscape, is that new competitors coming under PEM technology or low cost based on manufacturers?

Daryl Wilson

This is entirely a sourcing issue. So, early in my tenure in 2007 along with the team in Belgium, we had an – a very aggressive campaign of costs reduction and the backup, 50% of the costs making of electrolysers product at that time there were a number of suppliers establishing contracts and as those contracts rolled off and those supplier relationships got matured and maybe a little over confident. We suddenly fly a flight of significant price increases which given the pace of the business last year we could not immediately resource and overcome as we’re going back to existing suppliers or resource material, we are looking for significant recovery in that situation going into Q1. So, maybe I would have like to being ahead of this a little faster than we were but I’m pleased with the recovery effort at this point. So, it looks to me like Q4 would be the last of the major impact from the offset.

In terms of pricing competitive situation we have always done well not selling really on price, but more on the future service quality and overall capability. So, we haven’t really seen an upset in the competitive balance against us in the last year, if anything seems to be moving more in favor and some of our competitors had some quality and performance issues in the marketplace and we’re taking jobs from them on that account. So, some of that really 5% increase in revenue last year was certainly taking business away from historical competitors and the pricing profile has overall been attractive, it’s as I say more of a cost initiative we suffered.

John-Marc Bunce - Nomura

And so just in terms of margin so and the fourth quarter was a trough and when would we expect the margins to get back to sort of more normalizes levels is that first quarter or second or third quarter?

Daryl Wilson

I would expect there is a significant recovery in Q1. But as we said we have multiple factors affecting Q1 so we’ve got the onset of new work with CommScope which is first time. We’ve got the build up of activity from $90 million propulsion project. So, there is a number of factors and then we have the recovery in the cost profile from OnSite Generation as well. So once the positive factor is there exactly how it all ends up I don’t have a numbers yet, but its all on the positive direction.

John-Marc Bunce - Nomura

Okay. And then last one from me in the Power Systems business, you guys have one, two really significant orders over the last few months and are there any other orders like that in the pipeline and that you are looking to deliver on them this time of the year?

Daryl Wilson

We always like to have those and frankly one in particular had you asked me about the same question in March of last year I would not put the number I would have turned out. So, we have a number of relationships now where we’re well appreciated and respected. And I expect our overall orders by – would be going up in the future whether we can score another one that’s just higher almost $100 million I’m not sure. But the sales team of course has lots of expectations as we move out.

John-Marc Bunce - Nomura

Okay. Thanks a lot.

Daryl Wilson

Thanks very much John-Marc.

Operator

Thank you. Our next question comes from Colin Rusch from Northland Capital Markets. Your line is open.

Colin Rusch - Northland Capital Markets

Thanks very much. Daryl, can you talk about how your overall expenses are going to scale up with increased sales and your contribution margin that you’re expecting as we go forward?

Daryl Wilson

Yeah, I think from my history I would like to run things lean and our team is I think very much all oriented on that path. So, we said that we believe we can scale this business without appreciable increase in overheads whether if the facility is based we can get a lot out of the facilities, the leased facilities that we have already in terms of administrative staff and support functions we are obviously growing those in proportion to the growth in revenue. So, I think we have said that somewhere in the $12 million to $15 million total cost, that’s where we have been for a bit, and we don’t see scaling that as we move to scale the revenue in the coming years.

Colin Rusch - Northland Capital Markets

Perfect. And then can you talk a little about the micro-grid opportunity, if you are seeing any real material projects that might come to fruition in the next year or two?

Daryl Wilson

Sorry, micro-grid meaning?

Colin Rusch - Northland Capital Markets

Smaller scale kind of contained grids or you guys would be part of an integrated system is either backup power or regulation coupled with the natural gas infrastructure?

Daryl Wilson

Yeah. So, we are calling that energy storage or power-to-gas and certainly there is a lot of activity in many jurisdictions there. There is one variance of that, where you are dealing within island or a remote industrial site type of situation, which is basically an island at greater off-bridge situation. They come up from time-to-time. We certainly have several of that kind of projects in the pipeline, but it’s not the only variance of the energy storage. So, power-to-gas, for fuel for vehicles is happening in Europe. Power-to-gas and then the natural gas pipeline is what the E.ON project was involved with. There is even now project showing up where we are going power-to-gas and then taking a hydrogen and methanizing CO2 as part of a biogas project. So, there is a very interesting mix of some applications here. And I think that shows the maturity and diversity of the solution, which is I think a very positive thing.

Colin Rusch - Northland Capital Markets

Okay. And one final one for me, we are seeing supply chain maturity as it were or our investments happening from governments in Japan and Europe. Could you talk a little bit about what you are expecting over the next 12 months to 36 months in terms of the supplier capacity and cost reductions through support and maturity of the fuel cell industry?

Daryl Wilson

That’s an interesting question. It’s being the unpractical reality for us in the last six months. So, there has been many false starts in the hydrogen and fuel cell industry, and so what happens with suppliers over time as they lapse into a disbelief and say here they come again with fairly large numbers. And last year we had to say no, no we are not kidding, this is real. And so we had suppliers kind of pushed to their limits and working extra hours to deliver for us. We have also had a different kind of discussion with suppliers as the reality of using patent, especially in energy storage, where the market has shown itself, the price points are showing themselves and we are putting it altogether and saying look, if you want to do this with us, then this is where the pricing needs to be. So, the power in the supply chain has shifted a little bit.

And I am also happy to say that more than ever before, we had a nice diversity in our supply base, where we can say, listen, it’s not just you guys if you are not willing to work with us in this, then we have got two or three places to go. So, yeah, I see a supply, maturing the supply chain, and although I have said it was stretched at points last year, and I think going to this year not stretched to a critical level, where it will impede our growth. I think it’s more a matter of year where it’s maturing, where they have opportunities there and the suppliers are rising to the challenge and enjoying the benefits of it, but on a realistic basis to deal with what price points the market is offering us. So, yeah, a good process, but it’s certainly a reality for us.

Colin Rusch - Northland Capital Markets

Thank you so much.

Daryl Wilson

Thanks, Colin.

Operator

Thank you. Our next question comes from Orin Hirschman from AIG Investment Partners. Your line is open.

Unidentified Analyst

Hi, this is (indiscernible) for Orin. Congratulations on the transformational year. Then a lot of moving pieces here, I want to focus particularly to the CommScope order.

Daryl Wilson

Yeah.

Unidentified Analyst

Did you recognize any revenue from that order to the December quarter?

Daryl Wilson

Bob, I am going to need your help there. I think if we did it was minimal.

Bob Motz

No, we didn’t recognize any revenue on that in the quarter.

Unidentified Analyst

So, this all go into backlogs?

Bob Motz

That’s correct.

Unidentified Analyst

Okay. So, it means higher order would be part of your orders there?

Bob Motz

Correct.

Unidentified Analyst

Okay. And then you expect that whole order to really ship in Q1?

Daryl Wilson

That’s being the target and our production focus has been very good. The team has been very busy and we have managed to stay on track. So, we are trying to get it all out for Q1. I have been traveling and I haven’t been on the shop for a couple of weeks. But all the reports from home are that things are moving along well for Q1.

Unidentified Analyst

And that entire order is for a single end customer?

Daryl Wilson

It’s for a single telco OEM, so we ship our products in Mexico, it’s integrated into CommScope’s overall cabinet in Mexico and then shipped to one of their major telco customers. This particular deployment is happening in three cities as well as one customer in three cities.

Unidentified Analyst

Okay, can you talk about the total opportunity that they will just this telco customer and then talk about what we can think about in terms of follow-on order?

Daryl Wilson

So, for us this is being kind of the startup order, we are very appreciative. But in the last 18 months, we are seeing multiple requests from various telcos into the thousands of units. So, it seems that after 5 or 6 years of target picking and testing of this particular solution as an alternative to batteries and diesel gensets, the telcos are actually ready to do larger scale deployment. After this point in North America there is probably 1,200 to 1,500 units totally deployed. But we are seeing single orders in that order of magnitude coming for request or proposal in discussion. Now at this point, none of those have closed, but notionally they have been discussed and our hope is over the next 18 months that we will start seeing appreciable orders in the segment.

Unidentified Analyst

Okay, I know I’d say we talked about CommScope, but now I’ll move out to E.ON that you delivered the plant, now you are really working on managing it day-to-day, how has that been going?

Daryl Wilson

So, the delivery target was December, we made it December 21st. There is some site commissioning work and startup work that has been underway in Q1 and I don’t have any data yet to report financial operation. It is actually the business model operation that has a particular interest to E.ON. So, they are confident that our electrolysis technology will work. They know we deliver that same stuff all over the world for industrial customers, we are 7/24 operation. But they are interested to say okay when we are trading electricity dynamically and we are trading gas dynamically and we are providing some sort of a stable stability services then they needed to actually sort of testing that in terms of the actual operation for the business model.

Unidentified Analyst

So, are we going to – in terms of follow-on from them will be we have to wait until they can really see and realize how the plant works for them?

Daryl Wilson

Yes, in fact, we will.

Unidentified Analyst

Okay and so when do you think where they can really have some data possible?

Daryl Wilson

Probably in six months, so it’s not a long-term activity, it’s something that can happen fairly quickly.

Unidentified Analyst

Okay and then just lastly you talked about in the coming quarters getting to profitability, do you think we can get being profitability?

Daryl Wilson

As you can see if you watch what we are doing and what the overall business mix we are attracting in a number of different markets and with the exception of the industrial generation, gas generation market the – that one is mature, the others are emerging, so the total dollar values of contractors that are certainly moving us in right direction, but we are just a little hesitant to say exactly when it’s going to happen because two of the three markets are emergent.

Unidentified Analyst

Okay. And then any update in one week and I will find out more information about the very large propulsion order?

Daryl Wilson

No unfortunately I can’t disclose more about that just now.

Unidentified Analyst

Any idea of when we can find out more?

Daryl Wilson

No, that’s entirely in the hands of the customer.

Unidentified Analyst

Okay, thank you very much.

Operator

Thank you. Our next question comes from Jeff Osborne from Stifel Nicolaus. Your line is open.

Jeff Osborne - Stifel Nicolaus

Hey, good morning, Daryl and Bob. Just one quick question most of them answered. Could you just touch on the financing issues that you mentioned that E.ON had with the project and the related pricing pressure? Then as that future projects play out assuming there is some successful data that comes out of this one, how do we think about the price points for future projects, and more importantly, the availability of the capital to funding?

Daryl Wilson

Right. So, we have had some very intensive discussions with multiple customers as to where the price points need to be. Naturally, when technology starts to scale and commercialize, there is expectation that prices will go down to a certain point. And so we have looked at forward projections on our costs and the steel merits that are involved in the technology. And we feel that the whole story is very much aligned, and we can achieve the targets that are set out leaving ourselves positive margins and enabling the business model for our customers. There will be some fluctuation in the beginning in that whole story, but there is both the mixture of innovation and scale up supply chain volume etcetera that plays into keeping up some positive margins.

Jeff Osborne - Stifel Nicolaus

Is it right to think about it that the pricing would stay consistent with where it is now, but the movement to PEM is more the critical factor in terms of the margin?

Daryl Wilson

No, we spend very well on reduction in cost and PEM as well. Folks, I have a little bit of a strange situation, I am attending a clean-tech conference, and I may just be about to receive some interesting good news. So, I may have to leave the call Bob. I am sorry those who remain with questions, you are welcomed to perhaps get Bob to give your answers.

Jeff Osborne - Stifel Nicolaus

No problem. I am all said. Thanks good luck.

Daryl Wilson

Okay, thanks.

Operator

Thank you. Our next question comes from Mac Whale from Cormark Securities. Your line is open.

Mac Whale - Cormark Securities

Hi, most of my questions have been answered. Just I wanted to go back to the E.ON project, and I was just wondering in terms of the pricing that they got on that, what can you share with us some sort of IRR that they are expecting to get from that project?

Bob Motz

Yeah, hi, Mac. Actually, unfortunately that’s not something that is public domain and I’d be willing to share at this point in time.

Mac Whale - Cormark Securities

But in terms of setting the pricing you did have, was that part of this discussion in terms of getting the pricing to where they wanted it?

Daryl Wilson

Yeah, I think that was an element in it. The bigger issue was that there was – there had to be cooperation between ourselves and E.ON in the sense that this was in essence a lighthouse project. We needed to demonstrate in the European space that this is a technology that really will prove itself. And I think they were agreeable to that. And in fact the rush to bring it to market really drove us to bring the alkaline solution and my sense is that as the commissioning is completed and that they start to enter into the commercial electrolysis that they will see the value proposition very quickly, and then ultimately other parties growing in that market as well.

Mac Whale - Cormark Securities

So, you mean that if your discussions on IRR or part of it does not argue and there is no chance you are getting higher pricing?

Daryl Wilson

No, I don’t believe. A lot of factors go into the energy storage decision beyond just the cost of the asset. When you look at the energy storage model there, a provider like E.ON would say okay, there is various revenue streams that are built into that, there is the revenue stream from the electricity services operator for balancing the grid. There is the revenue stream from the gas company. There is a number of things that have to be modeled and ultimately that entered into be equation. So, from our perspective, the IRR wasn’t as big of an issue as it was demonstrating the value of the technology. And then ultimately, looking at the technology roadmap to see how we could get up in size and scale and also the movement from alkaline to PEM.

Mac Whale - Cormark Securities

Okay. And sort of just lastly following up on that, was there an element of the pricing, the fact that you are under cap delivery would argue that you could should be able to increase your pricing based on that, because they are pushing for a bunch of reasons that that drives you did – do you think you would normally do. So, was there an element of positive pricing from your point of view at all alright, were you able to argue for that?

Bob Motz

No, I’m not in the sense that – I think if you’re looking at 2 megawatt in isolation you might say yeah that’s correct. But ultimately you are looking at those were the demonstration projects to look at much bigger projects down the road, so 5 megawatt, 10 megawatt, etcetera. And I think the ultimate driver is going be what’s your cost per megawatt. And as the project get larger to costs should comedown. So, at the 2 megawatt level I would say probably your answer is yes, but as you move on and you’ll look at this as really what it should be as a lighthouse project for much larger scale projects down the road. Then, yeah, I think the drivers got to be how you are referring that cost per megawatt down.

Mac Whale - Cormark Securities

Okay and lastly when you are talking about profitability and sort of projections what you need to seen in terms of revenue or margin are you referring to EPS?

Daryl Wilson

We really haven’t looked at it from an EPS perspective. We have sort of looked at it just based on borderline EBITDA.

Mac Whale - Cormark Securities

On sort – with the way you adjusted for I guess for all year sort of cash expected?

Daryl Wilson

Correct, yeah right now the focus on the company’s cash operating costs.

Mac Whale - Cormark Securities

Yeah, okay. That’s all I have. Thanks.

Daryl Wilson

Thanks Mac.

Operator

Thank you. I am showing no further questions and I would like to turn the conference back to Mr. Bob Motz for closing remarks.

Bob Motz

Well, thank you everybody. And this concludes the call and we look forward to speaking to you all again when we announce our Q1 results in early May of this year. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does concludes the call and you may disconnect at this time.

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