普拉格能源 (PLUG) 2004 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the first quarter 2004 Plug Power earnings conference call.

My name is Carol and I will be your coordinator for today. [Operator Instructions].

I would now like to turn the presentation over to your host for todays call Ms. Cynthia Mahoney.

Mam please go ahead.

Good morning and welcome to Plug Power 2004 first quarter financial review.

Participants on the call include Roger Saillant, President and Chief Executive Officer, David Neumann, Chief Financial Officer and Mark Sperry, Chief Marketing Officer.

During the course of the call management may make projections or other forward looking statements regarding the events or future financial performance of the company within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 These forward looking statements are subject to numerous assumptions risks and uncertainties that may cause Plug Power's actual results to be materially different from the future results expressed or inquired in such statements.

Plug Power undertakes no obligation to reveal any revision to any forward-looking statements.

For detailed discussion of the forward looking statements please refer to our press release.

Now I would like to introduce Roger Saillant, President and Chief Executive Officer of Plug Power.

Thank you Cynthia.

Good morning everyone and thank you for taking the time to be with us today.

Today I would begin the call with an update on our first quarter operational accomplishments before handing the call over to David Neumann our Chief Financial Officer to review our first quarter financial performance.

As usual we would conclude the call with a question and answer period.

Once again I am pleased to be here to report our progress against our five milestones, which we publicly announced during our last conference call.

In addition I would provide some insight demonstrate how we are moving towards commercialization.

The first milestone we announced was the complete net testing for Gencore.

As you may recall many telecom service providers required products at nets level 3 compliant prior to installing new technology in the telecommunication's infrastructure.

We announced on March 3 Plug Power's Gencore 52 48 product is now compliant with the net level 3 equipment standard.

We believe we are the first and the only fuel (inaudible)to be able to make this client.

The second milestone that we announced was the secure Gencore distribution in hydrogen spark plug.

On March 17 we announced that Air Gas Inc. the largest US distributor of industrial specialty and medical gases and Plug Power signed a five year agreement to market hydrogen fuels service products together for Gencore fuel systems in the US.

This removes one of the concerns of the minds of the customers.

The resupply of hydrogen for their back up system.

In addition to securing hydrogen supply agreement we have signed Gencore distribution agreement with Hit Winner Hydrogen Energy Systems Inc. in Turkey IST Group Ltd.

A distributor of Ge products in South Africa and Phigen limited of Abrideen's (inaudible).

These additional distribution agreements open markets to us with significant potential for growth.

We have made initial Gencore deliveries to each of these distributors.

They are beginning the process of enabling their sales and service organizations to market their product.

We expect a further expand of Gencore distribution network this year.

Additionally we expect the whole -- we expect to add a 24V version to our Gencore product portfolio later this year.

The third milestone that we have announced was the complete negotiation and work after (inaudible) second phase from a home energy station with Honda.

On March 25 we announced execution of the phase two contract with Honda.

This project not only signals the growing relationship between Honda and Plug Power, but it also positions us to offer one solution to the chicken and egg problem facing the development of fuel cell vehicle, which is where will the hydrogen for fuel -- hydrogen fuel cell cars come from.

As California, Florida, Illinois and other states begin to publicize the idea of building hydrogen highway systems, we anticipate the technology will have broader appeal.

We expect to complete the work efforts under phase two, and make additional announcements later this year.

The fourth milestone was to install the initial Gensite system, our newest product designed to provide onsite hydrogen generation at customer location.

To date, we have commissioned the first integrated prototype system at the location in Appledorn, in Netherlands.

This running system has already attracted several important industrial customers.

We expect it to place systems at customer locations before the end of the year.

Finally, the fifth announce the milestone was to use less cash in operations than was used in 2003.

This is both an important milestone for, and a particularly challenging one.

We want the to show sound fiscal control while doing the necessary product and research and development R &D work coupled with building a strong sales force.

We are encouraged by our success to date.

In summary, we have either met or are on course to meet all of our previously stated 2004 milestones.

Additionally, we have made some important accomplishments so far in 2004 that were not covered in the milestones discussion.

We shipped a total of 20 Gencore systems to customers in (inaudible) in the United States, Europe, south Asia and Africa totalling 39 systems since shipments began in December.

Gencore systems in telecommunication applications with partners Verizon and FTD orange have 550 start and stop cycles and have provided backup power for 1100 hours combined.

On a comp rate level, we have been awarded five U.S. patents.

The total number is now 107 with 141 patents pending worldwide.

In addition, we announced on February 18, that miss Maureen Hell Mer joined the board of director, effective February 12.

She has more than 25 years of experience in the energy industry with broad experience in telecommunications law.

She brings significant insight into the telecommunication industry, and we view her appointment as strengthening us in this area.

One final note -- we are proud to announce that one of the managing engineers, George Earl, also president of the U.S. fuel cell council has been recognized by fuel cell management magazine as one of the top 30 people in the country helping to move us toward a hydrogen economy.

This validates the depth of technical leadership talent in Plug Power.

I'll turn to Dave Neumann, our CFO to let him present the first quarter financials.

Dave.

Thank you, Roger.

I will be providing a summary of the finance this results for the first quarter ended March 31, 2004.

Total revenue for the first quarter of 2004 increased to $3.3m in compared to $3m in the first quarter of 2003.

Product and service revenue, a component of total revenue was $1.4m for the quarter, compared to $2m in the first quarter of last year.

De-delivered 24 fuel cell systems in the quarter including 20 again core systems compared to 6 fuel cell systems in the same period last year.

Under the accounting policy, we defer 100 Hupps of the product service and revenue at the time of the sale and recognize this revenue over the period of the underlying service 0 obligations.

The costs associated with the production of the systems are expensed as they are incurred.

As of March 31, 2000, we had total deferred revenue of $4.7m and expect to recognize approximately $4m deferred amount throughout the remainder of 2004.

Contract revenue, under research and development contracts with $1.9m for the quarter ended March 31, 2004.

Compared to $919,000 in the first quarter of 2003.

The increase in contract revenue is due primarily to new government court works in the second quarter in -- in the second half of 2003, with the department of energy and with NIST, under which we expect to receive approximately $9.7m in additional net funding in the next 24 months.

Cost of product and service revenues representing the direct material costs of the 24 systems delivered during the quarter combined with labor and materials associated with the servicing all of the systems under contract was $895,000, compared to 565,000, during the first quarter of 2003.

These costs do not include any factory labor or overhead expenses.

During the first quarter of 2004 we delivered 24 fuel cell systems, including the 20 Gencore systems compared to six fuel cell systems delivered during the same period last year.

In total, we supported more than 210 systems during the first quarter of 2004, compared to approximately $115115 systems supported during the same period of 2003. -- 115 systems.

Contract of research and development contract revenues representing the fully burdened costs of research and development contract activity was $2.6m during the first quarter compared to $1.2m during the first quarter of 2003.

The increase is the result of the new contract with the department of energy and with NIST as previously mentioned.

We research and development expenses were relatively flat year over year and were 9.7m for the first quarter of 2004 compared to 10.1m during the same quarter last year.

General and eight straight expenses increased $1.9m in the quarter, compared to $1.5m in the first quarter of 2003.

The increase is primarily the result of stock based on associated with amortization of restricted stock issued under our June, 2003 stock option exchange program with employees.

Recurring general administrative expenses has remained relatively flat year over year.

Equity and losses of affiliates represents the minority interests in GE full cell systems.

During the first quarter ended March 31, 2004, we reported a loss of $46,000, which includes $448,000 for amortization of our original investment in GE fuel cell items.

The net loss for the first quarter March 31, was $12m or 16 cents per share compared to 13.8m or 27 cents per share in the same quarter of 2003.

Total non-cash expenses for items such as depreciation, amortization and stock based compensation were $3.7m during the first quarter ended March 31, compared to $2.7m in the first quarter of 2003.

Additionally, the 2003 net loss includes a non-cash charge of $3m for the write-off of in process research and development expense related to the acquisition of H power in the first quarter of 2003.

Weighted average shares outstanding increased to $72.9m shares in the first quarter of 2004,

from $51.7m shares in the first quarter of 2003.

The increase is the result of issuing approximately $8.9m shares in connection with our acquisition of H power, and an additional 11.7m shares in connection with the public offering in the fourth quarter of 2003.

As of March 31, 2004, there were approximately $73m shares issued and outstanding.

Net cash used in operating activities for the first quarter ended March 31 was $.6m, compared to $8.5m in 2003.

The amount for 2003 also includes 513,000 for acquisition fees and expenses related to our acquisition of H power Corp.

As of March 31, '04, the company had approximately $93.4m of cash, cash equivalents and marketable securities and approximately $90.7m in working capital.

That concludes the prepared remarks.

We would now like to open the meeting for questions.

[Operator Instructions] Your first question comes from the line of David Smith of Smith Barney, please go ahead.

Good morning guys.

Good morning, David.

Quick question.

On backlog, can you give us an update as to where the backlog is right now?

Yes.

Dave.

The backlog going out the quarter, so the at end of March was a total of 14 systems, 12 of which were Gen cores.

OK.

On gross margin, what drove the upside there.

Should we read something into that as a recurring improvement, if we look at the average of last year, as we put up the first quarter of last year in a seasonally weak quarter.

The negative roughly 6% combined, is that sort of a reflection of Gen core, or what's driving that?

Well David, it's is Dave.

As you know we deferred the revenue upon shipment, and when you talk about gross margin, we are operating off an R&D model, not a cost of sales model.

We are writing off the cost associated with building the systems, which were Gen Cores in the first quarter.

The revenue is basically amortization of deferred.

OK, as far as the Gen Cores go though, can we read into that there is better profitability than what you have been shipping in the past?

We continue to work on costs.

I mean, so costs continue to come down.

But I guess from that perspective, you know, we continually do get better.

I wouldn't necessarily try to tie the 6% that you are coming up with, though, to a typical gross margin.

OK.

How about you talked about a couple of new distribution agreements.

Should we look for more of those as the year unfolds?

Yes, you should, David.

We continued to work very aggressively to augment our current channels, and we do expect to have additional announcements as we go through the year, around - both on the sales distribution as well as the installation and service side.

OK.

Great.

Thanks.

Thank you, sir.

Your next question comes to you from the line of Steve Sanders of Stevens, Incorporated, please go ahead.

Good morning.

Good morning, Steve.

Just a general question on the field performance of the Gen Core units that have been installed over the past four or five months.

How are they doing relative to your expectations and anecdotally, what feedback are you getting from customers who have units?

Steve, this is Mark, I would say they are performing to our expectations and more importantly to the expectations of our customer set.

The systems that we call out here in the - are the ones where we have had customer that have been public in saying they are performing the way they're expected in fact, the system with Verizon as of now this morning actually has been cycled often on and off 800 times since it's been installed.

And just to kind of put that in perspective, we think over the life of the product, that it will in a ten-year life span actually only be cycled 500 times.

In that instance, we have eclipsed what we would expect to see in the complete life of the product.

It continues to operate as, as I said, as expected in some conditions, which are severe in the case of the system over in Aberdeenshire, literally up on a mountaintop supporting a ski resort communication facility.

So, we are very pleased with the performance thus far in the field.

Thank you.

A question on funding that was announced out of the DOE today, I think it's $350m of government funding and a couple of hundred million of private funding expected.

The focus looks to be on fuel cell cars and hydrogen infrastructure.

I just wanted to see if your early read on that was that you guys were in the sweet spot with the reforming technology to participate that there?

Actually, Steve, we did not - we chose not to submit anything against those proposals.

They were announced last year.

As you are aware, we got a significant amount of DOE and NISS, the New York State money last year.

And those programs are really the stationary oriented programs.

These programs, as you indicated were demonstration of validation around automotive and what I would characterize as large scale refueling systems.

So, our work in terms of the output sides of our refuelers that we're working with Honda, around the home energy station, fell below the output range that were required for these money.

So, consistent with our strategy of not going after government dollars that are not directly aligned with what we're working on, we opted not to submit against those.

OK.

Thank you.

Thank you, sir.

Gentlemen, your next question comes from the line of David Kurzman of Needham & Company.

Your question, please.

Good morning folks.

A couple of quick question.

First of all, are you also deferring the service revenue that's related to the units in the field?

Yes.

David, it's Dave Neumann.

We do defer 100% of both of product portion of the contract and the service and we amortize both over the life of the service obligation.

In terms of capacity, in other words, how many units in the field do you have the capacity to do service for at this point, and how much of the cost that we're looking at in the various line items relates to service versus R&D versus product building?

Dave, let me take the first part of that, and then I'll let Dave comment about the amount of the expense.

With respect to the capacity, our strategy is really to provide second and third level support to those systems.

So, we bring our service providers in for training, train them on the system operation, installation and maintenance and then they provide the majority of the service.

So, we're staffed to be able to handle the second and third level, which would be if the first line person in the field has problems, we have a hotline, obviously, that we staff, that they can come in through and then we have a set of people that we dispatch, if the first line folks cannot be in directly on site and the counseling over the phone rectify the problem.

So, fundamental to the growth strategy is that we sign up distributors who have service and installation capability and we're staffed to handle quite a bit of volume.

OK, can you give us sense in terms of the hundreds of units in the field, how many service people you have today and then you can kind of mentally ex trap late that you will probably get better at what you are doing in the future and so forth?

If you looked at our support infrastructure totally so that the people that and handle the phone calls as well as go out or dispatched, it's fewer than ten people today.

Finally, you mentioned the Verizon unit took over 800 hits.

I'm sorry, on-off cycles.

Is that unit still in the field, and if so, what are your plans for it?

Do you want to take it back and replace it with something else to see what 800 units or excuse me, 800 cycles does to a unit or what is your plan, for that kind of a situation?

Yeah.

The system is planned to innocent field for another several months.

And we will be swapping that unit out at a future point in time with even a later set of technologies.

We will do absolutely --absolutely do the destructive testing to understand any impacts of the on-off cycles.

I should point out that we are forcing that amount of on-off activity.

We're not -- we don't have a grid that has that kind of outage.

So, that is a routine that we put in place via software to force an outage at that particular location whereby we can determine whether we have come on or not.

And then, as an extrapolation of Verizon and so for the, did you give a sense, has any customer, telecom or otherwise, said "Hey, listen, if, you know, you -- if you can pass this hurdle, we want to put in a meaningful size order for units or anything like that".

Can you give us any sense of what your discussions have been with the potential customers?

David, it's progressing really along the lines that we anticipated.

I think Roger gave some good color to that in our last call, but essentially, we're moving through an initial phase where the end user customers are taking one or two units and deploying them typically first in the lab and then like Verizon or RNFTD and do a single location.

They're we have said for the most part in order to be delayed they're looking for certifications, variety of them, the CSA standards around gas and UL and others.

From there, they will typically move to a larger but still limited test.

So, on the order of 5 to 6 systems that will be deployed in various locations trying to incorporate different environmental conditions.

And that typically is what's required to get you into what's called the standardization.

So, you have to come to a single test, something like a 5 to 6 unit test.

All of these measured in three to six months, depending on which end use they're you are talking about before you get to the point where you're standardized and can be purchased by anyone, say in the Verizon organization.

So, that's the process we're in the middle of.

It is a -- I think as you are all aware, it is a conservative industry by necessity.

And we're working through that, and to this point, we're very happy with our progress.

We obviously like it to go faster, but, you know, we cannot tell you today that we have got somebody waiting in the woods saying, you know, we're going to order thousands if these conditions are met.

We're just not there yet.

Thank you so much.

David, I would add this is Roger.

I would just add one thing.

We're always very careful with regard to our customers.

Unless they have said something publicly and want it to be said, we don't name them.

But I need to tell you that there's greater than -- a significant number of people --large customers are sampling our product.

None have made the conditional statement that you would like to hear and that we would like to hear, of course, but in terms of what I would consider an orderly marketing engagement, what's happening is very expected, and there have been no negative surprises throughout our -- the top end of our funnel, with regard to our customers.

OK.

Very good, thank you, Roger.

Your next question comes from the line of Walter Nazdio of Idaho Capital(ph).

Please go ahead.

Good morning guys.

Good morning, Walter.

I just have a couple of housekeeping questions.

Dave, can you give me a little bit of breakdown on the other R&D expense line that $9m $9.25m.

What it's made up of?

That's typically consists of the labor associated with our engineering folks involved with the research on the product development as well as any materials and I did or subcontracted help that we --that we get.

So, it consists of all of those things.

The labor, the materials and the outside services.

OK.

So, they're not allocated to any specific product.

It's just kind of what's going on in the lab at this point?

Yeah.

At that point, that's what that is.

It's research and product development expenses.

OK.

OK.

And also, briefly, do you expect to see any more acquisition, AHB acquisition expenses going out?

Related to the AHB acquisition, no.

We didn't report any this quarter and we didn't expect any additional accounting purchase related to that.

OK, so that's all done then?

Yes.

Outstanding.

Thank you very much.

OK, thank you.

OK, bye.

Your next question comes from the line of Chris Kwan of TD Securities.

Your question, please.

Hi, guys.

Just couple of quick questions.

The backlog you mentioned, 14 systems, 12 were Gen Core.

What were the other two systems?

Those are for our Gen systems, so the continuous run product that we have been marketing now for on the order of two years.

OK and how long, approximately, will that take to get through this backlog?

We -- I expect that most of those systems -- all of the systems that have asked for delivery in the next quarter will be delivered in the next quarter, and obviously, we'll be adding to that as we go through it, so, we're probably averaging -- depending on the configuration, in the systems out of here in the three to four week time frame. -- I would say that the thing that -- the thing that's basing it is primarily, we typically won't ship the system until the customer has been here for training.

It's not the manufacturing assembly in the system as much as getting the technical people identified and cycled through the training so when the system arrives they can actually install it.

In the past, you have given an approximate value for the backlog, or is that something that we can expect.

We have not, but you could certainly extract it.

Right.

OK.

And then I know in the last, the year-end call, you didn't give a revenue forecast for the year or range, but can you comment a little bit on seasonality or rollout, what we see back end weighted or even kind of like last year?

I would say, if you look at the past two years, we are back-end weight and I would expect the same profile to happen this year as well.

OK.

And then the last question, just following up on the DOE question, just see this morning crossing the wire was something about DTE, energy getting involved in a hydrogen fueling project with BP and Daimler Chrysler.

I know that you have worked with DTE.

Is there any particular reason why you weren't involved in this project with them?

Yeah.

That particular program called for a lead from either an automotive company or a --basically a fuel company.

Neither of which we fit.

OK.

OK.

Great.

Thanks.

Your next question comes from the line of David Snow of Energy Equities.

Please go ahead.

Hi.

You said there's no purchase costs associated with the H power.

You have gotten -- you can update us on what you have acquired and what you're using and what you're experiencing the acquisition is to date, and what you expect to come?

I guess the experience in the acquisition is very positive.

We certainly transferred people here.

We have certainly evaluated the technology.

There's some very good technology relating to the membrane and stack system that we will be incorporating into our product over -- over the next coming quarters.

I would point out that H power's focus was primarily less than 1.5 kilowatts.

We have deliberately, if it isn't easy to incorporate into the 5 or so kilowatt effort, we have deliberately become aware of it, but we have tabled it as we get ready in the future to expand in that direction.

So, in terms of -- we have people, knowledge.

We have technology, insight, and we are in fact at a very fundamental level using some of the H power insights right now to help us improve our product.

You say that you would table it.

How would you use the one-and-a-half size technology in the future?

Well, I think right now, we are -- we have ideas along those line, but I think it would not be worthwhile to speculate, because the size of the markets that we're heading at and what I would consider the 3 to 10 kilowatt area is so enormous and the preoccupation with engaging and understanding exactly what the customer wants and the variations that that is driving on those products, for example, the 24-bolt variation against the 48 volt variation, AC and DC and things like that, we have got so much on our table in front of us right now, to make sure that we punch through and establish our presence in this market, that it would be not worth a lot for me to speculate about when and what applications we have used that we would be looking to at 1.5 kilowatt and below.

The 3 to 10 kill low Watts size, you're referring to the GenCore market, I believe right now, any anyway.

Today, absolutely, it is the backup premium power market space.

OK, Could you -- you mentioned the different volt -- 24-volt.

You can elaborate on what's being offered there now?

Yeah.

What we're doing, Dave, is if you look at particularly in the wireless market, in the United States and some of the cell tower, what I would consider the legacy technology there is primarily 24 volt.

So, today our Gen Core product offering as Roger indicated is 48-volt, positive-negative, which gets us some amount of the wireless market and primarily the wire line market.

As you mentioned, we have an AC version of the product.

The 24-volt we're absolutely working on that to target the north and South American wireless 24-volt market opportunity, and as Roger said, we'll be rolling that product out late ocean this year.

Right now, we're doing 24-volt.

It sounds like you're doing it already.

What are you offering now, 48 volt?

Right now is 48 volt, positive or negative in a 4 kilowatt AC version.

OK.

You can bring us up to date on any new developments in the facilities or Engle-- R&D work.

In terms of the particulars around cellny (Ph), I think you probably know they have restructured, and cellny's ventures have spun that off, so it's now Pemeas.

We had in fact long conversations with those investors to look at the viability of that market.

A lot of that work is supported by an NIST and DOE contracts.

I'm not at liberty at the moment to talk about that, other than what's in the public's face.

I will say that with people AEAM, we have a strong and lasting relationship.

I'm expecting that only to improve.

With EngleHart, it's even-dish guess even more solid, but in terms of breakthroughs, we're doing thing like basic blocking and tackling, and I don't have any special announcements that make except that it's central to our Gen site work and that's incredibly robust.

You're not using the cellny as -- cellnies in your Gen site yet, I guess, you are?

No, we're not.

Any timeline as to when it might be?

No.

OK.

And any timeline or are you using EngleHart's results yet, or some thing that's still to be done?

EngleHart, we are using their catalyst in their Gen site systems that are currently are in the field.

Gensis.

Gensis.

Yes.

OK.

You had said before that the cellnies work would be something that would be industry wide in terms of -- industry-wide in terms of potential market.

Is that what you are thinking.

Would you sell it yourself or would you sell it yourself or would you use it internally?

I think that gets into the kind of the agreement between us and Pemeas.

We're not going to discuss that at this time.

We'll be ready to give you updates on the high temperature work as we progress in our annual -- in our quarterly reports with NIST and DOE

Thank you very much, sir.

Your next question comes to you from the line of Jarett Carson of RBC.

Please go ahead.

Yes.

Good morning.

Good morning.

On the gross margins, is that really coming primarily from improvement in R&D revs, and can we expect about that level over the remainder of the year?

Yeah.

Again, Jarett, most of the margin discussion is a difficult one because of the way we do our accounting for revenues.

And you got to remember that we still do defer all of that revenue up front as I mentioned, and you know, we continued to improve on costs.

You know, so, as units go out the door you know, you should see improvements over time, and eventually, we'll change the accounting model so that when you talk about gross margin it, would be more meaningful, but we do follow an R&D accounting model today where we expense as we go.

And that $1.9m plus or minus a little bit is a fairly good number for the rest of the year on R&D?

You mean the $9.7 that we incurred this quarter?

No, no, no.

Sorry, on R&D, revs.

On the contract revenue.

Yes.

Yeah.

I would say that's probably a fair statement.

OK.

Mark, on the installation, particularly the unit that you have going into the UK, relatively speaking, in your conversations with the telecommunications and --providers, do you see the initial installations being more replacements for existing facilities or are we going to see the possibility of more an enabling -- using the fuel cells and enabler to build out their infrastructure in places where they would like to go, but it remains cost prohibitive of using conventional means right now?

I think initially, the targets are around what I would say augmenting the current infrastructure.

So, as people try to get more familiar with the technology, running it, you know, in an existing hut where there may be additional backup capabilities either from a generator set or batteries.

Existing infrastructure is where they have been primarily targeted.

I think in terms of interest and where is there pain, therefore, opportunity inside of the customer's footprint, it is the latter, where they want to put communications facilities that they cannot today because the grid cannot be expended or --extended or because of issues in terms of density and need to go up on rooftop and things like that.

So those installations tend to be the one that are causing the most problems, in terms of cost and reliability for the telecommunication folks today.

I think that ultimately will be a very compelling market.

But as it's being deployed, initially, I think folks are being conservatory pif, appropriately sow, so, and putting it into facilities that already exist and in other cases parallel to other technology sets.

Are we talking primarily at this point with wireless guys, or are you started having sessions or maybe you have had installations while not giving specific names, in -- in cable or wireline communications providers?

We have product with distributors in application across all three.

Wireless, wireline, as well as cable.

Great.

Finally.

How have your discussions changed with these providers given the air gas announcement or the ability to go in.

Does that come compress sales cycles for you?

How do you see that augmenting the selling situation?

I wouldn't say it's compressed it because of the process we need to go through in terms of the technology validation, but it has taken an objection off the table in terms of where am I going to get the hydrogen, who is going to take care of that, and when is it going to run low and be replaced.

The ability to point to air gas and their infrastructure and the credibility they have is an asset.

I think air gas as actually jumped up in several instances and said there is no problem because we handled that coverage completely.

That just makes the customer feel very comfortable.

So, relatively speaking from a service standpoint, I mean, you take or you -- you in combination with air gas take all of that off of the providers' plate?

Essentially air gas provides that service, and yes, in conjunction us with, where the worry about will I be able to get the fuel where I need it to my locations is satisfied in the conversation between the two companies.

OK.

Thanks so much.

Yep.

Your next question comes to you from the line of Eric Prouty of Adams Harkness Hill.

Please go ahead.

Starting with the commercialization of the product should we expect any tick up in marketing expenses as you start getting out to trade shows and tides advertising in trade rags in journals.

Or is that being borne by your -- by some of your partners?

You will see a modest up-tick.

We are beginning to do some advertising in primarily very targeted trade publications at this point.

Our show presence, I would say, is probably going to be reasonably consistent to the past couple of years.

But we are doing some direct end user stimulation, but we also have arrangements with our distributors where they're doing some of that work themselves.

You'll see more presence, I would say, to Plug Power into our product set some of which will be funded by us, and some of which will be funded by the industries bugs channels.

So -

Great.

Thank you.

Your final question comes as a follow-up question from David Smith of Smith Barney please go ahead.

Can you talk more about the patterns, the new patterns and what areas those are in?

I can only say that the numbers of patents -- the patents.

Are increasing around software and controls.

Our patents are also being driven right now by our field experience, where there's certain -- there's certain things that we're learning in the field that are becoming important to the performance of our systems, and in that case, it's more related to our Gensis product than the Gencore product but it's fundamental to our knowledge what's going to be required to make fuel cells successful.

OK.

Related to that, can you talk about -- Roger, can you talk about cost reduction on the actual fuel cell units, what you are sighing -- seeing this quarter and what you kind of envisioning for the rest of 2004?

David, you make me smile because there's probably nothing that my people would like me to talk less about than cost reduction.

We continuously look for ways to reduce our costs.

We they that the amount of GAAP that's needed for us to secure good margins, and good margins to us are significant double digits, I'm getting a quick look here from Mark Sperry I don't know if I can say what that is or not, but let my say in order for to us be successful we know that we have to have a good value proposition to the customer.

The key attractant is that the cost energy or the cost of use of these systems has to be less than their present systems.

Not only lifetime, but initially as well.

And we do not place products in the field that are subs subsidized.

That means that we have a relentless price-drag cost pressure inside of our company and in our supply base.

This are many activities which we have underway right now to keep on a forced March drill to the kind of numbers that will get us eventually to the mass commercial market, which is significantly below where we are today in these Gencore and Gensis markets that we're targeting where we can actually market where we have a value proposition, but the cost per kilowatt is not as severe.

We have never taken our high off of where we have to be ultimately.

Following onto that, the energy proposal that is going to be tacked on the they're talking about tacking on to this other bill, a tax bill, the next week or two, seems to be targeting 30% reduction or tax credit of 30%, or $1,000 a kilowatt.

I guess that would take the Gencore system down to $10.5,000.

How integral do you think at this stage is cost or price into boosting market penetration for Gencore as an early development product?

I think, Dave our positioning, as I think you know when we went to market here we did market-based pricing, and really looked at the existing technology sets and the price point on the product that we felt was required to gain customer decisions.

And while, you know, always reducing price, you know, is going to help in terms of volume I don't see that personally right now as a critical barrier, and I'm not saying that it is not, but the objections that we're working through right now are not price related.

They're more, you know, what is a fuel cell, how is the technology, how I do cite this, size, weight, those types of considerations, and I fully expect as we get through the --we're shipping, you know, five, six units to an end user for utilization and getting standardized that as we start to talk about significant volumes that price will come into that conversation.

It just hasn't yet.

I think it's there, but clearly lower price is going to help us get more activity.

We very much support what's going on in terms of those tax credits.

And think that that would just absolutely provide a very compelling value proposition to the end user at $10,000 versus the $15,000 that we sit at today.

OK.

One more thing I want to add to that.

If it wasn't clear in what I was saying before, we definitely have reached an attractive price point in the market.

It's for us now to figure out how to keep driving the costs down so we can have good sustainable margins for our company.

Right.

Right.

Last thing, if you can just address how many GenCorp. units could you possibly make in our -- Gencore units that you could possibly make in your current facility.

I don't know that we have actually got an hard number on that before.

I think they will.

We are capable here of somewhere between 6,000 and 10,000 Gencores.

We're constantly looking at ways to be sure that's true.

That would be a -- that would be -- that's a good number for us.

I think that's very solid.

Great.

Thanks, guys.

Thank you.

Ladies and Gentlemen, this concludes the question and answer portion of today's call.

I will now turn the presentation back to Cynthia Mahoney White for closing remarks.

Thank you very much.

This will conclude our call today.

We hope that you found the session informative and we look forward to having you join us next quarter for another update.