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Hydrogenics Corporation (NASDAQ:HYGS) Q2 2019 Earnings Conference Call August 12, 2019 10:00 AM ET
Daryl Wilson - President, Chief Executive Officer
Marc Beisheim - Chief Financial Officer
Daryl Wilson - 总裁兼首席执行官
Marc Beisheim - 首席财务官
Eric Stine - Craig-Hallum
Jeff Osborne - Cowen and Company
- Eric Stine - Craig-Hallum
- 杰夫奥斯本 - 考恩和公司
Good day ladies and gentlemen, and welcome to the Hydrogenics, 2019 Second Quarter Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call will be recorded.
I would now like to introduce your host for today's conference, Mr. Marc Beisheim, CFO. You may begin.
美好的一天女士们，先生们，欢迎来到Hydrogenics，2019年第二季电话会议。 此时所有参与者都处于只听模式。 稍后我们将进行问答环节，届时将给出指示。 [操作员说明]。 提醒一下，此电话会议将被录制。
我现在想介绍一下今天的会议主持人，首席财务官Marc Beisheim先生。 你可以开始吧。
Thank you, operator. Good morning ladies and gentlemen, and welcome to Hydrogenics 2019 second quarter conference call.
With me today is Daryl Wilson, President and Chief Executive Officer. The company's second 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 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 statement.
And with that, I'll turn the call over to Daryl Wilson. Please go ahead.
Thank you, Marc. Good day and thanks everyone for joining us on Hydrogenics 2019 second quarter conference call.
We will focus today’s call on our quarterly earnings, but I wanted to briefly discuss our proposed transaction with Cummins. As you know, Cummins agreed to acquire all of our outstanding shares, other than the shares owned by the Hydrogen Company for USD$15 in cash. The Hydrogen Company, a unit of L’Air Liquide agreed to exchange its shares with Cummins in lieu of receiving the cash consideration.
The Board and an independent special committee of the board unanimously approved the transaction and recommended that shareholders vote for the transaction for a number of reasons. The consideration represented a premium of 21.6% over the 30 day volume weighted average price of our shares on the NASDAQ and 38.8% over the 90 day volume weighted average price for the period ending June 27, 2019, which was the day before the transaction was announced.
Any questions concerning the Cummins transaction should be addressed to our management team separately from this earnings call. We look forward to the upcoming August 29 special meeting when shareholders will vote on the proposal to approve the transaction with Cummins. With that, I’ll move to discuss our quarterly earnings. Please refer to the presentation on our website for today's discussion.
Beginning with slide three, let me review some highlights from the past quarter, after which I’ll provide additional information on our recent developments in our near term areas of focus.
Second quarter sales were $10.4 million, up 37% year-over-year as the company saw a significant increase in shipments within its OnSite Generation business, including for a previously announced fueling stations in Quebec. This facility in the first 700 bar public fueling station in Quebec and the first fully containerized 700 bars location in Canada.
The station is capable of delivering four consecutive fills for typical passenger vehicles, an average tank size of 5 kilograms of hydrogen, and handles approximately 20 vehicles per day. It’s another great reference site for us here in North America.
Gross margins were impacted by product mix and Marc will review this in a moment, but we ended the quarter with a solid backlog of $144 million. As noted previously, this quarter we were selected by the Halcyon Power group to supply 1.5 Megawatt hydrogen production facility in New Zealand. This is our first major win in the South Pacific at Halcyon owners Tuaropaki Trust and Obayashi Corporation looked to implement a hydrogen supply chain for New Zealand and Japan using Hydrogenics technology.
We are in the home stretch of our first commercial order with Alstom, which should constitute some 81 heavy duty fuel cell power module systems, and our plans for expanded production in Germany are well under way. I'll speak to this more in a moment.
But the big news this quarter as I mentioned earlier is the pending acquisition of Hydrogenics by Cummins. We believe this will be a game changing transaction which will position our company and our technology at the forefront of the burgeoning hydrogen economy, and we encourage all investors to vote by the proxy deadline of August 27, 2019.
毛利率受到产品组合的影响，Marc将在稍后对此进行审核，但我们在本季度结束时积压了1.44亿美元。如前所述，本季度我们被Halcyon Power集团选中在新西兰供应1.5兆瓦的氢气生产设施。这是我们在南太平洋的第一个主要赢家Halcyon所有者Tuaropaki Trust和Obayashi Corporation希望使用Hydrogenics技术为新西兰和日本实施氢气供应链。
Now turning to slide five, let me provide an update on our relationship with Alstom where we are moving towards commercial production of our first heavy-duty fuel cell modules. With the increasing amount of press coverage this year, regarding Fuel Cell Powered Trains, it's only a matter of time before Alstom is building a book of business that translates into orders for Hydrogenics.
We are not at the finish line just yet, but we're closing in on an initial customer contract for more than 80 Fuel Cell Power Module Systems, primarily to serve the Hydrail Commuter network in Germany. Such orders for delivery in 2020 would be the first under our 10 year exclusivity agreement, which as you will recall was originally valued around $50 million, including the supply of at least 200 engine systems, service and maintenance. We're pleased with our strong partnership with Alstom, and the future that we’ll build together in the Hydrogen Rail Powered space.
With increasing interest for such applications in Europe, North America and elsewhere, we remain very upbeat about this market and our leadership position in it, which should translate into accelerating growth in the quarters to come.
Turning to slide six, I just wanted to take a moment to summarize the outlook for the rest of the year, given our strong backlog in improving demand dynamics. As I just mentioned, rail applications are just now beginning to take shape, but such orders herald increasing interest for the hydrogen based trains of tomorrow. Our long standing relationship with Alstom and our proven heavy duty PEM technology position us for rapid growth in this space.
In China we continue to work with our many certified integrators to provide fuel cell applications, primarily for the commercial bus market there. As our investors are aware, growth in China has been adversely impacted by trade issues with the U.S. and general macro-economic forces which have caused near term investment disruption.
Obviously this does not change our long term view of the importance of this market which remains the clear leader in next generation mobility applications. In addition, our relationships with L’Air Liquide and Cummins should strengthen our position in China and open up new avenues for growth, and allow for more flexible partnership opportunities, as well as capital for rapid expansion.
Overall, the outlook for 2019 continues to be bright. We forecast significant year-over-year growth due to our current book of business and the diverse array of customers that we service. In addition as we enter the second half of the year, we've laid the groundwork for a very strong 2020.
Due to the burgeoning demand for an array of mobility applications, our partnership with Alstom and our increasing presence in Asia, North America and Europe, we are well positioned for strong growth and improving bottom line results. We'll continue to focus on cost discipline, working capital management and further efficiency improvements as we move closer to sustained profitability.
我们还没有到达终点，但我们正在签订80多个燃料电池动力模块系统的初始客户合同，主要是为德国的Hydrail Commuter网络提供服务。根据我们的10年独家协议，这些在2020年交付的订单将是第一份，您将记得最初的价值约为5000万美元，包括至少提供200个发动机系统，服务和维护。我们对与阿尔斯通的强大合作关系以及我们将在Hydrogen Rail Powered空间共同构建的未来感到高兴。
Before turning the call over to Marc, let me again thank all of our long-term investors for their passion and patience as we built this company to where it is today. I'm very proud of what we've accomplished, but even more excited for what the future holds. I look forward to seeing you at our special shareholders meeting and hope that you'll join me, the Board, and other investors in voting for the pending acquisition by Cummins.
With that, I'll turn the call over to Marc for a review of our financial results in detail. Marc.
在将电话转交给Marc之前，让我再次感谢所有长期投资者的热情和耐心，因为我们将这家公司建立在今天的位置。 我为自己所取得的成就感到自豪，但对未来的发展更加兴奋。 我期待在我们的特别股东大会上与您见面，并希望您能加入我，董事会和其他投资者的投票，以便康明斯等待收购。
Thank you, Daryl. As shown on the slide seven and eight, we posted revenue of $10.4 million for the second quarter and $18.5 million for the first six months of 2019 versus $7.6 million and $15.8 million respectively for the compatible period in 2018.
The company posited significantly higher revenue within its onsite generation segment during the quarter, reflecting increased shipment. During the second half of 2019 we anticipate substantial growth across both business units, in line with our current backlog.
Gross margins as shown on slides nine and 10 were 12.9% for the second quarter and 28.2% for the first six months of 2019 versus 27.6% and 33.9% respectively for the comparable periods in 2018. The company's lower performance in the current year’s second quarter was due to both business units, with an OnSite generation reduced margins reflected the impact of a custom fueling station project, while within power systems results reflected warranty costs and the write-offs of obsolete inventory.
Turning to slide 11 and 12, our adjusted EBITDA loss was $3.3 million this quarter and $4.2 million year-to-date, versus $2.4 million and $4.1 million respectively last year, reflecting the revenue and margins previously discussed.
Slide 13 showed that the company's order backlog as of June 30, 2019 was $144.1 million of which we anticipate delivering approximately $60 million over the coming 12 months. During the second quarter we received $4.4 million of new orders and continue to bid on numerous project opportunities, including with Alstom.
On slide 14 our cash resources as of June 30, 2019 were $17.7 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.
Thank you. [Operator Instructions]. And our first question comes from Eric Stine with Craig-Hallum. You may proceed.
谢谢。 [操作员说明]。 我们的第一个问题来自Eric Stine和Craig-Hallum。 你可以继续。
Hi Daryl, hi Marc.
Good morning Eric.
Good morning. So I know it hasn’t closed the transaction, but curious you know over the last couple months or even as this process is kind of unfolded behind the scenes, how it has maybe changed your view of the mobility market opportunity, with their backing and then maybe as part of that obviously, given their market presence, maybe how you think that impacts your infrastructure business.
早上好。 所以我知道它还没有结束交易，但是好奇你知道在过去的几个月里，或者甚至因为这个过程在幕后展开，它如何改变你对移动市场机会的看法，以及他们的支持和 那么可能作为其中的一部分显然，考虑到他们的市场存在，也许你认为这会影响你的基础设施业务。
Sure, thanks Eric. I think the engagement by companies like Cummins is a very clear signal of maturity in the hydrogen sector. So we've seen the growth in China, we’ve seen the growth in electric vehicles around the world and the developments based on battery technology have brought to light a number of the constraints with battery technology and the opportunities with hydrogen to become more clear, especially in the heavy mobility applications.
So our leadership in trains and trucks and buses are historically diesel applications and I think that we can bring efficient, effective and cost effective electrification solutions to these areas with fuel cell technology and recognition by Cummins that that time has come I think is a very, very positive signal for the hydrogen sector.
So there will be a steady growth period now I think in the coming years. There's lots of work to accomplish the integration platform by platform, so it will be steady-up. I don't expect a massive up-swing. These things are challenging to implement, but I think there will be a very steady upswing in the place of hydrogen within electrified mobility, and as I said especially in the heavy mobility areas for truck, train, bus.
So a very positive signal, and I think there are numerous other positive signals around the world for our hydrogen market. China of course is a lead market with significant volume up-take, but we see Europe coming much stronger now, and in the U.S., California has been a very strong market for us and I see that continuing as well. So on the whole very positive for mobility and this is just one more clear signal about where we are and where we're going.
Got it! Okay and then just quick, last one from me, just turning on the train said, you know great to hear. I know you're not there quite yet, but very close to that aggregated order that you've been waiting for. I mean as that plays out, you've got things going on in other markets, the retrofit market in U. K. and Canada. You know just maybe how you see that playing out, especially if Alstom is really going to take that next step.
得到它了！ 好吧，然后快点，最后一个来自我，只是打开火车说，你知道很高兴听到。 我知道你还没有，但非常接近你一直在等待的汇总顺序。 我的意思是，随着这种情况的发展，你在其他市场，即英国和加拿大的改造市场上都有进展。 你可能只知道你是怎么看出来的，特别是如果阿尔斯通真的要采取下一步的话。
Yeah, I think the key threshold condition is that what we have done in the past is working well and indeed it is and that's been widely reported in the press. There's lots of customers that experience the Hydrogen Rail system and daily use in Germany, and this first group of orders will all focus on this first platform, the Coradia iLint that we worked on with Alstom over the last number of years.
In other market areas there are other applications on other train platforms and so there's some developmental work to have the power train solution suitable for these other platforms and then we'll move through the first trials, the certifications, and then eventually the series production for those as well.
I think on the whole as I look back over the last few years, working with Alstom, this application has moved much faster and much more strongly than we ever anticipated. It’s an application where the value proposition of hydrogen fuel cells is well positioned against the incumbent catenary technology and now that we have a reference site, perspective customers from multiple jurisdictions, municipalities can come and see what Hydrogen Rail is all about and kind of catch the momentum that exists and the opportunities that exist with this application.
So this is an area where we see good acceleration coming in the coming years and we've done a tremendous amount of speed work together with Alstom in the recent years and this will lead to nice momentum going forward.
Okay, thanks a lot. Best of luck going forward!
Okay, thanks for all your work Eric. We appreciate the support of Craig-Hallum and the analyst there in very fairly reporting the prospects and opportunities of this business, and just want to say thank you for that today.
[Operator Instructions]. And our next question comes from Jeff Osborne with Cowen and Company. You may proceed.
[操作员说明]。 我们的下一个问题来自Jeff Osborne和Cowen and Company。 你可以继续。
Yeah, good morning, guys. A couple of questions on my end. You certainly covered the train side there with Eric’s questions, but maybe Marc for you, can we just go over some of the moving pieces on the gross margin side. If I'm reading the SEDAR filing right, it looks like the warranty charge was about $560,000. I think you mentioned obsolete inventory as well as the containerized solution impacting margins. Is there a way to sort of peel back the onion on what the three items were, getting at truth naturalized gross margins without those one-time issues?
伙计们，早上好。 关于我的几个问题。 你肯定在那里用埃里克的问题覆盖了火车那边，但也许Marc对你来说，我们能不能只看一些毛利方面的动作。 如果我正在阅读SEDAR申请权，看起来保修费约为560,000美元。 我想你提到过时的库存以及影响利润的集装箱化解决方案。 有没有办法在这三个项目上剥掉洋葱，在没有那些一次性问题的情况下获得真实的归化毛利率？
Yeah with – as best as I can Jeff, but you got the three elements on the OnSite Generation side. I will say that our projects on balance were at our target margins and we talk around, you know the north of 20 to 25 range, but with the fueling station which as Daryl highlighted is a first of a kind in jurisdiction in Canada with commensurate, a little more heavy engineering and what you would expect, a lower margin. That diluted the quarter results, irrespective of the nice lift in revenue as that fueling station accounted for well over 50% of our revenue that quarter.
So I would say it’s what we expected, and the margins are actually coming in, just mildly better actually than what we had originally budgeted, even on that fueling station. On the power side, we are suffering – sorry, go ahead.
是的 - 尽我所能杰夫，但你在OnSite Generation方面得到了三个元素。 我会说我们的平衡项目是我们的目标利润率，我们谈论，你知道20到25范围的北部，但是加油站，正如Daryl所强调的那样是加拿大管辖范围内的第一个具有相应性的， 更重的工程和你期望的，更低的利润。 由于加油站占该季度收入的50％以上，无论收入增长如何，这都淡化了季度业绩。
所以我会说这是我们所期望的，而且利润实际上正在进入，实际上比我们原先预算的要好一些，即使在加油站也是如此。 在力量方面，我们正在遭受痛苦 - 抱歉，继续吧。
I was just going to follow-up, is it the issue that because its 700 bar or containerized, just a naive question, but the engineering aspect of difficulties. Can you just flush that out a bit?
Hi Jeff. When you start doing this in a jurisdiction that do not have familiarity in history, you have to educate the officials in multiple areas of responsibility and that leads to project delays that you know were not originally budgeted and extra labor work as we go through any open necessary issues. So it’s more a fresh start in the new jurisdiction that trips off the challenges.
In our experience in California and other places in Europe, once you’ve done the first one and the various authorities are well versed in the proper interpretation of the international codes, and standards and the applicability of their current local codes and standards, then it typically goes much more smoothly. So as Mark said, we anticipated something more challenging this first time around here in Canada.
杰夫，你好。 当你在一个历史上不熟悉的司法管辖区开始这样做时，你必须在多个责任领域教育官员，这会导致项目延迟，你知道这些项目是最初未编入预算的，而且当我们通过任何公开的方式进行额外的劳动力工作时 必要的问题。 因此，在新的司法管辖区开展挑战时，这更是一个新的开始。
根据我们在加利福尼亚和欧洲其他地方的经验，一旦你完成了第一个，并且各个部门都精通正确解释国际规范，标准以及它们当前的当地规范和标准的适用性，那么它 通常会更顺利。 正如马克所说，我们第一次在加拿大这里预计会遇到更具挑战性的事情。
And then in regards to the Power Systems Group, Jeff, the delta quarter-on-quarter is entirely attributable to the two adjustments that we talk about there, truing up some warranty provisions and also as we tend to be ahead of some inventory obsolescence charges and not waiting to the end of the year when there's evidence earlier in an appropriate provision.
The other thing I would just comment is, at sub-$3 million of revenue, this quarter as well as the quarter comparatively, our margins are eating up a disproportionate amount of – to start fix manufacturing overhead and perhaps what I would point to is the year-over-year growth margins with respect to the six months and the kind of halo effect of very strong results in Q1 that continued service so well through the first half of the year.
我要评论的另一件事是，本季度以及本季度的收入低于300万美元，相比之下，我们的利润率正在扼杀不成比例的数量 - 开始修复制造费用，或许我要指的是 六个月的同比增长幅度以及第一季度非常强劲的结果的光环效应，在今年上半年继续提供良好的服务。
Got it, and I appreciate the detailed. Two other quick ones if you don't mind. One is on China, certainly you highlighted the trade in macro. I was just curious I guess that the revenue is not flowing through and delays in orders. But is there a delay in discussions with potential customers as well or is the narrative still proceeding, but just people aren't pulling the trigger?
得到它，我很欣赏详细。 如果你不介意，另外两个快速的。 一个是中国，当然你突出了宏观贸易。 我只是好奇我猜想收入没有流入和订单延迟。 但是，与潜在客户的讨论是否有延迟，或者叙述是否还在继续，但只是人们没有动摇？
No, I think the general momentum is still there. I've often drawn attention to the phases of pilot trials and first-op prototypes and then scale up and most of the players that are active in the market up till now have been relatively small companies and when they start getting into larger volumes, they have more challenges in getting into higher levels of throughput. So that's being the phase change issue to be really ready to start doing decent numbers.
I do expect that those issues will get work through, and over the coming 18 months there will be you know reasonably decent demand. Sometimes perspective volumes are inflated in that market, as you know, but I think we will work through the capability issues to execute at a higher level.
And as I mentioned, this transition with Cummins I think is an important part of our market engagement with China as well. I Cummins has a very established network of joint ventures and partnerships in China already, many thousands of employees already there. So Cummins is a platform where we can work together in the Chinese market and established a very strong position with a lot of credibility in existing partnerships.
Make sense. And the last one I had Daryl was on the – either for yourself or what Cummins are jointly are seeing. But you talked about the heavy duty market in trucking. Are you seeing anything in the Class 4 - 6 range or is most of the pipeline and discussions you are having on the heavier side in in the Class 8 segment.
These discussions have shifted substantially in the last years. So there is a lot more focus now on what hydrogen can do, and a lot of work in identifying which parts of the trucking fleet make the best sense.
I won't get into detail by class, but whereas we’ve had you know the occasional interest in drainage trucks in California, I see much broader span interest now. You have major corporations focusing on zero emission, last mile delivery and decarbonizing their logistics pathways and so that's opening up a lot of other discussions in various classes.
And in some of these areas there's been attempts to execute with batteries and then the inevitable concerns around the long recharge time and the limited range and of course in heavier vehicle that range issue is compounded. So the truck discussion has matured very nicely in the last year in China and elsewhere and obviously that's an interest area for Cummins and their involvement in diesel applications in heavier mobility as well.
So I think there's some very good prospect for us in the coming years in the truck market across multiple classes.
Good to hear. Best of luck as your move forward!
Okay, thanks very much for your support over the years Jeff. Much appreciated.
Ladies and gentlemen, we currently do not have any further questions in queue. Thank you for attending today’s conference. This now concludes our program. You may all disconnect. Everyone have a great day!
女士们，先生们，我们目前没有任何进一步的问题。 感谢您参加今天的会议。 这现在结束了我们的计划。 你可能都断开了。 每个人都有美好的一天！
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