Hydrogen Engine Center: Wall Street Analyst Forum Presentation Transcript

TRANSCRIPT SPONSOR

Hydrogen Engine Center, Inc. (HYEG.OB)
Wall Street Analyst Forum
February 13, 2007 1:20 pm ET

Executives

Gerry Scott - President of Wall Street Analyst Forum
Ted Hollinger - Chairman, President and CEO
Don Vanderbrook - VP, General Manager
Phil Ruggieri - Director

Presentation

Gerry Scott

All right. Good afternoon, ladies and gentlemen. In our attempt to adhere to the published schedule, I'd like to introduce the next company in this morning's program, Hydrogen Engine Center.

Now, as I think a lot of you know, we've got a full plate of alternative energy and clean technology companies here tomorrow. And a couple of things I would note. First, I had a conversation earlier with the CFO of a company in the building industry that's -- who was speaking a lot of thought about how they incorporate this into -- sort of, into their products.

You know, the whole idea of alternative energy and how -- just the term 'alternative energy' is really kind of an outdated term. Now it's becoming like primary energy as opposed to just alternative energy. So we were having that discussion. This was not with an alternative energy company. This was a company that's in the building products industry. That was interesting.

The second thing I'll note before introducing the company is I got off the airplane yesterday and I went to the magazine section there at (inaudible) JetBlue. And I looked at all of the business magazines and at least two of them -- and I think three of them, their covers were green, including Fortune magazine. And if you looked closely at their covers and what they were saying, it was "Green for the environment, green for energy and green to make money."

And so to see two or three major financial publications -- and their covers were just like that, they were green -- I mean, you know, Fortune usually gold or something else like that, and they were just green. It was -- I found that really provocative. And there was more than one, there were several that were -- had this theme in this month's issue. It's interesting.

In any case, Hydrogen Energy -- Engine Center, symbol "HEC" designs, manufactures and distributes alternative fuel or primary fuel to internal combustion engines and power generation equipment for distributed power, agricultural, industrial, airport ground support, vehicular, business and home applications. All HEC engines and power generation equipment are capable of running on a multitude of fuels including but not limited to hydrogen, gasoline, propane, natural gas and ethanol.

Without any further introduction to the company, I'd like to introduce Ted Hollinger, President and Chief Executive Officer of the company. He is accompanied by Don Vanderbrook, Vice President and General Manager, and they've got an investment banker here -- a merchant banker, and they've got one of their Board Directors here.

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Ted Hollinger

Well, thank you. It's nice to be here. I'd like to tell you a little bit about background history on the company, a little bit about where we're going to go, and a little bit about the future in the next few minutes. I've had the privilege over the last number of years to be involved in two major changes in the economy. I participated in the semiconductor industry and I was part of the computer industry, and now I'm going to chance to look at what I think is the next major market that's going to develop.

I spent my early years at Fairchild Semiconductor, 1964 through '69, worked for the likes of Bob Noyce and Gordon Moore and Andy Grove and so on. And in 1969 I joined Advanced Micro Devices. I got some of the $0.10 a share stock, which was the promise in those days. 1973, I did a computer systems for -- the memory system for Amdahl Computer. So I spent a good bit of my career in Silicon Valley.

We didn't know how big those industries were going to be when we were participating in them. And we were all surprised by how quickly they grew up and what they became. We do know how big the energy business is and we do know what we might be able to achieve from this.

In 1984, I started my first company. I started Advanced Power Technology, a semiconductor company doing power devices in Bend, Oregon. We took it public and it was later purchased, still operational up there. In the year 2000, I joined the Ford Motor Company. They hired me as a Director of Engineering to work on fuel cell vehicles, electric cars, hybrid vehicles and hydrogen internal combusted engines. And the reason they brought me was my background on electronics and controls.

That group was merged with Axcelis from Germany, and with Ballard -- to form a new Ballard I was part of what was called the Ecostar Group. I went with that, not having then a career Ford person to Ballard. I was Vice President of the Power Conversion Group at Ballard. So I have had an opportunity to look at both internal combusted engines and fuel cells. And because of my age, I have nothing against fuel cells, I just don't believe that I'm young enough to see them in full bloom production, okay?

At the -- in 2003 -- in 2002, we introduced electronic power converter in May, and what I think is really the finest electronic labs in the country in Dearborn, Michigan in May. And then on August 7, 2002, I had the honor of introducing Ford's hydrogen internal combusted engine in Dearborn, Michigan. Bill Ford ordered me to do that, and I am grateful to him for it. It was quite an honor.

That was a changing point. And -- but we were talking about alternative fuel engines, because hydrogen became an internal combusted engine fuel for the first time as a commercial product.

At the end of 2002, Dennis Campbell came on as President of Ballard. He didn't want to do internal combustion engines. And he wanted to do fuel cells and we made a decision. I think we are both right. He had the right to make the decision he wanted and I had the right to make the one did. So I went to form Hydrogen Engine Center.

And we located in Iowa. On the screen there is a view of our -- rendering of our building. We went to Iowa not because I'm from Iowa but because Iowa gave us permits to do hydrogen. I couldn't get them in Michigan and I couldn't them on Ohio and few other states. So I saw the first person to give me a permit elsewhere I'm going.

So we started the facility in Algona, Iowa. The only place that Ford manufactured engines, has remaining engines there and started putting our plans together to build a building. What you see on the screen is the first dyno room, the tall roof building of it's type in the world. It is unique because it is class-one, division two from the roofline up but from the roofline down it is not classified.

What that means as we could connect that building to other buildings and move product between them. Now, if you are not in that space you don't understand how much of the difference that made. We think of that building will be copied a number of times around the world.

We have all of the First Mover advantages. The world has been kind to us. So with the concern over global warming and a mission, plus the concerns we have over foreign oil that created a market opportunity for all of us that is quite significant. And being the first to be on the space on the industrial side, I think we have a huge advantage of picking our partners.

The market is big. We are producing products. We -- one of the other differentiating points for us what that we wanted to get engines into production right away. We did not want to wait around and take a lot of investment money for research. We want to get product out there. The facility that you saw on the screen earlier is part of a facility that can later be expanded to 148,000 square of manufacturing space and 70,000 square feet across the way of manufacturing for genset.

We've done quite a lot of work. We broke ground on August 19th of 2005. And we had people in the building or early on 2006 and we've been producing engines in that facility during last year. What we want to do is run a capitalized on the promise. We saw a bit of a chicken and egg problem for a while was hydrogen where if you had the hydrogen, hope we can use it and if you built engines that run on hydrogen we're getting at the hydrogen.

Well, we wanted to just eliminate some of that and get some engines out there. Now, we have a unique position, our engines will run on all fuels including gasoline. So we can sell our product into existing marketplaces if we need to generate revenue. Something it feels so people don't have an opportunity to do and we also can modify those engines to run on hydrogen or ethanol or whatever other fuel you would like to run.

We shipped well over 500 engines so far, we'll do lot more this year. We've got a new configuration that's on coming on display next week up in Toronto on a 4+1 that's going on windmill. Wind application, we're working on the Montreal and Vancouver airports. We've already shipped some bus engines so we are moving -- starting to move some products.

The global warming, the carbon dioxide emissions is one of the key drivers in our business. In fact, if you took the EPA requirements and the Kyoto requirements out of the world, you'd have to question why we would be doing hydrogen engines. Folks, I don't think the emission problem is going away anytime soon and we think we're part of the solution.

There are 168 countries that are committed to reducing greenhouse gasses as part of the Kyoto Accord. These countries are looking for products and so we tend to be shipping our water products internationally.

Just to give you an idea, I've put this slide in there we're not going to cover this one for sure. But just you might want to look and see, these are some of the countries are that signed it and I thought this was, kind of, nice to see their flags with their names.

We have an advanced product development group and we have a little bit of problem. By the way one of the things that we wanted to do is establish our brand for our engines. You know, we reverse engineered if you would, and generated a new version of our Ford engine.

But of course, we cancelled others for Ford engine because we are in our Ford Motor Company. So we came up with a name Oxx Power, O-x-x power, okay? that echoes back to when we had wagon trains going across the country that they were pulled by ox and rather than horses, very much, so widely to decide that there is horsepower.

Well, along that line, our controls are called a Oxx Boxx -- O-x-x, B-o-x-x, where we had a little fun and we have our research and development group that's doing new engine work is called the Oxx Works. We have a very good dealer network. We acquired a lot of the Ford Power products, distributors only one of the business, they already knew our products.

This was a big help and that's why we were able to move products into marketplace quickly. We didn't have to train them, they already established. And so we could get product in the people's hand quite quickly. As you know from my description or background, that I came out of Silicon Valley and I was and integrated circuit designer, that intellectual property is an interesting thing.

We have three patents that are trials, three that are in drafting right now and may or may not be filed right now. There are four that are in prep that should be going in. so there are total of 69 patents so far in Haber. In addition to my self, we acquired Tapan Bose. Tapan is the President of Canadian Hydrogen Association, he use to be a professor at university Quebec in Trois-Rivieres.

And he is one of the world's leading experts on hydrogen. He also has an interest in intellectual property as you remember were other people. Our target markets are not on road vehicles, we do not do cars and trucks, we do fleet-oriented vehicles such as urban buses, airports. We're looking at doing some brainier application now.

On the distributed generation side, we're particularly interested in wind farms, we have been working on wind-to-hydrogen conversions. And we'll talk a little bit in a few minutes about fuel by wire, if you're not familiar with that concept, it's ability to move electrons over the wires at that time when they are not constricted, and generate fuel, this case, hydrogen electrolyzed water to make hydrogen to reuse it at a different time.

So it's a time of use problem, if you had a constriction between here and exit sign getting power across there, well you might deliberate at night and then re-burn the hydrogen during the day. It's a fairly big market. Our engines will run on a water fuels. So we're doing work in India -- chlor-alkali factories that are burning hydrogen that's a waste product. Now it's not clean enough to be fuel cell, but it's clean enough to run on internal combust engines. So that's a big market opportunity.

We are doing some work with on irrigation with ammonia. And I would love to take the whole 20 minutes and talk bout ammonia, but we won't. I think it's the fuel of future. We are selecting our markets carefully. We're doing -- taking advantage on the hydride electric technology that sounds there on vehicles. But we have adopted it for utility voltages.

So if you looked at in my case would be a Ford, because I came out of Ford. But nothing as Toyota or Honda, if you look at voltages out of those they wouldn't be sufficient to run utility voltages. We have redesigned that to do that. And so we're taking proven technology and adapting it into markets that we can have into productions quite quickly.

We've got a lot for drivers and I said earlier sometimes it's all price when gasoline went to $3 a gallon last year we had a lot of interest in what we were doing. When it dropped back to $2 there was a less interest there. But the global warming has continued to be a concern. Hydrogen engines do not have any emissions on -- the NOx emissions are at level that would be – they are not zero but there still well they would be qualified as zero.

Our name which shows into position as to color of the Company, you know, you already talked about green. Why green because that's where we wanted to go. Hydrogen Engine Center if you go to the website and put it in there we're going to come right up on – you look at hydrogen or hydrogen engines you'll come right to us. That's because that's where we want to go.

There's a lot of customers out there looking for products. We have the capability of producing them and we can start to scale our operation up now. So we run through a couple of the vehicles. We have shipped engines to Urban buses this happens to be one of them. This is an ISC bus and it's been driving around the country. This is a modified Ford V-10 engine that we did. And we are about to do our own version we've got a new 7.5-liter engine that's specifically built for bus freights and will be out later this year.

Airports because of emissions because they are fleet oriented. We have a worldwide agreement with Air Liquide they are the world's largest gas supplier. They will supply the gas and the tanks to ground support equipment inside defense vehicles, and we will supply the engines.

We are working that in Canada and we will soon working that in rest of the country. I'll get back to that in a minute. We have shipped to NREL a National Renewable Energy Labs part of DOE and Xcel a genset that takes hydrogen and puts the power back into grid, putting the power back into Boulder Colorado. This is part of there Xcel Energy's website it shows you how the system goes together.

This is the first project in this country where we have stored wind energy. Its importance is huge wind doesn't blow when we want to blow unfortunately. And so we don't get full utilization of it. This is a way of averaging and out storing it and again becomes a very good example of time of use. This is Ramea Island and I'll show you the picture, because folks we don't want to go, even I know it's going to be a little cold out there. This is southern coast in Newfoundland. It is where natural resources Canada's test site for wind is.

We have a 250 KW gensets that is it's going to on display in the Trois-Rivieres next week as already said that it's going to wind here and cover this island. It's part of a program and there is a link on here if you -- I would recommend you take a look at this very nice video and they're talking about the Canadian program.

They are going to replace diesel gensets in villages and small cities in Northern parts of Canada. There is a 168 cities that are been Mark and the idea is to put windmills in and generate hydrogen. So you don't have to have power from the grid, you don't have to use diesel and then burn the hydrogen when the wind is not blowing.

Clearly, if the wind is blowing at the time you need the power, you use the wind blower. There are number of things we like about winds, we like the fact that it's very fast growing segment of the market. We like the fact that storing energy creates a second wind market opportunity and of course, we like the fact that it's environmentally, friendly and renewable.

Jumping back to the buses, there are lot of buses and as soon we slide down and go over this to tell you how many there are here. There are over 100,000 buses in Calcutta in India. Most of those will be running on compressed natural gas, which we could also do. In the gensets we're putting some hydrogen and that will reduce emissions.

So cities tend to be very concerned about emissions, the bus fleets are something that we're -- we think it can reduce emissions and give good quality product. The future of airports, it's a very large market there are three possible players on it. Fuel source, electric vehicles and by the way in this particular case we actually compete against some of the technology I worked on in foreign so they do electric vehicles of LA and hydrogen engines.

We think the hydrogen talk about the engine is going to be the choices, the easiest to service and if it's on footprint leather and is more cost effective. But we'll at time see how that plays out. By the way for those who are not familiar, there's two sets of rules in this world, one is at inside your airport fences and one is outside the airport fences.

The biggest problem here is insurance on a hydrogen powered vehicle close to these rather expensive plans. Very quickly, there are a lot of airports in the United States, when you come a lot of them are very smaller airport and wouldn't have baggage tractors, total of how many gates there are, and how many baggage tractors here, list does not count UPS and products and stuff. We have big fleets of vehicles, so at $12000 an engine were more cost effective than electric vehicles.

And this is just a little picture to show you -- emphasize the potential with small gear or emissions at airports. We will be targeting other airports and we can add to this list opened in New York, which were actually has moved up on a list. Lot of the airports is very interested in doing this kind of work to clean up from the emissions that they have.

Wind times and you can all look this up, there is lots and lots of data. I don't want to crawl on this. It's a very large number. (inaudible) to me is going to be a one of the most important changes that we are going to see in the next decade.

We are going to see more and more of this as prices on electrolysis came down and are competitive. The ideas that we could deliver fuel to you, in fact the utility could well become a fuel supplier, because we can deliver fuel to your home, over the wires at night, generate fuel that you can burn it off during the day, which would be the ultimate in load leveling.

Just to give you an idea, there are 70,000 thousand homes -- single family homes in 70 million, not 70,000 in United States. And again I won't dwell on that particular one. We are working with company one of England called ITM power. This is a slide from one of their presentations and it shows you what's -- what the effectiveness of electrolysis is.

There are two things that are important, one is the initial cost of the electrolysis, the capital equipment cost had been up in the 2000 over kilowatt range. They are not talking $164 a kilowatt, you can plug that in there. Also they have just announced that they have got $10,000 hours on electrolysis with no loss of performance. That's also huge in when you do a life cycle cost.

We are very pleased, we're working with them. And of course we provide the other part of it the make the hydrogen, we burn it, thank you. The other thing I want to show you, I want to show you a process that we've been working with. We did some work with Pacific Northwest Lab and some other folks. I am very bullish on ammonia.

This slide shows what would happen if you use ammonia there is two messages here. One is it doesn't impact the environment at all. We could take wind energy or solar energy, capture it, first as hydrogen and then convert the hydrogen by taking nitrogen from the air and make ammonia. We can store that ammonia and use it at that location or we could transport it.

For instance, we could make ammonia and how to go near down Argentina, which has lots of wind. Put up on the ship and bring it in, we could put it islands out in the oceans, I mean there are lots places you could do it and then put it back in and burn it just like you would hydrogen in engine.

We've done lot of work in fact, I probably done as much work at ammonia engines as anybody in the world right now. And I am not breaking about it, I -- just a fact. And we will be introducing one of those engines in California, this summer it's going to be on irrigation project. We want to run it all the year.

All the irrigations that's out there season and get some hours on it, so that we can see what kind of durability we are going to have. We also are building what we call open power units and these are products we are shipping right now. And this could run on any other fuels as well.

Lot of these go out to the old patch they could go to irrigation and it's basically an engine with the radiator and a cooling system on it. It's got a key on it and just like you start your car, you start this engine and run it. You can put a -- we have got some going to our farm down and reservoir where they put in power takeoff out of that.

I don't know what they are running on it. But they are running something. From a competitive point of view, we have the advantage of already being in the market. We produced 500 engines. We will produce 10 times as much this year hopefully. Short-term competitors could come from other internal combustion engine manufacturers.

We don't see any of that want to come into this space. And by the way here is a point you should know. Internal combustion engines have been getting smaller and smaller in vehicles and they become lighter in weight. And those don't favor industrial applications. They like the bigger heavier engines.

In the future we'll see more competition from fuel cells and from electric power resources. I think the keys to success for manufacturing obviously, aggressive brand marketing well the horse power you can see we've betted upper in the right hand corner.

We could scale our operation, that's already been designed to just unfold the building and unfold it again and of course we got to stay up all the times. So we've got to keep the new technology rolling. I am not going to go through these I put them in so that you would -- could look at our organization, how its all's organized a little background of some of the people.

You might check on a slide on page 33, Don Vanderbrook who is sitting in the audience here today has joined us from Generac. That's interesting, isn't it? One of our competitors has come out to work for us. He must have seen something. A quick look inside our buildings. On page 34, the Dyno room, this is before it was -- well it's being finished up, before all dynos were in there.

On the upper left hand side, you see our manufacturing. One of the things unique about this in-floor heating, there is no heat inside that building. So all coming through the floor. We capture the heat off the dynos and heat our own building. We got five miles of tubing and breakthrough out of that.

We are working with the Disney Group on our advertising, and we're very pleased with that. And then on July 31st, we had the Governor's date of Iowa come up and dedicate the industrial part that we're in. Now, he dedicated to my wife's name. My wife died of a stroke a little over a year-and-a-half -- almost year-and-a-half ago.

Instead of cutting a ribbon, we cut a gasoline post, okay, to be symbolic with cutting our dependence on foreign oil, if you would. We can help eliminate our dependence on foreign oil. We can help eliminate green house gases.

And if we look at what we can do with electrolysers and the creation of ammonia, I think we can answer the question of how we got off our dependency on foreign oil. We had a visitor from [General's] office. He told us that Congress didn't believe there was a silver bullet. Gentlemen, I guess all gentlemen in the audience today, there is a silver bullet.

Hydrogen is the silver bullet. And we know how to -- we have it. We know how to do it. So I think the future looks very bright to me. We've got technology for today and we got the technology for tomorrow.

Thank you.

Question-And-Answer-Session

Unidentified Audience Member

[Question Inaudible]

Ted Hollinger

I am sorry. The question is that -- I think you all need to be (inaudible). The question is we sold 500 engines during the last year? Yes, that's correct. And that we're going to be all 5,000 this year. That's our plan.

Unidentified Audience Member

And what are the price points?

Ted Hollinger

The price points vary from about $1,450 on a low end to $18,000 on the top end, depending on which engine you have. The bus engines are $18,000, the V10s or V8s that we do. And if you just wanted a long block, then the price are roundabout $1,450.

Unidentified Audience Member

And margins?

Ted Hollinger

Margins range anywhere from 8% to 12% of low-volume stock to well over 50% on higher stuff. So obviously, what we'd like to do is run at capacity and sell at the higher margin products. But I want to run at capacity.

Unidentified Audience Member

[Question Inaudible]

Ted Hollinger

Our mix right now is mainly gasoline engines, because we have stepped into a void created by Ford Power Products. We expect as we go through this year the nexus is going to change. I would like to see a change about 5% a year. That will make our numbers and then sum to getting more and more hydrogen.

We've been getting pleasant surprises on other fields, requests that we didn't anticipate. So I think we'll beat that number by the end of the year. But I would expect this to be, you know, 90-10 on alternative fuels this year and we will grow it over time. We are starting to do systems.

And the systems are almost on oil. We don't do any systems under gasoline. So as those numbers pick up, the margin -- what do you think is going to be, if we include the system engines? It's got to be closer to a third of it maybe.

Phil Ruggieri

Absolutely, a lot more value-add there.

Ted Hollinger

So if you included our engines that we are internally using into that, then the number is more like -- you know, a third of them will be going into alternative fuels and two-thirds will be -- [we just hope it's less].

Unidentified Audience Member

[Question Inaudible]

Ted Hollinger

Revenue target this year…

Phil Ruggieri

29 million.

Ted Hollinger

29 million. Thank you, Phil.

Unidentified Audience Member

Calendar year?

Ted Hollinger

Calendar year. Yes, correct.

Any other questions.

Unidentified Audience Member

[Question Inaudible]

Ted Hollinger

What the competition looks like? There is a lot of competition coming on the fuel cell side. It's a ways away. On the internal combustion engine side, there is a lot of people working in the vehicle side. BMW and Florida are working very fairly. I spoke in Victoria, in Vancouver Island, little over a week ago that General Motors has got 600 people working on in this space.

We absolutely don't want to go there. They could cross over and come into our space, but they have got their hands full. I don't think they will be. So I think the competition right now is going to come from fuel cells. And there will be some competition in some areas from cleaner diesel technology.

Unidentified Audience Member

[Question Inaudible]

Ted Hollinger

The ability to deliver is absolutely a factor. And you know, I think, that's what we've done over the last year as proving to them we can build these engines. It takes a long time to establish a brand. We've been very fortunate with our brand being accepted out there. I mean think about it. We are a little company in Algona, Iowa, and we've got people buying our engine and replace it with the Ford engine. Now, that's pretty big step.

Unidentified Audience Member

[Question Inaudible]

Ted Hollinger

We haven't got it. We're announcing it. We will shortly have. But we've got a couple of big OEM contracts we hope to announce shortly, but I don't have those yet where I can do that.

Unidentified Audience Member

[Question Inaudible]

Ted Hollinger

Phil, you want to?

Phil Ruggieri

I didn't hear the question.

Unidentified Audience Member

[Question Inaudible]

Phil Ruggieri

I could do that. Yeah. There is approximately 45 million shares fully diluted, maybe 25 at hand. Current market price is $3 or $3.10 or something. So with that number, you know, you're roughly a $61 billion market cap.

What's interesting is the comparison charts of the fuel cell companies like Ballard, like the companies that have it, and I would tell you our company which use delivery in product today and, therefore, creating standards by which utilities will start expecting our internal combustion engines that could run on these kinds of fuels with their gensets, etcetera, etcetera.

I would tell you that our market cap is probably in the lower 10% of the industry, because frankly Ted has taken the position up until now, literally today, in which he said I'm not going to unveil the curtain on this company like the fuel cell companies do and talk about products that someday in the future I may actually deliver.

Until I can have the products designed, ready and go and protected, have the manufacturing capability in which to produce them in large quantity, and have the sales and distribution channels in place with which to market them. And interestingly enough, with about $11 million of equity capital stake and about a year in change, he is confident.

Unidentified Audience Member

[Question Inaudible]

Phil Ruggieri

They will come together, and today is the unveiling of the company.

Ted Hollinger

We have time for maybe one more question. I don't want to take next speaker's time.

Unidentified Audience Member

[Question Inaudible]

Ted Hollinger

How much stock is held inside?

Phil Ruggieri

Yeah. I would say, probably, 15 -- probably, 20 million. The 25 million is in the market.

Unidentified Audience Member

[Question Inaudible]

Ted Hollinger

Yes.

Unidentified Audience Member

[Question Inaudible]

Ted Hollinger

Yes. Thank you very much.

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