Hydrogenics Corporation (HYGS) CEO Daryl Wilson on Q1 2019 Results - Earnings Call Transcript

May 14, 2019 6:56 PM ETHydrogenics Corporation (HYGS)
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Hydrogenics Corporation (NASDAQ:HYGS) Q1 2019 Results Earnings Conference Call May 14, 2019 1:00 PM ET

Company Participants

Daryl Wilson - CEO

Marc Beisheim - CFO

Conference Call Participants

Eric Stine - Craig Hallum

Amit Dayal - H.C. Wainwright

Raveel Afzaal - Canaccord

Emily Riccio - Cowen

Operator

Hello, and welcome to the Hydrogenics 2019 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 is being recorded.

I would now like to introduce your host for today's call, Marc Beisheim, CFO. You may begin.

Marc Beisheim

Thank you, operator. And good afternoon, ladies and gentlemen. We sincerely apologize for the slight delay getting started this afternoon. Hello and welcome to Hydrogenics 2019 first quarter conference call. With me today 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 also uploaded the report this morning on both SEDAR and EDGAR and would refer you to those sites for our disclosure documents. As indicated in our press release this morning, all financial references are US dollars, unless otherwise indicated.

I would now like to provide a brief Safe Harbor statement. This call and the accompanying presentation may contain statements that are forward-looking. These statements are based on our current expectations and assumptions that are subject to risk and uncertainty. Actual results could differ materially because of factors discussed in today's press release, in the MD&A section of our most recent financial statements, or in other reports and filings with the Securities and Exchange Commission and applicable Canadian securities regulators. We do not undertake any duty to update any forward-looking statements.

With that, I'll turn the call over to Daryl Wilson.

Daryl Wilson

Thank you, Marc. Good day, and thanks everyone for joining us on Hydrogenics’ 2019 first quarter conference call. As usual, today, I will review our operations and outlook. After which Marc will discuss our financial results in detail. Please refer to the presentation on our website for today's discussion.

Beginning with Slide 3, let me review some highlights from the past quarter, after which I'll provide additional information on recent developments and our near term areas of focus. First quarter sales were $8.1 million in line with last year as an increase in fuel cell shipments were offset by lower electrolyzer sales reflecting order timing. Our gross margin hit nearly 48% and Marc will review in the moment. And we ended the quarter with a solid backlog at $150 million.

Also noted on our last earnings call, we closed the Air Liquide private placement during Q1 resulting in $20.5 million of cash added to the balance sheet and received a 20 megawatt order from the Air Liquide to build the world's largest hydrogen electrolysis plant right here in Canada. We also recently announced that Hydrogenics was selected by Halcyon Power to supply a carbon-free hydrogen production facility in New Zealand. This is our first major win in the South Pacific and the 1.5 megawatt project should be up and running next year. Halcyon’s owners, Tuaropaki Trust and Obayashi Corporation are looking to implement a hydrogen supply chain strategy for New Zealand and Japan using our technology. While Alstom continues to aggregate orders, as its racked up nearly 100,000 kilometers of service using our fuel cells on the existing first trains.

Our heavy duty mobility applications are gaining traction worldwide including here in North America leading to further demonstration trials, RFPs and contracts. Demand trends are indicating additional orders this year across the entire mobility space in Europe, China and North America. So we remain well positioned to see substantial revenue growth in the quarters to come.

Now let me go over a few specific areas of focus for the company starting with Slide 4, a look at our history of scalability within hydrogen production.

As our long-term investors may recall we've been working with marquee customers such as E.ON and Enbridge for many years with the first major milestones established in 2012 and 2014, when we operated an energy storage facility in Falkenhagen, Germany, and then again in Homburg. These powered gas systems for E.ON use surplus renewable energy to produce hydrogen for storage in the country's natural gas pipeline network. It was a groundbreaking achievement that has served as an excellent reference site for recent years. This was followed by a 2.5 megawatt energy storage project for the independent electricity system operator of Ontario commissioned just last year in 2018.

Here Hydrogenics partner with Enbridge and operates an energy storage facility that provides grid regulation to the IESO and serves as a world class demonstration of our capabilities in North America.

Now we're advancing this technology tenfold with the Air Liquide 20 megawatt hydrogen facility expected to be up and running next year. The equipment will be installed at Air Liquide’s hydrogen facility at Becancour, Quebec increasing its capacity by some 50%. With an annual output of just under 3,000 tons, the showcase operation underscores our leadership in the PEM space and solidifies our long-term partnership with Air Liquide. Reference sites such as these and many others that I haven't mentioned are evidence of the strong business execution, with successfully larger projects. We're now quoting systems that are even larger and are clearly on the precipice of significantly scaling this application further.

Now turning to Slide 5, I want to provide an update on multiple areas of the company where activity levels are very encouraging. I just spoke about our leadership in the hydrogen powered gas space, and we're already bidding on applications larger than 25 megawatts across the globe. Elsewhere in the electrolysis part of our business, we're seeing greater demand for hydrogen production for fueling as well as industrial purposes.

Due to ongoing concerns about climate change, it should come as no surprise that there is growing interest for reducing or eliminating carbon dioxide emissions worldwide, putting pressure on organizations to find alternatives to Steam Methane Reforming. Historically, Steam Methane Reforming or SMR has been the go-to-solution for industrial hydrogen but electrolysis based on our PEM technology is showing a disruptive capability that will -- and as we drive costs down and offer a much better carbon footprint, we believe PEM will be preferred. So we look forward to leveraging our leadership position to drive new avenues of growth in this area.

Within the fuel cell arena, we're very upbeat about our expertise in the mobility space which cuts across many geographies as well as specific applications. For example, with buses, we have a solid start in China even in the face of current geopolitical and economic issues. And we find that market continue to be very attractive.

We're working hand in hand with many current and potential partners to solidify supply timing, and we're cautiously optimistic about the outlook for 2019. At the same time, in the heavy duty truck space, major fleet customers around the world are demanding emission free offerings, and we anticipate several key partners will emerge across the globe. And we're already providing demonstration vehicles to support our long-term growth plans, as I'll discuss further in a moment. And of course, the rail market continues to be one that shines -- gives us shine to our long-term partnership with Alstom, their trains have garnered global interest. And as I mentioned earlier, we are approaching 100,000 kilometers of service in the field all with Hydrogenics fuel cells.

There are currently four countries that are deeply engaged in the process of ordering hydrogen powered trains with eight more well on the way. We remain very upbeat about the outlook for rail train orders deliveries during this year.

Now turning to Slide 6, I just want to take a moment to showcase some of our bus and truck applications in North America that I mentioned a moment ago. We're working with the California Energy Commission’s alternative and renewable vehicle fuel -- vehicle technology program to develop and deploy advanced zero emission vehicles that reduce greenhouse gases and petroleum dependence. With technical support from Siemens, we've integrated a CelerityPlus fuel cell drive system into a 40 foot transit bus made by New Flyer.

After a 1,000 miles of testing without any issues, New Flyer’s Xcelsior bus platform is ready for demonstration over the SunLine transit route in Palm Springs, California. At the same time, we're working with the California Energy Commission on a truck initiative in conjunction with Daimler Freightliner.

In this case, the Daimler Chassis is integrated with our CelerityPlus fuel cell power module, and Siemens’ electric drive along with ACTIA battery. This system on the most popular freightliner chassis is now ready for demonstration by TTSI around the ports of Long Beach in LA as well as in the Alameda Corridor. Both of these projects in California with some of the best names in the industry position Hydrogenics for major orders across the heavy duty transportation space. We're also working with UPS in bidding on additional opportunities in this sector.

Before turning the call over to Marc, let me just wrap up by emphasizing where we currently stand with our 2019 objectives as shown on Slide 7. While slower than anticipated in terms of initial order flow, the Transportation segment is turning to be a very good growth vehicle for Hydrogenics. We're extremely busy in the rail space, where discussions with Alstom take place on weekly agendas, and with incoming bids and new opportunities and active planning for production. Our relationship with them remains strong and we look forward to working together as numerous orders take shape.

China remains a challenge in terms of predictability, but we remain optimistic about the long-term market potential. Our partnerships continue to open doors for us even as we seek to expand our customer base and leverage our industry leading position to scroll order placement.

As I said at the start, in 2019, we did not face our growth expectations this year on a large uptick in Chinese shipments, although, we are dedicated to serving the industry there as demand increases. Overall, we have not changed our belief that this year will show a significant top-line growth for Hydrogenics based on our current book of business and the numerous additional opportunities that are now in our place.

Our $150 million backlog and strong relationship with Air Liquide, our growing pipeline with Alstom and various other RFPs leave us well positioned for solid revenue expansion and improving bottom-line performance.

Even as our balance sheet is stronger due to the Air Liquide investment, we continue to manage our business conservatively and with discipline, always looking for ways to more effectively run the business, reduce working capital and increase margins. Our focus on sound cash management is just as important as our path to profitability. And we believe that nimble, streamlined operations serve us well in terms of improving asset utilization and ensuring appropriate returns on capital.

With that, I'll turn the call over to Marc to review our financial results in detail. Marc?

Marc Beisheim

Thank you, Daryl. As shown on Slide 8, we posted revenue of $8.1 million for the first quarter of 2019 in line with last year, reflecting a higher proportion of Power Systems shipments and licensing revenue. OnSite Generation sales were lower year-over-year due to order timing. As Daryl mentioned, we still anticipate substantial growth in 2019 across the board driven by our current backlog and shipping scheduling.

Gross margins shown on Slide 9, were 48% for the first quarter of 2019 versus 40% late last year. The higher performance year-over-year reflected product mix as Power Systems margins expanded due to license fee revenue recognized from Blue G. OnSite Generation’s gross margin in contrast was negatively impacted by lower fixed overhead absorption due to the low level of revenues and the low level of manufacturing volume.

Turning to Slide 10, our adjusted EBITDA loss was $1 million this quarter versus $1.6 million last year, an improvement that reflects the revenue and margins particularly driven by the Power Systems Group.

Slide 11 shows that the company's order backlog as of March 31, 2019 was $150 million, of which we anticipate delivering approximately $57 million over the coming 12 months. During the first quarter, we received $26.5 million of new orders, inclusive of the 20 megawatt Air Liquide award, and continue to bid on numerous project opportunities.

On Slide 12, our cash resources as of March 31, 2019 were $22.4 million versus $8.7 million at the beginning of the year, we continue to work towards being capital neutral as we scale the business and drive improved bottom-line results.

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

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from the line of Eric Stine with Craig Hallum. Your line is open.

Eric Stine

So maybe just a few questions here, just wanted to start with power to gas and talking about the impact of Air Liquide projects, 25 megawatts plus that you're quoting. I mean just some thoughts, obviously, the impact of Air Liquide is pretty significant. Do you feel that to really see the market start to move beyond that? Do you think other parties need to see that project in the ground and operating or is it -- it's simply that look, if it's good enough for Air Liquide partnering with Hydrogenics, that that's something that in and of itself can move projects forward?

Daryl Wilson

Good question, Eric. I think it depends on the customer. There's certainly customers that look at our historical work in Germany and with Enbridge in Canada, and that's enough for them, and certainly the full scale of the 1500E module -- model electrolyzer is on display at those sites. So they should be sufficient. But sometimes folks wonder about execution capability at larger scale. And there's some consciousness, but the vote of confidence from Air Liquide is a huge plus for us. And we have customers in recent months since that announcement say to us if Air Liquide is confident then we are too.

So we've certainly moved the needle in a substantial way. There will be further customers, the laggards who need more time and the more proof that will need to see that plants in operation. But essentially, what we're deploying in the Air Liquide site that they concur is a multiple of what's already on the ground at Enbridge, so there's really no fundamental change in the technology from an operational point of view or a performance point of view. This is also comfort for Air Liquide that this is not the first time we're doing this, but it's actually a replication.

But there have been inquiries over the last number of years in this power to gas application across fueling, industrial applications, blending with natural gas, many of the different applications, a strength of ours awe can look toward a whole portfolio of reference sites, and show that we have actually delivered power to gas as a solution against all of these different modalities and inspire confidence with prospective customers that we know what they're doing and where they go to company to do this.

I did mention in the presentation an important point, as we scale this application and drive the cost down, major customers are now going to look at electrolysis in a different way given the CO2 footprint of SMR, the incumbent technology here of stripping hydrogen off of natural gas. And that process SMR leads to a very substantial release of CO2. And we're now getting into the zone where we're competitive and one doesn't need to have huge costs going forward on the CO2 footprint to say, perhaps electrolysis is a better option.

And we have prospective industrial customers that are having that exact discussion with us right now. So this signal is I think an important disruptive signal in the market with a much bigger operating base potential for us in the future. So I'm encouraged on all of these points, but reference sites is the beginning of the whole story. And that's why we featured on the slide today as you know.

Eric Stine

And then maybe just turning to rail. Your commentary, deeply engaged countries, four of them. I mean, I'm assuming Germany, France, UK and Canada. But what -- I'd just love more color on the eight additional -- what you're seeing and maybe how you see those markets developing as compared to these first four?

Daryl Wilson

Again, we're seeing the power of our reference sites. So hundreds of prospective customers now have been riding the trains in Germany, and they liked the experience and this thing is catching on in a major way. So the inquiries are getting serious. Around the rail industry there are numerous consultants and other parties that participate in shaping transit projects and they are getting more and more well informed, whether it’d be EPC engineering companies, consultants and advisors. And we anticipate in the coming months there will be consultancy reports issued showing the relative merits of the solution. So now we have customers saying we're not sure we want to be the ones to build the last overhead catenary rail system. We prefer to be one of the early adopters on hydrogen rail. So this is a nice trend of events for us. And so we've been out of the mark eight countries or more where the discussions are getting more serious and the intent to allow hydrogen as a solution in the procurement process is a whole new feature.

There are also battery solutions and other innovative rail approaches but the energy that we can bring to the train using hydrogen is hard to match and the cost that we’re displacing the overhead catenary systems is very significant. So as the realization comes with trains running on the tracks as a reference site and more parties become informed about this, then bid tenders are being opened up to allow alternative solutions. And we can show our strength in these other countries.

So, in all, I think both ourselves and Alstom are pleased and surprised with the momentum. I understand investors are looking for revenue and so am I. And I think revenue is very much in the near future. Unfortunately, this is a segment that has fairly long lead times and decision making times are protracted. And I think quite correctly Alstom follows a discipline of not committing orders until they have orders in hands, but you need only to follow the public press and you can see that there is indeed sales momentum there. So we'll be in production real soon, and the top-line impact will begin to appear I think quite soon as well.

Eric Stine

Maybe last one, just for Marc. Just on the margin outlook by segment, I mean, obviously, OnSite was skewed by low absorption in Power Systems, may be skewed higher by the license revenue. Maybe just updated thoughts on how we should think about margins going forward. I mean is it still kind of that 30% plus level that’s being the target?

Marc Beisheim

Yes, I think we’ve given guidance that's kind of in the 25 range for OnSite and in the 30 range for Power. I think those are still good normalized averages. And I think you characterized the Q1 and margin condition quite well.

Operator

Our next question comes from the line of Amit Dayal with H.C. Wainwright. Your line is open.

Amit Dayal

The increasing inventories in the quarter, what does that doing by?

Marc Beisheim

That supporting shipments coming ahead of us. So the increase was not insignificant, was about almost $4 million, but that’s into work in process and finished goods and raw materials that is all attached to product and project deliveries in the coming quarters.

Amit Dayal

And just to be clear on the Alstom contribution, there was nothing in the first quarter from Alstom, right?

Marc Beisheim

That's correct.

Amit Dayal

And any contribution from Air Liquide on the project side of things in the first quarter?

Marc Beisheim

Not in the first quarter, and we will expect to be talking about that in Q2.

Operator

Our next question comes from the line of Raveel Afzaal with Canaccord. Your line is open.

Raveel Afzaal

Just starting on -- starting off with the OnSite division. You had a big increase in your backlog, but your NPM revenue forecast didn’t move much. Why is that?

Daryl Wilson

So with the Air Liquide contract, we have a very substantial percentage completion contract. And we want to be a little bit careful about how we parse that out in the coming quarters. So there's a little bit of conservative as to how much we've applied in the percent of completion of that project. And as I've mentioned, we continue to be a bit cautious around China. Our overall plan for the year is not loaded up with all that much China. But we have adjusted our historical expectations as to how much will come and how fast. So in total, I think a conservative approach which I think should be welcomed.

Raveel Afzaal

You don't have China OnSite. Do you?

Marc Beisheim

No, I think Daryl pivoted a little bit into the Power Systems Group for you as well. But no, there's no China and OSG.

Raveel Afzaal

Are you guys thinking that maybe some industrial electrolyzer sales are also lower in the OnSite division and that's being offset the Air Liquide revenues, will that also play a role?

Marc Beisheim

No, I would say that, where I realized we're coming off a fairly soft year on industrial hydrogen equipment. We're hoping to do a little bit better than the year that was there. And then to Daryl’s point, as we have a fairly complicated project that will run over two fiscal years and we're just in the kind of early scheduling, planning and kind of project phase, we're being cautious in our Q1 guidance regarding OSG related to Air Liquide in particular.

Raveel Afzaal

And we should think about the Air Liquide coming on in 2021 then, commercial operationally?

Daryl Wilson

No, the shipping date is for next year 2020 in the third quarter, I believe. So the percentage completion will progress through that period.

Raveel Afzaal

And then just moving on to the gross margins for the OnSite division, they have been kind of weaker up Q3 onwards. Is this something else like we had 11% margin in Q3? Are the margins on the industrial electrolyzer units being impacted? Is there more competition in the market? Or how should we think about what's happened over the last three quarters and extrapolate that going forward to get to the 25% target?

Daryl Wilson

So this is always uncomfortable discussion for us. Some years ago, when we were pretty hungry for work, we took on a number of projects with major EPC parties. They were delayed in a very major way on their site deployments. And thankfully, the last of those is behind us now with what you see in Q1. It's a lesson in not taking on I believe stuff I know. But when you're hungry and things tend, you some time do that. It's a lesson on how to manage EPC contractors, well learned and strongly institutionalized since that time. But we cannot change what we took on some years ago, notwithstanding the delays. And as I say, finally, it's behind us. So we expect now to return to more normal levels. I don't see that there is any, fundamental market change. I don't see competition affecting us in any new ways. We have always had good discipline in driving our costs down and I'm pleased with our progress in that area. And as we scale into larger scale electrolysis applications, it helps us to leverage into the supply chain and drive costs down further. So I'm expecting a return to normal is the short answer.

Raveel Afzaal

And then Alstom, should we expect some pre-engineering revenues, would they come before the order or do you think pre-engineering revenues come concurrently with the order from Alstom, their potential order?

Daryl Wilson

No, there is certainly engineering work. As we move through different train platforms, there is work to do. We have been very active with Alstom over the recent weeks even working in detail on multiple platforms. So the initial job and the 2015 order was focused entirely on the Coradia iLint platform, which is the original hydrogen innovative design product from Alstom, but the requests that are coming from the UK and France and elsewhere are not on the Coradia platform. They're actually at a higher power level. And there are some increasing levels of complexity and unique points about these other train platforms. It speaks well to the maturity of our team that we can work together and innovate on these other platforms. And while we do work to try to minimize the crossover and our rework, as each of these platforms are in different jurisdictions, there is a need for testing and certification against different standards in different countries. So that's incremental, non-recurring engineering. And there's some configuration work to apply the solution to the actual architecture of different train sets. So, while we're still pointing towards the production orders for the series production units, there is some fairly substantial non-recurring engineering work that will fall into the quarters to come.

Raveel Afzaal

And that kind of makes sense because even when we look at your Power division, which reported very strong margins and we strip out the licensing revenues, both from your revenues and your gross profit, even then your margins are incredibly strong and well above your long-term average. So would you attribute some of that to the pre-engineering work that you guys are doing currently for Alstom?

Daryl Wilson

It is engineering work and you very stood in your analysis, but it's not Alstom.

Raveel Afzaal

You can’t elaborate any further I guess.

Daryl Wilson

Other motive clients. And it's terrific to see that even without much I know you guys are still delivering very strong results speaks to your diversity. Can you speak a little bit about what you think is happening with China Q2, Q3 onwards, I'm guessing some of these subsidies should -- some of them should start to receive these subsidies now and/or do you think that's going to do to your China story going forward in Q2, Q3 near term -- more near term -- longer term, we are more optimistic?

Daryl Wilson

Right. So after some pause, we do see some movement again, with our existing partners, and we're just working through what that will mean for production this year. But the modest level of Chinese shipments that we put in the budget, we do have confidence that that can be delivered in the coming quarters. We then see expansion plans with our existing partners. So they're looking at scaling up because they've completed their first prototypes, and they're now ready for more. And then there are discussions with additional partners, which also could lead to opportunities at a larger scale. So there's many positive fronts here. We are trying to be cautious in our expectations. And many of the hard phases have been already passed through. So we have a large number of vehicles that are certified for sale on the catalog and the hard work and teasing pains of first prototypes and testing et cetera is done. So I think we're still looking at a very positive outlook. But we're being cautious about the magnitude of that right now.

We're often asked about the current trade discussions and the relations with Canada. One of our sales guys did a trip to China just last week and reported that he didn't have any discussion with anybody about those geopolitical issues. The focus was entirely on getting on with business and getting things done. So while we read a lot about those things in the news, there is regular business going on every day in China and with Canadian companies like ours. So there's a level of normality at the operating level that I think is also a positive sign for us.

Raveel Afzaal

Perfect. I have three more quick questions. But if you have more questions in the line, I can just get back in the queue.

Daryl Wilson

No, go ahead.

Raveel Afzaal

Okay, perfect. So with respect to the R&D expense, when you look at the Power division, it increased to about $1.2 million range. Looks like it's more to do with heavy duty trucking. Should we expect this number to stay around here for the next few quarters as you continue doing the HD trucking work?

Marc Beisheim

I think that's fair.

Raveel Afzaal

And then, the one thing that you said that was discussed, Air Liquide partnership, some clients may want to see how that progresses before you guys get orders. But then you're already bidding for larger projects already. So isn't that conclusive by itself saying that hey people don't want to wait for the Air Liquide partnership if they're already out there, and our fees are out there for new larger electrolyzer projects?

Daryl Wilson

Yes, absolutely. I think the key point is that things that were in the pipeline are now moving more quickly varies by the confidence that in the credibility that we have secured with the Air Liquide participation. So yes, I don't see waiting, I actually see acceleration.

Raveel Afzaal

And just finally, a more difficult question, I don't even know if it's easy to quantify. But when you look at the economics for SMR versus electrolyzer, you said that they are narrowing. How do you quantify that?

Daryl Wilson

That's a very complex question. And of course, we have the analysis. But it's a very strong focal point for us, because in the economy as CO2 becomes more of a focus, CO2 intensive processes especially become a focus and SMR is one of those. Similar to Siemens making it produces a very large amount of CO2. So clients around the world who are needing hydrogen are much more now attuned to the full story. And so we have developed models where we can understand the gap and understand what it's going to take to close the gap. And we have some work to do. I'm not saying we have arrived yet. But a factor that’s coming into these investment decisions and also investment decisions about trains and trucks and buses now is these assets typically are purchased with a multiple decade horizon. If you buy industrial hydro plant, you're thinking about its operation for 30 or 40 years. The writing is on the wall very clearly now that certainly 10 and 20 years from now, the tolerance for strong CO2 emissions will be drastically reduced from the way it is today.

So if you're buying assets that last 10 to 30 years, you're going to think very strongly about the future policy environment. So even though we still have some gap, even though carbon pricing is not well established to the high level today, because of planning horizon for these investments in transit and industrial investments, a whole different discussion is emerging. And so with customers today, we're going into these kinds of details discussing, our capital costs and our operating costs and [YOT] incumbent SMR solution. And we're now strong enough in striking range that we foresee decisions going in our favor, where they might have bought SMR in the past, and now there's a willingness to buy electrolysis instead. So, I highlight this especially today because we see it coming into our conversations with actual customers.

In terms of quantification, we probably won't be out with that publicly and widely real soon. It has a lot of location specific factors, whether it's the price of natural gas or the price of electricity or the preferences of the customer, or the carbon tariff reading that may be in existence. So there's multiple factors that vary by geography and customer. But we can signal that new trend is a foot very much in our favor.

Operator

[Operator Instructions] Our next question comes from the line of Emily Riccio with Cowen. Your line is open.

Emily Riccio

Hi thanks for taking my questions. My first one is in regards to transportation with fuel cells being paired with batteries. Have you ever seen notable momentum on this side of the business or any additional partnerships?

Daryl Wilson

Yes, indeed, most of the applications we are deploying on trucks, trains and buses all include battery technology. And the mechanism that I'm sure you're familiar with from the previous car, that Toyota created some years ago where there's an ability to recover energy into a battery bank, when the vehicle is braking. When you go into very hard mass vehicles like trains, that amount of energy is very substantial. So the fuel cell is not suitable to recover that energy but the battery is. And so all of these applications are actually a good blend of battery and fuel cell technology. So we never say we're competing with batteries. We actually see batteries as an integral part of our solution.

This then brings up an economic factor because the cost of batteries and the confidence in batteries has grown substantially over the last three to five years. So when a customer now looks at a hybrid solution with fuel cells and batteries together, the total cost of ownership has come down substantially and the confidence of what those batteries will cost that customer over a life cycle is much more clear than it used to be.

So this is where we're seeing good acceleration. I should finalize -- make a final point though,

batteries are not sufficient to do these heavy duty transit applications because the amount of energy that can be stored in a battery is relatively modest. And the advantage we have with hydrogen is the amount of energy we can put on the vehicle is very, very much higher than what you would do with a battery. So the original Alstom train, Coradia iLint has a range of over 800 kilometers, what's that more than 500 miles. And the only way I can deliver that range is because there are hydrogen fuel cells on board. So hydrogen battery are good friends. And yes, indeed, we're seeing good acceleration in the market, partly because of our economics and the value proposition we offer with hydrogen fuel cells, but also because battery economics and confidence are improving.

Emily Riccio

Okay, great. Thank you. That was very helpful. And then can you just talk a bit about the cadence of OpEx that you're expecting throughout the rest of the year?

Marc Beisheim

Yes, I think we're tracking is very much in line in Q1 with an expectation for the balance of the year. Maybe SG&A was a little bit up, given some initiatives on the marketing side. But R&D in around the $6 million and 4 times our SG&A in Q1 is a good number for the rest of the year.

Operator

There are further questions in the queue. I would now like to turn the call back over to Mr. Marc Beisheim for further remarks, closing remarks that is. Thank you.

Marc Beisheim

I’d just thank again, ladies and gentlemen. And apologize for the brief delay in getting started and have a good afternoon all. Thank you.

Operator

Ladies and gentlemen that concludes today’s call. Thank you for your participation. You may now disconnect, everyone have a wonderful day.

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