Hydrogenics' (HYGS) CEO Daryl Wilson on Q1 2014 Results - Earnings Call Transcript

May. 7.14 | About: Hydrogenics Corporation (HYGS)

Hydrogenics Corporation (NASDAQ:HYGS)

Q1 2014 Earnings Conference Call

May 7, 2014 1:00 p.m. ET

Executives

Bob Motz – CFO

Daryl Wilson – CEO

Analysts

Sara Elford – Canaccord Genuity Corp.

Phil Shen – ROTH Capital Partners

Dev Bhangui - Byron Capital

Carter Driscoll - Ascendiant Capital

Rob Stone - Cowen & Co.

Operator

Good day, ladies and gentlemen and welcome to the Hydrogenics 2014 First Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder this conference call is being recorded.

I’d now like to introduce your host for today’s conference, Bob Motz, Chief Financial Officer. Sir, please go ahead.

Bob Motz

Hello and good afternoon everyone. Welcome to Hydrogenics 2014 first quarter conference call. With me this afternoon is Daryl Wilson, President and Chief Executive Officer. The Company’s first quarter press release and PowerPoint presentation are available on our website under the Investor Page at www.hydrogenics.com. We’ve also uploaded the quarterly report this morning on both SEDAR and EDGAR, and we’ll refer you to those sites for our disclosure 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 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.

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

Daryl Wilson

Thank you Bob, good afternoon and thanks everyone for joining our Hydrogenics 2014 first quarter conference call, which comes right after our annual shareholders meeting held earlier this morning. It was good to meet many investors in person and we appreciate all those who made the trip. Now will review our operations and outlook, after which Bob will discuss our first quarter results in detail. Please refer to the presentation on our website for today’s discussion.

Beginning with Slide 3, I’d like to briefly go over some recent developments since our Q4 conference call just two months ago. As we laid out in an earlier press release, revenue was light during the first quarter primarily due to shipment timing and the year-over-year comparison was also negatively impacted by our fuel cell sales to CommScope in 2013 as Bob will [put] you in a moment. However, even with the top line decline, we continue to build momentum and look forward to many accomplishments in 2014.

Our backlog grew to $58.5 million on the back of [sole] electrolyzer orders including some recently announced fuelling stations in the U.K. Our OnSite Generation business pipeline and potential opportunities remain very strong and we see higher demand for energy storage projects going forward as I’ll review in a moment. In addition, we’ve expanded our mobility offerings while at the same time begun targeting megawatt scale fuel cell applications for backup power in power generation. All in all based on our current backlog and the outlook for 2014, we are on track to surpass $50 million in revenue positioning us for positive adjusted EBITDA this year.

Now, let me get into some of the details behind our current outlooks starting with Slide 4. As I said in the past, there’s a real need for energy storage across the globe primarily due to the inefficiencies created by transient wind and solar energy. By using hydrogen based systems that leverage our PEM technology, we are in a sense able to bottle the wind and the sun for use in another time and place.

Hydrogenics is a clear leader in this emerging industry and seeing growing interests from utilities in Europe, Canada, California and elsewhere due to our unique Power-to-Gas applications. Our 2 megawatt E.ON facility in Falkenhagen, Germany continues to draw very serious enquiries and we’ve been talking to an array of potential customers in North America, Asia and the continent for several months.

In Germany, we’ve already seen significant traction having won four out of the five largest projects for hydrogen energy storage. And as we said before due to the nature of this market, utilities and governments are taking a careful and somewhat methodical assessment of the technology to determine what particular size, features and locations will offer the best payback for hydrogen energy storage. As that being, we are seeing larger request or proposals in the 5 to 15 megawatt range and utilities are analysing the total solutions with broader infrastructure requirements. This may include natural gas pipeline integration or fuelling stations or fuel cell power generation alongside energy storage if so. For us, this is a win-win situation, which means that we’ll potentially have the opportunity of securing multiple revenue streams, which should also reduce the install cost for storage.

The overall market remains in a learning stage with regards to the technology, contracting methodologies in methods, operating regimes and business models. But definitely things are moving ahead and we expect to see our next generation PEM facility in Hamburg later this year. In North America, Hydrogenics and our partner Embridge continue to actively participate in major energy storage procurement processes in Ontario here in Canada. Now, it’s expected to have a decision in June. We’re working hand-in-hand with Embridge on this first Canadian application, which we anticipate will be the basis for many more to come. And as I said last quarter, Ontario alone is looking to have at least 50 megawatts of energy storage in place for the coming years. In places like Ontario and California, we’re continuing to process of educating market participants and regulators and this takes time, but to illustrate the growing need for storage.

I wanted to share some facts regarding our backlog and pipeline of opportunities. We currently have $12 million of book-to-business including the Hamburg project and have formally quoted $40 million worth of additional energy storage work. At the same time, we’ve identified 38 million of perspective projects and have 6 million in active R&D programs, which we either quoted or already have in the backlog. So, overall, that is a total of approximately $70 million in energy storage projects in various stages of maturity, a strong sign that this market is gaining traction. I have said many times that these projects take time to develop. So, we’re not saying today that Hydrogenics is going to take on $70 million of new revenue in short order.

The $38 million of prospective projects will take a while to process, but it is an indication that there is solid interest here something that we’ve never seen to this level in the hydrogen sector. What’s becoming evident is the Hydrogenics offers a clear value proposition to utilities across the globe as we bring large scale, modular and scalable options that provide more attractive economics than [indiscernible] most prevalent alternative technology today. We’re working on further bringing down costs and in conjunction with our customers making the case for good stabilization, bulk storage and diverse end user applications for the hydrogen produced. While it’s so early for this market, the level of interest seems to grow by the day and we’re in a unique position to offer many solutions across the hydrogen value chain. Our strong relationships with E.ON and Embridge speak to our position in this space and our backlog and active pipeline highlight how quickly the industry is evolving.

Now turning to our Power Systems business on Slide 5. I’d like to update on our mobility applications. While we continue to aggressively market back up Power Systems as well, our mobility markets are showing a good deal of traction lately, even aside from our multiyear $90 million propulsion order. Our limitations in batteries are becoming very evident across numerous applications and I have said in the past our automotive OEMs are gearing up for mass-produced (inaudible) vehicles within the next model year. Hydrogen is clearly gaining traction within the mobility’s base for efficiency, energy capacity, durability, low environmental impact and of course driving range. Although not announced, we recently won business with a few new customers in this area. For example, we completed the sale of 10 fuel cell power modules for a Chinese company this quarter for bus applications and we anticipate additional shipments going forward.

We also provided fuel cells for some hybrid electric trucks during the period, which are being used to extend the range on these vehicles beyond just the single charge. Similarly, we supplied power modules for airport ground support. All these customers are new for Hydrogenics and we believe they represent a solid potential for future business. All in all, we see further growth across a number of mobility end markets where our niche remains high technology applications requiring complex integration and long-term durability. We’re well known by our customers and partners alike for having reliable scalable capabilities to match exact things system requires.

Slide 6 introduces a new market for Hydrogenics – multi megawatt and megawatt fuel cell systems for backup power and utility power generation. In the past, we would occasionally be asked if we would feed in this power generation space one that’s been traditionally served by other technologies. But given other priorities and the developing nature of the industry, we did not pursue a position here even given our technological advances in fuel cell modules and systems. Now, we believe that the market is right or certain megawatt scale opportunities that can leverage our strength and expand the company’s top line growth trajectory. We’ve already spoken about data center back up power departments, which we have been pursuing business alongside our partner, CommScope. Now, we’ll be offering large scale backup power for data centers. Typically, these applications range between 2 and 20 megawatts, so the sizes of the projects are quite significant and we’ve already started to mature some relationships and trials with some partners in this area.

In addition, we’re looking seriously at the power generation market. More than ever before, the evolving dynamics of this space including requirements for higher performance, lower cost, scalability, zero carbon emissions are driving demands that match our capabilities. Given the strong interest for producing electricity with truly no carbon footprints, several interested parties have approached Hydrogenics about using our fuel cells for utility scale applications. At the same time, our technology has matured in terms of both cost and performance making the value proposition meaningful for both of us and our potential customers. So, while I can’t go into the details of all of the developments now taking place, we thought it was timely to share some of these active discussions and advance this concept based on current levels of interest.

For Hydrogenics, this represents an important step toward megawatt and multi megawatt installations for PEM fuel cell products. The company’s development work and advanced fuel cell power modules and rack-mounted systems forms an important platform for such applications. This is not new for us. We estimate the initial target market exceeds 100 megawatts in size and represents a significant revenue opportunity in terms of equipments sales, service and operations. While we’re still working on the details of the business model, it is one that would likely use a build own operate strategy and include long-term service agreement with years of recurring revenue. That’s all very exciting and we expect to be able to announce further details in the near future.

Before turning the call back over to Bob, I’d like to wrap up by reviewing where we currently stand as a company on Slide 7. Even as revenue was down in the first quarter, Hydrogenics remains on track for a best year ever. Our backlog is solid, our balance sheet is strong and demands are growing for our large set of offerings covering -- the technology’s base. There is increasing evidence that the market for energy storage is reaching a tipping point and we’re in various levels of activity on Power-to-Gas applications worth some $70 million across the globe. This is real and demand is accelerating.

At the same time, we’re entering the market from megawatt scale fuel cell systems, for backup power and utility generation by pursuing certain attractive applications that will leverage our strengths including durability, efficiency, scalability and the desire for carbon-free energy. We’re also using our advanced technology to drive further penetration in fuel cell mobility markets and we believe this area is poised for further expansion in the coming years. Our fuelling station business is expected to grow in tandem and we continue to see an active pipeline of opportunities in Europe, Asia and certain parts of North America to build on the stations that we’ve already in a way. All in all, our markets are developing and maturing as we continue to make our product smaller, more modular, more scalable and more efficient where there be applications for energy storage, fuelling stations, utility power generation, Hydrogenics is a leader in every aspect of the hydrogen value chain.

We’re unique in this regard and so even if there is some lumpiness for what remain in the near term performance, the outlook continues to be very strong as I’ve said before we’re on track for a top solid top line growth this year positioning us for positive adjusted EBITDA in 2014. We’ve provided partners the right technology, the right people to make this happen and our focus will remain as it has since I first came seven years ago on ensuring Hydrogenics is a strong lean market leading Technology Company for our customers and shareholders alike. This is what we are today and where we see the future.

Now I’ll turn it back over to Bob, our Chief Financial Officer who will review our financial results in detail.

Bob Motz

Thanks, Daryl. Good afternoon, everyone. So to briefly summarize the financial results for the first quarter ended March 31, 2014.

Turing to slides 8, we posted a revenue of $8.1 million in the first quarter, a decline of 35% versus the prior year period. Note that while we had previously indicated guidance of $7 million to $7.5 million for Q1 of 2014, we ended up benefitting from higher-than-expected service and spares revenue that wasn’t calculated on a global basis until after the end of the quarter. On a year-over-year basis, top line results were impacted as 2013 benefited from sales of telecom backup power modules that did not repeat in 2014. However, as Daryl indicated based on the timing of our backlog, we expect revenue to grow sequentially going forward with the major growth of 2014 occurring in the second half of the year.

Now turning to Slide 9, our gross profit was 23.7% in the first quarter, a decrease of 7.6 percentage points versus Q1 of 2013. This decline reflects lower overhead absorption and increased material costs within our OnSite Generation business unit. We previously reported on our efforts to improve margins in this division resourcing and product design cost reductions many of these initiatives were successfully completed last year. However, part of the program included some fairly significant design changes. The new design was incorporated during a launch of a larger product in Q3 and Q4 last year. On that particular customer application, we did run into some difficulty in the current quarter. So, we did take a charge for the corrections in Q1 and we don’t anticipate a recurrence elsewhere. When we look to the pipeline of deliveries in our backlog for Q2 and beyond, we expect good recovery in the OnSite Generation division margins and therefore we anticipate division margins and therefore we anticipate OnSite gross margins to return to higher levels in the quarters to come.

So, I intend Hydrogenics cash operating costs were $3.7 million for the quarter comparable to the levels realized last year.

Our adjusted EBITDA loss shown on Slide 11 was $1.7 million in the first quarter reflecting the revenue margins and expenses previously discussed. Net loss for the quarter was $3.7 million or $0.41 a share. Now, the reconciliation of adjusted EBITDA net loss as outlined in the final slide of our deck of the $2.0 million between the two, $1.7 million of it relates to a charge with stock-based compensation. Much of this compensation is valued on a mark-to-market basis based on the price of Hydrogenics shares on the Toronto Stock Exchange, and during the quarter the price increased from $20.44 a share to $30.05 a share. Hence the reason for the increase in stock-based compensation expense during this period when compared to the comparable quarter last year.

The company’s funded order backlog shown on Slide 12 was $58.5 million as of March 31, 2014 versus $57 million at the end of the year and $55 million at March 31, 2013. During the quarter, we received $9.8 million of new orders.

Moving on to Slide 13, our cash resources at March 31, 2014 were $11.6 million, a decline of $2.2 million compared with the fourth quarter. This decrease primarily reflects $3.8 million of cash used in operations partially offset by $1.7 million of increased borrowings.

.

And with that, we’ll now turn the call over to our operator for questions. Please go ahead, operator.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Eric Stine of Craig Hallum. Your line is open.

Unidentified Analyst

Good afternoon, guys. It’s Aaron [ph] now for Eric. Thanks for taking the questions.

Daryl Wilson

Hi Aaron.

Unidentified Analyst

So, you gave a lot of good details on the Power-to-Gas opportunity, but I was just hoping you could maybe go into a little bit more detail on the timing of what is in backlog and then maybe looking at that pipeline anything on timing there and what really gets that pipeline moving. You talked about the market mechanisms a little bit, but just maybe a little bit more color there, please.

Daryl Wilson

Sure Aaron. So of the 12 in backlog, I would expect about 10 of that will be delivered in the calendar year and the remaining two very shortly afterwards. So, most of that’s going to move through 2014. In terms of the bids of course we have to wait until the bids are closed and then go through the final contracting details, etc. and all those things can take time because they’re kind of a first time occurrence for most of these utility customers. So, our aim here is to see some kind of [net scale offs]. As I talked about 5 megawatts to 15 megawatts, we hope to see some [net scale] our projects landing in 2014 for delivery in 2015. Sometimes things can accelerate, to go faster than we expect because there is a lot of interest in this area. Sometimes it’s slower. The unfortunate thing is this whole segment is not yet mature enough to be all that predictable. In terms of the $38 million, again it’s a little further out, but there’s enough substance in these things. So, these are not just casual calls and enquiries that we’re responding to, but good engagement of the customer, exchange of expectations and specifications, good intense meetings. So, that level of interest is serious enough for us to put the packets together today and say, “folks, there’s enough momentum here that it needs some due attention and the total number is 70.” So as we go now quarter to quarter having disclosed this kind of profile, we fully expect that we’ll need to keep you up-to-date and we intend to do that.

Unidentified Analyst

Right. Now, like as I said there is certainly good development and good to see progress there. Maybe secondly, can you just talk about on the fuelling station side of things, you mentioned in the U.K. obviously there has been a lot of pretty good news coming out in California. Maybe just talk about what that means for you guys and again kind of anything on timing from results in pipeline and those types of things.

Daryl Wilson

Our positioning in this segment is for renewable hydrogen. And depending on what’s going on in the local market, it will be a strong preference for an electrolysis solution connected to renewable energy and that’s what we have seen in the U.K.? And then other areas like California, there are interest of industrial gas companies that have surplus supply on hydrogen and interest to track down hydrogen either as gas or liquid to the fueling station sites. So, long as you’re surplus in supply from a gas supplier, they are going to take a good share of the market. They’ve got well depreciated assets and established businesses in those [locals] and so you see a lot of the stations go to parties in that area. We did have one win in the recent California bid and we’re just putting that press release together in constant with our partners that we won that project with. So, we’re in the recent wins and pretty much the level I expected. As the surpluses of existing assets get mopped up, there will be a strong interest in renewable hydrogen and we expect to play a role there.

Also in California, the development of energy storage services could well be linked with the fuelling side of the market and I see that a kind of thinking in California supporting that. They are mature on energy storage. They’ve had a long time interest in hydrogen and when we talked to counter parties in that market, they have a good deal interest and Power-to-Gas and fueling as asset. So, we expect more there. There are more stations to be built and more demand is going to arrive as the car numbers go up. So, I’m saying we’re not going to be top of the heap while there is surplus hydrogen, but certainly we’re going to show up in successes there in the future. And then finally, Europe will also be the site of deployment, especially in Germany, we’ve done well there already again the utility are so sophisticated to see the length between Power-to-Gas and fueling. With that some very high profile stations that we’ve done with Linde [ph] Gas in Germany in both (inaudible) and Hamburg. So, I think our prospects are good. The main point here is that vehicles will determine the rate of the adoption and the vehicles are coming indeed in 2015 and beyond, but the numbers will be smaller initially as cars go and will grow. So, we’re not seeing this as part of our growth story for sure, but I think it’s the longer and slighter slope than some of the other things we have.

Unidentified Analyst

Right. Okay. Good. I appreciate the color. Thanks, I’ll be back in queue.

Operator

Our next question comes from the line of Sara Elford of Canaccord Genuity. Your line is now open.

Sara Elford – Canaccord Genuity Corp.

Hi guys. Just a few things for me. I’m wondering firstly on you provided for the first time sort of pipeline of Power-to-Gas or energy storage projects and you’ve talked about increasing momentum. Would there be a willingness on our part and ability on your part to talk about where that number might have been, for example, a year ago? I would assume a whole lot less. I’m just trying to get some sort of magnitude of change over the course of last 12 months.

Daryl Wilson

Sara, it’s an excellent question and I should have been better prepared. So, I can’t say that I’m looking at a table and to flash the number immediately, but if I may kind of a mental recount. So, in backlog which is now 12, we would have been probably 4 or less. In [indiscernible] which is now 14, we probably would have been 6 or less, maybe 4 or less.

Sara Elford – Canaccord Genuity Corp.

Yes.

Daryl Wilson

On the $38 million in expressed interest, this is where larger projects have shown up and again there is enough weight behind the discussion that it’s gone from being all that interesting to serious discussion about how might this all work and that number which certainly has been less than 10, how much less I can’t be sure but it is certainly less than 10. So, yes indeed. I think you’re raising a good question that there’s significant momentum here in a very different complexion to just a year ago.

Sara Elford – Canaccord Genuity Corp.

Okay. And then just I’m curious that when you talk about, for example, [quarter] projects, I would assume that the path way and by path way I mean is it for clean fuel. Is it for as a natural gas grid or is it industrial hygiene, whatever, re-electrification sort of the plan pathway? Are those things once you’re encoded and certainly maybe even in perspective, is that pathway already decided and owner is simply we have an issue that we need to deal with and we’ll sort all that stuff out afterwards. I’m just trying to figure out how those things have been identified for some of these things once they get into your list?

Daryl Wilson

Again a good question. Most of them would have a very clear pathway for the realization of value from the hydrogen because that turns the whole business model and economics and no one would properly constitute a project unless they knew how the pieces go together. So, I would say in every case we know where the hydrogen is going and what it’s for. We continue to see a nice across-the-board spectrum in fuel industry, power generation and biomechanization is also showing up now. So, one of the R&D projects in Denmark, for instance, we have already announced this involves the biomechanization. So, we’ve seen all of the spectrum of potential applications and in these particular solid bids, they are all [set]. In some of the energy storage projects, the utility is procuring a service of storage and do not specifically concerned about what you’re doing other than providing the functionality on the grid. And so it’s slightly less interest to the customer of what you’re doing and more interest so much on bid price and what services are you going to render.

So, that is an area where the customer shows a little less interested in end-use application and it is incumbent on us to understanding with our project partner is, how such thing going to make money and what we’re going to do with the hydrogen? So, that is another variant that we had recently experienced with where really the utility is looking for the service and price and just how we manage the energy and the value from the hydrogen is kind of up to us. Those projects are all projects where the build-on operate in participation with an ownership sharing of the project that’s starting to show up. And increasingly, I’m realizing if that’s what customers are demanding and expecting partly because they are not totally comfortable with hydrogen technology and trust our confidence partly because they want to see us participate in the risk reward profile for the project and then we are getting engaged with projects where we might actually be also using the technology as an owner operator. At this point we’re not ready to take that on entirely ourselves. So we’re doing that with partners but even our partners are saying, we want you in this. And I think that’s a very positive note.

Sara Elford – Canaccord Genuity Corp.

And just correct me if I am wrong, but the first PEM Power to Gas or electrolysis system going out there, will be that project with you -- and I guess am I right on that or is timing slippage or something else going to actually be deployed in advance with that one? And secondly, the book or pipeline that you’ve sort of laid out here, is any of that dependent totally, certainly some of it dependent upon an operating history with that technology in place before they go ahead?

Daryl Wilson

So the first PEM project will be the one in Germany with E.ON and Hamburg and there are others to follow very quickly afterwards. In the total backlog I have talked about there are some customers that are still alkaline technology. So there is a blend of alkaline in that mix. I am sorry I can’t recount exactly what the blend is, but it’s heavily oriented toward PEM because of the scalability of PEM. We have enough in house test data and performance profiling that our customers are confident to go ahead and order the PEM technology, not having seen all of the field performance, that does represent a high level of trust and we appreciate it. But we’re not getting a lot of waiting on – you’ve got to see if it really works, that behaviour does not manifest, there's good momentum on moving ahead with orders notwithstanding the lack of hard operating experience on PEM.

Sara Elford – Canaccord Genuity Corp.

And is there any timing issues with respect to that first project or do you know definitively when it’s going to be put in place? Or is it still sort of a moving target?

Daryl Wilson

The schedule, our German friends are usually very rigorous and very oriented toward being on time and so there is a schedule and it is point for delivery in Q4. Because things are first of -- its kind, there are learning challenges in some site execution issues. So there is a bit of unpredictability but right know the schedule is set and we’re all working toward it.

Sara Elford – Canaccord Genuity Corp.

And then just moving on, I just have a couple of questions with respect to this larger scale megawatt process backup power discussion that you’ve had, could you just talk generally on, you made reference to various folks approaching you and seeing whether or not you would sort of venture forth into this market and application and historically you’ve certainly not done anything with it, but now deciding to do it. Why would they be approaching you?

Daryl Wilson

Our cost, durability and performances had shifted quite dramatically in the last five years and this is a thing that we would have pushed out and said, no, we’re not sure, we can do that. Now we have the confidence to say actually this works and we will look at the cost, we look at the competitive landscape, we say no, we actually should be doing this. We sit down with customers and have intensive discussions. They of course know the technology options and choices. Fuel cells for continuous power generation have reached a level of maturity where it’s a known and accepted solution using (inaudible). So there are other technologies where there is good familiarity. They have now cost profile and performances history, cost of service agreements over the long-term are well known. We benchmark against those and we say there's something here. It’s serious enough that we’re debuting it in this call and we hope to follow with announcements in the future a more definite progress. We will walk before we run of course, but there is the confidence to move into these things, most importantly not just with us but with customers also.

Sara Elford – Canaccord Genuity Corp.

And presumably you make reference to alternative fuel cell technologies that are out there providing continuous power generations, so there is sort of cost durability performance metrics. Would this be an application for you where you would think that would follow a similar path of frankly reference sites because again it’s a bit different and then building from there or totally different in Power to Gas in terms of the evolution of the market ?

Daryl Wilson

I think there certainly will be reference sites in piloting, but the results of those activities are – it’s possible to know the results fairly quickly. The data center applications are 2 to 20 MW and so much like Power to Gas moving from 1 megawatt pilots to 2 to 5 MW to 10 MW installations is a natural trajectory. And then in the case of data centers it’s more of a backup application and then in continuous power generation similarly initial pilots and then larger plants. Applications and continuous power generation are also more naturally in the 10 to f 30 to 50 MW. So it’s a very different game. I'm not saying that we’re going to be in that level in the very near term but what I'm saying is we’re starting off on a journey and it could well end there which is pretty attractive.

Sara Elford – Canaccord Genuity Corp.

And then again you would follow an OEM partner model for this niche market that you go after –

Daryl Wilson

Yes, I expect so.

Sara Elford – Canaccord Genuity Corp.

And just one final one from me, I promise, just again from my own brain to understand, the price point per megawatt on something like that, where do you need to be at to make it to be relevant?

Daryl Wilson

We’re probably not comfortable closing that today given the status of commercial discussions, but it's an attractive price point and there is substantial revenue here for us.

Operator

Our next question comes from the line of Philip Shen of ROTH Capital.

Philip Shen – ROTH Capital Partners

So of your 59 million in backlog, how much do you expect to potentially recognize in 2014?

Bob Motz

I think right now if you look at sort of projected delivery dates we’re probably in the mid-40s. So basically to get past that $50 million threshold that we’ve talked about for some time now it wouldn't take a lot more order intake to drive that goal.

Philip Shen – ROTH Capital Partners

And can you talk to us about what the cadence of those revenues might be by quarter?

Bob Motz

I can’t really go into specifics as you can imagine, Phil, there is lot of fluidity on delivery dates. But I think the sense is going to be, it’s going to be incremental by quarter with the largest quarter being in the fourth. But how much is split between the third and fourth is going -- is really up for debate internally because if we can push stuff into September all the better. But we do believe that regardless we have enough production capacity here in the organization, that no matter what quarter it’s in, we have the ability to deliver it.

Philip Shen – ROTH Capital Partners

And wanted to get a sense for -- you guys talked about data center opportunities, can you describe what – could you guys see a potential hit in data center revenues in 2014 or do you feel like discussions are more in the early stages and it’s more likely a 2015 opportunity?

Daryl Wilson

We’re probably focused on order intake in 2014, for deliveries in ’15. But some of this is near term and very exciting for us. There is a lot of interest in bringing the green [stripe] [ph] to data centers given the proportion of energy that’s being consumed. There is more talk about pure renewable energy based data centers which is interesting and there are some nice synergies with our 380 volt DC backup system, the way the whole thing is being engineered with DC focused data centers which is also a theme in the data center market focused on energy efficiency and cost reduction. So I am starting to see some good themes line up, it’s not just about us, it’s about green, it’s about efficiency, it’s about cost reduction in data centers. So you put all those things together and you start to see some nice driving forces.

Philip Shen – ROTH Capital Partners

And can you give us the latest update on CommScope, obviously that's something where you guys could get some near term revenue opportunities, and CommScope had a press release and said that they wanted to invest in this opportunity to get backup power with the cell towers going, what’s going on there and should we think about revenues in 2014 or it’s just maybe a 2015 type event now?

Daryl Wilson

So as we referenced we had a decent order from CommScope in Q1 last year. They’ve not let up. We have been meeting jointly with customers in North America and elsewhere in the world and there is still interest but obviously it’s not a statement that it’s giving every quarter. It takes a fair while to develop projects and go through the quoting process et cetera but those things are still happening.

And there’s also other activities elsewhere in the world that we doing with other partners which shows some promise but expectations of recurring revenues quarter-in quarter-out which is not there yet, so we’re going to say more about it when there is more stuff that is behind it. I will tell you that last order in Q1 last year came up very short notice November-December and we were in production in January, so things can move suddenly and it’s a bit unpredictable.

I did also highlight that CommScope is a very capable company delivering into data center markets and other markets as well and it has actually been with their support that some of the data center activity is going on and we are seeing some very significant high profile customers where CommScope is getting us the access and the profile on the credibility with those customers to have some serious meetings and talk about some serious trials. So, CommScope continues to perform very well with good commitment to us as a partner. None of these is easy but the pay-off I think will come for sure.

Philip Shen – ROTH Capital Partners

You talked about the Chinese bus market and I know the government is investing heavily in reducing their air pollution and emissions and there is a big push with hybrid buses, plug-in hybrids as well as fuel cell buses, how large of an opportunity could that be for you guys and what is the promise there?

Daryl Wilson

So Phil I don’t probably need to tell you with all of your experience in those markets. This is China, it can be huge. But of course there is always an interest in China to have some for themselves and develop these markets themselves and so we are seeing early trial volumes. There are discussions of much larger volumes subject to the performance of the trials. If we can structure a partner relationships with counterparties in China to do this kind of thing together we are all over it. But we also have some caution as to just how far we can run and achieve our objectives alongside those customers. So it’s a positive development and we’re pleased through screening processes that we've been selected and looking forward to nurturing those relationships. Yeah, eventually the numbers can be really large but let’s wait and see how it grows.

Operator

And our first question comes from the line of Dev Bhangui of Byron Capital. Your line is now open.

Dev Bhangui - Byron Capital

In terms of your prepared remarks you talked about [inaudible] June decisions Enbridge which has been and are waiting for the decision from the province and subsequently obviously there will be some kind of an acceleration on that part I would suppose. You spoke about 50MW installations. Now just given the fact that Enbridge has been held up, do you expect any kind of revenues for this to show up some time in 2014 and would that be the upside or above the 90% of your 2014 revenues already booked?

Daryl Wilson

That is a good question; important to understand there has actually been no delay or being held on the Enbridge part, together we define that we wanted a particular requirement in a successful project. Enbridge comes at this as an owner [asset] [ph] operator in the energy business. They expect projects to have a respectable return on investment and they are not all that interested in simple demonstration projects to show things that have been proven elsewhere. So with those very stringent requirements what we needed was a procurement process that had the prospect of creating a return on the investment. That happened in March when the IESO in Ontario announced the procurement process for 50MW. There is a pathway to realize economic return on projects in that. We made our bid into that process on Monday on time of this week and then the bids are being evaluated. It’s a very disciplined process; the IESO outlined a point scoring system for how bids would be evaluated. Naturally we worked very hard to structure our bid in a way that we are biased to win but we are in a competitive process. So we’ll see how that outcome looks and we are very optimistic, we like our chances, but I should also say this is not the only thing we are doing with Enbridge, there is a series of activities in at least two other areas and having put the extra effort in on a bid on Monday –it’s a full steam ahead on stop 1 – stop 2 and stop 3 and that is the value of having a joint development agreements in the market for this application in North America with such a worthy partner as Enbridge.

Dev Bhangui - Byron Capital

Thanks, no, the reason I asked is because the 50MW is definitely not included in the 70 million that you talked about and so book project out of the 95 projects of 30 million and so on, and just given that we are still about seven months left of the year I don’t think that the RFP bid evaluation is going to take seven months, so I expected that a significant revenue will trickle into 2014, and I am assuming that [12MW] [ph] is approximately I would say anywhere between 1.5 million to 2 million per MW and that would be pretty significant that is why I asked.

Daryl Wilson

Yeah, it’s a good point, sorry, Dev, and I forgot to deal with the heart of you question, my apologies, so should things turn out [inaudible] with the Enbridge bid, it probably is 2015 revenue because there is some site development and approvals and that sort of thing to get along the way, they are not difficult but those will stand in the way of the delivery in 2014.

Dev Bhangui - Byron Capital

Now just going to I guess your CommScope and the data centres and so on, so CommScope and this is kind of piggy backing on what Philip was asking, they had a very good quarter, 26% growth, they said that the wireless division was the engine of growth, they talked about densification of the base stations and obviously by [virtue] [ph] of the data consumption and so on and that the carriers are very eager to make sure that those the VPSs have those backup power as well. And I understand that this has been postponed in terms of your [pros] [ph] converting into some rollouts but it looks like to me that it won’t be utterly optimistic to expect some revenue in 2014. Am I out of the ballpark completely in terms of expectations although there are some wrinkles here in terms of how CommScope is able to proceed even though there is a significant optimism and desire and need on behalf of the carriers?

Daryl Wilson

It’s possible. As I answered earlier we just have to see the order and get it processed. It’s [inaudible] possible. How probable is it? I can’t even say that because as I said a moment ago we landed an order late November, early December in 2012 and delivered in early 2013, so once it gets real we can move fairly quickly. But we've got to see those orders.

Dev Bhangui - Byron Capital

Okay, and then in terms of 2 to 20MW capacity backup power data centres, I mean again just given your numbers, and given I guess the components of your backlog between your onsite generation and power systems, the way I took it was 24 million of confirmed orders on onsite generation, majority of that would be translated into revenues. So when I am doing the calculations without talking about all the numbers here on the call, I find that you just need about 8 million to 9 million in terms of power systems to make your numbers of 40 million coming out of the existing backlog. Would that be right because you have a backlog of 34 million and I know that a significant portion is going to be with this – the OEM for which you received the 90 million order. But I mean you just answered just now that you expect at least about 10 million orders from power systems to be [coming] [ph] into revenues in 2014, so it looks like a significant upside to the 50 million projection for 2014. Am I right that in terms of the angle at which I am coming...?

Daryl Wilson

Not quite. So, at this point the energy storage projects are predominately in the onsite generation area but depending on what we are delivering some of them actually end up in the power systems area as well. And I understand this is confusing but one business unit here in Mississauga will deliver parts of a project and another in Belgium will deliver other parts. And so at this point we just have not seen enough stability and recurrence in the revenue for energy storage to split it out in its own right. We hope and expect that will happen fairly soon and when you see the pipeline you can expect that it will. But in the meantime a bit of confusion, I am sorry, and so you get the electrolysis portion and deliveries out of onsite, you get some engineering services, maybe service contracts or other development work and engineering work out of our division here in Mississauga. So there is a bit of landing and that [inaudible].

Back to the heart of the question we don’t need a large amount of revenues in Q2 that can be delivered in 2014 to make our numbers and upside we have lots of capacity but with the profile leaning more heavily toward the back end of the year I don’t want to start promising that we are going to blow the lights out on 50 million plus because we are working hard to deliver the 50, we can do it, but promising a whole lot more starts to get into over-promising, we don’t like to do that.

Operator

Our next question comes from the line of Carter Driscoll of Ascendiant Capital.

Carter Driscoll - Ascendiant Capital

Maybe just following up and then you’ve had lot of very good discussions especially in energy storage side but and I realize Daryl and Bob, you just talked about hoping to break out that component from onsite and power systems later this year. Maybe from a utility perspective and the RFP which you are quoting how does the project need to get characterized by whether it does get booked into one of your operating segments or the other, and how you could possibly pull those out over time and maybe just quantify the different types of applications that might require services and products in both those operating segments and the different potential revenue opportunity [indiscernible] equipment or fuel cells. I realize it’s kind of a complex multi-layered question but just trying to figure out what would eventually pull you into making its own operating segment, is it a certain project, is it a dollar figure or is it one that you can just draw more of the line of delineation between what should go into your current operating segments and being able to break it out into a third?

Daryl Wilson

I guess I have to confess that it’s a bit complicated and we apologise for that. The real issue operationally is we are committed to being a lean company and yet at the same time we are a global company. We have got operations in Mississauga, in Canada, in Belgium and in Germany. As we continue to grow we need to fire on all of those cylinders and just the way the accounting is set up the Toronto location and the Germany location part of our systems, the Belgium location is part of the – is really the heart of onsite generation division but as we continue to grow and deliver larger projects we are pulling resources to work on these projects across all three operating sites. That’s what creates some of the accounting complexity.

I don’t want to kind of bulk up one and say okay you are going to do all this because we get away from being lean, as to when we start to break it out and pretty consistent on the issue that, when there is enough steadiness so that we are showing the market consistent results in performance then it makes sense that we are managing the business, with this treated as a business unit and we will break it out.

Overall our strategy is to build on the strengths of the company and because we are working on emerging markets we are hedging in working across different segments in parallel so that as a compass could turn up more or less consistent results. That is hard to do, we just had a quarter where the numbers were lower but in no way has the trajectory of company and growth compromised as we put these pieces together, it’s a bit lumpy, Yes, that is not totally comfortable for investors. I understand that. But as things continue to grow I think it’s going to smooth out and then we will have it nice and clean and clear between energy storage power systems and onsite. Clearly the strongest growth trajectory is in the energy storage but there is lots of value in all the things that we do and we see those three segments continuing for some time.

Carter Driscoll - Ascendiant Capital

In terms of the propulsion contracts and the accounting how much of that do you control from a booking perspective or is it – is the work really geared by your OEM partner and you have to take it as a [comps] [ph] and that’s really what creates the lumpiness; do you have any levers to control the timing of when you do work on that project?

Daryl Wilson

So the large 90 million contract is the only project we have in our portfolio right now which is done on a percentage and completion basis of accounting, that’s driven by how much cost we expend in a given quarter in proportion to the total project costs. Much of the cost is manpower but not all, and so when we move into segments when we are heavier in prototype build and testing the costs are more intensive, the revenue effectively goes up. When things are a little bit more oriented toward work at the desk and studies and reporting then the costs are a little lower in that quarter and the revenue goes down. I think you saw last year some quarters where we were very busy and there were fairly significant demands and milestones and then Q1 a little lighter, it will still fluctuate up and down but we are talking about I don’t know plus or minus 25% rather than plus or minus 75%.

Carter Driscoll - Ascendiant Capital

Maybe last question getting back to the data center opportunity, you talked about some of the competing technologies and just kind of frame out what advantages you think your solutions offer versus what’s you are seeing on the battery side and from all capacitors and why you’re positioned well, maybe talk about the cost and performance vis-à-vis maybe select one or two of them and why you see such a good opportunity in the data center bucket?

Daryl Wilson

As data center operators look at their energy consumption more closely and look at the green renewable profile their minds open up to more creative approaches and I won’t start listing names but I think you are well aware of various parties that show a lot of interest in innovating in the segment to distinguish themselves. PEM Fuel cell is a very efficient way of delivering energy. It involves absolutely no carbon, provided the hydrogen is derived from renewable sources and it has that performance characteristic that are very highly responsive. So in contrast to high temperature fuel cells where they are needing to run on a continuous basis and don’t like interrupted and fluctuating operations our fuel cells are very tolerant to fluctuations on, off, up, down etc., also on the backup applications we’re more instant on, certainly in a diesel situation you’re anywhere from 30 seconds to a minute and a half to get a diesel system up and running at some level and then ramping beyond that. The fuel cell system is much more responsive and instant on, that’s attractive, so that the data center doesn’t skip a beat.

And then finally the architecture issues I mentioned earlier, fuel cells put our DC power, I don’t know by luck or good planning the architecture that we have worked with for now eight years is 380 volt DC power and that turns out to suit the DC architecture and data centers perfectly. So we have a good match. So, as I mentioned earlier, there is a number of themes going here that are aligned, it turns out where our capability is right on the mark. We had 30 KW rack mounted systems, actually when I first joined the company, so we’re very mature in that area, certified by UL and CE, very well engineered and the number of patents on the execution of indoor hydrogen backup solutions, so building on that architecture and platform which is now more than 8 years old for us, we took the next step to 100 kilowatt building blocks and putting those together in the megawatt blocks, makes a lot of sense, to our customers. So we are bullish on this.

Carter Driscoll - Ascendiant Capital

Just maybe last point of clarification, I think when you talked about the revenue shortfall in early April, you mentioned that you thought you had about 40 million pull-through in that [inaudible] figure, now you’re talking mid 40s. So there has been improvement over the past 5 weeks, is that correct?

Daryl Wilson

Yes, that’s correct. So as the orders come in, we have to make sure that we have to actually execute them and so what we are booking in, in Q2, some of it won’t be able to be executed in 2014 and some of it will but we’re closing the gap.

Bob Motz

Yes, and the other thing was when we went through the backlog and sort of scheduled the delivery dates this is where it came out. You know what we got a lot of one’s now that are showing Q4 rather than Q1, ‘15 delivery.

Operator

And our final question comes from the line of Rob Stone of Cowen & Co.

Rob Stone – Cowen & Co.

A couple of strategic questions, Daryl, first of all, on the power to gas business, you mentioned several times working with partners and a couple that you’ve named, Enbridge and E.ON. Is it the case that you see yourself in a given market, actually being approached by more than one partner who might be interested in bidding with your technology or are there – maybe we could call it other competing consortium of folks working on these activities?

Daryl Wilson

I think the answer is both, Rob. So certainly in Germany, we have seen the first condition where more than one party wants to work with us. That’s not new for us in the industrial hydrogen business. We bid contracts, some of them upwards of three parties using our technology and then adding their piece to it. So that little complexity shows up already in our industrial hydrogen business, and yes, it has shown up in the energy storage business. Some of the developments, because of the complexity and the newness it’s more common to find single proponents that are putting together the funding, the support, the utilities support for project and understanding the market for vendors and we’re up against our hydrogen related competitors and there is an issue of being selective as a lead or being put into an RFP situation competing against our other hydrogen providers. So all the variants are already showing up.

Rob Stone – Cowen & Co.

You talked about emerging business models, a number of different activities that could be associated with the utility wants to store power and once they it, it can be a number of different things. How many parties, typically your counterparties are then going to be involved in these projects where you’ve got a utility and you and possibly another technology partner and maybe something else on the offtake side, the number of folks involved, higher level of complexity?

Daryl Wilson

I think that’s certainly the case. Most typically we’d find in electric utility or gas utility are both involved and then you might have somebody else involved in the offtake of hydrogen, but certainly minimum too. The positive thing is that, that complexity is not phasing these customers, because energy storage is a theme, it’s not only a theme, it’s a need, there are mandates from senior-levels in these utilities to get on with it, figure this out, let’s get something happening. So there is more than the normal level of impetus in the utilities to make these projects happen. So notwithstanding complexity, which I think you’re quite right to point out, there is enough energy and focus in the organization that when we’re sitting down with consortiums and we have some that are bigger than two, there's regular meetings, there is good energy, there is commitments to get going with things. So it’s not an impediment at this point.

Rob Stone – Cowen & Co.

Question for Bob, as you look at what’s in backlog scheduled for 2014 delivery, assuming things go as planned, what range of gross margin on a blended basis, do you see based on the backlog you have today?

Bob Motz

Again what we always signal to the market is the target of 30% and when you look at the blend of what you see in power, which is definitely north of 30% and then onsite which range between mid to high 20s and some in the low 30s we believe that we will hit that target of 30% by the time we finish the fourth quarter.

Rob Stone – Cowen & Co.

And the final question I guess is – you talked about projects going with a build on operate model, and the potential for recurring revenue, is that a situation where Hydrogenics may be contributing cash or equity to some of these projects, or would you be providing the technology and services for your piece of the recurring revenue?

Daryl Wilson

It’s a good question, Rob. And I will remind you that in this area I talked about kind of walking before we run and proceeding wisely. So I want to assure investors we’re not going to get carried away in this area. But for good reason we’re being asked to be part of the delivery side of the project. That contribution could be in kind, so credited against government contributions to the project, in-kind contributions would be counted; that in-kind contribution could earn us a stake, an ownership stake in the project, so we didn’t contribute cash but we did contribute time. It could involve and we certainly make quotations where they involve the contribution of capital, so cash and it also could involve the contribution of assets. So we're contributing some portion of ownership of the equipment into the overall special purpose vehicle for the delivery of services.

So all of these variants have already shown us, we are carefully deciding what makes sense for us in our present time, the home market and the situation is not growing up so that we’re into project finance and power purchase agreements such as you would see in solar and wind, but I fully expect it will grow up to look like that. That’s a different cost of capital profile than our current situation and I'm sure we would mature into the type of business entity to handle that kind of blend in the future. But when I see this opportunity and it’s frankly more of a pull from customers and partners than it is a push on our side, I think it's a good thing for the business and we also get to learn about these applications from the actual trade flow and the use of the equipment. So all good.

Rob Stone – Cowen & Co.

Yes, recurring revenue is certainly enticing, what’s the typical term of the contracts that are under discussion for something like that?

Daryl Wilson

We have seen everything from as low as three years all the way through 20 years.

Operator

And we have no further questions in the queue at this time. I would like to turn the call back over to Bob Motz for closing remarks.

Bob Motz

Thank you very much. So I just want to thank everybody for being on the call today. I would like to remind everybody about the Safe Harbor comment we made at the beginning of the call and we invite you all to join us for our second quarter conference call which is currently scheduled for Wednesday July 30. Thank you very much everybody and have a nice afternoon.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!