Hydrogenics' CEO Discusses Q2 2013 Results - Earnings Call Transcript

| About: Hydrogenics Corporation (HYGS)

Hydrogenics Corporation (NASDAQ:HYGS)

Q2 2013 Earnings Conference Call

August 1, 2013 10:00 AM ET


Robert Motz – Chief Financial Officer

Daryl Wilson – President and Chief Executive Officer


Philip Shen – Roth Capital Partners, LLC

Colin Rush – Northland Capital

Amit Dayal – The Benchmark Co. LLC

Aaron Martin – AIGH Investment Partners LLC


Good day, ladies and gentlemen and welcome to the Hydrogenics’ 2013 Second Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will follow at that time. (Operator Instructions)

I would now like to introduce your host for today’s conference, Mr. Bob Motz Chief Financial Officer. Mr. Motz, please begin.

Robert Motz

Thank you and hello and welcome to Hydrogenics’ second quarter 2013 conference call. With me today is Daryl Wilson, President and Chief Executive Officer. The company's second quarter press release and PowerPoint presentation are available on our website under the Investor Page at www.hydrogenics.com. We also uploaded the quarterly report this morning on both SEDAR and EDGAR and would refer you to those sites for our disclosures documents.

As indicated in our press release this morning, all financial references are in U.S. dollars unless otherwise indicated. I would like to now also provide 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 risks 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 and 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 will turn the call over to Daryl Wilson. Please go ahead, Daryl.

Daryl Wilson

Thank you Bob, good day and thanks everyone for joining us for Hydrogenics’ 2013 second quarter conference call. Today I will review our operations and outlook. Afterwards which Bob will discuss our financial results in detail. Please refer to the presentation on our website for today’s discussion.

Beginning with Slide 3. Let me review the highlights for the quarter which saw continued year-over-year improvement in our operations. Sales rose 18% to $9.8 million reflecting growth in energy storage and increasing demand within our industrial end markets. Gross margin expanded to 26.3% of 8.5 percentage points versus the second quarter of 2012. Our backlog remained a strong $50 million at the end of the quarter and while down sequentially we have a large number of RFPs in our current pipeline. And we believe these will result in backlog growth during the remainder of 2013.

We also announced the award of a contract by the Linde Group for three HySTAT60 electrolyzers for installation as part of a fueling station in Bolzano, Italy. We recently received the Innovator of The Year Award from the Canadian Hydrogen and Fuel Cell Association, which recognizes achievements by a company committed to advancing the status of hydrogen and fuel cells. It's a great honor to receive this accolade from our industry peers, which serve to underscore the strengthening interest in the hydrogen-based energy applications worldwide.

All in all, we ended the quarter well positioned for growth with a solid backlog many opportunities in the pipeline and $16 million of cash on our balance sheet. We remain on track to be profitable as growth accelerates and we are very positive about the industry conditions in general and the increasing demand for hydrogen-based technology.

Now let me get into some specifics starting with Slide 4, here I would like to review a number of recent news developments within the world of hydrogen, I won’t review all of these in depth but just want to provide the context for the changing environment in which we live and give some color to the evolving interest in hydrogen as a fuel and energy storage medium.

First, the EU announced in July that they would invest an additional €1.4 billion over the next seven years in research and innovation partnerships for hydrogen and fuel cell technology in collaboration with the private sector and member states under a program called Horizon 2020. The fuel cell and hydrogen joint undertaking is one of five proposed research and innovation partnerships under Horizon 2020, and it builds upon the success of the first generation of this program which were in between 2008 and 2013.

In addition, the German Hydrogen Coordinating Organization, NOW has published a discussion paper which suggest future targets of 1500 megawatts for hydrogen based energy storage, 2000 fuel cell buses, 500 fueling stations and 500,000 fuel cell based cars on the road between 2016 and 2023.

At the same time, Southern California’s Utility put up a call for 50 megawatts of energy storage integrated with Photovoltaic Power Generation in California and has announced additional monies for hydrogen fueling stations.

Meanwhile growth in the vehicle fueling infrastructure area will be driven by developments at Hyundai, Toyota, General Motors, Honda, MVW which have all announce plans to escalate fuel cell based vehicle development towards mass production in the coming years. So there are many areas converging on the hydrogen space, and Hydrogenics is involved across-the-board.

Moving to Slide 5. Let me provide an update on the Energy Storage market. This past June the largest Power to Gas facility in the world went live with the first direct injection of hydrogen in this gas pipeline using Hydrogenics technology. This 2 megawatt Energy Storage installation run by E.ON in Falkenhagen use the surplus renewable energy to produce hydrogen for storage in the countries natural gas pipeline network. Our equipment was delivered at the end of 2012 and then commission then certified during the first of 2013.

Now in operation and supplying 360 normal cubic meters of hydrogen per hour into the local natural gas grid an amazing achievement and one that’s made E.ON’s local operations much more efficient, the facility allowed the company to absorb surplus energy as needed, return power when required an alleviate grid and stability improving the overall utility performance.

The installation is operating as planned and E.ON is very pleased with its performance. Also as previously announced Hydrogenics won an order this quarter for a first of its kind 10 megawatt facility to be deployed in Hamburg, Germany again for E.ON. This Power to Gas facility we use the world’s largest PEM Electrolyzer stack at its core. A technological breakthrough which will serve as a building block for future multi-megawatt applications, construction for the facilities already begun and we expect to ship for our equipment early in 2014.

The side is already gone into a great deal of press and visits from interested industry executives and government officials alike. Using our technology that’s installation will be the most advanced Power to Gas facility in the world and have the largest PEM Electrolyzers installation producing hydrogen.

As I mentioned previously the technology is very scalable and we are now looking at much larger opportunities for energy storage applications, including those north of 10 megawatts in size. Once complete this facility will certainly be unique and exciting showcase for our technology and the benefits of hydrogen-based storage.

On-Slide 6, we show the overall development of this market in Europe where it’s been a total of 30 projects now announced of which we won eight. This information was presented in a recent report published by KEMA a very influential technology company focused on the energy sector. Most importantly out of the 5 megawatt class projects we have won four. Most of these are in the early phase of operation, although we certainly have a great deal of confidence about the future performance of our installations.

In my experience, having what I call raging reference sites is a critical to establishing a leadership position in a new area of technology. Hydrogenics has consistently been first to market and taken the leading share and in accumulating number of raging reference sites accelerating our business growth and the future in this sector. However, as interesting energy storage compounds so to does the complexity and size of these projects which often translates into greater lead time between awards.

This certainly did not mean that we are sitting still or the industry is stagnating quite the opposite, we are very busy working on a number of initiatives by given their size and the uniqueness of this technology it takes some time to structure the projects, engineer appropriate solutions and solidify the logistics and the financing parameters. So the lumpiness in the orders will remain for the time being and that's to be expected.

We remain very positive about this market and see strong steady improvement toward mass production, due to the necessity of energy storage to drive for efficiency, demand for clean energy initiatives and projects tied to vehicle fueling stations. So the future here is evolving, but certainly looks very bright.

On Slide 7 you can see the evolution of our core stack technology including the most recent member of the Hydrogenics family the megawatt Class PEM stack base technology for this equipment takes a long time to develop and refine and our latest application represents the combination of years of investment in PEM fuel cells and PEM electrolysis technology.

On Slide 8, you can see the inherent value of our PEM technology due to a dramatically higher energy density, which results in a 12-4 reduction in the physical size relative to our historical up-line technology. This compact footprints and superior performance will allow us to complete much larger projects in the future.

Finally on Slide 9, you can see our technology roadmap, last December we delivered two megawatts of alkaline electrolysis to E.ON in (inaudible) where operations went live in this past quarter. The follow-on order from E.ON in Hamburg will use our new 10 megawatts stack and future deployments of 1040 or 100 megawatts will use this stack as the building block to meet forecasted needs for energy storage.

So what we like to say here, we’re ready and when the German hydrogen coordinating organization published its papers with charges for 1,500 megawatts of hydrogen energy storage, we clearly have the means to help them get there.

Switching gears on Slide 10; let me talk about our power systems business for a movement which continues to develop well. We completed our first order for CommScope in the second quarter and we will soon have several 100 units in the field to be utilized by a major North American Telco.

We continue to work with CommScope on opportunities and see other backup power orders picking up in the second half of 2013. We also remain optimistic about the outlook for orders overseas particularly in Europe and Asia and we are pursuing bids for both telecom backup and a growing number of datacenter sites.

As stated previously, we can easily make much higher production volumes in the future. We also continue to show progress with our $90 million multi-year proportion contract, and we remain on a contract sorry on track in terms of milestones and deliver both.

Unfortunately the customer is still not ready to develop the additional information about this cutting-edge work, but we’re very pleased with our performance and very positive about the long-term demand for this application. Lastly as I mentioned before, we are getting on many other transportation related fields of opportunities and expect to be able to announce additional wins here in the second half of 2013.

Turning to Slide 11 let me briefly discuss the other parts of our OnSite Generation business those portions not directly related to Energy Storage. We've actually seen a lot of activity here likely due to generally improving economic conditions in many parts of the world where we supply electrolyzers for a host of manufacturing applications from food processing into glass production and many other applications.

We have customers all over the globe, particularly in Russia, the Middle East and South America and we are the largest provider of electrolyzers for such industrial applications. But these orders take time to solidify and therefore sometimes lumpy, but I can assure you that we are optimistic about the awards forthcoming in the second half of this year. We are also bidding on more fueling station opportunities and as I mentioned earlier we were recently awarded a contract by the Linde Group for a site in Bolzano, Italy.

The station is now under construction near major motorway in the area and as expected to supply hydrogen for the fuel cell powered cars and buses which are forecasted increase substantially over the coming decade. The project is part of the European Union’s clean hydrogen initiative which is committed to making hydrogen-based public transport a commercial reality.

This is another major award recognizing our leadership in the field and there are now 45 facilities using our equipment around the world with a growing number tied into the greater local utilities as part of larger Energy Storage management operations, whether producing hydrogen on the premises or converting – as power to hydrogen for a host of transportation uses, we are clearly being industry leader in the hydrogen value chain.

In Bolzano Hydrogenics units will initially produce 400 kilograms of fuel daily; we expect to deliver them before the end of 2013 for start up in nearly 2014 with additional hydrogen stations along Bolzano-Modena motorway plans for the future. We continue to work on operating improvements in the on site of part of our business, since gross margins were not where we wanted to be and Bob will review that in a moment. In this last quarter lower operating rates of the plants drove lower over head absorption and therefore lower gross margins.

For energy storage related electrolyzers margins are expected to grow as we gain more experience in the place and expand our customer base moving past early adopters. For industrial clients, we know that we’re a leader and quality and service and we are working on cost reduction throughout our supply base, so that we aren’t compelled to compete on price.

In my tenure at Hydrogenics, we’ve driven cost down substantially and improve margins across all of our products, and so I show assure our listeners that this is always of focus for me and the team, and we anticipate steady improvement in our electrolyzers margins going forward as revenue claims and concurrently we manage working capital, drive down cost and price our cutting edge products appropriately.

Now turning the Slide 12, I would like to wrap-up by saying that we are clearly pleased to see continued year-over-year improvement in our operations both in terms of top line growth and operating margins. We remain a leader in hydrogen based energy storage fields of cell based power systems for mobility and backup applications and industrial having OnSite Generation.

As I mentioned earlier our backlog is down slightly, but it remains at a near record level and we’re bidding on some very large projects across the board. Increase in harnessing the power of packaging for multitude of energy requirement is growing and we are positive about the moves and mass acceptance and adoption across power end markets worldwide. This intern should lead to acceleration in terms of both orders and revenue.

We also remain on track to become profitable at around $50 million revenue run rate and we are to-date stronger as a company than never before given higher cash levels, a solid balance sheet and improved trading liquidity. We also continued to see compounded annual growth of 30% or better. We run lean ship here at Hydrogenics and I personally know of each sales opportunity, customer relationship and technology development, our core competitive advantage lies in us being first to market with the best the product and unmatched customer service.

Our reason of word and accolades speak to the talent of workforce and leadership of our product portfolio, it should also come as no surprise that we are finally getting noticed by more investors and analysts, who see that our vision of the future is coming to reality in terms of hydrogen importance in the 21st century.

Now I’ll turn the call over to Bob Motz, our Chief Financial Officer, who will review our results in more detail. Bob.

Bob Motz

Thanks Daryl, good morning everyone. I’ll sort of briefly summarize the financial results for the second quarter and six months ended June 30, 2013.

Turing into Slide 13 and 14, we posted revenue of $9.8 million and $22.1 million respectively for the second quarter and six months ended June 30, 2013, which perceptively which represented increases of 18% and 58% respectively over the prior year period. The strong top line improvement was fueled by increased revenue within our power systems business segments, resulting from the company’s contract for Integrated Power Propulsion Systems and deliveries of fuel cell modules to our strategic partner CommScope.

Our growth profit shown on Slide 15 was 26.3% for the second quarter an increase of 8.5 percentage points versus 2012, primarily reflecting improved product mix within the company’s power systems unit offset somewhat by reduced margins in the Onsite Generation unit as indicated by Daryl in his commentary. For the six-month period on Slide 16, the company’s gross margin was 27.7% up a 11 percentage points. Again primarily reflecting improved product mix and higher revenue within the company’s power systems business unit.

Turning to Slide 17, Hydrogenics’ cash operating costs, which is defined as the sum of Selling, General and Administrative Expenses and R&D less stock-based compensation expense and depreciation and amortization expense was $3.8 million for the quarter, versus $3.4 million in the second quarter of 2012. This slight increase of reflected higher marketing expenses related to our increased commercial activities and higher research and development expenditures related primarily to our PEM, Power-to-Gas product development.

For the six-month period on Slide 18, cash operating costs were $7.6 million, versus $7 million in 2012 with costs as a percentage of revenue falling 38%. The year-over-year charge is primarily the result of increased marketing expenses related to higher level of commercial activities as well as slightly higher employee compensation costs resulting from small increases in head count to deal with the improved business performance and expectations going forward.

Turning to Slide 19 and 20 our adjusted EBITDA loss was $3.2 million for the second quarter and $4 million for the six-month period reflecting the revenue margins and expenses previously discussed. The EBITDA loss also includes charges for the revaluation of our long-term incentive plans to reflect the change in the share price of Hydrogenics in the six month period. The increase in the CSX share price of Hydrogenics from $675 million on December 31, 2012 to $8.02 on March 31, 2013 and $14.65 on June 30, 2013 required that we mark-to-market the value of these plans trends an additional adjustment to SG&A expense of $1.8 million and $2.2 million respectively for the three months and six months ended June 30, 2013 respectively.

As previously I indicated this charge is not included in our definition of cash operating costs. A reconciliation of cash operating costs the loss from operations has provided in Slide 23 of this presentation. Slide 21 shows the companies order backlog as of June 30, 2013 which was $49.9 million. During the second quarter we also received $4.7 million of new orders.

On Slide 22 our cash resources as of June 30, 2013 were $16.0 million an increase of $4.2 million as compared with the first quarter. This primarily reflects the $6.1 million of net proceeds from our underwritten share issue partially offset by cash use in operations and repayment of operating borrowings from the first quarter. I already had mentioned previously the Slide 23 was a reconciliation of our cash operating costs to our loss from operations.

Finally Slide 24 reconciles our EBITDA loss to our net loss for the three months and six months ended June 30, 2013. The majority of the difference is attributable to finance losses of $1.1 million and $1.7 million for the three months and six months respectively. Substantially all of these finance losses relates to the revaluation of our outstanding share ones again mark-to-market with the share price from March 31 to June 30, 2013 along with revaluation of warrants that were exercised in the quarter to the market value as of the date of exercise.

With that we’ll now turn the call over to the operator for questions. Please go ahead operator.

Question-and-Answer Session


Thank you. (Operator Instructions). And the first question is from Philip Shen of Roth Capital. Please go ahead.

Philip Shen – Roth Capital Partners, LLC

Good morning everyone. Daryl and Bob, thank you for taking my questions.

Robert Motz

Hi, Philip.

Philip Shen – Roth Capital Partners, LLC

So was the first question is on I guess guidance, you guys have guided to more than 30% revenue growth year-over-year, it applies a $19 million at least of back half revenues. I wanted to explore this a little bit and kind of talk about where the growth comes from obviously in power systems. You’ve talked about hundreds of orders from the CommScope’s customers with in three to six months; I think that was in the Q1 call. Just talk to us about whether or not this is still the expectation and what you are seeing to give you confidence that there are orders ahead for from CommScope.

Daryl Wilson

Thank you Phil, we been working with CommScope now for a more than five years, first the focus was on product developments and then more recently on market penetration, there has been a lot of activity in last six months in North America, Europe and Asia and so there is very good engagements here to work on development of projects. We believe the combination of CommScope with their very high credibility and high business volume in the Telco space is a very strong asset for us to work alongside and so they have very good access to senior levels of the major players in this business. It is still however a development area in many of these customers are being exposed for the first time to fuel cells as an alternative to batteries in diesel gensets. And so the sales cycle holder the longer and it’s a little more challenging to close a larger size orders, normally orders for these long battery backup systems would be in the order of several hundred units to a 1000 units at a time.

And the business hasn’t fully matured to the level where that’s happening on a recurring basis yet. But, I am please to see that the appetite there move beyond the one or 5 or 10 units and to discuss orders of hundreds of units at the time. So, the confidence of hearing the product but the time to close orders is still a bit of a challenge for us.

So, we’re looking for more progress in the coming six months and I think as we accumulate field experience on the units that are already in service that will also board well for our solution. Globally, this is an application where there is growing traction for fuel cells, and so the discussion among industry peers supporting application, I think it’s quite strong and we’re optimistic about the future.

Philip Shen – Roth Capital Partners, LLC

Okay. That’s really helpful, thank you. And then the other sources of revenues for you. Here, you’re time study states source has been Onsite Generation, obviously you talked about having confidence in orders in the back half. Can you give us some color on what might happen in back half with Onsite Generation, I’m guessing you’re going through some, our fee process right now and as you can – you have some closings, close that hand so some color on that would be helpful. Thanks.

Daryl Wilson

Sure. Certainly, the first half of this year has been little lights. But when I look over the last five or seven years that I’ve been here, we’ve seen fluctuations, in two or three orders to make a world of difference. The number could have usually been double what it was in this last quarter, but few customers decided, they need a little bit more time, this rate missing out of that. And so any delays here is certainly customer related no issues on our side and when I look at over the back half for the year, I’m very positive about the outlook.

So not a major concern, I would like to that numbers to be in a higher for sure for the first half. But I think we’ve got some closers that are imminence and I think it will be steady in that area as you said that’s been kind of the steady area for us historically. There is no fundamental change in the market, the demand, the competitor situation et cetera.

So I think it will be steady in the future, the areas where we’re seeing the largest growth opportunities or in energy storage and in the power system side relative to our history, and I think notwithstanding a little light in the first half will be steady on side in the future.

Philip Shen – Roth Capital Partners, LLC

Great, and let’s talk about storage for a bit. In terms of the stock in HOGAN facility, the up line electrolyzer, now that the facilities online. Can you comment more about how it’s operating? Have you had any hiccup or has it been smooth selling since you started turned it on? And has it been serving as a reference facility for you and if so what agree and perhaps how many visits have you had from potential customers and if so flexing comments on how there was activities are going?

Daryl Wilson

Sure, and as I said earlier our ranging reference sites were up absolutely critical to a new business line for us. And already this side of Falkenhagen has turned out to be very, very fruitful. I frankly don't have the numbers of visits right at hand to give you an actual number. But I can tell you it has been a very good number they've been international visits people coming from various places in the world, there’s been various conferences were E.ON has featured visits of the site. And there is more upcoming E.ON set up, a visitor center at the site and they are very proud of the operation themselves. And so it's not just us telling the story, but the customers telling the story very well. E.ON is even running television commercials in Germany featuring discussions about the site and hydrogen energy storage as a critical factor for the future and complementing renewable generation.

So that's one, there is also visitor center plant at Hamburg’s site where we will have our first 10 megawatt installation, so these are very significant catalysts for us to showcase what we have done along with the customer, and yes the operations have been rock solid, these are industrial products for us that we are delivering with a lot of history and so there is absolutely no concern about the ongoing space and high operating rates at the facility.

So everything is good. Another point of this I didn't mention earlier is this is a first injection of hydrogen in the natural gas grid. It took E.ON a little longer than they anticipated to get all of the approvals in place. But I think it's a very critical indicator that what we’ve talked about herein concept is now actually happening and the cross connection between the electrical grid and the gas grid is now a reality which is something we are very excited about.

The learning points are coming along are how the business model works and the economics perform and not getting close attention with E.ON, but I think it is also indicative that we’ve got another order and then this discussion about 1500 megawatts is a government supported plan in Germany for hydrogen energy storage in the future, so lots of good momentum here and clearly Hydrogenics is in the forefront.

Philip Shen – Roth Capital Partners, LLC

That’s great, and thanks for that update. I think it’s really helpful to get that color in the degree of partnership that you have with E.ON. And one last question here before I jump back in queue. About the ten facilities, I think when that award was first announced. The target was to ship – sorry the 10 units was to ship it by sometime in this year. I think today you commented on shipping in early 2014, so what happened and what’s going on there?

Robert Motz

There is a mixture of site preparation issues and also a supply chain to support that larger megawatt system; we have already a prototype running here that facility since last September. But this is a multiparty team effort and one of the parties is a little behind, I'm not concern about a major delay, but at this point I'm calling this for more early next year than for late this year. Not a major setback mater of a couple months change rather than a major delay.

Philip Shen – Roth Capital Partners, LLC

Okay, thanks very much.

Robert Motz

Thanks Phil.


Next is call on Colin Rush of Northland Capital. Please go ahead.

Colin Rush – Northland Capital

Hey guys. Can you talk a little bit about the recent activity in the mobile applications space, how many customers are you talking to, how much interest is there, what could we expect see over the next 12 months?

Robert Motz

Thanks Colin, so you are well aware that electrification of mobility is certainly a theme and in the battery world there’s been some successes and challenges. And the value of hydrogen technology as much more energy is deployed from a hydrogen application with fuel cells than you would ever get from a battery. And so we have targeted some larger scale transportation proportion systems on trucks, buses, planes and other mobility application where the higher energy content of the hydrogen system is attractive.

In each case, this is new territory with the exception of the bus markets. But there is more than half a dozen significant opportunities out there, the value proposition on some of them is very attractive and we see over the coming months that there will be gathering momentum on this particular vector.

So we feature this as something that’s kind of steady and moving in positive directions. Again I point towards the German [NOW] plans which would suggest support for 2,000 bus units. That’s dramatically higher than any previous discussion and so there’s an area in public transportation where there is some good momentum and interest. The Hydrogenics fuel cell power module is very competitive from a cost point of view, very reliable from a operation point of view and we’re getting some very good uptake in our discussions with customers. So you know we are talking about half a dozen significant opportunities that will close over the next 12 months.

Colin Rush – Northland Capital

All right, thanks. And then what’s the (inaudible) it’s been a lot deferred much of activity with those guys. You know and some of this is still significant interest with them on doing some E.ON. What, could you talk about that?

Daryl Wilson

Yeah, thanks for that question. Good to point out that they, under go water there’s been a lot of activity Emeritus is turned out to be a very, very strong partner with us. Moving the agenda for storage in North America has been more challenging. Battery technology and Compressed Air (inaudible) dominated the agenda in North America. And so it has been a challenge to get on the agenda, have discussions with utilities and folks like DOE and Ministry of Energy here in Canada.

But those discussions are absolutely happening there is activity almost every other week at this point, and we are making good progress. We hope to announce our first project for a while and we are kind of knocking down the remaining road blocks one at a time, but the progress is steady and certain and I’m very positive that will get us, first half of our project I would hope sometime during this year an announcement on the first project with Enbridge.

We’ve also had progress in the U.S. in last quarter with a very well attended webinar hosted by EPRI and some very good follow-up interest. Again some of the energy storage solution that had been tried in the U.S have been found wanting and efficient and the level of capacity and responsiveness that we’re offering in hydrogen energy storage is certainly now catching some attention because other solutions have been and failed found to be inadequate so I gathering momentum we are on deal with Egypt in the last week, we are talking to them about this and developments in Europe.

So its always a hard go when you are starting something off, but as I stand back and look out at it over a 12 month period under a gratified with the progress also important to note Kema that where we provided some data today in the presentation. Kema is very highly credible, when it comes to commentary on NIM energy technology. And they put out a descriptive first record, it’s available on the Internet out of the Netherlands on hydrogen energy storage but it's only the first of many reports that they plan to further develop the story and understanding on energy storage. So yes Hamburg is moving nicely and we hope to have some good news in.

Colin Rush – Northland Capital

All right. And then just a final one on financing partners how much work have you done in terms of bringing in potential lenders through some of these projects gain them comfortable with the technology and really being able to provide some additional resources to your customers?

Daryl Wilson

We are certainly getting contacted by folks who are offering services in this area as they watched solar and wind projects develop to the point where projects finances kind of the primary interest area of course in this next area of storage there is interested to see what this is all about how fast it’s going et cetera.

Given our kind of marquee customers right now are E.ON and Enbridge they tend not to need any help and their whole business model is to build on operate and finance large-scale energy applications. So I would say while there is good interest and we’re taking calls and we are educating potential lenders about future opportunities here takes a little bit premature and I think the first larger scale projects will sit in hands that are well funded and not in need of supplementary financing.

Thus in the near term eventually of course this will become much likely solar and wind installation with various owners and financing arrangements. So I fully expect we will grow up and mature the way the other industries have but we are not quite there yet.

Colin Rush – Northland Capital

Right, thanks a lot guys.

Daryl Wilson

Thank you.


Next is a Amit Dayal from Benchmark. Please go ahead.

Amit Dayal – The Benchmark Co. LLC

Thank you. Good morning everyone. And just want to ask…

Daryl Wilson

Good morning Amit.

Amit Dayal – The Benchmark Co. LLC

Hi, how are you guys?

Daryl Wilson


Amit Dayal – The Benchmark Co. LLC

Just quickly, it’s quantifying some these opportunities on the energy storage side of things, could give us a number on how many projects you have a bid out on. How many of them could come to solution within next twelve months and the range in terms of the megawatt whether its smaller or larger. Any color on this side in terms of numbers would be helpful.

Daryl Wilson

Sure, I mean, I understand the interest. It’s a little bit of dangerous gain because in these early maintenance time periods that things fluctuate very substantially, and so I’m a little bit careful in this area to go too much into detail. We of course have a whole team here, that’s dedicated to moving this area had and we have very active tracking on a significant number of projects. But I’m not quite ready to start releasing numbers yet, you get a bit of a breadth of things when you see the numbers in the presentation today with 30 projects in total adder the 35 a megawatt and above and we’ve taken four of those five. So that gives you a bit of a distribution.

There is some very small projects in that group of 30, so it doesn’t concern me that we haven’t participated in larger of number than 30, some of them were developed very regionally and they are very small indeed.

Looking forward, it takes easily a year or two to develop a substantial project and we’ve had time already into larger projects. So we’re not just starting on larger projects. There have been already discussions ranging between 5 megawatt and 40 megawatts as next step projects. So, there is very good momentum toward moving up in scale and I’ve often referred to even the megawatt class singular, two megawatt class projects are really starter kits. To have a meaningful impact on the grid, we need to be talking about 10 to 50 or even a 100 megawatt project.

And again the contacts for the German coordinating committee for hydrogen talking about 1500 megawatts of projects in Germany gives you a sense of how this thing is going to scale.

My main focus right now is to position Hydrogenics to be fully ready to deliver on a very credible basis on projects of this nature. We’re seeing RFPs in the last little while that one of the criterion is the company is able to – has already delivered megawatt or multi-megawatt projects and so there’s a recognition that certain companies need a history and a capability to deliver at larger scale under reliable basis.

So, good momentum, good scaling on projects, good number of projects, but just right now I’m a little shy to put out the forward numbers because these things can fluctuate and they can take a longer than sometimes we hope.

Amit Dayal – The Benchmark Co. LLC

And is Germany, accounting for a larger portion of the numbers of the start side of things?

Daryl Wilson

In Europe it’s more than 80% or almost 90% at this point and the reason for that is Germany has very high penetration of wind and solar energy. In recent weeks Germany has had 50% of their energy needs being met on some days just by their solar assets which is fairly shocking. Very large wind assets and so, the grid in Germany is in need of support from storage in a significant way and that’s why it’s happening first there. I mentioned earlier that California has recently announced the need for 15 megawatt to support the integration of solar on the grid in California. And so we are seeing other jurisdictions – join Germany in the need for large scale bulk energy storage, but Germany is way out of the world when it comes to actual deployment.

Amit Dayal – The Benchmark Co. LLC

Just last question, a follow-up on that. With the elections coming up over there in September, do you anticipate things to remain on course from a policy level or are there any risks from your election point of view?

Daryl Wilson

No, I think it’s already clear that the German public has driven the energy agenda in very significant ways in the last five years or 10 years and I doubt there is any political parties that will pull the electric in their strong mine to move away from nuclear to move up with renewable generation and to leave the world in the movement away from fossil fuels. So that’s a very strong and resilient base politically and I don’t think any of the potential outcomes with the election will make any change in this whatsoever.

Amit Dayal – The Benchmark Co. LLC

Got it. Thank you so much.

Daryl Wilson

Thanks so much, Amit


Next is Aaron Martin of AIG Investment Partners. Please go ahead.

Aaron Martin – AIGH Investment Partners LLC

Hi, it’s Aaron Martin of AIGH. Hi, Daryl. Hi, Motz. Congratulations on this progress, even it’s sees like what’s an issue appropriate for where you are. I want to focus on comp build. That wasn’t clear. Did you say that some of the units are in the field with the end customer at this point?

Aaron Martin – AIGH Investment Partners LLC

Yes. Already there has been some deployments out of the order that we made in Q1 and Q2 and it will take some time to actually do this, the field deployments and start getting a feedback typically in North America backup power units get very little action until there is a hurricane or major events typically they are off and they are as a reliable backup source.

So it take some time to get field experience, but it does mean that this particular application products and fuel cells is growing in number of field deployments and experience, which is a good thing, the more this kind of application is socialized in the industry, the more interest there will be in further adoptions. So it takes some time to get them in the field, but it's all positive.

Aaron Martin – AIGH Investment Partners LLC

Even though they have been deployed in the end field, do you recognize most of revenue from that in Q1, will you shift to CommScope?

Daryl Wilson

Yeah. I would say the bulk of the revenue was in Q1.

Aaron Martin – AIGH Investment Partners LLC

Okay, so it will anyway opens out. but in terms of the lumpiness of the company can we really just get axing out the CommScope difference in Q1 on Q2 we can look at revenue being potentially flat, flat or maybe going up a little bit?

Daryl Wilson

In our strategy, many years ago, we recognized that with emerging applications in hydrogen with no one application that was going to support the business all by itself and even though, we made a decision to pickup several trends of strategy in 2012, it became evident that we’ve made some very good choices and a number of them were starting to grow very significantly.

In these last few quarters, you’ve seen our revenue from power systems almost equal as the revenue in the OnSite Generation business that's very new for us. So as we go forward, we're going to see some lumpiness in any one of the three major areas of the business, be it OnSite Generation, power systems or energy storage. What we do see as a composite is we can support 30% compound annual growth and we’ve been very clear about that. We’ve now delivered, I think in the first of this year, lots of evidence that’s happening as well as last year and we see that on going.

But which leg of the stool is going to get a weight, it’s going to change quarter-to-quarter until all these elements start to mature and they’re steady every quarter. That’s of course our goal and we don’t control entirely our destiny in terms of any one of these markets, but as a compensate, we think we’re in good shape for ongoing growth.

Aaron Martin – AIGH Investment Partners LLC

Okay. And then switching over, I think you’re talking about different opportunities comes from data center, just state on the update from that?

Daryl Wilson

Yeah. This is our promising area that’s if early, but it’s a very positive application again. Fuel cells displacing battery in diesel gensets. There is a lot of focus on reducing power consumption and innovation around data centers at the present time and it turns out the products that we’ve developed some years ago and it seemed interest in those areas had veined. When interest is coming back strongly, we’ve had significant shipments of shall I say demonstration units to multiple customers over the last six months.

We haven’t cut in with a single major order yet. But I think this an area where the strength of the technology is as well differentiated and we will see some growth in the coming months. The order quantities will not be as large as the back up power for telecom. However, the amount of power being delivered in 100s of kilowatts or even to megawatt level, it’s certainly part of the discussion. So it’s an interesting and positive area. It happens that telecom companies also have data center attributes and parts of their operations that need backup and so it’s been another effective part of our relationship with CommScope to work in this area of infrastructure and you’re quite correct to identify there is something somewhat new and I think a positive development.

Aaron Martin – AIGH Investment Partners LLC

Okay. And in top of the gross margin (inaudible) little low, mentioned your facing being a factor fair, does that explain the whole thing that is partially explained by Mick maybe Daryl. Just give me a little more color there on – look at it going forward?

Daryl Wilson

Probably the biggest impact in the OnSite generation division has been absorption of overheads in terms of operating rate because the intake of orders in the first half is lighter. As we move into the second half, we see a pick up in operations and orders there. And so I think that situation will improve. Previously, we talked about supply chain challenges. We put through a number of corrections there and…

Aaron Martin – AIGH Investment Partners LLC

I want to actually significant on that. Is that includes that part, has been the supply chain issues corrective or is that still part of the issue here for this Q2?

Daryl Wilson

Now I would say that a significant correction has gone through in the supply chain, so the outlook for the balance of the year is more positive on the supply chain side. And then there is the ongoing cost reduction activities as well that will further improved. So I think we have good visibility and the backlog and what’s to be delivered for the later half of the year based on customer requirements and we have some confidence that things will improve in the OnSite business. And you can across the board, the margins are fairly much improved over a year ago and we see that being a sustained situation.

Aaron Martin – AIGH Investment Partners LLC

Okay, thank you.

Daryl Wilson

Thanks very much.


I’m showing no further questions in the queue and I would like to turn the conference back to Mr. Bob Motz for any further remarks.

Robert Motz

Thank you very much, and to all the listeners, this concludes the conference and we will welcome you, first of all remind you of the Safe Harbor information that we indicated at beginning of the call and we encourage you to keep us in mind in early to mid November for our third quarter earnings call. We will announce it around two weeks prior to the call, when that call will take place and we wish everybody a great day. Thank you, bye-bye.


Thank you Mr. Motz and Mr. Wilson. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect. Everyone have a good day.

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