Earnings Call: Q3 2019

Nov 7, 2019

Greetings, and welcome to the Plug Power Third Quarter Earnings Call. At this time, all participants are in a listen only mode. As a reminder, this conference is being recorded. It is now my pleasure to introduce Teal Vivacqua Hoyos, Director of Marketing Communications. Thank you. You may begin. Thank you. Good morning, and welcome to the Plug Power 2019 Q3 earnings call. This call will include forward looking statements. 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 19 34. We believe that it is important to communicate our future expectations to investors. However, investors are cautioned 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 risks and uncertainties discussed under Item 1A Risk Factors in our annual report on Form 10 ks for the fiscal year ending December 31, 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 on which the statements are made, and 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's CEO. Good morning, everyone. We're pleased with the quarter and a detailed description was provided in our shareholder letter released earlier in the day. I'd like to go over some highlights. We achieved over $61,000,000 in gross billings. We had adjusted EBITDA of $2,500,000 I'd like to highlight the EBITDA would have been $7,100,000 without the higher than normal warrant charges. I believe this is an indicator that our operating performance continues to improve as we scale. Few highlights for the quarter include and this one really excites me, our first order from Fiat Chrysler for over 240 units, another validation of our value proposition for material anointing in automotive applications. Today, we have BMW, Daimler, Honda, VW, GM and now Fiat Chrysler's customers. European expansion continues leveraging some of our new channel partners with an order for nearly 100 units at the BMW Leipzig factory in Germany. This deal was part of a German funding activity and Plug Power product support supported in the recent announcement. 3, the sales funnel for non material handling applications for our ProGen engines and stacks are continuing. We have many OEMs and integrators testing our systems and stacks. This includes a wide range of activities that we're pursuing, including a variety of on road and off road applications, large scale stationary projects and aerial projects. We also in the quarter closed the supply agreement with United Hydrogen for liquid hydrogen, which will positively impact our gross margins in future quarters. Hydrogen and vertically integrating into generation with partners is a key part of our strategy. 4th quarter will be a record for Plug Power as we are on track to achieve $235,000,000 to $245,000,000 in revenue and breakeven adjusted EBITDA for the year, a major accomplishment for the company. We have announced 2 of our major four announcements for the year. First one was the deployment of 500 units with StreetScooter using our ProGen engine in Germany by DHL. StreetScooter is 100% owned by DHL. Our global partnership with ENGIE. ENGIE has a global footprint across 70 nations. We have already closed an order with ENGIE in a new region for Plug Power worth over $6,000,000 This is a deal that would have never been identified without ENGIE. We have another deal pending that should close this quarter. Announcement 3, which will be for a new multi site customer will be announced this year. We're already working with them preparing 3 sites for early 2020. Supporting our 5 year plan that was rolled out in September at the Plug Power Symposium. At the Symposium, Plug Power outlined our plans for the next 5 years. All the slides from the presentation can be found in our website. To highlight a few items, Plug rolled out a $1,000,000,000 revenue plan by 2024 with a mix of $750,000,000 of material handling, $200,000,000 in on road vehicles and $50,000,000 in stationary power. The company is targeting in 2024 $200,000,000 in EBITDA and $170,000,000 in operating income. An aggressive plan, but with our broad offering capability as the only turnkey shop in the fuel cell space, we believe these targets are achievable. At the seminar, the logic for achieving these goals were clearly enunciated. Paul and I are now pleased to take your questions. Thank you. At this time, we will be conducting a question and answer session. Our first question comes from Chris Van Horn with B. Riley FBR. Please state your question. Good morning. Thanks for taking my call. Good morning, Chris. I just wanted to, could you provide some additional detail on the Fiat Chrysler award, maybe the timing of the rollout, where from a geographical perspective that is and just maybe a little bit more detail how it came about? Sure. I think the positive item is the sales cycle was relatively short. It was in the range of 6 to 7 months. The deployment will occur in Detroit, Michigan. There was a press release yesterday where Chrysler talked about this activity. It'll be for approximately 2 40 units and overall it'll be worth over $10,000,000 to plug power. Okay, got it. Go ahead. And of course, we're looking to expand that relationship. Okay. Thanks for that detail. When I think about you set out the 2024 plans. When I think about 2020, is there anything you can tell us kind of directionally on how you see that you're playing out? Is it more back half weighted or how do you see 2020 looking right now? Good question, Chris. And overall, I think at the symposium, we laid out that revenue growth will be in the 30% range. I would expect that the Q1 will be lighter, but I think you'll see a strong ramp and much stronger second and third quarter than this year. We have a great deal of visibility to 2020 already, more than we've ever had in the business. So we know about where 85% of everything we plan to ship will go, which is extraordinary for us. I think it shows that the business is really maturing. Okay, got it. And last one for me. When you think about the R and D, how do we think about that spend going forward? And what specifically are you working on in that area? Sure. I'll talk about what we're working on and I will let Paul talk about where he sees the spend going. But on the R and D front, the key items to us are increasing power capacity of our products for a variety of applications. And we probably have about 15 to 20 applications in the funnel, 15 or 20 opportunities in our funnel and there's about 5 that quite honestly I really, really want. And when you look at it, a lot of that starts with higher power stacks. So we're looking to achieve we're looking to have products by mid 2nd quarter, which will be in the 125 kilowatt range for our ProGen engine. We already have customers wanting to start testing them as soon as possible. And that by going to ProGen, our vision of products is that they should be as easy to use as batteries. And ProGens are designed that someone who is not an expert in fuel cells can pick 1 up, plug it in and it works as well as a battery. And when I think about that, Chris, that's why people start with battery sometimes. We want them to start with fuel cells without a lot of additional support from Plug Power. So our design philosophy is make it easy, put it in a box, have 2 or 3 connections and you're ready to use the fuel cell. Paul, on the spend rate? Yes, I think I guess piggybacking off of what Andy shared, one of the most exciting aspects for me is that leverage ability into these other applications in other markets. We don't have to double and triple resources in order to take advantage of those opportunities. We're building a platform and leverage and building a technology base in a way that makes it very easy to translate that into these other 7% on 7% on the upper end range. And the only anomalies to that will be some of the things that we've talked about in terms of incremental opportunities and other strategic areas that we might get involved in like hydrogen strategies, other areas. Those are to be determined as we continue to nurture and evaluate those spaces. Okay. Thanks again for the time. Okay. Thank you. The next question comes from Eric Stein with Craig Hallum. Please state your question. Hi, Andy. Hi, Paul. Good morning, Eric. How are you? Good morning, doing well. I was hoping we could just start with Anji. You mentioned the one award that you already had and one that it sounds like is pretty near term. And I know that's a pretty broad ranging agreement. Maybe just any specifics you can share on both of those, but then would also kind of love to hear, I mean, you're a quarter in, just how you see that playing out, what that means in other areas, any color there would be helpful. Sure. So I expect we will so let me take a step back. You are correct. The opportunity with ENGIE is fairly widespread. And it includes both our ability to provide fueling solutions, fueling systems as well as them positioning our material handling equipment and other applications around the world. This first deal is actually that will be announced is for a fueling station that will support deployments of vehicles in a country to be named later. And we have a second one which should close this quarter and that one is actually for material handling equipment, again in a region of the world that Plug has never participated in. I think the combination of those 2 will be well over $12,000,000 to $13,000,000 And it's a combination per plug of our expertise in products and capabilities and leveraging ENGIE's broad service capability. Is that helpful? Yes. No, that is helpful. I guess I'll stay tuned. Going forward, maybe next question just And by the way, both of them will be in the first half of next year. Okay, for deployments. Yes. Okay. And then just you laid out the 2 major announcements left that you're targeting and maybe this is my misunderstanding, but I guess I had kind of thought that the next one was more in stationary applications. And sounds like you described that a little bit differently. So just curious on that whether I had read it wrong in the past or something has changed to some extent? Eric, I would say I must have explained it wrong to you in the past. But it is more along the way of our traditional material handling with obviously a larger retail customer. Got it. Okay. And all right. I guess I'll leave that alone. Maybe that's your maybe that's the official announcement of the 3rd or the 3rd mega customer that you have discussed. You got it, Eric. And the 4th quarter, as I mentioned, is associated with hydrogen. Got it. All right. Maybe last one for me. Just United Hydrogen, clearly part of the strategy. I mean, is that something that you think I mean, I know that your 4th targeted announcement has to do that strategy as well. But aside from that United Hydrogen, is that something that you potentially can replicate so that you have greater geographic coverage as you roll this out to more customers? So the answer to your question, Eric, if you were at the Plug Power Symposium and one of the items that Tim highlighted was looking for one of the items in the past is production agreements with the hydrogen providers as well as we've talked about more extensive partnerships on the generation side together. So we are I think you can name every hydrogen provider in North America. We are in negotiations for similar type deals. But we won't be limited to just that. I think that there is a big push for renewable hydrogen and we are in discussions with what we would call non traditional players in this market to work with leveraging both electrolyzers and renewable natural gas to expand our green footprint with hydrogen. And as I mentioned before, our plants in that generation front is really to be part of a partnership and ownership position, not just a customer of the product. All right. I'll turn it over. Thanks. Okay. Our next question comes from Christopher Souther with Cowen and Company. Please state your question. Hey, good morning guys. My first question, I was hoping I could just get a little bit more details on the new subscription program that you guys talked about in the letter. As far as kind of what percent of the GenDrive shipments in the quarter were recognized and how the subscription gets recognized and flows through the P and L kind of over time, if you could kind of give some examples of that? Paul, do you want to take that? Yes. So I guess to try and give you a simple answer on how it works, when a customer access our solution with the subscription, it's really like they're doing vendor financing and they're paying us to access the solution over time. So there'll be a recurring amount of revenue that goes into our P and L over that duration of that period. But when we deploy those projects, we finance them. And today, we're financing them with traditional commercial banks and basically doing a sale leaseback and because of the operating accounting lease rules, it qualifies for sale project. And so those revenues will show up in our financials as we monetize those programs for the equipment portion of that. And then again, over duration of 5, 6, 7 year term of the subscription program, we'd have a recurring revenue in for from the customer. Chris, let me kind of add to that. We've been looking at the way wind and solar were able to grow so rapidly. And in 2020, we expect about 20% of our revenue will fall under the subscription program. And like wind and solar, we expect the interest rates to rapidly decline over time as Plug becomes more and more competitive. We have been engaging with many banks and with many institutions over the how to roll out this program at a larger scale. We believe we are very aggressive about how to grow this revenue more rapidly, because growing revenue more rapidly will increase our margin position, will generate more cash for Plug Power. And that's how we're really thinking about the market. Okay. And then to kind of follow-up on that, was FCA or are there any other pending customers that were waiting for this type of solution? And do you see them kind of joining the program over the next quarter or so? Is that kind of how we should see it? Who was that? I didn't hear what company you were referencing, Chris. The Fiat Chrysler. That is not a subscription model. Okay, got it. And then to touch on the NG and StreetScooter, the Hamburg, it seems to be a lot of focus on international. Could you talk a little bit about longer term looking at that $20,000,000,000 guidance of $1,000,000,000 In broad strokes, what do you think Europe and other international markets make up of that? Do you have kind of a good sense of that? Sure. I would put it in the $200,000,000 range, Chris, with primarily being Europe. Got it. Okay. And then just the last one, with Amazon and Walmart, could you give And if you think about what we have already with StreetScooter that could represent a quarter of it. Okay. And then just year to date with Amazon and Walmart, could you give us a sense of what the percent of revenue thus far is versus kind of the other customers that have grown? Probably in the 50% to 60% range, Chris. Appreciate it. Thanks guys. Okay. Thank you. It will be lower next year. Our next question comes from Colin Arch with Oppenheimer and Company. Please state your question. Thanks so much. It's actually Colin Rusch. Guys, as you look at the potential to reduce the cost of capital on that subscription business and in general, particularly as you get to sustainable EBITDA positive situation, Can you talk about your pricing strategy with customers and how that may evolve and enhance your addressable market? Well, Colin, let me give you an example that there is opportunities long term to own certain assets. And there's assets like hydrogen infrastructure, which are very, very valuable. And in round 1, we may have the ability to own those assets at the end of the subscription period. And those assets are extremely valuable to Plug Power. Those assets could be revenue generators per year just like hydrogen generation assets are available for generating cash for industrial gas company for years. So I think a lot of our thought process is associated with especially the value of those hydrogen infrastructure long term. I think on pricing, we have goals for the business that allow us to get the 20% EBITDA and that in 2024. And our pricing strategy as we work our numbers today is to support that kind of performance. Okay. I have a couple of follow ups, so I'll take offline. And then just in terms of what you're seeing in terms of hydrogen fuel cost reduction, obviously, there's an element of scale at this and purchasing power for you guys as the now the largest consumer of hydrogen. But then also what are you seeing on the technology side in terms of the industry's ability to drive costs lower and the evolution and the cadence of that sort of cost reduction? So let me give you a reference point, Colin. So yesterday, McKinsey rolled out the U. S. Hydrogen Roadmap, which 20 companies participated in developing and Plug Power was one of those companies. And the number I'm about to give you is also what was presented the previous day where I'm a member of HTAC which is the Hydrogen Technical Advisory Committee to the Department of Energy. And in both of those presentations, scale they felt would drive the total cost of hydrogen, including infrastructure in the $4 to $5 range. So if you take a step back, when you think about the fact, especially if you compare it against gasoline, that's about $2.50 an effective gallon per gallon. And if you think about $4 for hydrogen, that puts you about in the $0.06 or $0.07 per kilowatt hour range. Perfect. Thanks so much. Hey, it's a great report. So if you Google U. S. Hydrogen Roadmap McKinsey, there'll be a website that will link you to and the executive summary is up there today. And I know a forward description will be up there in the coming days. And I think it really will give people a broad view what the companies are thinking this market can be. Our next question comes from Craig Irwin with ROTH Capital Partners. So Andy, one of the Good morning. Good morning. Good morning. One of the most interesting pieces of the shareholder data you had in Albany was the presentation by the man from Deutsche Post, right, where he showed the chart range versus payload and how things pencil out for economics of fuel cells versus battery electric vehicles. Now you've talked a lot about the different things you're pursuing to grow on road, right, and the opportunities over the next couple of years. But the same basic analysis also translates into the UAV and aviation environment, right, where weight is extremely important. You would never have bought energy or unless you believe in the future in that market. But we don't hear a whole lot about it on a regular basis. Is there anything that you can maybe share with us as far as an update or progress plans for this business and a vision for where this fits in the future at Plug Power? So Craig, that is the mark I think your description was perfect. The same issue and I'm going to start talking about vertical, taxis, aerial taxis that we see that application almost identical to on road vehicle because of the power density of weight of fuel cells. Those are programs in which you are engaging with people who are where it's quite long term. That's not going to be overnight. We're in discussions for people programs for 2024, 2025. That being said, I think the learnings will be extremely valuable for on road applications. And we have 2 applications in the aerial space where our team is deeply engaged with customers and I think one of them will be a real surprise. Okay. We look forward to learning about that. Is there an approximate timeline for us to see that publicly? Yes. So I would tell you a month, Craig, but months usually turn into months. So I would say in the next 6 months. Fantastic. So my next question is about the delivered cost of hydrogen, right? Obviously, as the largest buyer of hydrogen, this is an intense focus for you guys over the next number of years looking to buy hydrogen at the best possible prices for your customers and produce it at the best possible prices. There were some fairly exotic ideas tossed around several years ago, ranging even to purpose built nuclear reactors for hydrogen production, right? So there's a whole spectrum out there. Do you see any particular technologies coming onto the horizon that are ready for adoption within the next 5 years that can maybe have the production cost of hydrogen today and give us a real major tailwind above and beyond what we're seeing in the fuel cell market? I can say this, that's a good do I you put in the timeframe of 5 years. And as you mentioned, there is a great deal of activity going on how to use nuclear energy, heat or electricity, because there's so much strain of electricity to generate hydrogen. I listened to presentation companies like the Southern Company on Monday Tuesday this week at HTAC. I would say about 30% of the presentations were associated with the hydrogen. I think that's probably more than 5 years out. That being said, I think there's a good deal of activity going on in 3 areas with I think non traditional players. You see some of the utilities really focusing on RNG to hydrogen, which I don't know if it would be at scale, but I think it could be beneficial in helping pricing. I think there's a lot of interest with solar companies to leverage it with electrolyzers to drive down costs. For that to work best though, I think you need to have sites which you're in with 150 miles. You need that generation facility with 150 miles of customers. And third, the way the practical way we're negotiating near term is that we're much focused on the spigot cost of the site and then managing with our customers in negotiation what that spigot cost is and then keeping transportation as a variable. There's also Craig and work on on-site generation. I think you'll see us doing more of that next year to eliminate the transportation cost. But I don't see as I mentioned, I think the roadmap that was rolled out yesterday with that $4 to $5 all in a kilogram range is probably realistic. Today on a variable basis, we're probably between $5 to $6 in most cases, depending upon where the site is. You could be a little lower, you could be a little higher depending on range. I see buying power impacting that more for us as well as ownership of some of the assets. You. Ladies and gentlemen, this concludes our question and answer session. I'll now turn the floor back over to Mr. Marsh. Thank you. Well, thank you everyone. And for those who did not attend the Plug Power Symposium, we have a few minute video which provides some snippets. I hope you enjoy it. So thank you and looking forward to talking to you for the Q4 conference call. We got a big quarter coming.