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Edited Transcript of HYG.TO earnings conference call or presentation 8-Mar-18 3:00pm GMT

Q4 2017 Hydrogenics Corp Earnings Call

Mississauga Mar 9, 2018 (Thomson StreetEvents) -- Edited Transcript of Hydrogenics Corp earnings conference call or presentation Thursday, March 8, 2018 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daryl C. F. Wilson

Hydrogenics Corporation - CEO, President and Director

* Robert M. Motz

Hydrogenics Corporation - CFO and Corporate Secretary

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Conference Call Participants

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* Amit Dayal

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

* Christopher Curran Souther

Cowen and Company, LLC, Research Division - Associate

* Eric Andrew Stine

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

* Orin Hirschman

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Hydrogenics 2017 Fourth Quarter Conference Call. (Operator Instructions)

I would now like to introduce your host for today's conference, Mr. Bob Motz. You may begin.

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Robert M. Motz, Hydrogenics Corporation - CFO and Corporate Secretary [2]

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Thank you very much, and hello, and welcome to Hydrogenics' 2014 (sic) [2017] Fourth Quarter Conference Call. With me today is Daryl Wilson, President and Chief Executive Officer. The company's fourth quarter press release and PowerPoint presentation are available under our -- on our website under the Investor page at www.hydrogenics.com. We've 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 in U.S. dollars, unless otherwise indicated.

I would like now 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 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.

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

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

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Thank you, Bob. Good day, and thanks, everyone, for joining for Hydrogenics 2017 Fourth Quarter Conference Call. Today, I will review our operations and outlook, after which Bob will discuss our financial results in detail. Please refer to the presentation on our website for today's discussion.

Beginning with Slide 3, let me start briefly reviewing some highlights of the past quarter and year, after which I'll go into further detail about major developments and our near-term areas of focus. It gives me great pleasure to announce that Hydrogenics posted record revenue for the fourth quarter of 2017, approaching $20 million in sales on the back of strong shipments across both of our operating units. Fuel cell demand in China continued to boost our Power Systems segments, while sales of electrolyzers for various projects drove significant growth in our OnSite Generation business. Such shipments included the previously announced Doosan Babcock award in Aberdeen, Scotland for the exhibition and conference center, where we installed over 300 kilograms of hydrogen storage capacity, and separately, we delivered a 2.4-megawatt Power-to-Gas system using excess wind energy to Brunsbüttel, Germany. With these, and our Enbridge facility in Toronto, we are now -- we now have Power-to-Gas sites in Asia, Europe and North America up and running. Our gross margin rebounded to nearly 29% in the quarter, and we posted positive adjusted EBITDA as well, marking a solid step in our path to profitability even while investing in R&D for next-generation applications. For the full year, we posted revenue of $48.1 million, also a record, and improved our cash position from Q3 due to positive changes in cash flow from operations. Overall, we ended 2017 with a number of notable accomplishments that underscore increasing demand across our product portfolio, improving market dynamics and greater recognition of Hydrogenics' leading proprietary technology.

Now let me go over a few major announcements since our last earnings call, starting with Slide 4 and a look at our activities in China. 2017 was certainly our best year ever in the People's Republic, no matter how you look at it. We delivered around 300 fuel cell modules in total, some ended in private placement with the Chinese investment partnership that provided $21 million in capital. We landed our biggest order to date and we broadened our Certified Integrated Network with additional companies that will accelerate growth going forward. We currently have approximately 1,200 orders outstanding, even as our customers remain in the beginning phases of ramping up production. The market continues to be robust, dynamic and a leading indicator for trends expected in other nations over the coming years. Even as China remains on the forefront of using fuel cells for a variety of mobility applications, particularly buses, shipments will remain lumpy due to the normal gyrations involved in implementing new breakthrough technology such as this. Given the testing, prototyping and integration lead times required as well as the associated infrastructure build, orders will continue to be in a -- somewhat haphazard over the near term and come in various sizes. Each integrator moves at its own pace with some wanting less publicity than the others.

I'd like to also mention, by the way, that most entities we work with manage the customer channel from start to finish, meaning that they have coordinated approach, which takes into account the necessary infrastructure requirements, including hydrogen sources or a partner such as Hydrogenics for electrolysis. We estimate that the overall cycle for fuel cell implementation per integrator can take anywhere from 18 to 24 months, which to the outside world may appear slow. But the fact is, that we have some partners that are moving quite rapidly now, while others are still in the planning stages for how and where fuel cell deployment will take place. That said, we expect 2018 to be a year of production scale up for Hydrogenics, given the sheer size of the market and the key integrators with which we're aligned.

Longer term, we're laying the foundation for larger, more advanced manufacturing requirements with the start of full production in Canada, but slowly moving toward partial localization with Chinese suppliers. The key to this approach is to maximize the company market penetration while protecting Hydrogenics proprietary technology, something that we take very seriously. And by having the right connections in China, we feel confident that our strategy will result in improved product positioning, built on quality, reliability and broad customer testing and acceptance. Overall, we remain very upbeat about the Chinese market and the opportunity that it holds even with recent changes in regulations impacting certain incentives, as shown on Slide 5.

Due to the increasing demand for battery-powered vehicles, China's central government reviewed the current incentive scheme covering various types of electric transportation. As a reminder, Beijing has targeted 20% of cars sold domestically to run on alternative fuels by 2025. Already due to current incentives and official proclamations as well as individual concerns over the environment, nearly 300,000 electric cars were sold in China last year, more than the rest of the world combined. This underscores the success of China's strategic vision and incentive system. However, in recognition of more adaptive technologies, such as fuel cells, the government decided to reduce the incentives on battery vehicles, concurrently -- and concurrently made modest changes in incentives covering other forms of clean transportation. For fuel cell-powered buses, the size of the system relative to the electric motor power now determines the amount of incentive paid, with the implication being that bus power modules will increase in size from 30 kilowatts to 40, 45, 50 or even 60 kilowatts. A similar incentive change will impact fuel cells for cars, while truck incentives remain largely unchanged. There's nothing negative about these policy changes, except that in the near term, that they have caused some delays in orders, given the uncertainty that was generated prior to the final announcement of the changes a few weeks ago. Hydrogenics technology is well suited to larger, heavy-duty fuel cell power modules, and as I just recently stated, our strategy in China involves a multifaceted approach with many players at various stages of order development. We have a long-term vision to serve the market from our current manufacturing centers of excellence as well as building a local supply chain suitable to address the needs of tomorrow. Most importantly, we're bringing unique capabilities that no company can match. We continue to talk with all partners, including our strategic investor about the appropriate steps to scale up production, expand our presence and serve the Chinese people with the innovation and vision for pollution-free transportation alternatives.

But our passion and enthusiasm for -- in the mobility space is not just limited to China. As shown on Slide 6, the market is providing lessons learned for other nations and governments around the globe. China's experience with battery electric vehicles has shown the extent to which clean transportation can be rapidly adopted, but at the same time, the limitations of batteries in terms of range, longevity, maintenance and fueling characteristics. It's for these reasons that China made a recent changes to their incentive scheme that favor fuel cells over batteries as a natural long-term solution to urban and suburban locations alike. As I said earlier, many of our integrator partners in China have ties to infrastructure companies that work hand-in-hand to provide hydrogen as a fuel for bus depots and in the future passenger vehicles. The Chinese leadership is very behind the development of this industry and the use of fuel cells for mobility applications, which is having a ripple effect on various activities in Europe, the Americas and elsewhere. So while I talk about China a great deal in terms of market potential, we are no less excited about what we see globally in terms of trucks, buses, boats, delivery planes, and of course, trains.

Turning to Slide 7, I'll provide an update on this latter market for us, and in particular, our work with Alstom. As we've said in the past, we believe the opportunity for fuel-cell-powered rail transportation is beginning to blossom, and our partnership with Alstom is one that will have long-lasting benefits. The company continues to attract attention with its fuel cell electromotive units and rack up orders in Germany and beyond. This has served to increase our long-term view of the market while recognizing that it be, who is, Alstom to wait and order larger batches for production efficiencies at their facilities and ours. We therefore, now expect initial commercial orders later this year with substantial delivery set to begin in 2019. The lead time here has never been a question, but Alstom has chosen to stage its railcar production in a way that best serves their needs, maximizing working capital and still get the end production -- end product to customers when desired. Hydrogenics understands this approach and will be investigating the small production facility upgrade to further refine the product and allocate appropriate resources to ramp up shipments later this year.

At the same time, we're seeing growing interest in hydrogen-powered rail applications around the globe, including here in North America. For example, Metrolinx, the agency of the Province of Ontario, released its Hydrail Feasibility Study in February. The study investigated the technical and economic feasibility of using fuel cells to electrify the local commuter rail system. To accommodate the growing great -- the population of greater Toronto, Ontario has committed to implementing a Regional Express Rail Program and make other improvements to improve service and accommodate more passengers by 2025, and fuel cells are being considered as a serious cost-effective low-carbon technology versus electrifying the entire track from scratch. The study proved that the overall lifetime cost of building and operating a Hydrail system were equivalent to that of conventional electrified overhead systems. So while implementation of such technology on this scale and complexity has never been undertaken, the value of such an approach is clear in terms of reliability and environmental impact. RFPs have been issued, and Hydrogenics is now in the process of assessing how best to respond, likely with the consortium of rail system suppliers, such as Alstom, given that Metrolinx wants a complete design build, operate, turnkey approach. Bids are due later this year, followed by a lengthy review process. This is a very large opportunity for the company, particularly given our local presence and expertise with Alstom. We're optimistic about the future and what would be the largest fuel-cell-powered rail system in the world.

Lastly, turning to Slide 8, I'd like to end by providing an overview of the industry and increasing speed of commercialization that we're now experiencing. This is clearly not new technology in the traditional sense as the vision for fuel cells and hydrogen and energy storage were built decades ago. But through persistence, investment in R&D and continuous innovation, the advancements of today go well beyond what we might have expected and the applications are widening in size and scope. We now see a rapidly evolving market maturity in terms of acceptance and the interest in fuel cells, electrolyzers and the energy solutions which we offer, as evidenced by increasing traction across the bus, rail and truck landscapes. The industry is benefiting from higher rates of deployment and testing, along with the scale-up of suppliers to address the demand triggers already developing.

Just like other clean tech industries, such as solar and wind energy, the scale-up of hydrogen technology will bring with it economies of scale and improved efficiency as well as increased reliability and power density. This is where we stand today, with larger scale commercialization close at hand. Given the value proposition that's becoming self-evident, mainstream applications are no longer decades away but rather on the horizon, driven by countries like China and Germany, and companies like Alstom, Uniper and Enbridge. We're fortunate to have the respect of many players in this growing global market, a respect built on our experience, hard work and technology leadership.

So as we close on our best year in history, I'm still more interested in looking ahead rather than behind. We're well on our way to ushering in a new age of hydrogen-based energy solutions worldwide, and we'll continue to play a leading role in providing cutting-edge systems that serve society's power needs in carbon-neutral sustainable ways. We'll look back on 2017 as being a big step in our next phase of development, paving the way to higher growth and strong bottom line returns.

So with that, I'll turn the call back over to Bob Motz, our Chief Financial Officer, who will review our financial results in more detail. Bob?

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Robert M. Motz, Hydrogenics Corporation - CFO and Corporate Secretary [4]

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Thanks, Daryl, and good day, everyone. As shown on Slides 9 and 10, we posted revenue of $19.5 million for the fourth quarter of 2017 and $48.1 million for the full year versus $8.7 million and $29.0 million, respectively, in 2016. Fourth quarter revenue reflected an increase in both the OnSite Generation and Power Systems business segments. OnSite grew by $8.8 million over Q4 of 2016, due principally to several large Power-to-Gas and industrial hydrogen products delivered into the European market, as Daryl had indicated.

Power Systems grew by $2.0 million over Q4 of 2016, due to increased fuel cells -- fuel cell shipments for the Chinese mobility market, also as Daryl had mentioned. You'll also note from the quarter, we had significant project revenue, particularly on the OnSite group, and this will continue to produce lumpy revenues for quarter to come. But given the results and our contracted backlog, we remain positive for ongoing longer-term growth, but we'll still see some volatility as that long-term growth is reflected over future quarters.

Our gross margin, on Slide 11 and 12, was 28.6% for the fourth quarter and 23.8% for the year versus 23.0% and 20.7%, respectively, for 2016. The higher performance year-over-year was principally due to improved product mix, including the impact of increased fuel cells shipments for the Chinese mobility market and the benefits of economies of scale within the power segment because of standardized production of fuel cells for the mobility market and better indirect overhead absorption.

Turning to Slides 13 and 14, we reported breakeven adjusted EBITDA this quarter versus a loss of $1.7 million in last year's fourth quarter, and our adjusted EBITDA loss was $6.3 million for 2017 as a whole versus $7.6 million in 2016, reflecting the revenue and margin changes previously discussed. Similar to Q3 of 2017, net R&D expenses in Q4 were higher than expected, principally due to nonrecurring engineering work continued for the commissioning of the Enbridge Power-to-Gas facility in Toronto that is expected to begin operation in the next few weeks.

Slide 15 shows the company's order backlog on December 31, 2017, was $144.6 million, of which we anticipate delivering approximately $55 million over the next 12 months. During the fourth quarter, we also received $13.9 million of new orders.

On slide 16, our cash resources as of December 31, 2017, were $22.4 million versus $11.3 million at the beginning of the year. In the quarter, we generated $2.1 million of cash, reflecting $5.6 million in positive cash flow from operations, offset by $1.7 million in investment and property plant and equipment and $1.5 million in financing expenses.

And 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) And our first question comes from the line of Eric Stine from 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 just -- at first, just wanted to touch on the OpEx. So it sounds like the Enbridge, what's associated with the Enbridge, that's nonrecurring and it makes sense that you're going to up the R&D a little bit based on rail. But just maybe how should we think about the OpEx going forward? And then with that in mind, maybe kind of an update on where you peg your breakeven level. I think in the past, you've kind of been in that $55 million to $60 million range?

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Robert M. Motz, Hydrogenics Corporation - CFO and Corporate Secretary [3]

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Yes, we -- I still believe that that's the case. We had a couple of things that lifted the OpEx higher both in SG&A and in R&D. In R&D, it was the Enbridge facility work as well as we have some increased work around refining the fuel cell model with the Alstom rail application. So those 2 elements really drove the R&D. And again, with Enbridge opening eminently that R&D level should mitigate to more historical levels. And as you may have -- I think we've mentioned in the third quarter, we also had a shift in R&D from more European to more North American which is, doesn't have the funding that you'd usually have with EU-based R&D. That kind of continued somewhat in the fourth quarter, so what I would expect is that you'd start to see a more traditional level of net R&D of, say, $1 million to $1.25 million per quarter on a roll-forward basis. In terms of SG&A, it's higher than what we would anticipate. There were 2 factors there. One was on cash SG&A, well, if you look at total SG&A, you also have to factor stock-based comp, but that doesn't factor into the definition of adjusted EBITDA, that factors more into total SG&A per bottom line EPS. But there were 2 things that factored in there. One was, in the quarter, we took a bad debt charge of close to $500,000, which will be nonrecurring. So you can model that out. And then there was some impact of the strengthening euro on SG&A, certainly when compared to Q4 of 2016. That may well continue, but that was secondary. So I would still say that you're looking at somewhere in the mid-50s as the normal sort of run rate breakeven adjusted EBITDA.

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

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Okay. So I mean, most of this, well, most or virtually all of it, you would kind of consider onetime in nature, even rail, I mean R&D is going to move around, so okay.

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Robert M. Motz, Hydrogenics Corporation - CFO and Corporate Secretary [5]

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Correct.

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

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That's very good to hear. And then maybe just turning to rail a little bit, and I understand Alstom looking to aggregate a little bit. And I know they've received an order from lower Saxony. I mean, any thoughts on kind of what the aggregation, I mean, have they expressed or can you share what you think that aggregated number might look like as we think about later in the year?

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Daryl C. F. Wilson, Hydrogenics Corporation - CEO, President and Director [7]

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Yes, we can't give a quantitative answer there, but notionally what we're saying is, it's in Alstom's interest and ours to aggregate the production at a higher number rather than drips and drops of orders working through this year. So it's a respectable number, I think it's a bigger number than either of us expected would happen. The attractiveness of this application in the market has surprised us, and that means Alstom is able to aggregate I think a significant number of orders coming in the future, and then we'll go into production on a smoother basis on both sides. As I mentioned, this will require some facility expansion for us in Germany. Not expensive, we're in leased facilities over there and we'll remain on leased basis. But we'll be making preparations to be ready with production late in the year, and I think most of the revenue impact is in 2019. Notwithstanding that moving out, if you look at our -- we're starting the year off with a very respectable backlog, including respectable number, which we're saying can be revenue in 2018. So we're still in very good shape even with this a little further out than we had anticipated.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [8]

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Right. And you'll add to that $55 million number throughout the year that you guys recognized in this year? Okay. And last one from me, in sticking with rail, I mean, obviously, what's going on around the world, you're going after with Alstom. But you mentioned what's going on in Toronto. We know what's going on with Alstom in Germany. I know earlier this year, the U.K. came out and said they want trials as soon as possible on their rail system. So just curious, what interest you're seeing from other rail OEMs as these opportunities grow?

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Daryl C. F. Wilson, Hydrogenics Corporation - CEO, President and Director [9]

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Yes, I think this is a very typical evolution that happens with new technology win there or reference sites and the opportunity for other players to go and kick the tires and see something real, it generates great excitement. And so Alstom has been showing this application, going all the way back to September of 2016, and the excitement generated is leading to orders for them and leading to further leads and contacts in multiple countries, so that's excellence. I think rail is actually one of the strongest value propositions we have because of the amount of infrastructure that's displaced in not needing to use the overhead electric wires. So that's the exciting part. The less exciting part is, this is an industry that cycles on very long lead times. And so it's not something that kicks over into immediate volume impact within a quarter. So but that being said, the size of it is very attractive and I think it brings fuel cells into the mainstream markets for even more applications to get activated. So we're very excited about it and very appreciative of the opportunity to work with Alstom.

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Operator [10]

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And our next question comes from the line of Craig Irwin from Roth Capital.

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Unidentified Analyst, [11]

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This is [Anna] on for Craig. So the first question that I wanted to ask was on the OnSite Generation side. So it looks like the revenue was very strong this quarter, but because that -- there's been a slight dip on the backlog for it. So could you please run us through how it's looking in terms of getting further orders and building the backlog back into historic levels going forward? And in this context, could you talk a bit about as well the expanding hydrogen fueling infrastructure, there's been quite a bit of talk about that recently. So do you see that positively affecting your backlog?

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Robert M. Motz, Hydrogenics Corporation - CFO and Corporate Secretary [12]

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Sure, [Anna], thanks very much for the question. So our OnSite Generation segment has 3 things going on in it, and you've touched on all 3 of them. One is the industrial business, which over the years, quarter-to-quarter, has fluctuated. We've typically enjoyed somewhere in the $15 million to $25 million range in industrial business, but it's not -- never been smooth quarter-to-quarter and we don't anticipate it ever will be. When you add on top of that the Power-to-Gas facilities, such as the one shipped in Q4, then we enjoy good strong quarters as we did just recently. What's interesting there is the size of the Power-to-Gas facilities that we're bidding now has stepped up, so they're larger in size, even larger than what we've delivered in the past. So this lumpiness, in a positive way, we think is going to get worse rather than better, but in a good way in terms of larger opportunities on these Power-to-Gas plants. These are complex developments with multiple parties, often going through the process for the first time. And so the lead time on actually closing a large scale Power-to-Gas facility has been quite long, but we do see a good volume of interest in larger scale. And so we can look for it to, I think, positive impact of that in the future. And then finally, the third area that impacts this segment is fueling. And there are 4 or 5 countries in the world where fueling is proceeding well, Korea, Japan, Germany and California. So the numbers of orders there are growing generally in the world. There are several ways to deliver hydrogen fueling, and it's not always involving electrolysis. If it does not involve an electrolysis plant, we have a little less interest because it's not using our proprietary technology, we're really just reselling other people's stuff. But if we can make a link with renewable energy and involve electrolysis project, it's a very strong interest for us. So gradually, the fueling infrastructure continues to build, and we've had fueling stations in various quarters over the recent years, and I think that will continue to be the case. And the spread of infrastructure across multiple countries will happen as well. Recently, we've seen growing interest in Canada to have fuel cell vehicles in Canada, and that makes us very pleased. So lots of different factors driving revenue in this division and that results in some lumpiness. But as I sometimes say, lumpy up is good.

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Unidentified Analyst, [13]

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Okay. And the next question I wanted to ask is about gross margins and specifically on the Power Systems side. So this quarter, it looked like the gross margins are really good for the segment. So I just wanted to confirm, like going forward, the bigger Chinese customer that you're expecting to deliver in '18, are the gross margins expected to be in this line? Or will it be slightly closer to historical level?

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Robert M. Motz, Hydrogenics Corporation - CFO and Corporate Secretary [14]

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So we don't typically talk about gross margins by any particular customer or application. However, in Q4, you have a blend of various projects and various applications, and I think an overall good result. Like any company, we have projects with higher margins on some segments and lower in the others. I think in China, there is a general expectation that pricing should continue to go down with increasing volume. We work very hard to balance that natural inclination to -- at the same time negotiate reduced pricing on the supply side. So we continue to hope to keep a balance in that area for our Chinese customers, meeting their expectation on a price point of view, but also recognizing a fair contribution to our own benefit as well. So that's a balancing game, and I think we've done well in the past and we fully anticipate to do well at that in the future.

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Unidentified Analyst, [15]

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Okay. And the last one from me. In the call, you were talking about expanding your Chinese Integrated Network and how it's broaden, maybe you could give a little bit color on that and how are things looking on that side?

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Daryl C. F. Wilson, Hydrogenics Corporation - CEO, President and Director [16]

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Yes, our business model in China has always been on a nonexclusive basis with multiple parties. It's a very large market, no one party can claim to serve the entire company -- country or all municipalities. And so we've continued to work with multiple parties and entertain additional parties. I don't see changing that. As I mentioned on the call, the progress with any one party is lumpy, and at various stages, there is a long lead time to actually get started, but that lead time is gradually shortening as the whole market matures. So this year, we're looking for a good increase in volume in aggregate. We'll have some partners of course just starting out and others more advanced. But in aggregate, I think it's going to be a good year for us. And then we do anticipate, over the course of time, that there will be a growing amount of localization. And working with our partners, we will get support from them as we transfer technology, enter into licensing agreements and provide technology transfer training and support. And so there's revenue to be realized in all of those kind of activities, and then eventually, working on more focused royalty basis once the production is fully localized and the supply chain is fully mature. That process is going to take place over a number of years, it's not a matter of months, it's years. And so we'll have, I think, a positive evolution both for our Chinese partners as they enjoy larger volume and for ourselves as well as we go on that journey with them.

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Unidentified Analyst, [17]

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And just the last one, in terms of revenue provision into the next quarter. So Q1 has generally -- has been the lowest quarter in the year, historically. So -- and we have almost in the mid of March now. So how is it looking in terms of revenue generation in this quarter? And which programs [in particular]...

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Daryl C. F. Wilson, Hydrogenics Corporation - CEO, President and Director [18]

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Yes, actually, Anna, I'm sorry, we don't give guidance as a normal practice. And the reason for that is there are many factors that affect the results in any one quarter and they're often hard to predict. So I understand the historical trend that you note, but I'm afraid I can't help you with that. So stay tuned for our conference call in May.

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Operator [19]

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The next question comes from the line of Chris Souther from Cowen.

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Christopher Curran Souther, Cowen and Company, LLC, Research Division - Associate [20]

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Just wanted to kind of clarify on that $55 million for 2018, is that revenue that's already in the backlog? Or is that kind of assuming some kind of additional wins for the year? Could you just kind of clarify that?

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Robert M. Motz, Hydrogenics Corporation - CFO and Corporate Secretary [21]

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No, that's revenue that's already in the backlog. So we look at the orders that we have won, so these are firm orders with deposits, the customer's confirmed, there is a contract in place, so they're secured orders. There's sometimes some judgment needs to be exercised as to project timing and the realization of the customer to achieve delivery within the year. But generally, in our total pipeline, the lead times are shortening and so our confidence is fairly high. And then in addition to that, there is the possibility of securing orders early in the year, sometimes in both the first and second quarter, and the ability to deliver those within the same year. So that, again, it depends on project lead time and the nature of the product. So a number of factors go into drive the final result for the year, but you can see we're starting with a very strong starting point with firm orders expected to be delivered in 12 months.

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Christopher Curran Souther, Cowen and Company, LLC, Research Division - Associate [22]

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Got it. Okay. And then as far as the current backlog, I was just wondering if you could give any indication on what portion of that is the 1,200 orders outstanding in China?

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

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There is a significant portion having to do with China, but there's also a significant portion having to do with the Alstom contract and delivery of rail vehicles, which I mentioned is likely concentrated in 2019. So there is -- and then there's other programs in there as well. But I would say 2 of the larger portions would be the Chinese orders and Alstom.

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Operator [24]

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And our next question comes from the line of Orin Hirschman from AIGH Investment.

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Orin Hirschman, [25]

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So I think you -- I just want to reaffirm in terms of some of the OpEx because OpEx is obviously -- even though you hit the EBITDA positive, which is great. The OpEx will obviously be unusual this quarter, so just wanted to go through, again, what would be -- what would have been a more normalized OpEx? It sounds like in the R&D, there was roughly $500,000 to $700,000 of Enbridge. I just want to go through that again. And then also with the bad debt expense and what the normalized OpEx would look like?

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Robert M. Motz, Hydrogenics Corporation - CFO and Corporate Secretary [26]

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Yes. I'm more than happy to do that. So if you look at our cash, what we call cash operating costs, so this is OpEx adjusted for depreciation and stock-based comp, we had -- Q4 R&D was about $1.7 million. Normal -- what we consider to be a normal run rate type of R&D would be kind of in the $1 million to no more than $1 million -- $1.25 million per quarter. There is some volatility with that because a lot of our R&D, particularly in Europe has EU funding associated with it, so we report net R&D. So a lot of it is predicated on where the R&D is domiciled because we do some in Canada. In Canada, you get R&D tax credits, but they're not cash credits until such time that we actually have tax that we're going to offset against it, and we have NOLs that we would use first. So it depends where the R&D is domiciled, that would drive that number. But ideally, you want to be in the $1 million to $1.25 million a quarter. SG&A, also you'd be looking at normal cash operating cost type SG&A would -- you'd want to be in that $3 million to $3.5 million -- no more than $3.5 million, ideally around $3 million a quarter range as well. And again, this quarter, we had a couple of things that -- we had a onetime allowance for doubtful accounts, which are about $0.5 million that pushed it up to $3.9 million. And then outside of cash operating cost, you have the volatility of stock-based compensation, which in Q4, with stock increasing in the quarter, that impacted stock-based comp in SG&A, and then also impacted the value of our warrants below operating income and, in the warrant, waive off cost as well.

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Orin Hirschman, [27]

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In terms of the bad debt expense, is that something we have to be concerned about on a recurring basis or there was an isolated incident, because I don't recall any assets you ever had, which is...

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Robert M. Motz, Hydrogenics Corporation - CFO and Corporate Secretary [28]

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Yes, that was an isolated incident. Normally, the creditworthiness of a customer would be covered after our own policies or by credit insurance, as the case may be.

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Orin Hirschman, [29]

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Okay. And in terms of Power-to-Gas, talk about two things, Enbridge turning on, what again is the capacity of what they're turning on and have they given indications for anything additional? And the other deliveries that, is like a test delivery, the one in, I believe in, Germany, kind of give us an update there. Because I think a lot of people decided that Power-to-Gas isn't for the near term. On the other hand, you're seeing little bits and pieces here actually coming online.

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Daryl C. F. Wilson, Hydrogenics Corporation - CEO, President and Director [30]

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Orin, you picked up on a good point. The Enbridge gas is a very important project here in North America as the first reference site, it's 2.5 megawatts. It's secured under a contract with the independent system operator. A contract that had 400 bidders and only 5 winners, so a very important achievement for us to secure that contract with lots of bids on energy storage and stabilization services here. We do have a plan to expand the facility to 5 megawatts, and we're working to secure funding to do that. At 5 megawatts, it then becomes a meaningful contribution on the grid in terms of storage and stabilization. It's also the foundation to demonstrate larger scale fueling capability for buses and cars and trains. So it's not to be underestimated the importance of securing this kind of a facility with this kind of a customer. This is really our North American version of what we did with E.ON, which is now Uniper. So getting started with the ability to demonstrate the value of Power-to-Gas technology and how to operate it cost effectively, et cetera, so very important movements. Then Brunsbüttel at 2.5 megawatts is again similar size and a further demonstration integration within the German grid. And I mentioned on our earlier question that we're being invited to quote on projects, which are much larger. Now coming back to the point about timing and how long this takes, et cetera, yes, things often take longer than we hope or expect. And for Power-to-Gas, there are a number of policy elements to enable it to be in the money and be valuable within the grid system. And over the last number of months, in Germany and Europe, we've seen those policy elements starting to click into place. And so the proponents on larger projects are getting more confidence that some of the things that they con -- they've gone beyond the concept, they've engineered and designed certain approaches for larger programs, now they're starting to see the policy tools falling into place and the prospect of having a larger scale win, I think, is increasing. I'm not trying to suggest that it's going to happen next week, but I think that there are some decent size bids out there, and they could consummate in the coming year for sure, and obviously, that would be a good thing. So Power-to-Gas has not gone away, it's taken longer than expected and these reference sites are very critical for us to let customers see what we can do, especially the very high energy density we have and the very compact footprint. So we would be the strongest in the world in terms of the footprint we can deliver for large-scale Power-to-Gas, and that's a good advantage for us.

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Orin Hirschman, [31]

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Last question, just on Enbridge. You mentioned trying to find additional financing to increase the size of the plant there. Is that Enbridge looking for additional finance or are you looking for additional financing for it, I wasn't clear on that?

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Daryl C. F. Wilson, Hydrogenics Corporation - CEO, President and Director [32]

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We have a joint market and technology development agreement with Enbridge since 2012, and that means that we work as partners to secure usually government funding from both levels of the Canadian government to support the advancement of this technology. Here in Canada, there's a very strong policy around decarbonization and climate change, and there is a strong appeal for the historical fossil fuel companies to demonstrate material progress on decarbonization and to do the foundational work so that should they want to proceed with very much larger operations that are carbon free, they can have the confidence that they can do that from a financial risk point of view and a material risk point of view. So these are very important starting points, and I can't overemphasize enough the importance of the things that we have done with E.ON, Uniper in Europe, the Brunsbüttel project recently another program in Thailand, as you know, and then here in Canada, very important reference sites for us in growing this business.

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Operator [33]

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And our next question comes from the line of Amit Dayal from H.C. Wainwright.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD & Senior Technology Analyst [34]

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In regard to these 1,200 units to be delivered to China this year, I guess. Are these all with one customer or are they spread out amongst several customers?

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

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Yes, we've mentioned several times, we have multiple partners and they're in various stages of development. So these are partners that are secured with some agreement with us and have placed these orders with us, but it is multiple parties and they're at various stages in their development.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD & Senior Technology Analyst [36]

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Got it. And in regard to Alstom, to push out a little bit I guess, it looks like good thing overall in terms of how these orders could be aggregated for you guys. But in the near term, were there any resources, working capital, et cetera, that were committed to this effort that might sort of create some load on the balance sheet in the near term?

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Daryl C. F. Wilson, Hydrogenics Corporation - CEO, President and Director [37]

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No, I wouldn't say there is a load in the balance sheet. In these kind of programs, we obviously have an obligation to actively support the customer as they're moving towards full commercialization, I think everything that's happening here signs -- the positive signs of maturity. What we've always wanted is to have applications where it's part of the production line process, and effectively, we're the engine supplier and somebody else is making the vehicle and integrating our engines. And as Alstom's planning out their scale up for production, it makes sense for them to build the line, have a fixed production rate and have us supply at a fixed regularized rate the appropriate engine. So these are all signs of growing up in maturity, building a production line to make vehicles always takes time and one wants to do it correctly the first time. So I would say this so-called delay is actually a positive signal that we're moving to be in big boy jobs rather than demonstration jobs.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD & Senior Technology Analyst [38]

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Got it. And just from your commentary around China, I mean it seems there might be a little bit of a pause as we saw this first wave of adoption is digested a little bit. Is that how we should be looking at this?

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

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It's a pause that we think delayed some orders. We anticipated closing more orders late in the year, but once there was some uncertainty about the policy, that didn't happen. We did have some orders, of course, in Q4, but not maybe as much as we anticipated. Now that the policy is clear, we expect to have more license agreement and order volume come through, so that's a very positive thing from a news flow point of view. And then the actual uptake depends on the readiness of the individual integrators. So making their first prototype can take many months. Then making 10 can take many more months, and then getting to 100 is a very clear sign of maturity and one of our partners is already there. So once they're at a 100 and moving on to much bigger numbers is much easier. So those first few stages take time and the way we've mitigated that is to have multiple parties with staggered starts, and that helps our ability to render support as they mature. But in aggregate, it smooths things out and I'm saying from a total year point of view, we're going to have a very strong picture from China for 2018.

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Operator [40]

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And at this time, I'm showing no further questions. I'd like to turn the call back over to Bob Motz for any closing comments.

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Robert M. Motz, Hydrogenics Corporation - CFO and Corporate Secretary [41]

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Great. Thank you very much, and I want to thank all participants on the call today, and we want to look forward to our next call, our first quarter call, which is currently scheduled for May 11, 2018. And at closing, I'd just want to remind everybody about the safe harbor language we made at the beginning of the call. And I wish everybody a good day. Thank you.

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Operator [42]

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