Hyzon Motors Inc (HYZN) 2021 Q4 法說會逐字稿

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Good morning, and welcome to the Hyzon Motors Fourth Quarter and Full Year 2021 Conference Call. As a reminder, today's call is being recorded. (Operator Instructions).

At this time, for opening remarks and introductions, I would like to turn the call over to Darla Rivera, Investor Relations Manager of Hyzon.

Good morning, and welcome to Hyzon's Fourth Quarter and Full Year 2021 Earnings Call. I'm Darla Rivera, Senior Manager of Investor Relations. On today's call are Craig Knight, our Chief Executive Officer; Pat Griffin, President of Vehicle Operations; and Mark Gordon, our Chief Financial Officer.

Hyzon issued our results today in a press release and presentation that can be found on our website at hyzonmotors.com in the Investors section.

As a reminder, our comments within this call may contain forward-looking statements, which may include expectations and assumptions regarding the company's future operations and financial performance, including the impact of supply chain disruptions and global uncertainties and our customers' performance under product orders in existing and future contracts, and are subject to various risks and uncertainties. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, please refer to our filings with the SEC, including the press release issued this morning, which was furnished on Form 8-K with the SEC. Except as required by law, we assume no responsibility for updating forward-looking statements.

During this call, we also refer to certain non-GAAP financial measures, including EBITDA and adjusted EBITDA. More detailed information about these measures and a reconciliation to the nearest U.S. GAAP measures is contained in the press release issued this morning, which is available on the Investors section of our website and was furnished on Form 8-K with the SEC.

And with that, I'm pleased to turn the call over to Craig Knight, Chief Executive Officer of Hyzon.

Thanks, Darla, and thank you to everyone for joining us this morning.

2021 was truly a transformational year for Hyzon. The reality of hydrogen-powered heavy mobility has come to the fore through Hyzon's proprietary fuel cell technology. It's remarkable to think that just 8 months ago, we made our public debut. During that time, we battled supply chain challenges like anyone else in manufacturing, but we are proud of this first chapter. We delivered 87 Hyzon fuel cell electric trucks to customers in Asia and Europe with a total contract value of $19 million, put another 8 trucks into trial in the city of Foshan, China, and kicked off fuel cell validation activities in both Australia and the United States.

Additionally, we expect to commission our fully integrated U.S. fuel cell system manufacturing facility in the coming months, and Hyzon is proud to be the first company in the United States commencing series production of fuel cell stacks that power a Class 8 truck. And we are gradually ramping up vehicle production in Europe and China, as well as doing initial local builds in the U.S. and Australia.

During the year, Hyzon executed to plan, laying a solid foundation for the creation of long-term shareholder value, and we are pleased to observe an increasing consensus that hydrogen will be the solution for high-utilization commercial vehicles in the quest to decouple them from fossil fuels. Hyzon continues to work on accelerating the adoption of hydrogen by supporting the build-out of low-cost, low-carbon intensity hydrogen production and dispensing infrastructure, designed to ensure commercial transport can be decarbonized at scale and at pace.

We believe the energy transition is paramount as oil prices continue to be volatile and reaching historic highs at some points. The need for energy independence is at the forefront of the global economy. We see hydrogen as the solution to decarbonize the commercial transport industry and have positioned ourselves as the key to the hydrogen economy through our leading fuel cell technology, first-mover status in zero emission heavy trucks and pathway to securing low-cost clean hydrogen through partnerships with leading hydrogen proponents around the world.

While electric vehicle adoption is accelerating, so too is the demand and dependency on the grid which creates new challenges not only with overall demand, but more importantly, with consumption patterns. That is why we remain committed to hydrogen as the long-term solution for commercial mobility, especially in those heavy-duty, high utilization use cases.

Hydrogen offers fleet owners the most comparable replacement to their diesel trucks today, enabling them to achieve zero emissions with zero compromise. Achieving a total cost of ownership, approaching diesel parity is crucial for fleet owners, and we can get there today through various subsidy programs that are being implemented in European countries and in the U.S., with California leading the way and more states and jurisdictions to follow. We are seeing increasing demand as evident in our growing backlog, which now stands at $287 million, an increase of well over 200% since our last backlog update was provided as of July 2021.

We define our backlog as vehicles with a purchase order or an MOU where we have clear indication of commercial terms. We have a significant number of vehicles under MOU that are pending confirmation of specifications and commercial terms, and therefore, are not counted in our backlog.

Further proof is on hand through a recently received order to supply 18 Hyzon trucks in Europe for daily operations with a leading global logistics company as the end user, and more details will be shared in a press release in the coming weeks. As well as the successful start-up of another of our European customers' first green hydrogen production this week, which will be combined with truck fueling capability in the coming months to fuel their first batch of Hyzon fuel cell trucks.

Our near-term focus is getting our vehicles on the road and into customers' hands, letting them experience for themselves the advantages of fuel cell electric vehicles that are available today, with Hyzon gaining highly valuable real-world experience and performance data.

After a slow start due to the delays in procuring equipment for our operations, North America is progressing at pace. Our first customer demo Class 8 fuel cell truck was recently delivered to TTSI at the Port of Long Beach in California. The truck is being tested in daily [duration] over about 2 months, and we look forward to providing more updates on the performance of the truck as it faces the challenges of long days and long routes within the TTSI operation.

TTSI is just the start of our North America trials. There is incredible enthusiasm for hydrogen-powered trucks, and we expect to have 10 to 15 Hyzon fuel cell demonstration vehicles deployed to major fleet trial customers by year-end, and we'll share information on those trials as appropriate in due course. Efforts to decarbonize trucking are experiencing significant tailwinds as government mandates and attractive subsidies enable faster adoption of zero-emission vehicles by fleet operators.

Additionally, we are making excellent progress scaling up our U.S. operations. I'm particularly excited by the recent commissioning work occurring on Hyzon's Membrane Electrode Assembly production line, and we look forward to producing the first Made in the USA Hyzon fuel cell system before the end of 2022.

Just to remind everyone, the MEA is the most important element of a fuel cell, having an outsized impact on both performance and cost when building what we affectionately call the heart of zero-emission trucks, the fuel cell itself. To support demand as it evolves, we continue to focus on expanding capabilities around the globe, with a particular focus on Europe to support the well-publicized building wave of hydrogen investment and adoption there.

The Hyzon family continues to grow at a rapid rate. Our global team has grown to over 200 employees. I'm excited for the year ahead and know we are well positioned for success as we build out our team with top global talent, many of whom turned down many other opportunities to come to work at Hyzon because they sense the dawn of something incredible and feel good working towards something so meaningful, not for ourselves, but for our children and grandchildren.

While 2022 continues to bring macroeconomic challenges, and the recent COVID lockdowns in China is just one more example of supply chain difficulties, and the terrible Ukraine situation adds further uncertainty in Europe in particular, we remain optimistic and energized for our journey as we enable the adoption of zero-emission commercial vehicles and broaden our partnerships with like-minded companies to accelerate the transition to hydrogen even further.

As some of you may recall during our last earnings call, we introduced Parker Meeks, Hyzon's Chief Strategy Officer, who is leading our strategy around fueling and hydrogen infrastructure. Parker provided a deep dive into how we are growing the fuel supply side of the equation to make it easy for fleets to convert to zero-emission operations with zero compromise.

And this quarter, I'd like to introduce Pat Griffin, President of Vehicle Operations, who joined Hyzon last October. Pat brings a wealth of knowledge in truck assembly operations, and has been able to leverage that experience from day 1 to help us scale Hyzon global operations. Pat will provide some details on our path to commercial production and an update on our U.S. operations.

Thanks, Craig, and thanks to everyone on the call.

As we scale our operations from prototyping to commercial production, I'd like to provide some color around our path forward. We are keenly focused on development and completion of our core differentiating technologies, and when coupled with our modularized designs for assembly, we expect it will provide rapid and synergistic vehicle commercialization across our global locations. A key enabler to this initiative is the Hyzon Innovation Center located in the Chicago land area. Comprised of approximately 100,000 square feet, it will produce our domestic proprietary fuel cell systems. Just this past month, we achieved a significant milestone and validated important stages in the Membrane Electrode Assembly line, which is the heart of our fuel cell stack. We expect to be producing Hyzon fuel cell systems in the United States by the end of 2022, supporting our global vehicle build.

Our Rochester facility is also progressing to plan. Having already completed prototype and demonstration vehicle builds, it will continue to scale and provide various subassembly modules, such as the vehicle's hydrogen storage system, as example. Utilizing both U.S. facilities allows us to support selected subassembly modules for both U.S. and European production.

As we ramp production in the U.S., final vehicle assembly will initially be performed via third-party upfitters, such as Fontaine Modification, which has the capacity to build tens of thousands of vehicles per year. Our vehicle production in China follows a similar model in which we utilize OE vehicle assembly partners during early stages, until vehicle volume supports dedicated Hyzon facilities. This approach to scale production allows us to be nimble while aligning with our capital-light model. Once vehicle demand reaches a tipping point, we plan to build dedicated production lines by region, strategically positioned to meet the increasing demand.

For trucks in Europe and Australia, we currently have our own facilities to assemble vehicles through our ventures and our partnerships to meet early and growing demand in those regions. Due to strong interest in Australia, we already have plans to increase our production capacity there. Based on Europe's demand for hydrogen powered vehicles, we've established a path forward, taking advantage of existing facilities and reconfiguring our operation to provide production capacity of 1,000 vehicles per year on a 2-shift basis. We believe our global footprint and multi-region platform offerings will enable us to meet customer demand where the adoption of hydrogen fuel cell vehicles is accelerating, to get our trucks on the road, gaining real use case experience. We are pleased with the progress our teams have made in just a few short months and look forward to providing updates as we begin scale production.

Now, I'd like to hand the call over to Hyzon's Chief Financial Officer, Mark Gordon.

Thanks, Pat, and thanks, everyone, who joined the call today.

Since our last quarterly call, the security of energy supply has become a paramount issue. It is imperative that this unfolding crisis be addressed immediately, with a viable path towards a long-term sustainable solution. Before the Ukraine conflict, oil, natural gas and coal prices had all steadily increased, driven by compounding years of low investment. Climate change concerns forced the energy industry to cut capital spending, lowering supply before the energy transition could lower demand. The Ukraine conflict has now exposed the fragility of the global energy system in a way that will not be forgotten. While the IEA has called for emergency measures to curb energy demand, a comprehensive and revolutionary energy solution is called for.

The global rollout of waste to hydrogen has the potential to replace a large portion of oil demand by converting municipal waste to a clean green hydrogen. This has the important additional benefit as solving the overflowing landfill issue. Even plastics and biohazard waste can be used as a feedstock. The conversion process advocated by Hyzon is noncombustion, so it avoids adding pollutants to the atmosphere. According to calculations based on the Raven system, converting all municipal waste to hydrogen could theoretically offset 25% of oil demand. This percentage could be substantially increased if agricultural waste were included as a feedstock.

Most importantly, the process can generate its own electricity using a fuel cell or microturbine. This means the hydrogen production process can be completely grid-independent. Already in Europe, electricity prices have made a grid-based solution to the energy transition impossible and misguided. With coal and natural gas making up the majority of electricity generation globally, grid independence is a problem for the energy transition from both the security of supply and a decarbonization perspective. It is imperative that the energy transition have a grid-independent path forward.

Hydrogen has multiple infrastructure advantages. Most importantly, hydrogen can be produced off grid. A large-scale expansion of the grid is still considered, given the massive infrastructure investment required and the unknown availability of natural resources, such as copper. More specific to Hyzon, the charging or fueling infrastructure needed for long-haul heavy trucks could be 8x greater for battery electric vehicles versus fuel cell vehicles as estimated by the Clean Air Task Force.

Finally, hydrogen will be produced locally. This avoids dependency on imported energy and allows virtually any region of the world to be energy-independent. When looked at from the perspective of a complete transition away from fossil fuels, hydrogen is the only viable path forward.

We believe mass conversion of vehicles to battery electric will not work. Cobalt, nickel, copper and lithium are scarce resources, with prices already increasing despite minimal BEV penetration. All of these resources have their own security of supply issues. For fuel cell electric vehicles, platinum is a modest percentage of the total vehicle cost, and platinum resources will free up as fewer catalytic converters are built for internal combustion engines.

From an infrastructure perspective, BEV requires a much greater investment than fuel cell and that investment is often not included in the total cost of ownership calculations. The frequently cited efficiency argument for BEV does not take into account energy economics. For example, at $0.22 a kilowatt hour, electricity prices in California are currently trading at $360 per barrel of oil equivalent when the BTU basis of the energy is considered. In Western Europe today, where electricity prices are now double California, electricity is more than $700 per barrel of oil equivalent. It does not matter if a BEV vehicle is 2.5 to 3x more energy efficient if the input energy is 3 to 7x more expensive.

Never before has the need for a hydrogen economy been greater, and only now is it possible thanks to advancements in fuel cell technology. Hyzon's market-leading fuel cell and our thought leadership make us the key to the hydrogen economy. A rapid transition is critical not only to meet decarbonization goals but also to provide energy security in an increasingly unpredictable world.

Turning to the financials. I will discuss our 2021 full year results and 2022 business outlook.

Hyzon finished the year with $445 million in cash on the balance sheet as the company continues to manage its expenses prudently with an item making every dollar count, we are in line with the cash forecast we laid out when we went public. Full year revenues were $6 million. Total operating expenses were $107 million. We took the full charge to the cost of sales for vehicles sold in China, which was only partially offset for the collected revenues for those sales in 2021. We expect another large portion of cash for the vehicles delivered in China during 2021 to be collected in 2022. Once this customer has a longer operating history, we anticipate booking more revenues upfront. As we have discussed previously, the end user of those vehicles is one of the largest steel companies in the world, truly a great validation of Hyzon's heavy-duty trucks.

Operating expenses for the year were comprised mainly of $16 million in research and development costs and $70 million for SG&A. Within SG&A were charges totaling $33.5 million, which were essentially onetime in nature relating to foundational equity grants for senior executives and expense related to retirement of our former CTO as well as transaction costs. For the full year, we recorded a net loss attributable to Hyzon of $14 million. Hyzon also reported a negative EBITDA of $13 million due to changes in the fair value of earnout and private placement warrant liabilities. Adjusted EBITDA for the full year was negative $64 million after backing out the onetime charges as well as noncash items primarily related to the change in fair value of the earnout and private placement warrant liabilities.

For Hyzon's 2022 business outlook, we expect to deliver 300 to 400 commercial vehicles with deliveries heavily weighted towards the back half of the year. In 2022, we expect the geographic mix will continue to be weighted to regions with lower margins. We expect the geographic mix to shift towards regions with more favorable margins in 2023.

While demand for our trucks is stronger than ever as our backlog increase testifies, we anticipate the supply chain issues to persist through 2022. We expect to commence assembling vehicles using our high-power density proprietary fuel cell made in our U.S. facilities during the second half of 2022. We have made solid progress on this front, and we anticipate showcasing our facilities later in the year. We also expect an increasing number of North American trials of our Class 8 trucks as our facilities ramp.

Trials continue to increase in the rest of the world. We expect our backlog to grow as we progress towards commercial discussion -- ongoing commercial discussions and as demand of zero-emission vehicles grows exponentially. By year-end, we expect the first Hyzon/Raven gas-to-hydrogen hub and waste-to-hydrogen hub to be online.

We intend to drive innovations and increase the Hyzon content within our vehicles. Bringing the manufacturing of our fuel cells in-house is just one step in this direction. Our continuous innovation efforts are expected to deliver both vehicle CapEx and fuel operating savings, which lowers the total cost of ownerships even further. We reaffirm our medium-term EBITDA margins in excess of 15% by 2025.

And with that, I'd now like to turn the call back to Craig for closing remarks.

Thanks, Mark and Pat.

In closing, I'd like to reinforce Hyzon's role as the key to the hydrogen economy as it pertains to commercial vehicles. We are the hydrogen technology company that decouples heavy mobility from fossil fuels and facilitates energy independence in the process. The world is at an inflection point, and a new energy infrastructure is needed. Hydrogen is emerging as a highly versatile, clean solution for high-utilization commercial vehicles. The advances in Hyzon's technology and the visible momentum in hydrogen adoption through government mandates, expanding subsidy availability and significant investment in green hydrogen production underscore the phenomenal opportunity for our company in the coming years.

Our purpose is clear. We won't rest until we have made a significant positive impact in this world, as underscored by our recent announcement that Hyzon joined The Climate Pledge, which commits over 300 leading corporations to reaching net zero by 2040, a full decade ahead of the Paris Agreement on climate change.

Thank you all again for your time and attention. And with that, let's open up the line for questions.

(Operator Instructions) And our first question coming from the line of Jerry Revich with Goldman Sachs.

Congratulations on strong deliveries this quarter.

Thank you, Jerry.

Craig, I'm wondering if you could talk about your anticipated vehicle mix over the course of 2022. What proportion do you expect to come from China versus Europe and Australia? Just to help us understand the picture from a high-level standpoint. And touch on the ASPs that you expect as a result as well, if you don't mind.

Sure. Obviously, we're all very keen to see the geography and product mix move to a more favorable balance. Frankly, 2021 was somewhat disappointing in that regard. Supply chains were just so challenging, especially in Europe where we had expected to build more momentum. We're very focused on validating the early vehicles we've got out in the field, and we aim to work hard towards a stronger Europe delivery and Australian delivery mix within the next 12 to 18 months and to really ramp U.S. activities as well once our various customer trials are proven successful.

So it would also, however, be overly ambitious or irresponsible of us to pretend that the business at the moment is highly predictable. And that's why we prefer not to give too granular guidance around vehicle type, vehicle specification, vehicle ASP and end markets and customers' end markets. The business is still lumpy. It's still driven by activities, such as customers successfully accessing rebates and policy support, et cetera. And therefore, we remain cautious and say that we expect that mix to be a lot more favorable once we're into 2023. And the rate at which it becomes more favorable is still a little unpredictable, but we see very encouraging signs in Europe.

And we mentioned in the prepared remarks about a new order for another 18 trucks in Europe. We also mentioned that one of our customers that we've got vehicle supply agreements with has successfully started their -- commissioned their green hydrogen production this week, which will, in the coming months, turn into a dispensing capability that can be used to deploy their first Hyzon trucks. And it's these activities that we'll see that geography mix shift over the next 12 to 18 months, dramatically in the favor of higher-margin markets. So I'm sorry to disappoint you with a lack of very specific details, but the business is still lumpy and somewhat unpredictable so the exact timing of some of these things are difficult to predict.

I appreciate that. And in terms of the free cash flow outlook over the course of '22, Mark, I'm wondering if you could just update us on your CapEx outlook. And given the moving pieces that Craig spoke about, how should we think about free cash use over the course of '22 as you folks ramp up?

So as I said in my prepared remarks, where we ended the year with cash is where we had anticipated to be when we went public, and that is how we feel that 2022 will unfold as well.

Sorry, Mark, just so I'm on the same page with you. So the outlook that you folks have previously laid out for cash for year-end '22 still holds, is your point?

Correct.

Our next question coming from the line of Courtney Yakavonis with Morgan Stanley.

Can you give us an update on where the Bolingbrook and Rochester facilities are? I think, originally, you were anticipating them to be online by the end of the first half of 2020. Now, it sounds like the target has moved towards the second half of 2022. But I think you were awaiting some equipment because of supply chain issues. Is that in place? And are we now just -- just give us an update on what kind of the hurdle is to get those facilities online? And what's the expectation for the timeline is?

Sure. Courtney. Thanks for the question. I'll take that one. Bolingbrook is definitely making some great leaps in being built out. We've been testing our MEA -- some of our MEA facilities. It's a multi-stage process to make a fuel cell system. But that first and very important part of it, making the multi-layered MEA, the Membrane Electrode Assembly, this is being commissioned at the moment. So we've been running some tests on the MEA equipment in the last 4 to 6 weeks. We will start making fuel cell stacks here in the next 4 to 6 weeks, and we will be able to make complete systems sometime during the second half, probably much closer to the middle of the year than the end of the year, to be honest, but just during the second half of the year.

And as for system build, the subsystems for the vehicle include hydrogen storage, electric propulsion, the fuel cell system itself, et cetera. Some of these subsystems have some capability already being set up in Rochester, for example, and there's also a vehicle prototyping going on in Rochester now as well. We also have some vehicle prototyping activities in Bolingbrook as well, but we expect to see that internal hydrogen fuel cell production in-house, hydrogen fuel cell production, feeding the Hyzon vehicle assembly requirements before the end of the year.

And that's the most important thing because that integrates us right back through that fuel cell production and improves the gross margins, as Mark was alluding before. Wherever we have to buy fuel cells from Horizon, we're buying from the market at a commercial rate and it greatly improves our margins when the most expensive part of the vehicle is made in-house.

Great. And then just on the back of the earlier question about the mix understanding, that it's tough to predict. Can you at least give us some -- your thoughts on the HongYun contract? And do you anticipate a higher production for them next year relative to this year? Because I think Mark alluded to the full cost will be flowing through, that you should start to get some incremental sales flow through from the order -- or from the deliveries from this year. So I'm just trying to understand how much more of the P&L will be labeled by cost associated with that next year.

And then what is the time line until you would start to see those revenues flow through at a full rate? You kind of mentioned they need to have a long enough operating history. Is that 2 or 3 years or it is more like 6 or 7?

Okay. So if I can touch on the first part of that question, just in relation to the business we -- how we expect the business in China to materialize. And then Mark can speak a little bit about some of the efforts to -- and some of the expectations around improving the revenue recognition treatment of those deployments in China.

So we have a number of significant project and vehicle deployment opportunities in China. It's not only the HongYun activities for the steel company end users, but also, we've announced initial trials with Foshan, which is one of the UN hydrogen demonstration cities in China and receiving a lot of support from federal government, et cetera, down there. And we expect to be able to share information on at least 1 or 2 interesting vehicle deployment opportunities beyond the HongYun heavy-duty truck deployments.

Now, in terms of how that flows through to the bottom line to earnings, et cetera, I'll let Mark comment and just provide a bit of information about when we expect revenue recognition treatment to maybe change.

Sure. Thanks, Craig. So Courtney, I think it's important to think through on how we will be receiving revenues for the trucks delivered this year with no costs over the next few years. And the bulk of those revenues for the trucks delivered last year will come in 2022, so that will effectively be pure margin. It's a little strange accounting treatment, but what we're waiting for is for HongYun to have more operating history, and we plan to reevaluate this method of accounting for their revenues in the fourth quarter of this year, at which point we hope that we'll be able to account for their revenues more normally.

Our next question coming from the line of Rob Wertheimer with Melius Research.

I'm so sorry. I'm so sorry. Craig, I wonder if you could talk a bit about how your expectations for '22 have evolved over the last couple of months. I think you're still expecting a little bit higher number of truck deliveries. Maybe your backlog even implies you could do more. I don't know whether the $300 million to $500 million is production limited or whether orders have been percolating but slower than you expected? I wondered if you could just talk about the evolution there.

Yes. Rob, great question. We would love to deliver more trucks, but you're absolutely right. The 300 to 400 vehicle range from our standpoint is a reflection of supply constraints in a couple of other markets that are really starting to build momentum, and that is Europe and Australia, in particular. And we've been cautious in our outlook for how many vehicles we think we'll deploy in those 2 markets. Even though customer orders are building and customer interest is building and we continue to sign vehicle supply agreements, we're tending to commit to only a very small portion of contracted quantities by the end of 2022 with a much larger portion of those contracts falling into 2023.

We're not doing that to pump up 2023. We're simply doing that because it's still a reality that supply chains are still very constrained and unpredictable. If things improve dramatically by the middle of this year, say, in the next 3 to 4 months, we will be able to do better on deliveries than our kind of more conservative estimations. But at the moment, we're still very much tempering the forecast and expected deliveries with those supply chain factors, which continue to be quite challenging.

Okay. I think that's clear. Could you walk through what makes the outlook so back-end loaded? You talked a little bit about U.S. production. What is a similar kind of story in Europe? And what kind of gets better in order to drive those deliveries in the back half? Kind of what needs to happen in order to hit as opposed to even raise the guide?

Sure, sure. So there's 2 factors that play into the delivery timing. One is all of those supply considerations coupled with our own ability to get the vehicles assembled once we have all the necessary materials and parts and components, and then have these vehicles prepared for and certified for on-road use, et cetera.

But the second thing is that deliveries in China, which will still make up a fair portion of deliveries for this year. Deliveries in China will always inevitably be loaded towards Q4 because this is just the way the contract cycle a bit works in that market. And we were able to take advantage of that last year by -- even though we were only really starting to work on the vehicle assembly towards the end of the year, we were still able to deploy dozens of vehicles even in December, for example, in China. So there's a contract dynamic -- contracting and delivery dynamic in the China market more generally, but also there's a dynamic there around supply of all the parts and components and what that means in terms of our ability to then subsequently build the vehicles. As our -- as we take delivery of all the important stuff for the vehicles, we still obviously then need to go through the process of building, testing and certifying.

And then in Europe for this year, what is the source of the fuel cell stack? And then I'm sorry for the last one, I'm just trying to think about what gets you to the numbers this year. Do your customers need -- do they all have sources of hydrogen? Do they need to build out the sources? And could that be any kind of delay if they don't have their setup right? And I'll stop there.

Okay, Rob. A couple of questions in there. The first one in relation to the supply of the fuel cells. Our plan is to substitute Horizon-sourced fuel cells for in-house Hyzon-produced fuel cells out of the U.S. once that production is fully validated, so I can't give you an exact date. But certainly, before the end of this year, we would expect to be starting to substitute supply of fuel cells for European assembly with in-house production.

And then the second question around sources of hydrogen, we continue to have options for deploying trucks in Europe. But by the same token, the supply of hydrogen is still the rate-determining step. So there are some customer opportunities that still have hydrogen supply lead time factors associated with them, so what we sometimes do is work with a customer on a certain scope for a project. And then define the Phase 1 as the place where the hydrogen is most imminently available, knowing that the Phase 2 is dependent on, for example, a new station to be built by TotalEnergies or somebody else, right?

So there are still timing factors involving availability of hydrogen, but Europe is improving all the time in terms of availability of heavy vehicle filling stations. And no doubt, you would have witnessed from some of the publicity and news flow around events in Europe that many parties are active and engaged in building hydrogen infrastructure, which does include those very important filling stations.

And our next question coming from the line of Bill Peterson with JPMorgan.

I have a few questions, first related to the U.S. market. You mentioned that TTSI just started. It feels like that may have been delayed and kind of feel like this should have been earlier in the year. I'm wondering if there's any reason for that.

And then maybe looking ahead, when could we expect to get a vehicle CARB certified? And I guess the last one related to North America, you said 10 to 15 fuel cells. I guess, compared to 3 to 6 months ago, how many vehicles would you have thought you could get in North America at that time?

Fair, Bill. So 3 questions there, one around the U.S. market and whether the TTSI trial was, in fact, delayed. And yes, we had expected to put the truck into operation around the end of the year. Frankly, we ended up spending a lot more time with truck validation and all that sort of thing than we had intended. And there were a few things with our first road validation, road certification activities that just took longer than planned. Not surprising that when you do something for the first time, you don't necessarily have all the answers right off the bat. So that was, in fact, a little delayed. Happily, the trucks are in the Long Beach Port now.

As for CARB certification, I'm going to let Pat comment on that in a moment, but I will make a comment on your third question around the number of trucks we were anticipating in the U.S.

So I believe that we had originally anticipated somewhere around 20 Class 8 trucks for 2022, I think that was kind of where we were looking to target. We said 10 to 15 is our expectation to be in trial by the end of this year. So we still feel quite good about that because we've been validating the vehicles and the performance pretty heavily, and we've had a number of customers come to witness truck testing and some of this sort of thing. So we're seeing increasing interest and engagement by major fleet operators in the U.S. for our trucks, and we kick off those engagements with the trials we were talking about.

So I'm just going to turn over to Pat so he can comment on CARB certification. I think he's a little closer to it than I am.

Sure. Thank you, Craig, and thank you, Bill, for the question. And as Craig mentioned, interest in testing and validation is strong relative to customer demonstrated trials. Of course, CARB certification always at the key forefront of what we're working towards for the support in California, and it takes generally 4 to 6 months to walk through the certification process. So we've received the executive order through CARB and so once we had that, that allows us to go on trial in California, and so things are progressing well through CARB.

Okay. Yes. You noted that you're developing power management, vehicle control, eAxle and so forth. So I guess the current trucks are obviously using your fuel cells, but what is the timing of that development? When will we see more of your proprietary content show up in vehicles? Is this a 2023 thing, or is this really more longer term? Just curious on the timing of these enhancements.

Yes, you can pencil that down as a 2023 thing, as you mentioned. There's a lot of work going on to validate some of these internal innovation and development activities. We expect that between now and the end of this year and first quarter next year, a lot of that work is done. And so sometime during 2023, we expect we'll be able to report various elements of the increasing Hyzon content in the vehicles, which gets us to those higher gross margins that Mark is always looking for.

Okay. If I could sneak one more in. Nice to see progress with the Raven SR. Can you remind us, I guess, what are the economics? Who -- what do you benefit from in terms of the sales? And should we assume that the sales of your fuel business starts to take off, I guess, early next year? Anything on the economics would be helpful.

Okay. So I'll just introduce our relationship in there and how it works with our early engagement with Raven giving us access to produce -- to their producer economics on our field which we take from them, which is up to half of the output for hubs in which we participate together with Raven. So it gives us nice access to the economics on the hydrogen. And then I'll let Mark speak more specifically on the economics coming out of those first 2 hubs in California.

So I think -- first, it's good to point out that each of these hubs is going to produce about 4.5 tonnes a day of hydrogen. So when you think about that, that's enough. If all the hydrogen were going to our vehicles for heavy-duty Class 8 trucks, that's enough for each hub to do 100 trucks. So with those 2 hubs, there would be enough hydrogen for 200 trucks, and that will be on by year-end.

The first hub is a gas-to-hydrogen hub, and I think Raven is still debating the actual location with Chevron. It's going to go on a Chevron field, and it's between some place in Bakersfield or a field in Colorado near Denver. Once that's determined, we'll look to have trials in those vicinities. And the economics now are low-teens unlevered, and we do anticipate being able to debt finance the hubs in the future after we've demonstrated that they work so that we'll get levered returns on them. And we also think that the costs for those hubs will come down over time. The first couple are expensive, but the nice thing is that Raven is manufacturing the majority of the equipment in-house. And so as they sort of streamline their process, we can see some cost savings coming.

And importantly, the economics of the hydrogen coming out, Mark. Let's just talk about that for a minute.

So the hydrogen, when I gave us the low-teens IRR, that's assuming that we're selling at around $5. Now, there's a great subsidy program in California for the first hubs, and most likely a large percentage of the hubs will be in California, or at least, they'll be in states with the LCFS credit. And so it's a little hard to answer what the exact economics are because the credit can range from between $3 and $9 a kilogram depending upon the feedstock. And so as you can imagine, my unlevered IRR calculation gets substantially better if we move to dairy waste as a feedstock. But I'm using -- I'm just assuming municipal waste in my calculation there.

That's super helpful. Really exciting progress on that front.

Thank you, Bill.

And our next question coming from the line of Jed Dorsheimer with Canaccord.

I guess first question on the electrolyzer. Are you -- have you moved off platinum? And if not, what's the expectation from a supply chain procurement perspective?

Well, we're going to assume you're talking about our MEAs rather than the electrolyzer. So actually, the MEA we make can be used in electrolyzers, by the way, but we're using them in fuel cells, obviously. But the platinum is indeed the key cost determinant for the fuel cell. The nice thing is that we -- that the platinum doesn't degrade or get destroyed in the use of a fuel cell, so at the end of life, if the fuel cells kind of worn out, like an engine eventually wears out after a lot of driving, we're very happy to take those fuel cells back and reuse the platinum and put refurbished fuel cells together or essentially rebuilt fuel cells after we strip out the platinum and put it into -- coat new membranes with it. So fuel cells are very much a cradle-to-cradle technology on that basis. You don't throw anything away.

Now, for a comment on the platinum -- expected platinum economics and how we see that kind of happening here in the next couple of years, I might defer to Mark. We've thought and talked a lot about the -- not only the platinum issue, but the chemistries and the metals relating to batteries, because we still use batteries in our vehicles. Now, we use LFP batteries, so there's no nickel or cobalt in those batteries, but we still are very interested and concerned for the supply of lithium, for example.

So Mark, do you want to make a comment about platinum and how we see some of that playing out?

Yes. So we don't give out the exact amount of platinum that we use per vehicle, but what I will say is it's modest. And while everyone focuses on platinum as the key material for fuel cells, we're talking -- low single -- let's say about $12,000 per vehicle. So -- and we expect that to drop the amount of platinum used as well over time in our new iteration of the fuel cells. So this is not something that is going to pose an ultimate constraint. And if you look at platinum prices, I mean, they're up from a year ago, but they're not exorbitant.

Well, I guess I was asking, just given where most of the platinum is procured with respect to Russia and the Ukraine invasion war, whatever you want to call it, right now, atrocity, I guess. And what your strategy is from a procurement with a critical element that's going to be constrained? That's where I was coming at from that perspective.

Yes, okay. I got you. Most platinum comes from South Africa.

South Africa is the major source.

Okay. Okay. So you're not seeing any issues with that? And then...

No, no. We don't buy anything from Russia.

Got it. Great. And then on the -- so if I think about sort of the relationship you have with different geographical locations, Tesla has done a really effective job of, quite frankly, making vehicles in Shanghai that are being shipped to Europe, and now they're starting up a localized manufacturing. Why the limitations, I guess, in terms of fuel cells? Is it just a demand issue, that the demand in Europe and the U.S. is not there? Or I guess -- I'm just curious why you wouldn't follow a similar path there in terms of where you're manufacturing versus where you're selling?

Yes, I'll take that one. So Jed, for us, as a U.S.-based company, it's important to us that we have a manufacturing base in North America and that we have also operations base in Europe, for example, because these are our 2 key markets of focus in the coming, say, 5 to 10 years. And we had always intended to have U.S.-based production of fuel cells as the core of our upstream operations. They're very IP-intensive part of our operations. And we believe that, that will serve us well over time. We've had concerns about geopolitical stability for a while, and we think that it's going to be very important to have this dependable domestic supplier within the U.S. of fuel cells.

So if you think about the heavy lift that's ahead of the whole industry to get from fossil fuels to clean alternatives, we view heavy vehicles as naturally going to hydrogen. And I think for the security of supply and for the benefit of the industry generally, transport industry generally, I think domestic U.S. supply is very important. It's not a heavily labor-intensive activity to make fuel cells, and if you come and see our MEA line, you see it's basically a lot of fancy machines as opposed to a lot of humans. It's very different to building a complete car, which is a very involved process with lots and lots of robots and lots and lots of steps and also quite a few people. The process of building fuel cells is not that people-intense, and we feel local production is very good for long-term stability and surety of supply.

Got it. Great. And one last question, just to sneak this in. But the first Raven hub, and I recognize that you spent a decent amount of time talking about our market. But the first Raven hub is working with Chevron on a gas-to-hydrogen. Is that a biowaste-to-hydrogen? Or is that a methane-to-hydrogen conversion?

It's actually going to be flared gas, I think, is the most likely source of the gas. So the nice thing -- yes, go ahead.

I was going to say, so if it's flared gas, that would be curtailed energy. And so is that going to be intermittent? Or is that continuous?

No. So these details are being worked out. And frankly, I'm not right in the thick of those conversations. But the Raven system can take flare gas or it can take a casinghead gas, which means you don't have to strip out the NGLs and stuff, so it's like a more robust system. And frankly, there's a number of large energy companies looking at it to solve the flare gas problem out there. But no, it would run consistently. The 4 tonnes a day would be consistent gas, so -- and this system could -- can run on RNG, and it can run on biogas as well, which an SMR cannot do.

Got it. Well, great. That's it for me.

Yes, Jed, you can think of that Raven process, it's just a more flexible version of a traditional SMR. So traditional SMR, steam methane reforming process, takes methane and then converts that into hydrogen. So this is more of a...

Sorry, just to ask another question on that. So Craig, will that be considered blue? So are you going to be capturing the carbon at the exhaust to sequester that, or is that considered gray hydrogen?

If that was to use just natural gas out of a pipe, it would be considered gray hydrogen. When you use gas that's being flared or is otherwise off gas, et cetera, then it's got obviously a whole different treatment, and it's got a rating of green attached to it. If it was just using a natural gas pipeline and it wasn't certified RNG, it would be gray. If it's using certified RNG, it would be green. But I don't believe that it's got carbon capture directly on that process, right, Mike?

How is it considered green if you're emitting the carbon?

Not if it's...

Yes. So it's RNG and also, right, methane, like it's 25x worse for the environment than CO2. So if you capture RNG instead of letting that emit while there's some CO2 that comes out of the process, your net carbon economics are positive. And while we're...

Carbon accounting, yes. The carbon accounting.

Yes. While we're on the subject, obviously, we're doing a whole bunch of waste-to-hydrogen projects with Raven as well. And in that scenario, this is -- you get a very large negative carbon intensity score. So this would be more green, in our opinion, than doing solar with electrolysis because you're actually offsetting methane that would be emitted from landfills. So you're cleaning up the environment and you're putting less -- it's not carbon, but less methane into the atmosphere.

Not from a carbon perspective, though, guys. I mean, I'm very familiar with the molecular structure of RNG, which is going to be a CH4. It's not going to change whether you're fracking or whether you're getting it from...

But carbon accounting -- yes, yes. Kind of carbon accounting, yes.

A land -- so this is kind of a technicality associated with blue or green. But if you're getting CH4 and we're using an SMR or some type of hybrid SMR process, if you're not capturing -- when you break the atomic bond, if you're not capturing the carbon, then that's being emitted. And I'm just wondering how that could potentially be considered green? So that's why I was asking if there's some capture method?

Yes. So we'll just take this offline. But the one thing I will say is just that when we sort of adjudicate how green something is, we go by the CARB methodology because we think that they're the ones in the best place to understand this. And CARB sees the process, is very carbon-negative underscoring process, and we could probably have a 2-hour debate about how to think about it.

I'll take it offline. I appreciate it, guys. It is something I want to follow up on, though.

Yes, sure.

Our next question coming from the line of Mike Shlisky with D.A. Davidson.

Before I get to my question, I want to follow up on your comment just now, Mark, about waste-to-hydrogen. Do you know if Hyzon will be able to get a piece of the tipping fees that come into Raven on those?

The answer is -- yes. So if you look at any one of these systems, we will share in our proportionate amount of the economics.

So in every hub, our share will be slightly different depending on who the other partners are. It could be Raven and Chevron, it could be Raven and ITOCHU. It could be Raven and someone else. But for our percentage of the ownership in that hub, we will share in all the economics and the Raven systems. The first one in Richmond is not getting a tipping fee, but Republic Services or Waste Management or any other dump knows that Raven expects a tipping fee. So that's just something that was negotiated on the very first one.

Okay. Got it. Now, on to my question I had earlier. If the supply chain issues are resolved at some point during 2022 whether it's tomorrow or December, is it fair to say that any amount that you've lowered your 2022 outlook by should be able to be made up for in 2023?

Let me take that one, if it's okay, Craig. So the answer to that, unequivocally, yes. When you look at our backlog, I mean, part of the reason why it's sort of growing quickly is because we're having supply chain issues delivering. And the backlog will continue to grow as we have -- well, it's going to grow just because of sales, but it's also going to grow because we're not delivering what we could be delivering because of the supply chain. So there's absolutely no issue in sales, and sales that aren't being met this year are being put into the following year.

And so we've said consistently since the beginning that we have no issue with sales, and frankly, that's the way it -- there's definite acceleration and momentum and excitement on the sales side. And this is all a matter of logistics, and that's working up the global supply chain. That's working with our suppliers to get various pieces of equipment to us as fast -- as quick as possible.

All right. And one other question I wanted to ask was about some of the performance tracking system of the current product. So as soon as you get Bolingbrook up and running and the Hyzon-owned production system up and running, how different will the specs be and the performance be of those trucks from that point onward than they are today? And also, what customers are testing today, does that include sort of a hand-built version of what it's going to look like at the end of this year? Or is it whatever you can get from Horizon that's in those trucks today?

I'll take that. So Mike, the fuel cells that are currently going into the trucks are the same fuel cells that we've -- in Hyzon trucks in the U.S. and in Europe and Australia are the same as the fuel cells we put into the trucks for delivery for the steel customers in China, for example. Those fuel cells are the same designs, and that design of fuel cell is being updated slightly for the higher power applications, the higher power requirements, but it's very, very similar. And it's not made in a drastically different manner, whether it was to be built by Horizon and purchased by Hyzon or whether it was to be made by Hyzon with in-house production. The fuel cell itself won't be noticeably different.

Okay. So just to clarify, the difference then will only be on your margins and your -- really, the capturing more of the value chain? That's how it is.

Yes, yes. Cost of -- yes, we get cost of production price instead of a customer price.

Our next question coming from the line of Steven Fox from Fox Advisors.

I'll try to stick to the standard 2 questions here. First of all, Craig, versus 90 days ago, have you done anything or had any progress in terms of controlling your own destiny on the supply chain a little bit better? Or would you still describe it as sort of a fistfight every day?

And then secondly, Mark, you made a lot of good arguments for why the secular benefits to hydrogen, especially given current events. I'm just curious like versus, say, the beginning of February to now, you're not seeing much in terms of like public opinion from government leaders emphasize around hydrogen as much. Are you seeing anything that's changed in your conversations either on the government front or with corporate that's because of the Ukraine war?

So thanks, Steven. So I'll touch on the supply chain factors. Naturally, and I mentioned this even in our prior Q3 call, we had moved fairly quickly to put as many things on order as we could around the middle of 2021 to be able to build as many vehicles as we could approaching the end of the year. But unfortunately, that wasn't even aggressive enough because lead times of things that are normally a 5- or 6-week delivery schedule, those lead times went out to unknown numbers of months and typically 9 months plus. So I'm happy to say we've taken delivery of a lot more parts and components and vehicle chassis in Europe than we were able to get last year. So this year is definitely looking better.

Whether or not we took a lot more actions in the last 90 days, I don't think we took a lot more in the last 90 days. I think we took a little prior to that, a lot of actions to buy quite a bit of inventory for deliveries in 2022. But still, the challenge for us is that the customer appetite is growing much faster than the ability of the supply chain to catch up with it, as Mark kind of indicated before. The orders are coming in, but we simply can't get the vehicles out in -- at the rate that we would like and at the rate the customers would like. But we are looking at a much better Q2, Q3, for example, in Europe than what we have endured in the last 90 to 120 days. It's been pretty tough, so I'd say Q2 and Q3 in Europe will be much, much better for us, and we look forward to making a lot of customers happy because they've been waiting a while for trucks, frankly.

Now, if you don't mind, I'll turn it over to Mark on the questions about the -- some of the secular benefits, as you called them, around hydrogen. I'll just make a comment about interactions with some of the customers and some of the government agencies and reflect on the burgeoning interest, frankly, in hydrogen as a solution for heavy vehicles.

It's not just Hyzon's view anymore that hydrogen is going to be so important for these heavy vehicles that operate many hours every day. It's not just our view or our wish that hydrogen is important in those sectors. It's now become a well-accepted mantra amongst government agencies, policymakers and corporations generally. And so we have high level of confidence, a much higher level of confidence than we had going back 12 months when we were promoting the vision of what Hyzon could be and could do, and we feel extremely confident that the thesis we laid out around hydrogen and the fact that hydrogen would prove to be the secret source to unlocking zero emissions for these hard-to-abate mobility sectors that, that thesis is definitely in very good shape, and in fact, it has far more of a tailwind now than we ever would have imagined 12 months ago.

Do you want to comment on that at all, Mark?

Sure. I mean, Steven, you might have seen yesterday, I mean, Reuters is reporting that China set a target to produce 100,000 to 200,000 tonnes of green hydrogen by 2025. So I mean, obviously, they get it. They're very focused on security of supply.

I didn't read these comments, but this morning, Jamie Dimon was talking about how we need a new marshal plan for energy. And when I think about a marshal plan or a way to sort of march the whole economy to something beyond oil and gas, it really only can apply to hydrogen. That was sort of the point to my remarks on the call. We do need a marshal plan, and we need a massive revolution of the energy infrastructure, and it would be in our opinion sort of a dead-end to try to move it all to battery electric because, of course, that depends upon the grid.

But if we rolled out massive waste to hydrogen all across America, I mean there's garbage produced everywhere. I mean it's a great local source of hydrogen. I mean this would be something that would create energy independence, and it would be sustainable. It would clean up the environment. I mean, the landfill issue is a real issue. I mean, you might know that New York City ships its garbage to Rochester, Wyoming ships its garbage to Utah, Singapore ships it to Malaysia, and so forth and so on. So all that gets fixed. And at the same time, we could create energy independence.

So part of the purpose to my comments in the call is to get this message out there that we do have a plan, and we do see a future here, and we can -- if needed, if there's going to be -- well, it's going to go to 200, as many people are calling, we have a way to get the whole world to be energy independent and stop relying upon imported oil, whether it's imported from Russia or imported from the Middle East. This is a positive for everyone because it's -- you get security of supply and at the same time, you clean up the garbage situation.

And our next question coming from the line of Donovan Schafer with Colliers Securities.

So my first question is just for the unrecognized sort of portion of the 87 vehicles that you sold this year. Because it's spread over this kind of 5-year period, I'm just curious just from like -- just how you think through those and combine this with your reporting on the backlog? So I'd like to see how you broke out the backlog in terms of binding, nonbinding. You've got about $60 million binding. Is the remainder of the $19 million kind of contract value, is the unrecognized part of that counted in the binding backlog or the nonbinding backlog? Or are you leaving that out of backlog altogether?

Craig, that's a fair question.

Yes, I'll take that.

Yes.

So there's a slide in our presentation that was put out this morning in an 8-K that actually addresses your comment exactly. So the remaining is actually not in backlog. We show the backlog in a bar chart, and then beside that, we show the backlog plus that remaining bit, so an incremental. I think it's $14 million that...

$13.4 million...

$13.4 million, that's right.

$13.4 million as uncollected revenue. And it's a fair question, because it is a payment obligation for the customer. So we do expect to receive it, but it's some -- it doesn't quite fit backlog definition so we added it separately.

That's great. I like that treatment. So -- and then to follow up on that same thing. Just for trying to understand the spreading it out over the 5 years, the sort of, for lack of a better word, you talk about it being tied to operating history. And I'm curious if there's -- what the specific sort of gap provisions are? Maybe like what we might Google to find that?

Because I could think of it as being like when I think about GAAP and the Public Accounting Oversight Standards Board (sic) [Public Company Accounting Oversight Board] or whatever that -- to put that together, it could be kind of in the spirit of 2 lines of thinking. Where, one, you can talk about operating history. It makes me think of kind of a similar line of thinking to the sort of like allowance for doubtful accounts type of thing or bad debt -- just in the spirit of it. Or the other one being like the nature of the contract, almost like a year-to-year rental agreement or something. So just what would you sort of Google in terms of keywords? I understand what this falls into?

We can do in a specific question is...

The main factor -- go ahead, Mark.

I was just going to say, well...

The main factor here was the treatment of collectability, the assessment of collectability by our auditors. They're saying we just don't have enough kind of enforcement power to go out and make sure that money gets collected.

Now, the end user of the zero-emission vehicle services is one of the largest steel companies in the world, and we think it's highly unlikely they'll default or stop using trucks anytime soon. So we don't find that an unacceptable business risk, but from an accounting treatment standpoint, because there's a new intermediary involved in the provision of the service for the vehicles, then it's considered a collectability risk. But as that company has more operating history, then the collectability would become clearer. And I'm sorry, we both tried to answer the question at the same time there. Mark, do you want to add anything?

So I think you did a good job answering it there, Craig. I'll just add now that if you want, we're happy to have you speak with our Chief Accounting Officer. She is far in the weeds in all this and can explain to you.

Okay. Great. And then my last question...

I just want to say, Donovan. Donovan, I just also want to say that it's really a short-term issue. It really doesn't affect the viability of the trucks. It doesn't affect the attractiveness of those deployments and the extent to which we learn from the operations and from all the data we get out of all the vehicle operations, and it's getting us where we need to be, which is in the market with a whole lot of trucks validated by a whole lot of customers, right? So it's a short-term issue, whether we recognize the revenue next year or the year after.

Frankly, it's not a huge deal. It's unattractive to have shipped vehicles that you haven't recognized all the revenue. One, it doesn't make us feel good. But at the end of the day, it's a very minor pain point.

Sure. Okay. That's great. And then just my last question, kind of taking a stab at the green -- well, blue versus green hydrogen. I don't know -- I'm actually not familiar with the specific breakouts, but someone -- I used to be a petroleum engineer, and so the whole flaring process in Bakersfield and stuff. And correct me if I'm wrong, but just at the kind of high-level logic, my understanding is something like that, at least conceptually, would be seen as green because as an oil and gas producer, you're required to flare those methane emissions. So you're making the CO2 no matter what.

Like, it doesn't matter, everything else aside the CO2, it's just happening because you're under laws probably going back couple of decades. You're being required to just combust that methane for absolutely no benefit. Well, to convert it from methane to carbon dioxide. So the logic of the green would be, well, it's happening no matter what. So if instead of just having that be waste heat going off into the ether like essentially a campfire with nobody around it, you might as well capture it. And then if you're capturing that and it's creating a vehicle that is being powered and that vehicle is displacing a vehicle that would otherwise be powered by fossil fuels that would also have carbon tailpipe emissions. That's -- is that the logic?

So that's the logic, Donovan.

Yes, yes, exactly. You hit on it. And it's because it's an end-to-end carbon accounting consideration. It's what is the feedstock and where did it come from, as well as what happens through the process and what's the output of the process.

So it's end-to-end carbon accounting that CARB looks at when they assess the carbon intensity, and you're absolutely right. It's also the reason why when you, for example, take dairy waste and make hydrogen from it, you get a really massive negative carbon intensity score because what you're abating is straight methane. And you just mentioned that the conversion of CH4 to CO2 has been mandated for many years in a lot of countries because the ozone depletion effect of CH4 is so much worse than CO2, that's why they're forced to burn it.

So if you're abating CH4, you get a hugely negative CI score. If you're abating CO2 being released without displacing fuel, then you're getting a negative CI benefit. And if you're actually carbon capturing, then that's blue even if it's just natural gas, for example. But it will also be a negative CI green if the methane was from a renewable source.

Sorry, Mark.

Yes. I was just going to say, it's the same logic for waste-to-hydrogen in the negative CI score there. I mean, flared gas will be going up into the environment no matter what, and same with the methane produced from a landfill. And so what we really need is a color for this type of hydrogen, a color to describe garbage-to-hydrogen. But what we would argue with the help of CARB is that this is more green than electrolysis using solar or wind because that CARB score or carbon intensity score is like close to 0, and we're now dealing with negative scores. In some cases, very negative scores.

Our last question coming from the line of Noel Parks from Tuohy Brothers.

Just a couple of things. I was -- I noticed that you talked earlier about your cash burn was essentially on track with your original projections for the end of 2021. And just looking at the expenses, I just noticed that it seems that your R&D run rate is pretty far below -- or last year, it was pretty far below maybe the original projections you had, I think, which were 5-year projections. So just looking for a little insight as to maybe -- if and -- if so, where you cut back on that? And just what -- where we might see the ramp-up on that expense line going forward this year or more 2023, frankly?

Sure. So R&D, I think what we had provided as an outlook for kind of major buckets of expenses were looking forward over several years. And our spend on CapEx and R&D generally in 2021 have been on the lower side because it's been very slow to procure equipment to do things, like lab work, et cetera. So in fact, we are a little slower investing in some of that than we probably would have preferred, to be honest. But it meant that we ended the year with a cash position fairly consistent with what the outlook had been even given revenue recognition and cash collectability of some orders, et cetera -- or cash collection of some orders, et cetera.

But we do expect to continue a healthy spending on R&D, and we do expect to be spending more on capital equipment in the coming 1 to 2 years simply because we're going from these low-volume validation vehicle-type assemblies to more trucks on the road doing more work. And we are also expanding that Hyzon content in the vehicles, and we go from the front end of the R&D processes through much more involved and slightly more expensive parts of the R&D stroke engineering where we validate designs and validate R&D developments.

So I do expect that we need to keep investing, but that's consistent with everything we're trying to do right now, which is laying a foundation for a 5- to 10-year outlook, which is going to be very wildly full of lots of hydrogen trucks going to lots of countries around the world. Frankly, we have to invest in this base, we have to invest in the core capabilities, and we have to maximize the Hyzon content in the vehicles we deploy so that we realize both the higher sustainable margins, but also a business which is more stable, predictable. And vehicles which are more reliable and dependable and have good long-term service characteristics for our customers.

So we will continue to invest fairly heavily in R&D. And yes, it is a little slow to get started, especially given equipment purchases have been so slow, frankly.

Great. And then you did mention earlier that you did have a customer, I believe, in Europe, who successfully started their green hydrogen production, and the delivery is going to be on the way. So I just -- if we look at them as maybe sort of an earlier -- early-ish adopter, wondering if that -- if they're sort of useful as a case study for what you might see in other potential customers?

And if you happen to know, I'm just wondering if you had a sense whether there were significant incentives involved in their achieving that or something they did more on their own?

Yes, that's a good question, Noel. So if anyone had kind of seen our original kind of investor materials, and you might have remembered that we characterize the early adopters kind of in 2 buckets. They were the type of companies that were -- that had made a commitment and were aggressively investing in their own green hydrogen capabilities, such as Fortescue in Australia, such as this company in Europe that's built electrolyzers from renewable -- to run-off renewable electricity. It's these types of customers are early buyers of vehicles because they are committed to hydrogen strategically.

And then there's another type of customer, which is more like the typical customers in Europe and a lot of the customers in China, where they know they can access available hydrogen from a public station or it might be from a chemical plant that's got waste hydrogen or whatever.

And these -- we see that European customer as a bit of a case study, as you say, of one of these kind of behind the fence, make my own hydrogen and displace diesel in my operation without any substantial subsidy support. And we saw Fortescue do something similar in Australia where they committed to purchase coaches and those coaches are now in Australia and doing all their validation work and all the rest of it. And this customer in Europe has just commissioned their electrolysis, and now they'll build their filling station. And then in a couple of months when they get their Hyzon trucks, they'll be able to tell the world about it.

And I think that those behind the fence green hydrogen projects are underappreciated as a commercial weapon for some of these companies, becoming independent of diesel and removing that volatile cost element in your operation, which is also a very high kind of variable cost element. It's not something that -- you don't get a lot of scale benefit of doing more trucks because you just got to buy more diesel. Whereas when you make green hydrogen and you put more trucks under the green hydrogen, you get this fantastic scaling effect, right? You get this improving marginal cost of adoption.

So that European customer, we're not talking about them yet in detail because they want to talk about their project a little later. But it is a good example of a behind-the-fence type of initiative. And we believe that over time, they will receive government support simply because they've been so progressive and pursued these initiatives. And it will ultimately result, I believe, in support, for example, for them to scale vehicle deployments.

So that's yet to be revealed. But I believe that, that's an inevitable development once they prove that they have this green hydrogen available at strong economics, there still will be, I believe, support for scaling vehicle adoption around that green hydrogen.

Operator, do we have another question?

That was going to be the last question. I think we're pretty much out of time.

I'm showing no further questions.

Great. Thank you very much.

I think we pretty much run out of time, anyway, so...

Yes, yes. Thank you very much. We look forward to speaking with you on the next quarterly call. And we'll leave it at that. Thanks, operator.

Thanks, everyone.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.