Earnings Call: Q3 2018

Nov 8, 2018

Greetings, and welcome to the Plug Power Third Quarter 2018 Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Teal Vavacqua Hoyos, Director of Marketing Communications. Teal, please go ahead. Thank you. Good morning, and welcome to the Plug Power 2018 Third Quarter Earnings Call. This call will include forward looking statements, including but not limited to statements about our expectations regarding full year 2018 net revenue and gross revenue, Achieving EBITDA breakeven, achieving positive EBITDA and cash flow, achieving profitability in the service business, the We intend these forward looking statements to be covered by the Safe Harbor provisions for forward looking statements contained in Section is 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange session will be given a reconciliation of the company's financial statements. However, investors are cautioned to not unduly rely on forward looking statements because they involve risks and uncertainties, is related to the risks and uncertainties discussed under Item 1A Risk Factors in our annual report on Form 10 ks for the fiscal year ending December 31, 2017, as well as our reports we file from time to time with the SEC. Good morning, everyone. The investor letter posted on Plug Power's website provides a thoughtful review of the past quarter. Some key highlights are: the company had a strong top line with gross revenue of over $55,000,000 We had the best quarter in the history of the company for adjusted gross margins and EBITDAs. In the 4th quarter, we That continual financial improvement reaching $175,000,000 to $190,000,000 in gross revenue for the year. And Plug Power remains committed to achieving EBITDA's breakeven in the second half of twenty eighteen. Promised for customers and investors is being realized in our Material Handling segment. We are producing high quality products that offer value to operators and warehouse warehouses and manufacturing facilities. Our financials are improving As we deploy more and more units, revenue growth and quality improvements will continue to Increasing scale now allows us to drive down our costs. We're using the Internet of Things and artificial intelligence to improve quality Our new metal plate stack design and internally developed MEAs were excellent examples How we are leveraging technology and vertical integration to improve performance, reliability and cost of our products. The distinguishing feature of Plug Power is that we've always been market driven and have closely linked the market to our internal activities. We also think big and building extensive relationships with Amazon and Walmart are prime examples. We are pursuing other leadership. Plug Power is focused on meaningful deals in these markets with committed partners and a clear understanding of the value chain for delivering Holistic Solutions. As I tell my team and Board, we have an enormous opportunity in material handling, And we must first capitalize on our success in this market. But let us not forget, With modular designs like our ProGen engine, leading technologies and the right partnerships, we are well positioned for growth in Our first question is coming from Eric Stine from Craig Hallum. Your line is now live. Andy. Hi, Paul. Hey, Eric. Hey, Eric. Hey, Eric. Hey. So just thinking about the Q4 relative to the guidance, Well, so first revenues, I mean, it's a pretty wide range there with half the quarter to go and And also working towards that EBITDAS positive goal, maybe you could just talk about the puts and takes both from a revenue And EBITDA's perspective to get to those goals in the Q4? So, I'll take the range, and I'll let Paul talk about EBITDAs. We've We've become much better at making sure we meet market expectations. And I wanted to make sure that when keeping the range as broad as we have that There is no chance we'll miss our numbers quite honestly. And that just Keeping an eye on the unexpected. That being said, we're quite confident that We'll be in the middle to upper end of that range. So we're we feel comfortable. We just don't want to surprise if a customer comes in the middle of December and say, hey, we want to push Down to the Q1, we don't want to be viewed as a miss when we're really having a very, very strong year. Paul, do you want to comment on EBITDAs? Yes. I guess what I would say is you see it in the Q3, the continued trend of positive momentum there. And what favors Plug quite well is when we do sell more particular products because there's a Very favorable mix benefit there. So to Andy's point of meeting the mid to upper end of that range in the Q4, that bodes In particular, Stacks and Life extending in a lot of those programs are starting to have and continue to yield big benefits, and we start to see With our performance and our progression, and we look forward to meeting those expectations as we roll through Q4. Got it. No, that's helpful. And maybe just turning to 2019, I mean, I know you're not Other than EBITDA, not giving a range for revenues, but maybe From a high level, talk about 2019. And I'm also curious, given Walmart, given Amazon, given some of your other customers, what type of visibility, As you sit here today, you have into what 2019 looks like. Sure. So Eric, As we've done every year for the past 3 or 4 is that I'll just say this that we've looked at the analyst models for next year. We think those projections are realistic. And that additionally, I would kind of highlight that We end most years with about 70% to 75% of the shipping backlog known for the coming year, And I don't expect anything different for 2019. Got it. Okay. Thanks a lot. Okay. Thank you. Our next question is coming from Colin Rusch from Oppenheimer. Your line is now live. Thanks so much. Guys, can you talk a little bit about the cadence of cost reduction as you move into the new stacks and into the new manufacturing facility? Is this something that we're going to see Kind of fits and starts in terms of the cost reduction or is it going to be a steady cadence? Yes. That's actually a good question, Colin. And when we look at the stacks, we are and this and we're talking about, I assume, Collyn, the metal plate stack we've been Yes. When you look, I would expect the cost to open initially at the same range as our present stacks And that as we have about 2,000 units deployed in the field, I would expect that The cost will achieve that 25% cost reduction on stacked, and it represents about 25% of the Our products, I would expect most of that to start linearly Being kind of flat the first half of the year and start lingering declining over the second half of next year and say into mid first quarter Okay. That's helpful. Okay. Yes. And then in terms of Some of these PPA agreements, as you look out at the technology and having a little bit longer history, at what point do you feel like you're You're going to be able to go out and find better finance terms and refi some of these assets. Is that kind of a 12 month Yes, production, are we talking more like 24, 36 months before you're going to be able to just get better terms now that you've got a little bit longer operating history and a little bit more stable balance sheet? So Colin, I'm going to answer the first part, then I'm going to hand it off to Paul. Primarily and almost Exclusively, the only PPA agreements have been with Walmart. And the Walmart deals, And so the deals that are older certainly are higher rates, But the present deals and anything that's been done over the past 12 months have been actually at To add some color, there's 3 fundamental things that we're saying is 1, and we've been pretty public about it. But as part of the new platform agreement that we signed last year with Walmart, they've in the new structure, they're now providing a guarantee for portions of our financing. So that's helped Tremendously on our cost of capital and our terms. Second thing is now that ITC is back that obviously bodes quite well for us in And then the third thing is now that we've had, I would just call it, tremendous success in deployments over the last few years, this is the first Industry is very conservative. And as you can imagine, prior to 2014, there wasn't really an easy way for them to kind of approach those Seeing now the institutions we're working with on the PPA financing as well start to put those estimates in. So the combination of those have already made A fairly large step function in our financing transactions, and I expect that to continue To get better and actually expect next year to be competitive because now you're seeing a lot of institutions And so we're actually getting a lot of inbound interest to participate. So I don't know if it will be another step function, but you'll certainly Thank you. Our next question today is coming from Amit Dayal from Raymond and Reneshaw. Please proceed with your question. Good morning, Andy. Good morning, Paul. Hey, Matt. Good to see you guys marching steadily towards profitability. On those lines, once the service business gets to profitability, can it stay profitable consistently? Or should we expect Some quarter variances as you make some progress over there. I'll let Paul comment. I'll just say from a technology and Product point of view, it's all about lifetimes of stacks and being able to reduce the workforce size as those stacks The trends we see with the new stacks that we're putting in the field today clearly indicates that we can reach that We can reach profitability. And I guess I'll let just Paul talk about what he would expect Go north and get better. And we see that every quarter. And as Andy mentioned, with the improvement of stack life and reduction of average parts cost And increased leverage on labor, it continues to get better. I think you do see seasonality with customers where you have peak periods Greater usage in accounting rules today makes us amortize the revenues for the service lines more straight lines. You do see ebbs and flows. But I think what you're going to see is a fundamental progression north where it continues to get better. And we clearly see a path to get that business to 30% gross margin. And I think you're going to see that you're We're going to see traction in that direction over the next 12 to 18 months, and we're going to be continuing to demonstrate that progress as we move forward. Got it. Thank you for that. Strength in revenues and margins you're seeing in the second half of twenty eighteen, Is all this from contribution coming from Amazon and Walmart? Or is it spread out more widely for you? More widely. Okay. Got it. And then just one last one for me. In regards to the Gen Fuel hydrogen stations, what level of utilization, if that is the right way to look at it, are these And are these only in the U. S. So far? Are you putting any of these stations up in Europe as well in the future? Sure. The utilization and let me just make sure I answer. The utilization is A typical distribution center with 200, 250 units, they're used We are the largest user of liquid hydrogen in the world. And most of our sites are using somewhere between 150 kilograms at 300 kilograms a day, which is equivalent to 300 to 600 gallons of gasoline. So they are used very heavily. I think it's when you have 180,000,000 hours on the product, That's a lot of usage. And I think we probably are at the range of where we've done 14,000,000 to 15,000,000 fuelings. So it's a pretty big number. I don't think anyone comes close. I was just trying to see how much more you can extract in terms of say leverage, if that's the right word, from these existing stations before you might Sure, Amit. I mean those stations are going to last 20 years. Our next question is coming from Chip Moore from Canaccord Genuity. Maybe you can give us a bit of an update on the U. S. Pipeline in the core Handling market, right? We've had the ITC in place for a little bit. I think last quarter you talked about an initial deployment at least with a new Retailer with a lot of distribution centers. How's that going? And how's the rest of the pipeline in the U. S? Pipeline strong, Chip. As I mentioned before, we'll be talking more about that in early February. But The pipeline is strong and we expect the growth rate to continue for Plug Power. As far as The next state customer, when I look at it, our customers actually been involved in A large effort to redefine their distribution business, which is both good and bad because it slowed down our It's good in the fact that a lot of the rethinking of these companies is being driven by what Walmart and Amazon have done. And if you look at Walmart today, the number that just stuns me is that If you look at we're probably moving 15% of the food in the country at the moment now for retail use. And I think that people who are in that business, they recognize that Walmart and Amazon wouldn't be doing this if it wasn't reducing their costs and improving So we're as you may kind of gathered by this call, we're kind of bullish about The North America funnel as well as the European funnel. Yes. Can you give us an update on Europe, whether it's Carefor or others? Yes. So yes, it is folks like Car And I know that we'll be at a grand opening coming up and that I think our sales team has told me they believe in the next 18 months, our revenue in Europe will And just one follow-up. When you talked about Visibility that 70% to 75%, is that mostly Walmart and Amazon in that at this point? It's a good percentage, but there are others. I mean, Walmart and Amazon usually dominates, but It'll be a mix. So if I think about the mix, it'll probably be Like our business today is probably 40% of that funnel will be Amazon and Walmart activity. Absolutely. And we probably have more going on there than We really talk about because I don't want to lose focus on the opportunities in material handling. But we do believe there is a value proposition, especially when we look at items like Delivery vans. And we this what we believe the material handling, it's a lot of this starts with hydrogen. And there are places like Germany, U. K, California Hydrogen that is becoming available. And we're we have active business development and sales activities going on in all those areas. And like and this is really kind of fundamental to plug. I'm not I'm interested in dealing with companies that can move the ball Like Amazon and Walmart rapidly for us. And those are the kind of discussions we're having. I'm not interested in doing 10 one off projects. I'm interested in doing 2 or 3 big projects that can move the ball, and that's the kind of folks we're engaging with and talking to. Quite honestly, we do best when we're working with Fortune 500 type customers. Got it. That's helpful. Andy, thanks. But the metal stack is a key Our next question is coming from Carter Driscoll from B. Riley FBR. Your line is now live. Good morning, Carter. So first question is China and I know it's not a focus and you've done a good job of recalibrating expectations, but they've subtly changed the rules in terms of subsidization and On road vehicle time to qualify for subsidies, has that had any impact on your outlook for China or discussions with the partnerships? Sure. Carter, we've been, as you know, deliberate about China. And there has been two reasons. One is that IP is important to us. We spend a lot of time developing the products And I think if you go back and listen to our call 2 quarters ago, we highlight The fact, both the regulation front and some of the challenges with hydrogen that from our Activity over there that we recognize were challenges. We've Continue to have dialogue with major companies in Mobility and Logistics Industry. And we do believe And let me just because we've been deliberate, I think, China is one of the real markets And I believe that what you'll start seeing is a ramp probably in the 2020 Mid-twenty 20 timeframe and I think really accelerating 2022 when the Olympics come. When I talk with potential Chinese partners, they're very interested in making sure that Hydrogen fuel cells are a showcase for that Olympics. So we'll make a deal if and when it makes sense Something that doesn't help us grow continue to grow this business. Okay. Maybe back to Europe because it tends to get short shrift. When you talk about and I know you don't generally Quantify the geographic contribution, but 4x to 5x, could we kind of put that in a framework What that would mean numerically? And is that potentially $5,000,000 range, Carter. $35,000,000 Got it. Okay. I mean, could you develop a maybe not the same size Amazon, Walmart, but a deep relationship like You started with Carrefour. I mean, could there be other retailers out there that you could have a similar type of anchor customer in Europe by, say, the end And when I say auto manufacturing, I mean in their manufacturing facilities. So the answer to that question is yes. And I wouldn't discount on road vehicles either in Europe. Even though they probably have even greater Challenges for fueling infrastructure or Not really, Ed. And this is one of the items that if you look at Germany, Germany is actually, by 2023, plans to have 400 hydrogen fueling stations available. And they're probably running a year ahead of schedule. So and if you look at Germany, when I look at it, I think it's the most interest I actually I think Germany may be as interesting as China because there's government commitment, station you can I understand you can Should get in a hydrogen fuel cell car today and drive across Germany, I don't think there's very few places you could do that? And so I wouldn't discount the opportunities for fuel cell providers Okay. Thank you for that. A point of clarification, Paul. So did just over 1,000,000 Dollar loss and EBITDA this quarter. So obviously, you're talking about at least generating that in the 4th quarter to get to a second half breakeven, Yes. I think that's in our range, yes. Got it. Okay. Number of fueling stations domestically is up to 3. Any plans I think one of the other analysts was asking about kind of economics, utilization rates. Does that become a positive contributor On an individual basis or collectively at some point in the near future? Okay. So let me be Clear, Carter. We when we talk about fueling stations, we're talking about industrial fueling stations, and we've built over 80. I think the 3 you're referring to are kind of the hybrid systems that we developed, which helps reduce the cost of Hydrogen, while providing a certain level of hydrogen backup during emergency. So there are 3 sites that are hybrid sites that we developed, which use reformers on-site To provide the base hydrogen load and liquid hydrogen to provide peaks and backups. So we believe when we move to the hybrid systems, especially For sites that have long term commitments, I mean that the cost of hydrogen reduces and Our profitability for hydrogen will increase. Right. So I guess what I was trying to get at is that is there a number of hybrid stations that That will help pull that line item towards positive breakeven or even a positive number over some timeframe. No, I would think that somewhere as we deploy 20% to 25% hybrid stations, it helps. Got it. Okay. And we do it. FedEx, obviously, a lot of run time with the hybrid vehicle with even Workhorse in it. Maybe just an update on pull through with FedEx, Some of the other last mile competition and the opportunity at least domestically for on road? FedEx is going quite well. I think The biggest challenge and then we'll be doing more we expect to be doing more FedEx Where the fueling stations exist on the road today. I think the biggest challenge In North America, is the financial depth of people who are in the Obviously, hydrogen in the U. S. Outside of California. So you could go Tether fleets like we've done in material handling. But I think the partnership needs to be with someone with real financial scale. And I think, Carter, you know this market. I think the integrators in the market today Lack that capability. And so I think the structures have to be a little bit different to make sure there's somebody with money Probably to me is probably the biggest North American challenge. Yes. The last question for me is Interesting, less of a challenge probably in Europe. That is interesting. Well, better state commitment, On the PPA gross profit, is I mean, obviously, it's a blend of The older, less profitable PPAs you signed and it takes time to get that to breakeven. If Walmart will continue on the same type of growth trajectory, obviously, as it's more mature, is there A realistic time frame, we could see that be at least breakeven on the gross line. Could it be by the end of 2019, first half of twenty twenty? Just trying to get Because that's one that is still a bit of a hindrance to your profitability on the gross line. Yes. I think, I mean, we're as We've mentioned and you just referenced, we have a series of older deals that have to run their course. So that's a couple of years. The new deals coming in will bode well. The part of the cost that goes into that line is The service component that to service those specific sites were and as we've So I think holistically, you're going to we will and we have this year and we will continue to see progression In that line item, but it's probably 2020 early before it gets to breakeven and moves into that positive range. The other The overall volume and will continue to be more and more diluted as we sell and we Okay. And maybe just could you summarize at a high level the accounting impact on the balance sheet just The slight tweaks that you referenced in the letter? Yes. I mean, the net of it is an adoption The new lease standard, the biggest change, quite frankly, is and I'm sure you'll see this with other companies as well as they adopt, is that you basically We recognize an asset and a liability on your balance sheet for the present value of those operating lease payments In the future, and the asset is deemed a right of use to those leases. And so your operating lease expense becomes the amortization of that right to use asset with the interest component as you amortize that over time, but it's a little over $30,000,000 when you look at the collection Those leases, the majority of those obviously are associated with our PPA financings in the past. And where we We had sale leaseback treatment, and those are deemed operating leases. And so we've always disclosed it in our footnotes with minimum lease Payments and PPA payments over time, but now the accounting standard has you throw that up on your balance sheet as Our next question today is coming from Jeff Osborne from Cowen and Company. Your line is now live. Hey, good morning, guys. I had a couple on my end and maybe related to that last question. But I noticed Just in the letter that you called out that GenDrive under units under service and PPA actually declined for I think the first time ever to 17,300 from 18,000. Is that because of the accounting change? Or is were there any facility closures? I just wanted to understand Yes. It's part of the accounting, and it's also just ebbs and flows when you look at new sites Plus older ones coming off, so it's a combination. But overall, that business continues to grow. Got it. And then can you just touch on The fuels segment that seem to have a pretty poor margin relative to prior quarters? Well, I think, actually, if you look at it in contrast to prior last year and prior periods, it's pretty positive in terms of I think as and we may have talked about last quarter, we had for the first time, I think maybe We broke even at slightly positive trends on that. The design of that model is such that it's not It's in that single digit, maybe not even up to 5% kind of gross margin because it's a pass through. And the efforts that we've been putting on the efficiencies and kind of making sure that we can continue to maximize And kind of making sure that we can continue to maximize the value prop there in terms of what we recognize as well as our customers It continue to be kind of a breakeven to maybe slightly positive business. And some of the a number of the new hydrogen strategies, including things generation system that we referenced, we put in this quarter, those continue to promulgate and we do more as well as some of the other things that we're rolling out. In the longer term, I think you start to see some real traction in that margin line. Got it. And then can you just touch on I think in the you're continuing to guide on gross revenue. I think in the past shareholder letters, you had a table Talking about the delta there, but were there any accounting changes that you're factoring in as it relates to the Amazon warrants there? And then Maybe related to that, what's your expectation for Amazon versus other customers in the Q4, just given we're heading into the holiday season? I would have expected that both Amazon and Walmart might slow down, but maybe just touch on what you're seeing with the mix of customers as it relates to warrants Just in general, given the holiday impact on your business. I would say this, Yes. We got to be sensitive being that exact. I there are shipments going to both, which are reflective of A typical quarter like the 3rd quarter. Okay. So don't as it relates to the accounting difference between gross and net, not a big step up of that Delta, I think it was about $2,100,000 of impact this quarter down from just under 4 last quarter. So somewhere in Between those two quarters, is that fair? I think that's fair. Okay. And then can you just touch The number of sites you've done for both in terms of the backlog? I'll talk about Walmart. Walmart's close to 40 sites. And Amazon, Last year, we did 10 sites and we're at the same clip for this year. And then any noticeable trends on field reliability that you can share? I think that's an area where Over the past 6 months, it's really I think we've got The equation right. The units, I can say it's Some of our larger customer sites, the uptime of the units are beyond 99.5%. The number of down units is probably onethree of what you would find with a forklift truck. So I got to tell you, Jeff, I've had about 4 goals this year that we've been driving the business on. And one of the big key goals was to get the quality to the point that not only is important to customers but shareholders. And I think we got the equation. Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments. Thank you for taking the time today, and we're looking forward to a strong Q4 and talking to you in February about 2019.