Earnings Call: Q2 2018

Aug 9, 2018

Ladies and gentlemen, greetings and welcome to the Plug Power Second Quarter 2018 Earnings Call. At this time, all participants are in It is now my pleasure to introduce your host, Teal Lovakwa, Director of Marketing. Thank you, Teal. You may begin. To forward looking statements, including but not limited to statements about our expectations regarding full year to 2018 revenue, deployments of GenKey sites and GenDrive units, gross margins, bookings, liquidity and to cash collections and usage and the impact of the Amazon and Walmart relationships and the revenue to be derived from those listen only mode. And our outlook for 2018, including growth, future cost reductions, expansion in Europe, further testing and to the presentation of applications for ProGen, including opportunities in the on road electric vehicle market and achieving positive cash flow and gross service margins. We intend these forward looking statements to be covered by the Safe Harbor provisions for forward looking statements contained in Section listen to the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Listen only mode. We believe that it is important to communicate our future expectations to investors. However, investors are cautioned not to unduly rely on forward looking statements because they involve risks and uncertainties, and actual results may differ materially from in our annual report on Form 10 ks for the fiscal year ending December 31, 2017, and our definitive proxy Statements on Schedule 14A filed with the SEC on March 30, 2018, as well as other reports we file from time to time with the SEC. These forward looking statements speak only as of the day that they are made, which At this point, I would like to turn the call over to Plug Power's CEO, Andy Marsh. Thank you, Teal, and good morning, everyone. We've developed a unique set of capabilities and relationships at Plug Power. As a pioneer in developing the commercial mobility market for fuel cells, are in a listen to the results of our work are starting to become visible in our financial statements, and we believe will provide dividends in a listen only mode. Just take a look and compare our quarter to quarter performance. Gross revenues of $39,900,000 in the Q2 of 2018, an increase of over 75% in the Q2 of 2017. Listen to adjusted gross margins of 8.1% versus negative 1.9% in the Q2 2017. When you look at those numbers, you can see the benefit of our relationships with Amazon and Walmart in our sales performance. The in house stack and global sourcing ability we've developed really demonstrates our ability to continue to reduce costs in a listen and is showing up in our gross margins. Hydrogen gross margins were positive at first for Plug Power in a listen and service is improving as labor utilization has improved and our products have continued to become more reliable. With these improvements, we are projecting our revenue will jump up 25% for the year and that we will reach EBITDA breakeven in the second half. Listen. In the Q3, we are projecting revenues in the range of $47,000,000 to $52,000,000 and EBITDA is between minus $3,000,000 $0,000,000 listen. We remain focused on building the material handling market for fuel cells, a market with over 6,000,000 forklift trucks and an application in which we believe our product value proposition addresses over 40% of the market. Listen. There are other market opportunities for Plug Power and the capabilities we have developed, fuel cell MEAs and stacks, in a listen and customer relationships that are unique in the industry. We know these capabilities can be leveraged across a broad range of applications. Listen Our success in the first market will allow us the opportunity to be selective in choosing our next market and future partners. Listen. We're seeing interest in our solutions for delivery vans and ground support equipment globally. Our deployments to date suggest these applications are much more environmentally benign as we are used to operating harsh and rapidly changing environments. Example of our ability to offer products and new application is our delivery van for FedEx that has been running spectacularly. Finally, let me reemphasize, plus building big business and material handling and starting to see the financial benefits, in a listen. We are by far the leader in real world commercial applications. Our GenDrive products have operated over 180,000,000 hours. Listen. We're starting to leverage our expertise and we'll be moving appropriately in other markets. And as the segment for mobile fuel cells could grow, are in a listen. Adam, we can now open the line for questions, please. So while we're waiting for the line to be open for questions, let me just highlight a few successes that we've had. For For example, we had a new customer we deployed our first units with this quarter, one of the largest retailer in the U. S. At 150 unit listen. Quite exciting. We also had one of our products qualified with a in a listen to the global system integrator for backup power systems, which they're looking to be deploying and have reached markets in China, India and Africa, and they'll be utilizing Plug Power's products. We're very excited about both applications and a listen to both recent wins and the business is looking positively. On that note, Teal, are we ready for Q and A? Ladies and gentlemen, we are now conducting our Q and A session. Our first question comes from the line of Chris Souther from Cowen. Your line is live. Hey, good morning. Listen only mode. Good morning, everyone. I wanted to see if you could walk through what are the levers to to improving gross margin in the Q3 and the Q4. Can you walk us through some of the puts and takes you guys are looking for there? Paul, do you want to take that Yes, absolutely. I think it's a combination. First of all, as we all we've talked a lot, listen. We make really good margins on our equipment sales, and we're benefiting from increased list of favorable mix as we sell more equipment in the second half. As we've talked about in the past, we do about 60%, 70% of our business in the second half. To expect nice volumes and that should contribute nicely to the overall margin mix. Secondly, in a listen. We continue to push heavily on cost downs. And so a lot of the things that we're doing in service in terms of labor leverage on our in a listen to units in the field as well as part cost on those units and reducing that burn rate continue to contribute. And then as you've seen, the improvement that we've made on fuel, we expect to continue making progress and sustain those improvements as we go into the listen to the next half. So the combination of those really should continue to really drive more operating leverage and we should enjoy those benefits on in second half and into next year. That's helpful. And then, I was wondering if you could maybe touch on the FedEx program. Listen. It's great to see you kind of vehicle on the road. What is kind of the timeline that you guys are looking for there? Sure. I'll take that one. So We have been operating FedEx Van and actually for the last 31 days, it has been filling and running with no interaction a listen between Plug Power and FedEx on keeping the truck on the road. We have a meeting scheduled at the end of August to talk about a listen the rollout of the next 20 units with FedEx and Workhorse and that we should be able to provide more insights at at the beginning of Q3, but the discussions with FedEx and quite honestly, they're quite happy with the unit. There There was a presentation to the DOE and FedEx presented and one of their competitors presented a solution with fuel cells. Listen. We've been working on the program for the same time. The competitor is not even at the integration stage yet. So I think it's a listen statement of the capabilities Plugus Develop. And one of the statements I made, which is really, I think, is critical when you think about a program like that. Plus we're used to working on in operations in forklift trucks listen where you see 50 gs of shock and vibration. You're operating in freezers at minus 30 degrees C and driving out at 50 degrees C. Listen. Quite honestly, working in these delivery vans is a dream because the environment is so stable and consistent and these units have shock absorbers and listen. It's a much, much simpler application because of all the capabilities we've developed over time. Listen. Thanks. And then kind of the last one. How should we think about the cash burn in the second half of the year and kind of overall liquidity? I listen. Next year, it looks like you guys were looking to move into positive cash flow. So I just wanted to how you guys are thinking about that for the back half here. Paul, do you want to take that one? Sure. Absolutely. It's Actually, if you look at last year in the Q4, what in terms of the turn of all that volume, we saw substantial positive to operating cash flows effect, certainly helped our free cash flow benefit, and we expect a similar turn this year. Listen. The overall volumes in the first half are up and for the year will be up. And as that second half build starts to convert, we should listen. We're forecasting it's going to be actually positive cash flow for the free cash flows in the second half. And Obviously, improved margins and improved EBITDA helps a lot in that as well. So I think we're in a very good position. We've actually So closed 2 of the first PPA finance programs this year under the new structure that we've struck with which has been improved greatly given the reinstatement of the ITC. That's providing to a tremendous spread both overall economically as well as cash liquidity in those transactions. And we expect as we close more of those in the second half, listen. Those will add and make us strong as well. And as we said, today, we really don't have a lot of debt to the Q1 of 2019. We are pleased with the release of restricted cash, which a substantial amount gets released in the second half of this year. Listen. And so we'll end the year with a fairly nominal position there. So we have a pretty good we have a wide range of options available to us. And listen. So we sit in a good spot as we navigate the balance of the year and on into next year. Thanks, guys. I'll hop in the queue. Listen. Thanks, Chris. Thank you. Our next question comes from the line of Carter Driscoll from B. Riley FBR. Listen. Good morning, Carter. Good morning, Andy. Good morning, Paul, everyone, Teal. Hopefully, surviving the lovely summer we're having. First question is, can you talk about maybe just the contribution from Amazon and Walmart listen for the strong revenue performance in 2Q and the retailer that you highlighted 150 units, The expectations of their continued engagement in the second half of the year? I have a few follow ups. So Paul, I'll take the second half of the question and I'll let you take the first part. Paul and I are in different spots, So we're trying to coordinate here. So what we know about the new customers, I would expect that in a listen with the deployment that's going on at the moment. During the next 6 months, they will be validating the value proposition. This retailer has well over 35 distribution centers. And as we found, and you look at a listen. Walmart and Amazon, both of them large retailers, large fleet, in a listen Heavy usage of assets, working in Walmart's case, working at freezers. Listen. Now this customer has a very, very similar profile and we know the results we've had with Walmart in improving their productivity in improving their operations and there's no reason for me to believe we can't prove that again with this customer. It's one that quite honestly I've been working on listen to 5 or 6 years, so we're really excited to bring it into the fold. I think when you think about deals like that, the relationships with Amazon and Walmart certainly in a listen Last year, when we won the award, we had 2 sites in the Q1, and then we did the bulk of their 2017 deployments in to the Q3 this year, working with them and being able to spread that out a little bit more. We actually listen to the 3 sites in Q2, and there was actually incremental volume in the quarter from additional programs as well outside of Amazon and Walmart. So, nice traction and Walmart continues to add a listen only mode. We continue to see increase there. To date, the most recent programs we do with them have not in a listen to the under revenue recognition. So you see it in the increased PPA payments, but you don't see as much to the question of the impact on our GAAP statements, as you do from Amazon and some of the other customers in terms of the traction. But we expect both those in a listen and these other customer momentum to continue on into the second half. I'm sorry, just to be clear, you're talking about the PPA structure It's just Walmart, right, not the new customers not adopted the PP construct. Right. Yes, sorry, yes. All right. Listen. Andy, in the prepared remarks, you talked about and I think you've been very consistent in trying to find the right partner in China. So maybe 2 fold question. Has the tariff back and forth had any impact on discussions there or the scope of the changes. And it sounds as though what's important, as like you've said consistently, is finding the right partner. But are you at all in a listen Changing that year end is the timeline you might be able to find such a partner? Is that a little bit more of a state now? I think that's a Really good question, Carter. And as I've continued to take a very balanced approach to China, listen to the questions that are in the press about are in a listen. Plug Power's shareholders have invested quite heavily in. So we've been engaging with partners and we're down to listen to discussions at the moment with companies that we believe have similar, listen where we are today and just have the understanding of just the legal a listen to the business steps that would have to be taken. I'm not at the point where I'm saying this is going to be the partner listen And I'm not at the point that I'm saying HUG is going to be entering this market. But we so I would not expect anything listen to this year. I think part of it actually, Carter, is that I've a listen. The opportunities for the company are broad. I really believe we're kind of in a unique position that I don't have to do something. A listen. And the work we've done with FedEx has helped us engage with other people globally, listen No, especially in Europe and North America. And I think that I look at those opportunities, I look at the breadth of the material listen. I mean, the ground support equipment, it won't be revenue this year, but I have some really listen to 4 or 5 active discussions going on with people who know me in most cases. And I look at those opportunities, listen. I think in the near term, and I'm talking 2018, 2019, 2020, I think there are better opportunities. Listen. But we'll continue to pursue and discuss the China, but I haven't seen a deal I want to take yet. Listen. Is that maybe just a little more clarity. Is it because the some of the old issues with China in terms of them are in a listen Wanting more IP than you're willing to give up? The economics? The scope of the agreement isn't or discussions aren't what you're hoping for? Just to it. I would say IP and the breadth of the request. A listen. Okay. So IP is a big concern. Yes. No doubt. Can we talk maybe broadly about costs? Because we congratulate obviously positive margins on the fuel side, continuing progress in a listen at least in positive territory in the service side, which should only grow. You expect a as you continue to grow that you'll maintain positive fuel margins listen Or at least directionally move in positive territory. And then talk about some cost downs, the new plate technology and maybe on the infrastructure side as well listen. Great. So let me start with hydrogen. And a listen. With hydrogen, it was a good quarter. We've made progress in improving our hydrogen margins by increasing the efficiency of our a listen to margins by increasing the efficiency of our systems, by deploying novel systems like the first two a listen. We did in this number 2 and number 3 of our hybrid systems, which included reformers and liquid tags in the past quarter. Listen. I think hydrogen today over the coming year will have variations up and down just listen based on some customer mix and usage. But in general, today, hydrogen is a sale, resale business listen with a few sites having reformers which we control the price of. I think that when you think out in 2019, 2020, in a listen. The sale, resale portion of the business being the 5% margin. The real opportunity is in these hybrid listen to help drive down cost because the gas generated from those systems from a variable basis, but always you have to consider the fixed cost are in time grow that margin. But if I was modeling that margin, I would treat it like a typical salere listen to the business for the next few years at least. Okay. And any update on potentially doing a listen Return to base centralized production model. You talked about maybe a couple of different territories, one in the Northeast. Listen. We are and actually we are and probably most people don't know, we have a we actually have a not a lot of people, listen. We have a rather large facility and large, it's about 50,000 square foot facility in Chicago area where we've considered putting some on-site generation there for distribution with our hub and spoke model. Listen. So that work is ongoing and especially we believe that could really help support small in a listen to the customers and provide system backup for large customers and become a profit center for flood power. Listen. Maybe just 2 more quick ones for me. Are you shipping all MEAs now from Rochester after the listen. No. So Carter, the manufacturer actually, as we speak, the first ones for us are coming off the line. Listen. I'd expect to do somewhere in the range of 100 to 600 stacks this year with our own MEAs. Listen only mode. I think it's really exciting. So you asked about cost and in a listen. No. What we see is that stacks represent about 20% to 25% of our cost structure for our products. Listen If I use our own MEAs, we see those stack prices can reduce by 25%. And look, it's not going to be overnight, listen. Once we get the scales of using a 1,000, 1500 units a year with our own NDAs, we should start seeing the impact of listen directly in our financial statements. Plus, the added benefit of Rochester is, I think I've mentioned this before, The folks we hired are all GM engineers and they've been extremely helpful in us developing our thought process how to address a listen to other on road mobility applications. You talked about interest for delivery vans and ground support on a global basis. Maybe you could call out the territories maybe we haven't typically discussed and maybe wrap that in with a discussion of listen to the progress in Europe. They've made some inroads with Carrefour Group and just maybe talk about the environment in Europe as well. Thanks. A listen. Yes. So we did 2 new small deployments in Europe in the second quarter in a listen. And Carrefour has been going really well. I mean, I look at the weekly reports and like I mentioned, the listen. Previous retail customers, we've been doing studies and that for the value proposition and listen. I think both them and us are pleased with the progress to date. At the end of the Q3 here, we'll are going to France with leadership to talk about next steps. So I think they're pleased, we're pleased. We're happy we have the 2 new opportunities there. And listen. And we're also as the work we have going on with mobile products like delivery vans, we're actually engaging with in a listen to the ground support equipment, we are looking activities on the 3 main continents in China, U. S. With one of our present customers and also in Europe with a few sites. Listen. Okay. Appreciate taking all my questions. I'll get back in the queue. Sure, Carter. Listen. Thank you. Ladies and gentlemen, our next question comes from the line of Eric Stine from Craig Hallum. Your line is now open. Good morning, Eric. Good morning, everyone. Well, I mean, most questions have been asked here early in the call, but maybe I'll just You talked about the retail customer, that it took you 5 to 6 years, and so maybe you're in the same boat with this one. But you've been talking about a the 3rd mega customer. Just maybe an update on where that stands? I mean, your confidence level in the past has been quite high on that one. A listen. So, you know, it always unfortunately take longer than you hope, especially when you're dealing with large to customers. It's been about 9 to 12 months negotiations. We are moving ahead. I am positive. In a listen. And I really want to emphasize that when we provided guidance for the year and this quarter, that was not included. So listen It has no impact on our guidance. And Eric, once I sign, you guys will be the first ones to know The group the people on the phone here, the shareholders. Right, right. Maybe second one, just on the metal stack. So it sounds like that's end of the year, so it will start to impact things in fiscal 'nineteen. I mean, I know you're going to use that across on the platform, but I mean is this is there more ideal application? I mean is this really geared towards on road listen. Just given its characteristics or I mean, obviously, it's got benefits in materials handling, but just maybe talk a little bit how you're thinking about The impact of that stack as you get into fiscal 'nineteen? Sure. First, listen. It is designed for all our applications, but it is a listen to the next step to help us move more aggressively into on road applications since the power density, I think we've shown before, is in a listen only mode. Kind of an interesting example in the previous quarter, we were able to work with 1 of the large OEMs in a listen and eliminate some of the weight we had to put in our units, and we were able to increase the size of our tank by listen 40%, 50%, which strengthened the value proposition. Those units have been deployed with Walmart and really added listen. Our second thought is too is that a listen. Material handling is going to drive the volume of our MEAs during the next couple of years. In a listen and to develop and metal plates. And by using it across the product line, in a listen The cost structure of all our products will be lower in cost. So that's really the thought process. It's always better as I think Everyone knows that design a product, leverage scope economy and push it out across your business. In a listen. And with the plate technology, it will be easy for us to reach 125 kilowatts, which really opens up a listen. Most application for 1 row vehicles for Plug. I got to tell you, it is in a listen. Good. No, Thanks a lot for that. I'll jump back into line and let others ask questions. Thanks. Listen. Thank you. Our next question comes from the line of Amit Dayal with H. In a listen to Wainwright. Your line is now live. Good morning, Amit. Just a question around the It looks like just from all of the commentary on the call, you guys are tracking well listen for the year. So I'm wondering why the guidance hasn't been narrowed down a little bit more. Well, listen. That's actually a good question. And it's one that having been around listen. This business now for pushing this material handling industry for 5 or 6 years. Listen. We have orders in house that exceed the low end of our guidance listen. Sure that we don't disappoint anyone and if somebody pushes something out to the Q1 listen that we're well positioned that to hit our guidance and to listen not be at the low end of the guidance, but be at a position that people look at the numbers and know they can trust Plug Power when they give listen. So we're just making sure that any variability that can happen listen that we're in a position to address. Obviously, when we come to the 4th quarter, listen. I'm going to give you some pretty tight guidance for the Q4 and that'll allow us to listen to me that we'll be able to give you a little bit tighter spread. Got it. And in terms of Seasonality associated with the retail side of things, should we expect the Q3 to once again be the strongest for the year? Listen. I would suspect the I meant you can if you look at the math, We've done so far about $70,000,000 I'm saying another $50,000,000 this quarter. Listen. The Q3 and Q4, I think both will be strong. Listen. Well, I believe there's no other questions. I want to thank everyone for in a listen to the Plug Power Conference Call. And I would like to reemphasize in that we are in a listen. And all that expertise, and I think it's so hard sometimes to explain all the capabilities we've developed in a listen. Not only products, but the whole range of the business from finance to sales to listen. Aftermarket service, to manufacturing, we're really unique in the Penn Fuel Cell Industry. In a listen. And I think that's when I take customers or potential partners from China to our facility, that's really what us then in a listen only mode. After talking to other folks in the industry. So thank you for your time today and look forward to the 3rd quarter. Listen. Thank you, ladies and gentlemen. This does conclude our teleconference for today.