Greetings. Welcome to the Plug Power third quarter 2018 conference call. At this time, all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Teal Vivacqua , Director of Marketing Communications. Teal, please go ahead.
Thank you. Good morning. 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 impact of new ProGen stack technology, the adoption of hydrogen fuel cell electric vehicles, the impact of new lease accounting standards, the impact of Amazon and Walmart relationships, the expansion of applications for ProGen, including opportunities in the on-road electric vehicle market. We intend these forward-looking statements to be covered by the Safe Harbor Provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We believe that it is important to communicate our future expectations to investors.
Investors are cautioned to not unduly rely on forward-looking statements because they involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including, but not limited to, the risks and uncertainties discussed under Item 1A Risk Factors in our annual report on Form 10-K for the fiscal year ending December 31st, 2017, as well as other reports we file from time to time with the SEC. These forward-looking statements speak only as of the day on which the statements are made. We do not undertake or intend to update any forward-looking statements after this call. At this point, I would like to turn the call over to Plug Power CEO, Andy Marsh.
Thank you, Teal. 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 million. We had the best quarter in the history of the company for adjusted gross margins and EBITDA. In the fourth quarter, we expect continual financial improvement, reaching $175 million-$190 million in gross revenue for the year. Plug Power remains committed to achieving EBITDA breakeven in the second half of 2018. Promise for customers and investors is being realized in our material handling segment. We are producing high-quality products that offer value to operators in warehouses and manufacturing facilities. Our financials are improving as we deploy more and more units. Revenue growth and quality improvements will continue to drive profitability for Plug Power.
The continual improvements in our financial is a result of technology enhancements and increasing scale that allows us to drive down our costs. We're using the Internet of Things and artificial intelligence to improve quality and performance. By vertically integrating key technologies into our products, we're able to both grow and reduce costs. Our new metal plate stack design and internally developed MEAs are excellent examples of how we are leveraging technology and vertical integration to improve performance, reliability, and cost of our products. A distinguishing feature of Plug Power is that we've always been market-driven and have closely linked the market to our internal activities. Building extensive relationships with Amazon and Walmart are prime examples. We are pursuing other electric vehicle markets beyond material handling, leveraging our years of learning, cost structure, and technology 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. We must first capitalize on our success in this market. Let us not forget, with modular designs like our ProGen engine, leading technologies, and the right partnerships, we are well-positioned for growth in a multitude of EV markets beyond material handling. Paul and I are now available for your questions.
Thank you. We'll now be conducting a question and answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that is star one if you'd like to ask a question at this time. Our first question is coming from Eric Stine from Craig-Hallum. Your line is now live.
Hi, Andy. Hi, Paul.
Hey, Eric.
Hey, Eric.
Hey. Just thinking about the fourth quarter relative to the guidance. First, revenues, it's a pretty wide range there with half the quarter to go, and also working towards that EBITDA positive goal. Maybe you could just talk about the puts and takes, both from a revenue perspective and EBITDA perspective to get to those goals in the fourth quarter.
Eric, I'll take the range, and I'll let Paul talk about EBITDA. We've become much better at making sure we meet market expectations. I want to make sure that when keeping the range as broad as we have, that there's 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. We feel comfortable. We just don't want to surprise if a customer comes the middle of December and say, "Hey, we want to push out into the first quarter." We don't want to be viewed as a miss when we're really having a very strong year. Paul, do you want to comment on EBITDA?
Yeah, I guess what I would say is you see it in the third quarter, the continued trend of positive momentum there. What favors Plug quite well is when we do sell more particular products, because there's a very favorable mix benefit there. To Andy's point of meeting the mid to upper end of that range in the fourth quarter, that bodes quite well for us. Coupled with that is the traction we continue to make. There's been a tremendous amount of effort this year on service, in particular stacks and life extending, and a lot of those programs are starting to have and continue to yield big benefits, and we start to see those pay even more dividends as we go into Q4.
A lot of good progress, and we feel pretty comfortable 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. Maybe just turning to 2019, I know you're not, other than EBITDA, not giving a range for revenues, but maybe just 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. Eric, as we've done every year for the past three or four, is that in early February, we'll provide guidance to the analysts in the market. I'll just say this, that we've looked at the analysts' 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%-75% of the shipping backlog known for the coming year. 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?
Yeah, that's actually a good question, Colin. When we look at the stacks, we are, and this we're talking about, I assume, Colin, the metal plate stacks we've been discussing?
Yep.
Yeah. Look, I would expect the cost to open initially at the same range as our present stacks. As we have about 2,000 units deployed in the field, I would expect that the cost will achieve that 25% cost reduction on stacks, and it represents about 25% of the cost of our products. I would expect most of that to start linearly, being kind of flat the first half of the year, and start linearly declining over the second half of next year, and say into mid first quarter of 2020.
Okay. That's helpful.
Okay.
Yeah. 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 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 projection, or are we talking more like 24 or 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?
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. The Walmart deals, over the past year, have actually been financed at relatively low rates because of Walmart's support. Those rates are close to our customers' lease rates. 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 attractive rates. Historically, I think is really where some of the issues lie. Do you want to comment on that, Paul?
I think just to add some color, there are 3 fundamental things that we are seeing. One, and we have been pretty public about it, as part of the new platform agreement that we signed last year with Walmart, in the new structure, they are now providing a guarantee for portions of our financing. That has helped tremendously on our cost of capital and our terms. The second thing is now that ITC is back, that obviously bodes quite well for us in those agreements. The third thing is, now that we have had, I would call it tremendous success in deployments over the last few years, this is the first time this year that we are seeing financial institutions give credit in the financing transactions and residual values because the banking industry is very conservative.
As you can imagine, prior to 2014, there was not really an easy way for them to approach those estimates for residual values. We are seeing them provide those estimates and ranges to our customers, and we are seeing now the institutions we are working with on the PPA financing as well start to put those estimates in. The combination of those have already made a fairly large step function in our financing transactions. I expect that to continue to get better and I actually expect next year to be competitive, because now you are seeing a lot of institutions start to approach us and say, hey, this is a big track of volume and a structure that makes sense for them and very interesting yields. We are actually getting a lot of inbound interest to participate.
I do not know if it will be another step function, but you will certainly see a continued progression as we go forward over the next year.
That is incredibly helpful. Thanks, guys.
Thank you. Our next question today is coming from Amit Dayal from H.C. Wainwright & Co . Please proceed with your question.
Good morning, Andy. Good morning, Paul.
Amit.
Morning.
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 become better and better. The trends we see with the new stacks that we're putting in the field today clearly indicates that we can reach profitability. I guess I'll let just Paul talk about what he would expect post mid-next year.
Yeah, I think the fundamental answer to your question is it will continue to go north and get better. We see that every quarter. 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 and greater usage, accounting rules today makes us amortize the revenues for those service lines more straight line. You do see ebbs and flows. I think what you're going to see is a fundamental progression north where it continues to get better. We clearly see a path to get that business to 30% gross margin.
I think you'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 2018. Is all this from contribution coming from Amazon and Walmart, or is it spread out more widely for you?
More widely.
Okay. Got it. Then just one last one from me. In regards to the GenFuel hydrogen stations, what level of utilization, if that is the right way to look at it, are these stations seeing? 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. Let me just make sure I answer. The utilization is, a typical distribution center with 200, 250 units, they're used continuously during the day. We are the largest user of liquid hydrogen in the world. Most of our sites are using somewhere between 150 kilograms or 300 kilograms a day, which is equivalent to 300-600 gallons of gasoline. They are used heavily. I think when you have 180 million hours on the product, that's a lot of usage. I think we probably are at the range of where we've done 14-15 million fuelings. It's a pretty big number. I don't think anyone comes close.
Got it. Yeah, 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 have to build more to support it.
Sure, Amit. Those stations are going to last 20 years.
Okay. Got it. Thank you so much for that.
Yep.
I'll take the rest of my questions offline. Thank you.
Okay.
Thank you. As a reminder, if you'd like to be placed in the question queue, please press star 1 on your telephone keypad. Our next question is coming from Chip Moore from Canaccord Genuity. Your line is now live.
Morning, Andy and Paul.
Hi, Chip.
Maybe you can give us a bit of an update on the U.S. pipeline in the core material handling market. 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's strong, Chip. As I mentioned before, we'll be talking more about that in early February. The pipeline's strong, and we expect the growth rate to continue for Plug Power. As far as the next big customer, when I look at it, our customer's actually been involved in a large effort to redefine their distribution business, which is both good and bad because it's slowed down our deployments, but it's good in the fact that a lot of the rethinking at these companies is being driven by what Walmart and Amazon have done. If you look at Walmart today, the number that just stuns me is that we're probably moving 15% of the food in the country at the moment out for retail use.
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 their performance. As you may gather by this call, we're bullish about the North America funnel as well as the European funnel.
Yeah. Can you give us an update on Europe, whether it is Carrefour or others?
Yeah. Yes, it is folks like Carrefour auto companies, and I know that we will 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 increase by a factor of four or five.
That is great. Just one follow-up. When you talked about visibility, that 70%-75%, is that mostly Walmart and Amazon in that at this point?
It is a good percentage.
Yeah.
There are others. Walmart and Amazon usually dominate, but it'll be a mix. If I think about the mix, like our business today is, it'll probably be 40% of that funnel will be Amazon and Walmart activity.
Yeah. Okay. Helpful. Maybe just one last one from me on the new metal stack. Can you talk about potential for that given these better power density in the EV fleet space? Is that something you'll be looking at?
Oh, absolutely. We probably have more going on there than we've really talked about, because I don't want to lose focus on the opportunities in material handling. We do believe there is a value proposition, especially when we look at items like delivery vans. What we believe in material handling, a lot of this starts with hydrogen, and there are places like Germany, U.K., California, hydrogen, that is becoming available. We have active business development and sales activities going on in all those areas. This is really kind of fundamental to Plug. I'm not interested in projects. 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 two or three 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.
Fuel cell stack is a key Chip.
Thank you. Our next question is coming from Carter Driscoll from B. Riley FBR. Your line is now live.
Morning, guys.
Morning, Carter.
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 on road vehicle time to qualify for subsidies. Has that had any impact on your outlook for China or your discussions with your partnerships?
Sure. Carter, we've been, as you know, deliberate about China.
Yeah.
There have been two reasons. One is that IP is important to us. We spend a lot of time developing the products we've had. I think if you go back and listen to our call two 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 recognized were challenges. We've continued to have dialogue with major companies in mobility and logistic industry. We do believe, and let me, just because we've been deliberate, I think China is one of the real markets for fuel cells, and I believe that what you'll start seeing is a ramp probably in the mid-2020 timeframe, and I think really accelerating in 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. We'll make a deal if and when it makes sense to Plug Power. We continue to engage and continue to understand. We're just not going to do something that doesn't help us continue to grow this business.
Okay. Let me get 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 four to five x, could we kind of put that in a framework of what that would mean numerically, and is that potentially?
$35 million range, Carter.
$35 million range. Got it. Okay. Could you develop a, maybe not the same size as Amazon or Walmart, but a deep relationship like you've started with Carrefour? Could there be other retailers out there that you could have a similar type of anchor customer in Europe by, say, the end of 2019 or early 2020?
I would call both retail and auto manufacturing, and when I say auto manufacturing, I mean in their manufacturing facilities.
Yep.
The answer to that question is yes.
Okay. Excellent.
I wouldn't discount on-road vehicles either in Europe.
Even though they probably have even greater challenges for fueling infrastructure or even.
Not really. This is one of the items that if you look at Germany is actually by 2023 plans to have 400 hydrogen fueling stations available. They're probably running a year ahead of schedule. If you look at Germany, when I look at it, I actually think Germany may be as interesting as China because there's government commitment. I understand you can actually 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. I wouldn't discount the opportunities for fuel cell providers there.
Okay. Thank you for that. A point of clarification, Paul. Did just over a $1 million loss in EBITDA this quarter, so obviously you're talking about at least generating that in the fourth quarter to get to a second half breakeven, correct?
Yeah, I think that's in our range, yes.
Got it. Okay. Number of fueling stations domestically is up to three. Any plans to, you could share with us in terms of targets either end of this quarter, end of next year? 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. Let me be clear, Carter. When we talk about fueling stations, we're talking about industrial fueling stations.
We've built over 80. I think the three 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 an emergency. There are three 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. We believe when we move to the hybrid systems, especially for sites that have long-term commitments, that the cost of hydrogen reduces and our profitability for hydrogen will increase.
Right. I guess what I was trying to get at is that, is there a number of hybrid stations that will help pull that line item towards positive breakeven or even a positive number over some timeframe?
Yeah. I would think that somewhere as we deploy 20%-25% hybrid stations, it helps.
Got it. Okay.
We do it.
Yep. The work you've done with FedEx, obviously a lot of runtime with the hybrid vehicle with 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. We expect to be doing more of FedEx in next year, probably most likely in a place like California, where the fueling stations exist on the road today.
I think the biggest challenge, we expect to be doing more of FedEx in next year, probably most likely in a place like California, 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 EV chassis business. Our focus is also looking for, I'll say, larger partners with deeper balance sheets that can help accelerate this market. I think that's probably the bigger challenge in the market. Obviously, hydrogen in the U.S. outside of California, though you could go to tether fleets like we've done in material handling. I think the partnership needs to be with someone with real financial scale. I think, Carter, you know this market. I think the integrators in the market today lack that capability.
I think the structures have to be a little bit different to make sure there's somebody with money and service capability at the table. That probably, to me, is probably the biggest North American challenge.
Yeah. The last question from me is.
Interesting. Less of a challenge probably in Europe.
That is interesting. Well, better state commitment, obviously.
Yeah.
On the PPA gross profit, obviously, it's a blend of the older, less profitable PPAs you've 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 timeframe we could see that be at least breakeven on the gross line? Could it be by the end of 2019, first half of 2020? Just trying to get a sense, because that's one that is still a bit of a hindrance to your profitability on the gross line.
Yeah. As we've mentioned and you just referenced, we have a series of older deals that have to run their course. 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 to service those specific sites. As we've seen in service to direct customers, that cost continues to come down. There's a positive trend on that line as well. I think holistically, 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 factor, it is a drag in that regard, but it's a small percentage of the overall volume, and will continue to be more and more diluted as we sell and we grow the business and grow more direct sales, which are much higher product mix. It'll have less and less impact as we go forward.
Okay. Maybe just could you summarize at a high level the accounting impacts on the balance sheet, just for the slight tweaks that you referenced in the letter?
Yeah. The net of it is in the adoption of the new lease standard, the biggest change, quite frankly, I'm sure you'll see this with other companies as well as they adopt, is that you basically recognize an asset and a liability on your balance sheet for in the future, and the asset is deemed a right of use to those leases. Your operating lease expense becomes the amortization of that right-to-use asset with the interest component as you amortize that over time. It's a little over $30 million when you look at the collection of those leases. The majority of those obviously are associated with our PPA financings in the past. Where we've had sale leaseback treatment, those are deemed operating leases. We've always disclosed it in our footnotes with minimum lease payments and PPA payments over time.
Now the accounting standard has you throw that up on your balance sheet as well.
Yep. Got it. Appreciate you taking all my questions. Thank you.
Thank you. Our next question today is coming from Jeff Osborne from Cowen and Company. Your line is now live.
Hey, good morning, guys. Had a couple on my end, and it may be related to that last question. I noticed in the letter that you called out that GenDrive 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 were there any facility closures? I just wanted to understand what was going on with that.
Yeah. It's part the accounting, and it's also just ebbs and flows when you look at new sites plus older ones coming off. It's a combination, but overall, that business continues to grow.
Got it. Can you just touch on the fuels segment? That seemed to have a pretty poor margin relative to prior quarters.
Well, I think, actually, if you look at it in contrast to last year and prior periods, it's pretty positive in terms of its trend. I think we may have talked about last quarter, we had, for the first time I think maybe ever, that we broke even, had slightly positive trends on that. The design of that model is such that it's in that single digit, maybe not even up to 5% kind of gross margin because it's a pass-through. The efforts that we've been putting on the efficiencies 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 has really driven that improvement over the years.
I think in the next 12 to 24 months, I expect that to continue to be kind of a break even to maybe slightly positive business. A number of the new hydrogen strategies, including things like the generation system that we referenced we put in this quarter, as 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. Can you just touch on, I think you're continuing to guide on gross revenue. I think in the past shareholder letters you had a table talking about the delta there. Were there any accounting changes that you're factoring in as it relates to the Amazon warrants there? Maybe related to that, what's your expectation for Amazon versus other customers in the fourth quarter, just given we're heading into the holiday season? I would've 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 and just in general, given the holiday impact on your business.
I would say this, Jeff, we got to be sensitive being that exact. There are shipments going to both, which are reflective of a typical quarter, like the third quarter.
Okay. As it relates to the accounting difference between gross and net, not a big step-up of that delta? I think it was about $2.1 million of impact this quarter, down from just under four last quarter. Somewhere in between those two quarters. Is that fair?
I think that's fair.
Okay. Then can you just touch on the number of sites you've done for both in terms of the backlog?
I talked about Walmart. Walmart's close to 40 sites. Amazon, last year we did 10 sites, and we're at the same clip for this year.
Yeah. Then any noticeable trends on field reliability that you can share?
I think that's an area where over the past six months, I think we've got the equation right. The units, I can say at some of our larger customer sites, the uptime of the units are beyond 99.5%. The number of down units is probably one-third of what you would find with a forklift truck. I got to tell you, Jeff, I've had about four goals this year that we've been driving the business on, and one of the big key goals was to get the quality level to the point that not only is important to customers, but shareholders. I think we got the equation. I'm excited.
Perfect. Great to hear. Thanks much.
Yeah.
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 closing comments.
Thank you for taking the time today, and we're looking forward to a strong fourth quarter and talking to you in February about 2019. Thank you, everyone.
Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.