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Edited Transcript of HYG.TO earnings conference call or presentation 14-May-19 5:00pm GMT

Q1 2019 Hydrogenics Corp Earnings Call

Mississauga May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Hydrogenics Corp earnings conference call or presentation Tuesday, May 14, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daryl C. F. Wilson

Hydrogenics Corporation - President, CEO & Director

* Marc Beisheim

Hydrogenics Corporation - CFO & Corporate Secretary

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Conference Call Participants

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* Amit Dayal

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst

* Emily Joyce Riccio

Cowen and Company, LLC, Research Division - Research Associate

* Eric Andrew Stine

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Raveel Afzaal

Canaccord Genuity Limited, Research Division - Analyst

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Presentation

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Operator [1]

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Hello, and welcome to Hydrogenics 2019 First Quarter Conference Call. (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.

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Marc Beisheim, Hydrogenics Corporation - CFO & Corporate Secretary [2]

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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 U.S. 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.

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Daryl C. F. Wilson, Hydrogenics Corporation - President, CEO & Director [3]

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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%, as Marc will review in a moment. And we ended the quarter with a solid backlog of $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 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, it has 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. I'll 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 Hamburg. These Power-to-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 partnered with Enbridge and operates an energy storage facility to provide 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 hydrogen facility in Bécancour, Québec, 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 putting 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 Power-to-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 cost 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 revenues of growth in this year.

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 to 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 are 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 the one that shines -- gives a 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 hydrogen fuel cells. There are currently 4 countries that are deeply engaged in the process of ordering hydrogen-powered trains, with 8 more well on the way. We remain very upbeat about the outlook for rail train orders and 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 our 40-foot transit bus made by New Flyer. After 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 and L.A. 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 and 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. Whilst lower than anticipated in terms of the 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 a strong one, and we look forward to working together on numerous -- 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 for industry-leading position to spur order placement. As I said at the start of 2019, we did not base 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 significant top line growth for Hydrogenics based on our current book of business and the numerous additional opportunities that are now in our plate. 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 profit -- 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?

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Marc Beisheim, Hydrogenics Corporation - CFO & Corporate Secretary [4]

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Thank you, Daryl. As shown on Slide 8, we've 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 shipment 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 continued 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 cash flow neutral as we scale the business and drive improved bottom line results.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Eric Stine with Craig-Hallum.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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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 you 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 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?

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Daryl C. F. Wilson, Hydrogenics Corporation - President, CEO & Director [3]

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Yes. Thanks. Good question, Eric. I think it depends on the customer. There is 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 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 had customers in the 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 need more proof that will need to see that plant in operation. But essentially what we're deploying in the Air Liquide site at Bécancour 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. Strength of ours is we 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 a confidence with perspective customers that we know what they're doing and we're the go-to company to do this.

I did mention in the presentation an important point. As we scale this application and drive the costs down, major customers are now going to look at electrolysis in a different way given the CO2 footprint of SMR, the incumbent technology here restricting 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 impute huge costs going forward on the CO2 footprint to say perhaps electrolysis is a better option. And we have perspective industrial customers that are having that exact discussion with us right now. So this signals, 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 it on the slide today, as you know.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Yes. Perfect. Okay. And then maybe just turning to rail, your commentary, deeply engaged countries, 4 of them, I mean, I'm assuming, Germany, France, U.K. and Canada, but what -- I'd just love more color on the 8 additional what you're seeing and maybe how you see those markets developing as compared to these first 4.

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Daryl C. F. Wilson, Hydrogenics Corporation - President, CEO & Director [5]

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Yes. Again, we're seeing the power of our reference sites. So hundreds of perspective customers now have been riding the trains in Germany, and they like 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 be EPC, engineering companies, consultants and advisers. 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 who build the last overhead catenary rail system. We prefer to be one of the early adopters on hydrogen rail. So this is a nice turn of events for us, and so we've been able to mark 8 countries or more where the discussion is 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 track 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 hand. 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.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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Okay. 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, maybe 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 as being the target?

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Marc Beisheim, Hydrogenics Corporation - CFO & Corporate Secretary [7]

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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've characterized the Q1 margin condition quite well.

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Operator [8]

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

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [9]

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The increase in inventories in the quarter, what was that driven by?

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Marc Beisheim, Hydrogenics Corporation - CFO & Corporate Secretary [10]

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

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [11]

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Understood. And just to be clear on the Alstom contribution, there's nothing in the first quarter from Alstom, right?

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Marc Beisheim, Hydrogenics Corporation - CFO & Corporate Secretary [12]

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Yes, that's correct.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [13]

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

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Marc Beisheim, Hydrogenics Corporation - CFO & Corporate Secretary [14]

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

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Operator [15]

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

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Raveel Afzaal, Canaccord Genuity Limited, Research Division - Analyst [16]

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Just starting off with OnSite division. You had a big increase in your backlog, but your NTM revenue forecast didn't move much. Why is that?

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Daryl C. F. Wilson, Hydrogenics Corporation - President, CEO & Director [17]

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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 conservatism as to how much we've applied in the percentage 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.

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Raveel Afzaal, Canaccord Genuity Limited, Research Division - Analyst [18]

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Right. You don't have any China in OnSite, do you?

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Marc Beisheim, Hydrogenics Corporation - CFO & Corporate Secretary [19]

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

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Raveel Afzaal, Canaccord Genuity Limited, Research Division - Analyst [20]

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Okay. Are you guys thinking that maybe some industrial electrolysis sales are also lower in the OnSite division and that's being offset by the Air Liquide revenues? Would that also play a role?

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Marc Beisheim, Hydrogenics Corporation - CFO & Corporate Secretary [21]

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No. I would say that I realize we're coming off a fairly soft year on industrial hydrogen equipment. We are 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 2 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.

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Raveel Afzaal, Canaccord Genuity Limited, Research Division - Analyst [22]

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Got it. And we should think about Air Liquide coming on in 2021 then, commercial operation date?

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Daryl C. F. Wilson, Hydrogenics Corporation - President, CEO & Director [23]

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

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Raveel Afzaal, Canaccord Genuity Limited, Research Division - Analyst [24]

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Perfect. Okay. And then just moving on to the gross margins for the OnSite division, they have been kind of weaker Q3 onwards. Is there something else like we had 11% margins in Q3? Are the margins on the industrial electrolysis units being impacted? Is there more competition in the market? Or how should we think about what's happened over the last 3 quarters and extrapolate that going forward to get to that 25% target that you have?

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Daryl C. F. Wilson, Hydrogenics Corporation - President, CEO & Director [25]

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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 are thin, you sometimes do that. It's a lesson in 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've 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.

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Raveel Afzaal, Canaccord Genuity Limited, Research Division - Analyst [26]

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Perfect. And then also should we expect some some preengineering revenues? Would they come before they order? Or do you think preengineering revenues come concurrently with the order from Alstom, a potential order?

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Daryl C. F. Wilson, Hydrogenics Corporation - President, CEO & Director [27]

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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 in 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 U.K. 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 NRE work, as each of these platforms are in different jurisdiction, there is a need for testing and certification against different standards in different countries. So that's incremental nonrecurring 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 toward the production orders for the series production units, there is some fairly substantial nonrecurring engineering work that will fall into the quarters to come.

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Raveel Afzaal, Canaccord Genuity Limited, Research Division - Analyst [28]

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Got it. 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 that -- would you attribute some of that to the preengineering work that you guys are doing currently for Alstom?

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Marc Beisheim, Hydrogenics Corporation - CFO & Corporate Secretary [29]

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

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Raveel Afzaal, Canaccord Genuity Limited, Research Division - Analyst [30]

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You can't elaborate any further, I guess?

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Marc Beisheim, Hydrogenics Corporation - CFO & Corporate Secretary [31]

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It's other motive clients.

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Raveel Afzaal, Canaccord Genuity Limited, Research Division - Analyst [32]

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Okay. And it's terrific to see that even without much China, you guys are still delivering very strong results. It 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 the OEMs should start to receive these subsidies now. And what 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. But...

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Daryl C. F. Wilson, Hydrogenics Corporation - President, CEO & Director [33]

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So after some pause, we do see some movement again with our existing partners. Some are just working through what that will mean for production this year, but the modest level of Chinese shipments that we've 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 teething 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 normalcy at the operating level that I think is also a positive sign for us.

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Raveel Afzaal, Canaccord Genuity Limited, Research Division - Analyst [34]

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Perfect. I have 3 more quick questions, but if you have more questions in the line, I can just get back in the queue.

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Daryl C. F. Wilson, Hydrogenics Corporation - President, CEO & Director [35]

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No. Go ahead, Raveel.

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Raveel Afzaal, Canaccord Genuity Limited, Research Division - Analyst [36]

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Okay. Perfect. So with respect to the R&D expense, when we look at the Power division, it increased to above $1.2 million range. Looks like it's more to do with the 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?

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Marc Beisheim, Hydrogenics Corporation - CFO & Corporate Secretary [37]

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I think that's fair.

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Raveel Afzaal, Canaccord Genuity Limited, Research Division - Analyst [38]

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And then 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 are 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 RFPs are out there for new larger electrolyzer projects?

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Daryl C. F. Wilson, Hydrogenics Corporation - President, CEO & Director [39]

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

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Raveel Afzaal, Canaccord Genuity Limited, Research Division - Analyst [40]

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Perfect. 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're narrowing. How do you quantify that?

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Daryl C. F. Wilson, Hydrogenics Corporation - President, CEO & Director [41]

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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 cement 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 an industrial hydrogen 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 the 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 kind of details discussing our capital costs and our operating costs in light of the 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 price of natural gas, the price of electricity or the preferences of the customer or the carbon tariff regime that may be in existence. So there's multiple factors that vary by geography and customer. But we can signal that a new trend is afoot very much in our favor.

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Operator [42]

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(Operator Instructions) Our next question comes from the line of Emily Riccio with Cowen.

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Emily Joyce Riccio, Cowen and Company, LLC, Research Division - Research Associate [43]

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My first one is in regard to transportation with fuel cells being paired with batteries. Have you guys been seeing notable momentum on this side of the business or any additional partnerships?

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Daryl C. F. Wilson, Hydrogenics Corporation - President, CEO & Director [44]

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Yes, indeed, most of the applications we're deploying on trucks, trains and buses all include battery technology. And it's 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 breaking. When you get into very high 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 3 to 5 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 clearer than it used to be. So this is where we're seeing good acceleration. I should finalize -- I 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 it 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.

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Emily Joyce Riccio, Cowen and Company, LLC, Research Division - Research Associate [45]

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Okay. Great. 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?

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Marc Beisheim, Hydrogenics Corporation - CFO & Corporate Secretary [46]

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Yes. I think we're tracking it 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 $6 million and 4x our SG&A in Q1 is a good number for the rest of the year.

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Operator [47]

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There are no 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.

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Marc Beisheim, Hydrogenics Corporation - CFO & Corporate Secretary [48]

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Just thanks, again, ladies and gentlemen, and I apologize for the brief delay in getting started. And have a good afternoon all. Thank you.

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Operator [49]

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