普拉格能源 (PLUG) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2006 Plug Power earnings conference call. My name is Angela, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference is (OPERATOR INSTRUCTIONS). And now I would like to turn the presentation over to your initial host for today's call, Ms. Cynthia Mahoney White, Director of Marketing Communications. Please proceed.

Good morning, and welcome to Plug Power's fourth-quarter review. Participants on the call include Dr. Roger Saillant, President and Chief Executive Officer; David Waldek, our newly announced interim Chief Financial Officer; Robert Powers, Controller; Brad Johnson, Vice President of Operations; Allan Greenberg, Vice President of Sales; and Debbie Pawlowski, Investor Relations for Plug Power.

Mark Sperry, our Vice President of Marketing Strategy will not be joining us for today's call because he is traveling on company business. Dr. Saillant will discuss fourth-quarter and full-year 2006 results and provide an outlook on 2007, as well as the Company's long-term strategy. Following their discussion we will open it up for questions. Before we get started, you should have the press release which went out today before market open. If you don't, you can find the release on the Company's website at PlugPower.com.

During the formal presentation and the question-and-answer portion of this teleconference we may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our 2007 milestones and growth plan. These statements are based on current expectations that are subject to certain assumptions, risks and uncertainties, many of which are difficult to predict and are beyond our control. These risks and uncertainties could cause actual results to differ materially from the expectations we describe in our forward-looking statements.

These risks and uncertainties include the risk that unit orders will not ship, be installed and convert to revenue; our ability to reduce the cost to manufacture and support our products; our ability to demonstrate the reliability of our products; market acceptance of our products; competition from traditional and alternative energy companies; our ability to establish strategic relationships with respect to product development, manufacturing, distribution and servicing of our products; and the other risks outlined in today's press release and in the reports we file with the Securities and Exchange Commission. We do not intend and undertake no duty to update such forward-looking statement.

Now I'd like to turn the call over to Dr. Roger Saillant to start the discussion.

Thank you, Cynthia. And thank you, everyone, for joining us here today. As you might imagine, we have quite a bit to cover. There are five items that I will address -- restructuring for success; the lessons learned in 2006 and what we will be doing differently going forward; the financial results for 2006; our 2007 milestones; and our strategy and outlook.

First, restructuring for success. Over the last six to seven months we have been developing plans to improve our operations. With the Smart Hydrogen investment, we were able to add senior experienced professionals to our team. Tom Hutchison, Vice President of Engineering; Joe Millington, Vice President of Human Resources and Allan Greenberg, Vice President of Sales. We needed to have the direct voice of these new leaders at the executive table; thus it became obvious that we had redundancy with separate President and CEO functions.

This, of course, resulted in Greg Silvestri's resignation. We are continuing to engage Greg and have retained him as a consultant to work on strategic projects critical to our success. He is an extremely talented individual who has made great contributions to Plug Power over the last seven and a half years. We have no doubt that he'll find himself in another challenging leadership role soon. We believe the new structure will help to advance our reference to accelerate installations, pursue strategic partnerships and acquisitions.

I want to be clear that Greg's and Jean's departures have no relation to each other. Jean's departure was unexpected; her reasons for leaving were personal and solely her decision. We respect that.

We announced yesterday the hiring of David Waldek as interim CFO. We believe David has the experience necessary to make continued improvements in our operations and be proactive in our Investor Relations effort. He also has the character and experience with startup organizations which will enable him to adapt well to our strong team environment. Dave will assist in our search for a permanent CFO and will help profile the best candidate for us and his depth of experience will allow us to take our time to find the best suited permanent replacement.

Now for the lessons learned in 2006. Our lessons learned and what we are going to do differently going forward will be reported next. We learned about customer behavior; how we tended to respond and, most importantly, what are the customers' real needs. Our assumptions regarding the timing of adoption and full-scale deployment were wrong. As a result, although we did have a decent book of orders in 2006, however, these orders did not translate into installations as quickly as we had planned. As a result, we are adjusting our expectations for 2007.

Let me start with customer behavior and its impact on orders and installations in 2006. We have about 85% of our units in backlog belonging to two key accounts. We had received an order from one of the customers for 133 units in quarter three 2005, started installations in the fourth quarter 2005 and then, due to a merger and resulting internal reorganization, they put installations on hold for almost a year. We have recently restarted the installation process for this customer.

With the initial 35 units designated for South Africa we found that the start-up time for getting the customer's and are installation infrastructure ready for challenges in remote regions created longer than anticipated installation times. Therefore additional follow-on shipments were delayed. Allan Greenberg, our Vice President of Sales, has taught us a lot about the customer sales cycle. The sweet spot for our current offering is providing mission critical backup power solutions where the impact of downtime for our client is significant.

For this market we have refined our understanding of what is necessary to ensure our clients' success. We have developed economic models which help clients quickly understand the value of our solution versus alternative. This enables us to quickly qualify and invest in those opportunities from which there is compelling value and likelihood for success. This segment is historically risk averse and fuel cells do not have the years of industry experience that traditional technologies we replace have.

While we continue to build upon our knowledge of our clients' operational and economic experience with our products, adoptions typically involve pilot testing, limited production, standardization, as well as other activities that are required for the installations to go smoothly. These times are variable and vary widely across customers globally. We are working with our partners and industry stakeholders to compress the time for planning, designing, implementation and maintenance of the client's environment.

Allan's objective is to increase the sales team's precision and focus. He is aggressively engaging large wireless carriers and wireless related infrastructure opportunities. He's made a number of changes in the sales organization to upgrade talent. He has made three replacements and has filled two of six new defined roles.

In addition, we've realized that customers' adoption support after installation cannot be sustained at the level we executed at in 2006. These costs included both repair costs and proactive support costs that we were bearing and is not in the price of the product. We have been committing resources for being on site during our customers' installations to facilitate learning and ensure customer satisfaction and gather valuable learning that comes with entering new territories and supporting different types of installations and equipment. We over-invested to facilitate our learning and ensure our clients' success during pilot. Our objective is to move rapidly up the learning curve so that we can significantly reduce these costs.

We did make some progress on addressing the cost and reliability of our product. We tightened our specifications and design drawings so that we could provide our suppliers a consistent expectation for performance, reduce their costs and likewise lower ours. This also led to some re-engineering of components that can be manufactured more efficiently and result in a better operating unit as well.

Now to the financials. I'm going to review our financials for the year ended December 31, 2006. Directionally, our financial results did not meet my expectations, particularly with regard to total revenue and the cost of product and service revenue. The total revenue for the year ended December 31, 2006 was $7.8 million compared with $13.5 million during the same period last year, reflecting the extension of our warranties to align with installations as well as a decrease in the level of contract work performed.

Research and development expenses were $41.6 million and $36.3 million for the years ended December 31, 2006 and 2005, respectively reflecting ongoing investments in the Company's current and future product initiatives, as well as a decreased level of R&D expense reimbursements under contract work.

General and administrative expenses were $12.3 million for the year ended December 31, 2006, an increase of $3.3 million compared to $9 million for the prior year. The increase is primarily a result of expenditures to expand the Company's global sales and marketing activities, particularly in Russia and South Africa; increase spending on consultants, travel and the filling of key strategic roles at the executive level.

Our net loss for the quarter ended December 31, 2006 was $13.3 million or $0.15 per share compared to $16.5 million or $0.19 per share for the same quarter in 2005. For the year ended December 31, 2006 the net loss was $50.3 million or $0.58 per share compared to $51.7 million or $0.66 per share for the same period in the prior year. The increases in R&D and G&A expenditures previously noted were offset by an increase in interest income of $6.1 million in 2006 as a result of investment returns from the cash infusion of $217 million for the sale of equity to Smart Hydrogen in June 2006.

Net cash used in operating activities for the quarter ended December 31, 2006 was $13.3 million compared to $9.8 million in 2005. Net cash used in operating activities for the year ended December 31, 2006 was $46.1 million compared to $39.9 million during the same period last year. As of December 31, 2006 the Company had $269.1 million in cash and marketable securities and $267 million in working capital.

Let's talk about this year and our milestones. For 2007 we have better aligned our milestones to revenue. As noted in the release, these milestones are --

Install 400 GenCore systems. Clearly we have the capacity to achieve this; what will remain important is the demand for these systems. At the current rate of installations we believe that achieving 400 GenCore installations in the year 2007 is clearly possible. Achieve a 50% reduction in GenCore support costs by the end of the fourth quarter; reduce GenCore manufacturing costs by 25%; expand into new fuel cell applications for strategic partnerships for acquisition; contain total net cash used in operating activities to $45 to $50 million.

By the end of 2007 we think we will have a high degree of market clarity as to where our products are best suited, be better staffed and trained to make a compelling value proposition sale as opposed to a technology sale; be farther along in determining options with hydrogen and the alternatives to it; and be better positioned for additional strategic initiatives to provide accelerated growth.

Our strategy is to focus on mission critical infrastructure where our fuel cell technology has a value proposition. Our strategy is first to deliver mission critical solutions to telecom customers and then identify other industries where fuel cells offer unique advantages. This strategy will help accelerate market adoption, drive high-volume production and reduce costs.

The use of the equity provided by Smart Hydrogen is critical to this strategy. That investment has already afforded us the opportunity to hire key executives and support an outside review of the industry and reaffirm our strategic approach. In the future it gives us the financial flexibility to support potential acquisitions that can expand the markets and applications for alternative fuel technologies.

We also are engaged in opportunities that could result in aggressively moving us into emerging economies where the demand for long run stationary power is growing faster than a traditional power structure can and in areas where a power structure does not already exist or may not ever be available. We have some very defining criteria for these efforts that include commitments from others and thereby placing their skin in the game.

Global sourcing and a low-cost offshore production are also on our mind. Both are still in early concept and discussion phases, but can move rapidly to implementation if the conditions are right. These efforts become possible as a result of Tom Hutchison's activity to stabilize the GenCore design.

That concludes my early remarks. I'll turn back to the operator for questions and answers -- for the question-and-answer session.

(OPERATOR INSTRUCTIONS). [Trey Cobb], Stephens Inc.

Good morning. Roger, in prior years you've given us guidance around GenCore orders and not the target installation. Why was it different this time and how should we be thinking about that going forward?

I think that's a good question. First I want to point out that we've made the change principally because the orders turned out to be so variable. Our customers have tended to want to place large orders in order to get the best price. And sometimes they've placed orders without understanding all the implications in installing the best use, siting and so forth. What that has done is it has tended to have us imply an event closer to revenue, and we really feel comfortable with today based on our experience. We feel that installation and by noting installation we are in fact moving much closer to a financial event and that ties closely to revenue.

Okay, and also kind of a follow-up. On GenCore orders, can we get some more detail around geographies, applications that you're seeing orders from?

Sure. What I'm going to do is I'm going to have Allan respond to that. Allan?

Our initial thrust in activity is in North America where we have traction with most of the major carriers; South America where the infrastructure is fragile and the temperatures are somewhat extreme we have significant traction; South Africa, the Middle East and Southern Europe are the major areas we're focusing our sales activity. We do have business development activity going on in India and in those regions, but those are right now more in examining the markets and the infrastructure required such as that.

Brad, do you have anything to add to that?

I would say Allan gave you good insight into where our current market activities are. Related to our current backlog at the end of the year, one-third of our backlog is in North America, and then the rest is in the remaining regions of the world.

Thanks, guys.

[Bert Chow], Simmons & Co.

Just a quick question -- kind of a follow-up on the potential markets that you're looking at. Looking at GenCore and your technology roadmap, can you kind of provide a little color maybe on -- I guess there's kind of -- you've been talking about extreme weather climates and the decision to be made to, A, kind of refine the current GenCore product and kind of expose and try to go after your current market segment; or maybe even what would be involved with coming up with a second generation GenCore unit and maybe trying to go after some different markets.

So if you could just provide maybe a little color and kind of what your decision-making process is looking at, I'd really appreciate it. And maybe even some preliminary CapEx of what it might cost for you to move that next generation of system.

I'm going to again give that to Allan.

I think we're becoming smarter as we work with our clients. Our first approach, as I think Roger alluded to, was looking at the economics and where the return on investment is. We originally thought that fragile infrastructure and climate was a critical issue; that is the case. But as we become more knowledgeable there are regulatory requirements as in the case of California. There are issues of putting our alternatives on buildings and high-density urban areas where the economics are compelling. There are areas where due to hurricanes and ice storms, etc., we're seeing applicability where we didn't initially envision that.

So in fact in North America where the grid is historically very reliable we're seeing a lot more activity than we had initially thought in engaging more deeper with conversations with our clients. So I think the market is broader. We're also looking at additional tangential markets that aren't just a carrier. There's a lot of wireless infrastructure in terms of state wireless networks, communication infrastructure and those similar economic concerns are there and we're moving aggressively to explore those markets and create industry proof points.

And Bert, I want to add that part of the reason that our costs have gone up this year overall, our cost of operations, is that in fact we are looking at customizing product for specific applications and opportunity. So what's happening is we're seeing a cost, an investment being made to anticipate where we see the new markets developing, just as Allan has pointed out.

Okay, great. And just one quick follow-up is that on those -- so would you say that this current GenCore system and unit with minor modifications to it, markets would be adequate and that you would kind of rule out, for the short-term at least, kind of going to that second generation? Not that the technology is necessarily there, but focusing on your -- refining what you're currently looking at and, as you said, spending the money to customize it to those individual applications versus a "let's create a new type of [vista] that we can go after a significantly different market".

I would say our experience is, in the markets we're targeting, that the capabilities of our product addresses a significant percentage of the market. We're also validating that by working more closely with the telephone equipment manufacturers to understand where they're going in their power requirements. So we're collaborating with them and looking at what the future needs are. We're also focusing on the voice of the customer to not only focus on the delighting customers today, but in looking three to five years what's the next generation of power requirements. So we're working more intimately with not only our clients but the supply chain to adapt our capabilities to meet the market realities.

Thanks for the color, guys. Have a great day.

(OPERATOR INSTRUCTIONS). Walter Nasdeo, Ardour Capital.

Good morning. I noticed again this year the bulk of your orders came in the fourth quarter. It seems it was that way last year again. What do you attribute that to?

Well, I think, Walter, that this has been a chronic question, as you know. There's generally -- in the past there has been the behavior that people have looked at their budget and toward the end of the year they felt that they could -- they had excess monies available and they could run a development project or test project. Now I think it was more an accident of being very heavily delayed by the merger and acquisition activity of a key customer who had to go out and survey sites. They had to readjust their thinking to the new organization and so forth, and it just happened that they emerged with a demand pull in the latter part of the year.

Okay. So what's the total order -- the total number of orders in the pipeline right now?

Allan, the total number of orders in the pipeline in terms of back -- you mean in backlog, right?

Not going forward. What you've got in the house that you've got to push out the door.

This is Brad Johnson. So related to our backlog at the end of the year we have 572 units in backlog.

Okay, and what have you -- how many have you installed year-to-date?

So far this year?

Yes, sir.

So far in 2007 actually we've had our best two months ever since we started shipping GenCores in late 2003. We have 27 right now through the first two months, and the activity is accelerating.

So there's 27 that have been installed and they're basically up and running at this point?

That's fully up and running in the first two months of the year, that's correct.

Okay. How long as the install process usually take?

The physical activity of installing a unit is actually very short, from the time that you actually start construction on a site to the time you turn it on can actually be measured in as little as a day. Most are a couple of days of activity. That's usually not the biggest delay we see. The biggest delay we usually see is related to project planning with the customers, especially when they're doing large rollouts where some of our customers are today. So the full project planning of going to multiple sites and multiple states and lining up their contractors, that's probably the significant timeline and where we probably had missed expectations. That's been longer than what we originally expected maybe a year ago.

Okay. And you're still by and large using cylinder delivered hydrogen at these sites?

That is correct.

And then just one more brief -- can you go into a little bit of detail when you say "stabilize the GenCore design" of what -- what technological issues are you fighting with right now?

Tom, do you want to answer that question?

I will. This is Tom Hutchison. We've going to work as an engineering team to really tie in all of the ambiguity and specifications. That's driven us to a very, very solid place in electronics, number one, and in stack performance, number two.

That means you're just making them better, that you're not fighting any performance or quality issues going back?

What we're doing is we are expanding our knowledge of real-life customer duty cycles, what they're really experiencing and solving those issues as they relate to electronics.

What's your stack life right now?

That's a proprietary thing that I'm not sure I can address.

Okay. Thank you very much. Appreciate it.

Richard Rambaldo, Pacific Growth Equities.

I was wondering if you guys could add some color as to what metrics you're using to evaluate potential acquisition targets with respect to geography and technology.

We're constantly looking, and have looked for a number of years, at ways to improve our reach in terms of applications for fuel cells. So what we're looking at, the first criteria is what is the shortest path to profitability. Will this particular acquisition shorten the path of profitability versus the path that we're currently on? That's the first criteria.

The second criteria is -- is there something complementary about an acquisition to what we are currently doing; i.e. one company may be very well developed in a particular application, but lack, for example, manufacturing expertise. Is there a combination of their needs and our needs relative to supply base?

In terms of geography, when we look at an acquisition -- and we've looked certainly globally -- we haven't found that that is a major barrier. Of course closer is better, but that hasn't been a major [source] factor for us yet.

Very good. Thank you.

(OPERATOR INSTRUCTIONS). George Largay, Dawson-Herman Capital.

Good morning, gentlemen. I had a couple questions. I was wondering if you could elaborate a little bit more as to what you're doing with Smart Hydrogen in Russia and what the outlook in Russia might be over the next say five years. Thank you.

Thank you for the question. Our view is that the relationship with Smart Hydrogen has three key elements. One is that it obviously opens a wide opportunity for market, but that means that we have to gain together a knowledge of a market where the infrastructure is sometimes absent or fragile.

And so, we have to understand that market together, and Smart Hydrogen is very determined and has been working very closely with us -- in fact, that's part of what our expense has been in 2006 is to learn how to understand their market, what our capabilities are from a technology perspective, and begin to build the relationships that actually lead to commercial sales. So market development is the first.

The second is across Russia there are a number of very strong technological institutions. And we are working with the Russian Academy of Sciences and various institutions inside of Russia to see -- in fact, we have active collaborations going on with a number of them on a relationship basis that we call statements of work where we're looking at technologies that could be, within the next 12 to 36 months, be placed into our products as either a feature or as a fundamental design change that would enhance its salability both inside of Russia or outside.

So the technological collaboration via Smart Hydrogen is very strong. And the third is in active presence inside of Russia there is a large research facility that is connected deeply to Smart Hydrogen, which offers the potential for beginning to manufacture in Russia, begin to evaluate supply based capability in Russia, as well as to prove out some of the designs that we're seeing in this technological search that we're doing currently. We're expecting to see -- we're expecting to give more and more detail about that over the coming months and years.

Thank you. Could I ask one other question? And that is, as far as your other customers, I know you've got a lot of development work going on with other major customers. Are there any other areas that you're close to -- commercialization or other inventions -- that might be helpful for us to know about?

Well, we have things that are going on within our company constantly looking at possibilities. But to say that we have an invention or a product that's near commercialization, right now we're very focused on GenCore and mission critical applications for the telecommunications market. So right now our major effort is to try to satisfy those needs as best we can.

We're open to other possibilities, but what it requires from our side is that we need a customer who's willing to put his skin in the game with us, as I said in my prepared remarks. Before we go and make a major commitment we would like to be very confident that there is a receiving customer that would justify that. And the confidence in my view really comes about how much investment are they willing to make themselves with us to develop that product.

Thank you.

If there are no more questions what I'd like to do is to wrap up and summarize what we think we're trying to communicate today. I want to thank you for being here today, and I just want to reinforce one more time our vision and strategy. I believe that forces are converging on a global basis that will help to propel the need and use of alternative energy sources. These driving forces simply are the need to reduce the dependency on fossil fuels, the need to reduce carbon dioxide emissions, and the continued growth of emerging markets and the world population.

Clean, reliable alternatives for on-site energy production could be regulated to increase the speed of adoption. Our goal is to be well-positioned should that occur and, if not, to successfully market our product to those who realize the benefits of on-site energy production which markets and applications where our products provide a compelling value proposition.

Strategically we believe we can achieve this by -- one, continuing the improvement of our GenCore operational performance by standardizing and tightening design and specifications, improving product reliability and increasing our sales success rate; two, accelerating opportunities to develop strategic partnerships to fund product advancement where there is the greatest demand pull such as long run, reformer based energy supply in regions that either lack a supporting power grid structure or the structure is insufficient to meet demand; and three, acquiring technologies and products that expand the markets and geographies we serve and are as advanced towards commercialization as the GenCore.

I look forward to talking with you again in the near future, and thank you very much for being with us.

Ladies and gentlemen, we thank you for your participation in today's conference. This does conclude the presentation, and you may now disconnect. Have a wonderful day.