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Hydrogenics Corp (NASDAQ:HYGS)

Annual Shareholder Meeting

May 8, 2013 10:00 AM ET

Executives

Douglas Alexander - Chairman

Daryl Wilson - President and CEO

Analyst

Operator

Good day ladies and gentlemen. And welcome to the Hydrogenics’ Annual Meeting for 2012 Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions). As a reminder, toady’s conference is being recorded.

I would now like to turn the conference over to your host for today, Mr. Douglas Alexander, Chairman of the Board. Sir, you may begin.

Douglas Alexander

Thank you very much, operator. Good morning ladies and gentlemen, both those joining us in the room here in Mississauga and also everybody joining us online. I’d like to extend a very warm welcome to all of you to our 2012 Annual General Meeting of shareholders of Hydrogenics. My name is Doug Alexander. I’m the Chairman of the Board of Directors of Hydrogenics, and I’d like to chair off today’s meeting.

Before I call the meeting to order, I’d like to introduce Mr. Daryl Wilson, our President and Chief Executive Officer, and to his left is Bob Motz. Bob is our Chief Financial Officer and the Corporate Secretary of Hydrogenics. It’s also my pleasure to introduce the other directors who are standing for re-election today and are identified in the management part two circular. Joe Cargnelli. Joe is one of our founders and our Chief Technology Officer; Michael Cardiff. Mike chairs our Human Resources and Corporate Governance Committee and is a member of the Audit Committee. Harry Gnacke; Harry is a member of our Human Resources and Corporate Governance Committee. He’s a nominee of General Motors Corporation and is standing for re-election. Norm Seagram. Norm is our past chair, Director, Chair of our Audit Committee and a member of our Human Resources and Corporate Governance Committee. And also, in attendance today is our Board Observer, Mr. Jim Bowen, who represents CommScope.

Thank you gentlemen.

Now, to formally open this meeting, it is my pleasure to welcome all of the shareholders, members of the Board, officers of the company, advisors and other guests who are present today. Please note that a recorded version of the meeting will be available on Hydrogenics’ website after the meeting.

On behalf of the Board, I wish to express thanks to all shareholders who have submitted their proxies in advance. Only shareholders or their proxies are entitled to vote and take part in this meeting. And to make the best use of our time, certain shareholders have been asked to move and second the proposals that are called for in the notice of meeting. Should you wish to make a comment or ask a question at the appropriate time during the meeting, I would currently ask you to raise your hand and identify yourself. There may be instances when a question or comment is made and where I as Chairman wish to take advice from counsel to the company or otherwise speak to our CEO or Chief Financial Officer. I would ask your indulgence as it will contribute to the orderly running of the meeting.

Notice calling the meeting was delivered to shareholders and to the auditors on April the 17th along with a management proxy circular and the company’s 2012 Annual Report. We have since received a certification of CIBC Mellon Trust Company after this mailing. Should you wish to have one, additional copies of the notice and a proxy circular are also available at the meeting. Accordingly, I will dispense with the reading of the notice and direct a copy of the notice and certificate of mailing be kept with the records of the meeting.

Let me now turn to the formal part of our business. The items of business of the meeting are described in the management proxy circular. There are three items of business to be considered today. First, to receive a company’s consolidated financial statements for the year ended December 31, 2012 and the auditor’s report thereon; second, to elect the directors; and third, to reappoint the company’s auditors and authorize the directors to fix their remuneration. I have been advised that ballots are conducted, the total number of votes attached to common shares represented by a proxy at this meeting which are required to be voted against the motions to be heard is less than 5% of the total votes that may be cast by shareholders on such ballots. Accordingly and proceeding with all items of business to be considered today, I propose to conduct vote by a show of hands unless a shareholder or proxy holder demands a poll or if I otherwise direct the poll.

Once we have dealt with the formal business of the meeting, Daryl Wilson, our President and CEO, will review our company’s accomplishments during the year and the company’s direction for the future. After the presentation, the directors and management will be available following the meeting to answer any additional questions that you might have.

Now, it is time to turn to the formalities of meeting. In accordance with the by-laws of the company, Robert Motz, our Chief Financial Officer and Corporate Secretary will act as Secretary of this meeting. With your consent, I ask the CIBC Mellon Trust Company, the company’s registrar and transfer agent, through its representative Sherita De Vero act as scrutineer for the meeting. The scrutineer has completed their report with respect to the number of shareholders represented in person or by proxy at this meeting. And I have in front of me the scrutineer’s report from attendance and that having reviewed the report, I declare that a quorum is present.

I will ask the secretary to keep the scrutineer’s report with the records of the meeting. I now declare the meeting is readily called and properly constituted for the transaction of business. To get started, I request the secretary to table the minutes of the annual and special meeting held on May 09, 2012 which are available for inspection by any shareholder. I will entertain and motion the minutes to be taken as read and approved.

Unidentified Company Representative

Mr. Chairman I moved the minutes of the annual and special meeting held on May 09, 2012 as we take that, read and approved.

Unidentified Company Representative

Mr. Chairman I second the motion.

Douglas Alexander

Thank you Mr. Frank and Mr. Harvey. Any discussion of the motion? If there is no discussion, we will proceed with the vote on the motion. Those of you in favor, please raise your hand. And the opposed? The motion carries.

Next is a presentation of the audited financial statements. The Board of Directors has approved the 2012 annual financial statements and auditor’s report and I now place them before the meeting for consideration. Are there any questions relating to the annual financial statements of the audited report? Seeing none, we will now proceed to the election of directors. It is proposed by our Board that seven directors are up for the coming year. All of the nominees proposed re-election, have been introduced to you earlier and their biographies are included in the management to proxy circular. And there is one exception to that, Mr. Don Lowry, our Director, he’s unable to be here today but his biography is included in the proxy circular. I now declare the meeting open for nominations.

Unidentified Company Representative

Mr. Chairman I nominated Doug Alexander, Michael Cardiff, Joseph Cargnelli, Harry Gnacke, Donald Lawry and (inaudible) as directors of the company, to hold offices until the next annual meeting of shareholders, or till their successors are duly elected or appointed.

Unidentified Company Representative

Mr. Chairman, I second the motion.

Douglas Alexander

Thank you, gentlemen. Are there any further nominations? As there are no further nominations, I declare nominations closed. Mr. Frank?

Unidentified Company Representative

Mr. Chairman, I moved up the seven persons nominated for election as directors to be elected.

Unidentified Company Representative

Mr. Chairman, I second the motion.

Douglas Alexander

Thank you. Any discussion on the motion? If there is no discussion, we will proceed with the vote in the motion. All those in favor, please raise your hand. Any opposed? Motion carries.

Next, the appointment of auditors, and the authorization of the Audit Committee of the Board to fix their remuneration. I will entertain a motion in this regard.

Unidentified Company Representative

Mr. Chairman, I moved up PricewaterhouseCoopers LLP to be reappointed as auditors of the company, hold office until the next annual meeting of shareholders or till their successors are appointed and that Audit Committee of the Board of Directors (inaudible).

Unidentified Company Representative

Mr. Chairman, I second the motion.

Douglas Alexander

Thank you gentlemen. Any discussion of the motion? You’ve heard the motion. I will now ask for a vote. All in favor? Any opposed? I declare that motion carries. Are there any other business to come before the following part of our annual meeting? If there is no further business to be brought before the meeting, I will entertain the motion for the formal termination of this meeting.

Unidentified Company Representative

Mr. Chairman, I move that the meeting terminate.

Unidentified Company Representative

Mr. Chairman, I second the motion.

Douglas Alexander

Thank you. You’ve heard the motion. I'll now ask for a vote on the motion. All in favor? Any opposed? Thank you. The motion carries.

Now, ladies and gentlemen, that terminates the formal part of the meeting. And as I said recently, now let’s move to the interesting part of the meeting, and it’s my pleasure to turn the podium over to our President and Chief Executive Officer, Daryl Wilson who will provide some comments on the progress that we’ve made. Thank you.

Daryl Wilson

Thank you, Doug, and good morning ladies and gentlemen. Thanks for attending here in person, and thanks to those who’re on the call for joining us this morning. I’d like to make a special note, as we often do, Mr. Sandy Stuart has joined us this morning, founder of Stuart Energy. It’s always good to see you here at the meeting Sandy. Thank you.

So, briefly, I’m going to go over some highlights from 2012 and look forward into the current year. This presentation is preceded by our Safe Harbor Statement of course as we look forward into future. Here is three words that come to me as I think about the last years, not just 2012 but the ones that came before; persistence, patience and hard work. Now, those who are more senior in our gathering this morning will know that any good and worthwhile thing always takes persistence, patience and hard work. But, eventually these things pay off and it happens in 2012 we finally saw the results of our persistence as we many years in the past, wondered, what would ever come of the hydrogen industry and patience to wait for those good things to come to us and the hard work to be available and realize the full value of this company and its great promise. So, last year, our revenue increased to $31.8 million, a 33% increase and we have shared with our investors that we do anticipate strong growth in the years to come at some rate and approximately 30% or better compound annual growth.

Our backlog increased to $60 million, an all-time record. We were able to sign on two very prestigious, world-class OEM partners, Enbridge and E.ON, with Enbridge taking investments in the company and taking an observer’s seat on our Board of Directors in April of last year. And E.ON now booking two orders with us for energy storage in Germany. As well in September, we announced an order for $90 million, an all-time record for the company with a major OEM partner in September. Then in December we finished off the year with a bang with the first commercial orders with CommScope for the telecommunications application on fuel cells. And that order went into production in January of this year. And throughout the year, through many, many announcements and a lot of hard work, we distinguished ourselves as a leading company in the world for the powered gas application for hydrogen energy storage. This is an image that we’ve shared with investors around the world over the last number of months, as we paint the picture of our growth story.

Historically, this company was primarily a hydrogen generation company focused on industrial customers with a relatively small effort in power systems and fuel cell applications, mostly developmental projects. That has dramatically changed in the last 12 months. We are now in the inflection or transition period where the power systems and energy storage components of the business will start to represent a very significant part of our overall portfolio and we have talked about the prospect of reaching 50 million in revenue and profitability at a targeted gross margin of 30%. Later this afternoon, at 1 o’clock, we’ll hold our Q1 conference call and you will see at our Q1 results that we’re well in a way to realizing those targets. Ultimately when we grow up in the near-term we expect these three components of the business to represent about a third each. But it’s clear from the size of the markets that the energy storage business has by far the greatest potential to carry us to a much larger scale company.

On this slide, the slide number five, we picture some of the important applications that we have pursued in recent years. On the top left hand side, the mainstay of the business is historically with hydrogen generation using electrolysis. Over the last five years, we’ve been able to reduce the cost of electrolysis technology by 50% and realized positive attractive gross margins in this business. On the top right hand side, fueling has been an application that has steadily grown and we anticipate more announcements this year in fueling stations around the world to provide the upcoming fuel cell vehicle fleet in many countries, the necessary fuel to keep moving. On the bottom left, the newest part of the family, a member of the family that we’re very proud of, the world’s first and largest megawatt PEM electrolyser. This will become the cornerstone of large multi-megawatt energy storage projects in the near future. And finally, on the bottom right, after a lot of hard work and simplifying and innovating the product, we’ve achieved 85% cost reduction at fuel cell power modules and that’s enabled markets like the telecommunication market for backup power.

On this slide a fairly busy slide but an important note of the differentiated characteristics of the company across these three market areas. Again, through the first row, you can see the largest and most attractive market is the energy storage market, estimated to be $50 billion. We can back that number up in discussions that we’ve had with major customers in Europe where individual customers speak to us about upwards of $6 billion in potential revenue in the application for energy storage. Our market position in each of these segments is very strong. We clearly distinguish ourselves notwithstanding a small size of the company and that’s because we’ve been able to attract the confidence and the partnership of distinguished partners like CommScope and Enbridge and E.ON and others to work along with us, to extend our capability around the world. This is a technology company. In each of these areas, we’ve done the hard work of establishing technology platforms and standardizing them so that we can deliver a differentiated product into the important applications that we targeted as part of our overall strategy.

The most important of these has to do with energy storage. As we naturalize our energy system, and we take advantage of the abundance of natural renewable energy sources, along with it comes some other natural attributes. Seasonality, the amount of wind their solar energy that’s generated from renewable generation fluctuates by season. And so seasonal energy storage is necessary. And renewable energy is a little wild. If you saw the output of wind turbines, you would realize that it varies to the cube of the wind speed and so you get very large, wild fluctuations as another part of a natural energy storage system. And so it’s necessary to complement these natural energy storage systems with the natural resource of storage. And this is where hydrogen energy storage comes into plot.

In December last year, we delivered our largest multi megawatt energy storage systems to the prestigious customer E.ON which is one of the largest utilities in the world. This system has already been deployed on site. It’s now being commissioned by the customer where the surplus electrical energy for wind energy in the Falkenhagen area of Germany will be converted in hydrogen gas and injected into the natural gas pipeline. And this is just the first of two projects now that we have announced with E.ON.

And in total, in Germany, a cluster of 18 hydrogen energy storage projects. As we’ve recently reminded our investors, you are not able to show any country in the world, where there are 18 projects related to any one energy storage technology of any other type. So hydrogen is distinguishing itself in terms of a system to provide very large scale energy storage. But more notably, and something that we’re very proud of, Hydrogenics is being able to capture six of these 18 projects with the largest single market share in the leading jurisdiction for hydrogen energy storage in the world.

Moving on to the next application where we continue to see growth is in telecommunications. This segment is estimated to be about $2 billion in annual value, as cabinets are deployed around the world for the supply of emergency backup power services. We’ve been working with the part of the Carlyle Group; CommScope, a major investor in Hydrogenics over the last numbers of years to develop five products which are now being deployed around the world for this important application. In the history of CommScope, they’ve delivered more than 0.5 million of these (inaudible) so you can see the potential side of this market is very substantial. While we’re displacing diesel and battery generation units which are the current incumbent technology with a system using hydrogen which can deliver more power for longer periods of time and there is a monetary reward for our customers as they deploy this system as an alternative. So we just recently announced the first commercial order in December. And while we have no further orders in hand right now, with CommScope, we do see a number of interesting projects on the horizon.

Unfortunately this next element, our $90 million propulsion order has to remain behind the black curtain and a little bit of a mystery. Our customer has requested that we not disclose the nature of the application and any detail. But, we assure you that it is absolutely real and in our results for Q1, you will see revenue already from this important project. The total value of the order is $90 million and out of that, $26 million is being a firm order commitment from the customer as well we have received $10 million in cash last November for exclusivity in this particular segment, so the work is progressing very well and our team is meeting our targets and commitments to this customer and has now become a very important part of our revenue portfolio for 2013.

And finally, the anchor play in our story historically, the generation of hydrogen using alkaline electrolysis continues to be strong, working at our site in Oevel in Belgium. We work closely with major industrial gas customers like Linde and Air Liquide and this is also the technology that’s been the foundation for our fueling applications and energy storage to date. The process of glass making, steel making and power plant generator cooling continue to pull products into the markets and we have good expectations for this business in 2013.

I highlight again our important partners as we develop the most important application for energy storage. We’ve already announced two projects with E.ON and we’re working very hard with Enbridge to develop projects in North America and anticipate announcements supported by Enbridge in the near future.

So, when it comes to results, wrapping up, it’s important for us to be accountable. It’s now more than 6.5 years that I have been here with the team at Hydrogenics and it’s important to look at our history. You can see initially we did very well on the buildup of revenue and then with the recession a major fall off. Gross margins continuously improved until last year where we had some setbacks and we’ve communicated about those on previous investor calls but with our Q1 results that we’re announcing today, you can see we’re back fully on track with 29% margins and very substantial record quarterly revenue at $12.3 million. So the plan is unfolding as we have hoped and we’re very happy with the results so far this year.

You can see on this next slide, a robust order backlog. Of course we took in a very large order, the firm order commitments from our $90 million propulsion order in September, fairly good support for orders in Q1, and a very good outlook for orders in Q2.

In terms of our loss, this has been our big challenge and our single-minded goal to bring Hydrogenics to the point of being a mature, profitable company. And I think that as we look at this result for Q1, actual loss, you can see that we are getting very close to being on the correct side of the line.

So, wrapping up, as we look forward to our prospects for 2013, these five things are what are on our mind and our focus points. We have a lot of growth prospects, and it’s very important for us to execute and deliver on those growth prospects so that we can satisfy the demand that we’re seeing in the markets. There is ongoing work for market development in energy storage and we’ve been looking at the globe and the various regions of the worlds, where renewable energy penetration and interest is running high and the need for energy storage assets is becoming clear. And we are very active in each one of those areas. Recent press releases will support that. We’re working to seed more telecommunications backup business around the world and we’ve had a lot of sales calls in remote places in the world recently and we see good prospects there.

Talked about margins already, and the good progress in Q1. We’re going to be working very hard through the balance of this year to sustain our margins so that indeed we can realize the foundation for profitability for the company. So I realize this has been a very quick summary of key events over the last year. We will make ourselves available to those in attendance for questions and members of our management team will be happy to give tours of the facility this morning. For those who are on the call, I remind you that we do have an investor call summarizing our Q1 results in detail at 1 o’clock this afternoon and we will be taking questions on that call.

So with that, I’ll turn it back over to our Chairman, Doug Alexander.

Douglas Alexander

Thank you, Daryl. You opened up your presentation talking about perseverance, persistence and hard work. I think it’d only be fair that on behalf of all of the shareholders and the Board of Directors, we express our thanks to you, your management team, and really all of the employees of Hydrogenics here and around the world for what you’ve done in the past year. Your hard work has been rewarded. It’s a very, very exciting time for us. We wish you continued success and we thank you.

Well, ladies and gentlemen, at this time we will end the conference call part of the meeting. But I would ask you in the room here, in Mississauga, to stay with us as we have a couple of presentations we would like to make. To everybody who has participated in the call, thank you very much for being with us this morning.

Operator

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

Question-and-Answer Session

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