普拉格能源 (PLUG) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second-quarter 2007 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.

(OPERATOR INSTRUCTIONS).

Now I would like to turn the call over to your initial host for today's conference, Mr.

Ben Greenberg, Senior Marketing Communications Specialist.

Please proceed, sir.

Good morning.

Welcome to Plug Power's 2007 second quarter review.

Participants on today's call include Dr.

Roger Saillant, President and Chief Executive Officer; Mark Sperry, Chief Marketing Officer; Gerry Anderson, Chief Financial Officer; Brad Johnson, Vice President of Operations; and Allan Greenberg, Vice President of Sales.

During today's call Roger will provide an overview of sales and installation activities for our GenCore backup power unit.

He will also briefly discuss the ongoing integration activities with respect to Cellex Power Products and General Hydrogen Corporation.

Gerry Anderson, our recently appointed CFO, will then provide details of Plug Power's second quarter financial results.

Roger will conclude with a discussion of where we stand against our 2007 milestones, and offer some additional thoughts on the direction of the Company, after which we will open the call for questions.

Before we begin, you should have the press release that went out today prior to market open.

If you don't, you can find the release on the Company's website at plugpower.com.

This conference call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to our 2007 milestones and statements regarding our growth plans.

These statements are based on current expectations that are subject to certain assumptions, risks and uncertainties, many of which are difficult to predict, are beyond our control and that may cause our actual results to differ materially from the expectations in our forward-looking statements.

These risks include, without limitation, the risk that possible benefits of strategic relationships do not materialize, the timing and quantity of orders for our GenCore product, our ability to develop commercially viable on-site energy products, the cost and timing of developing our products, market acceptance of our products, our ability to lower the cost of our products and demonstrate their reliability, and other risks and uncertainties discussed under "Item IA Risk Factors" in Plug Power's annual report on Form 10-K for the fiscal year ended December 31, 2006, filed with the Securities and Exchange Commission on March 16, 2007, and in the reports we file from time to time with the Securities and Exchange Commission.

Plug Power does not intend to, and undertakes no duty to, update any forward-looking statements as a result of new information or future events.

Now I will turn the call over to Roger to start the discussion.

Thank you, Ben, and welcome to everyone listening on the call.

We took a dramatic step forward along our strategic pathway in the second quarter of 2007.

We did this by adding GenDrive, our fuel cell based power solution for lift trucks, to our product portfolio.

But first, I will discuss the status of GenCore and then present our progress on GenDrive.

We made solid progress with our stationary, backup power fuel cell product, GenCore.

We installed 41 GenCore systems in the second quarter, bringing us to 104 for the first half of the year, more units than we installed for all of 2006.

It's appropriate for me to re-emphasize an important point that was made in last quarter's call.

We believe that as our customers follow through on their plans to integrate fuel cell technology into their networks, Plug Power will first see an increase in the rate of installations due to orders in backlog, followed by an increase in sales based on traction created by positive customer experience in the field.

It is also our view that the numbers we are sharing today, combined with promising developments in our sales pipeline, which I will touch on in a moment, support this belief.

The fuel cell industry is now witnessing a new type of intensity with customer interest on a global basis.

The feedback we're receiving from our largest telecommunications customers continues to be very positive.

We believe they are committed to improving network reliability through the integration of fuel cell backup power and that this commitment is driven by the enhanced reliability they have seen from our GenCore systems.

Some customers have seen investment paybacks of less than a year for GenCore.

Our sales team continues to foster strong relationships with our current customers and potential customers.

In the fourth quarter of 2006, the New York Power Authority, NYPA, ordered 24 GenCore systems to provide backup power to 22 public safety communication facilities throughout New York State.

Commenting on fuel cell technology, Timothy S.

Carey, NYPA's President and Chief Executive Officer, said, and I quote "There is no better use for advanced energy technologies than protecting public health and safety.

These fuel cell installations will keep state communications on-line when they are often needed the most, during power outages and other emergency situations." End quote.

Using GenCore to provide backup power to these critical communication sites is indicative of the confidence our customer has in this product.

The NYPA project also highlights our ability to drive from received orders through to manufacturing, shipment and installation in a timely manner.

Eighteen of these systems have already been installed with the final six scheduled for installation in August.

Earlier this week we received a contract to install 20 GenCore systems at six New Mexico National Guard sites with multiple configurations in AC backup power applications.

We expect an eight to 12 week turnaround from contract to installation of the 20 systems.

If this project is successful, 25 additional GenCore systems will be installed at New Mexico National Guard sites in 2008.

Due to the increased emphasis on energy security at our nation's military bases, we anticipate leveraging this program for a wider roll-out within the military.

These examples highlight why we are encouraged by the level of commitment and activity around the adoption of fuel cell technology.

Although we have more than doubled our installs year to date compared with last year, we are driving toward a faster pace of installations and orders in the second half of this year.

Now I am going to discuss progress to date on the integration of Cellex Power and General Hydrogen and their products into Plug Power.

We purchased Cellex Power and General Hydrogen in April and May, respectively.

Both companies are leaders in the development and commercialization of fuel cell systems for use in material handling operations.

This replacement technology for lead-acid batteries in electric lift truck fleets opens an estimated $1.5 billion market to us.

Fuel cells offer a compelling value proposition for operators of large-scale distribution centers, warehouses and manufacturing facilities.

This value proposition includes greater lift truck productivity, space released for commercial activity, full-shift availability of lift trucks and the elimination of disposal headaches and costs associated with lead-acid batteries.

Prior to acquisition by Plug Power, General Hydrogen primarily targeted Class 1 sit-down rider trucks; Cellex Power targeted Class 3 stand-up pallet trucks; and both companies were planning to pursue development activities targeted toward Class 2 stand-up reach trucks.

Via the acquisition of both companies and continued development, Plug Power's portfolio is expected to cover all three truck classes, 1, 2 and 3, under the brand name GenDrive.

This portfolio is expected to maximize customer value by allowing conversion of entire fleets to the fuel cell solution, eliminating the customer's need to maintain a battery support infrastructure.

Plug Power's integration of the two acquired companies is on schedule.

The Company has formed a cross-functional and cross-entity integration task force assigned to establish one team, one facility and one operation in Richmond, British Columbia, to conduct the engineering, sales, and customer operations work for GenDrive.

In parallel, Plug Power is moving GenDrive manufacturing to its facility in Latham, NY.

Although we have not set any public milestones for GenDrive to date, we are very encouraged by the results of the ongoing beta testing and early commercialization efforts.

Customer feedback has been encouraging, and we look forward to the initial manufacturing and delivery of GenDrive units to customers from our Latham facility later this year.

The market value proposition for GenDrive is very clear.

However, there is more to the story.

When we acquired Cellex Power and General Hydrogen, we acquired the know-how and systems engineering experience of two strong fuel cell companies.

The engineers of both companies and those of Plug Power have been actively engaged in comparing notes regarding design, system engineering, best practices, sourcing, and other knowledge to make Plug Power stronger.

We have already identified ways to increase our GenCore product offerings by the adaptation of designs from these acquisitions.

These new products will come faster and at lower costs than what was otherwise possible based on in-house processes alone.

I will now turn the call over to our newly appointed CFO, Gerry Anderson, to discuss Plug Power's second quarter financial results.

Gerry.

Thank you, Roger, and good morning, everyone.

I'm going to first discuss some of the metrics around our GenCore fuel cell systems.

During the second quarter of 2007, we shipped 62 GenCore systems compared with 37 during the second quarter of 2006.

In the trailing first quarter of this year, we shipped 41 GenCore systems, bringing our year to date total to 103 systems shipped.

As previously mentioned, we installed 41 GenCore systems during the second quarter of 2007 and this compares with 17 in the second quarter of 2006.

In the trailing first quarter, we installed 63 GenCore systems bringing the year to date total to 104 installs, which importantly relates to our stated milestone goal of 400 installations for the full year.

Our GenCore backlog stood at 489 systems on June 30, 2007, compared with 219 as of June 30, 2006, and 533 systems as of March 31, 2007.

Backlog had been building as customer installation plans slowed.

However, we are closely working with customers to accelerate their installations.

Turning to our Statement of Operations, please note that our 2007 second-quarter financials include the results of our newly acquired businesses, Cellex Power Products and General Hydrogen.

Total revenue for the second quarter was $4 million compared with $2.8 million during the second quarter of 2006.

The $1.2 million increase was the result of higher research and development contract revenue.

Our product and service revenue for the second quarter was $676,000, compared with $743,000 for the second quarter of 2006.

As we have previously discussed, we defer recognition of product and service revenue, and recognize revenue on a straight line basis over the service period, which ranges from 12 to 30 months.

The slightly lower revenue in the second quarter of this year reflects the timing of revenue recognition for previously shipped systems for units shipped and installed during the second quarter of 2007.

Our deferred product and service revenue at June 30th was $3.2 million, up from $2.8 million a year ago, and $2.8 million as of March 31, 2007, which is indicative of our improved shipment and installation totals year over year.

Substantially all of the deferred product and service revenue is expected to be recognized over the next 30 months.

Research and Development Contract revenue was $3.3 million for the second quarter compared with $2 million in the second quarter of 2006.

The largest contributor was the Department of Energy through three separate awards granting $8.6 million in research funds, most of which expect to benefit from in 2007.

Additionally, our program with Honda, in which we are jointly developing a fourth-generation Home Energy Station, was a major contributor.

Other contributing partners included the Department of Defense, New York State Energy Research and Development Authority, and the European Commission.

Deferred R&D contract revenue at June 30, 2007, was $400,000 compared with $1.2 million at June 30, 2006.

Our cost of product and service revenue represents the direct material cost for fuel cell systems shipped during the period, combined with the labor and materials associated with servicing all of the fuel cell systems under warranty.

Including the 41 GenCore fuel cell systems installed during the quarter, we supported 271 systems during the second quarter of 2007, and our cost of product and service revenue was $4.4 million, compared with $1.3 million during the second quarter of 2006.

The increase in the cost of product and service revenue primarily resulted from a $2 million charge related to certain expected service and warranty costs for existing fuel cell units in the field; materials and build costs for the greater number of units shipped and ongoing service costs on the larger installed base.

Our cost of research and development contract revenue, which represents the fully burdened cost of R&D contract activity, was $4.7 million during the second quarter of 2007 compared with $2.4 million last year.

The increase is directly related to the increased R&D contract work performed during the quarter.

Research and development expenses, costs incurred for internally funded R&D programs, were $8.8 million for the second quarter of 2007 compared with $10 million during the same quarter a year ago.

The net decrease in R&D expense is associated with the increased work on R&D contract revenue projects which more than offset additional R&D expense from the newly acquired companies.

General and administrative expenses were $5.4 million for the second quarter of 2007 compared with $3 million during the second quarter of 2006.

The increase related primarily to the general and administrative costs of the acquired companies plus increased marketing and sales activities.

Our net loss for the quarter ended June 30th was $16.7 million or $0.19 per share, compared with $13 million or $0.15 per share in the second quarter of 2006.

The $3.7 million increase over the comparable quarter includes $2.7 million related to the operating results of the acquired companies and the $2 million charge for cost of product and service revenue mentioned earlier in this call.

Weighted average shares outstanding were 86.7 million compared with 86 million shares during the same period last year.

Net cash used in operating activities of the combined companies for the second quarter was $14.6 million, inclusive of $1.8 million used to pay down liabilities of the acquired companies.

At June 30, 2007, the Company had $190.8 million in cash and marketable securities and $192.9 million in working capital.

During the quarter, the Company also used a net $45.4 million of cash for the acquisitions and another $600,000 for capital expenditures.

As we continue to integrate and combine our three companies, we have already made changes that will reduce cash requirements and we continue to seek out additional opportunities to manage our net cash burn while, at the same time, strengthening our investment in sales and marketing efforts to gain market traction.

Improvements in GenCore system design will not only reduce our per-unit manufacturing costs but will also help us achieve our service cost reduction targets.

Consolidation of GenDrive manufacturing into our Latham facilities will avoid significant commercialization ramp-up costs in our newly acquired companies and drive further production efficiencies as our Latham capacity becomes more fully utilized.

And finally, we continue to measurably reduce our internal R&D spend by focusing on contract revenue opportunities that align with, and help defray some of the costs of, R&D projects that are already underway.

At this point, I'll turn the call back over to Roger.

Thank you, Gerry.

I now will give a recap of where we stand with respect to our stated 2007 milestones.

We stated that our first milestone is to install 400 GenCore systems this year.

Our total GenCore installs for the first half of 2007 already exceeds our total for all of 2006.

We recognize that we are one-fourth of the way toward our goal halfway through the year and know that our activity typically increases in the second half of the year.

Accordingly, we believe that we can continue to increase the pace of orders, manufacturing, shipping and installation, and we are still aggressively pursuing our milestone of 400 installs by year end.

Our second milestone is to achieve 50% reduction in Plug Power's GenCore support costs by the end of the fourth quarter.

The work covered by the additional charge we have taken in the second quarter should enhance our ability to achieve this objective.

Third, we expect to reduce GenCore manufacturing costs by 25%.

We believe that we are well on our way to achieving this milestone.

We have already seen costs decrease by 17% and expect this trend to continue.

We also set a milestone to expand into new fuel cell applications through strategic partnerships or acquisitions.

As has been discussed, we reached this milestone in the second quarter with the acquisitions of Cellex Power Products and General Hydrogen.

We believe that the resulting diversification of our product lines further positions Plug Power as the leader in the development and commercialization of hydrogen fuel cell solutions.

Our final milestone, total net cash used in operating activities, is now projected to be $50 million to $55 million, versus the $45 million to $50 million originally stated, reflecting additional expenditures associated with the ongoing operations of the acquired companies.

I'm going to conclude the presentation portion of today's call by pointing to some recent public events, which underscore the re-emergence of fuel cells on the national agenda.

Earlier this month, President Bush toured GrafTech International Limited in Parma, Ohio.

GrafTech manufactures graphite material for the proton exchange membrane fuel cell power units manufactured for Class 3 lift trucks.

The President viewed a live demonstration of our GenDrive product on a lift truck.

Just two weeks later, Florida Governor Charlie Crist held the state's first-ever Climate Change Summit to which he invited California Governor Arnold Schwarzenegger.

A few days later Governor Crist announced that the People's House, the Governor's state-owned residence, had installed a Plug Power fuel cell system.

These events clearly demonstrate the high level of support for hydrogen fuel cell solutions specifically, and interest in promoting the hydrogen economy in general.

Support like this from the highest levels of government, combined with the compelling value propositions we offer with both GenCore and GenDrive, continues to inform our belief that we are on the right path.

June 27 marked the 10th anniversary of Plug Power.

We find ourselves 10 years down the road with two commercial product lines and a strong balance sheet to support our ongoing efforts.

This is a good indication of our ability to carry our success forward for many years to come.

Thank you, that concludes our prepared remarks.

We will now open the call for questions and answers.

(OPERATOR INSTRUCTIONS).

Steve Sanders, Stephens Inc.

I wanted to see if you could provide some additional detail on the service and warranty charge, just some specifics on the problem, how pervasive, if you can resolve the issues, whatever you can tell us?

Steve, this is Brad Johnson.

First I'd like to state that the charge really is the result of actions we plan to take in the future relating to upgrading certain parts of our technology and making certain retrofits to the systems in the field.

A lot of these changes that we've been making we are actually already shipping some of those changes in the units shipped today and we're doing that to ensure that we maintain our high availability that we've had with our critical customers.

As we previously mentioned, we're spending a significant amount of time with these units in the field with our critical customers to make sure we have high availability and really over ensure that.

We believe that this is important when we're launching new products with new technology.

This does have a cost, but it's also very effective.

With close to 300 systems in the field over a year we have identified some unique failure modes that we've seen in the field that we haven't seen here in the labs or in very early limited field trials.

So in order to maintain that high availability we are going to be upgrading those systems in the future in the next probably next two quarters and we expect that those upgrades will not only enhance our availability, but also reduce our future service cost because we'll begin to reduce these proactive on-site visits that have been very effective.

Some of the items that we've seen have related to -- they really run the gamut from electronics, hardware and software and controls.

They really cover a large path across the system, unique failure modes, some of them only show up in a very small percentage of the systems, like 10 or 15%, but we believe it's worth maintaining high availability to proactively upgrade all of those units so we're doing that.

We do have a few -- we do have a couple failures that are being experienced in a higher number of the systems and those are the things that we are going to retrofit in the very near future and have already made design changes.

These things relate to some design deficiencies that we identified with latitude after being out in the field on electronics; they relate to some of our manufacturing processes inside of our building that we're able to identify and place fixes in for; and others come from our supplier variability as they are starting producing new components and new technology, they're still working on refining their processes.

So these small items come from a number of places and there aren't significant issues related to availability.

We have very high availability with our units in the field.

We're identifying these things on proactive visits at key customers and we're taking this opportunity to ensure we maintain high availability in the future.

We've had a lot of significant run-time events around the world, South Africa, Mexico, here in -- Roger mentioned New York State.

We've had a lot of recent summer thunderstorms here where power has gone out and our units have been called to operate and they've been doing that because we've been able to maintain high availability and this really is to ensure we maintain that high availability going forward.

So the $2 million essentially covers the expected expense to retrofit the vast majority of units in the field, electronics controls, etc.?

Yes, we expect to -- that $2 million will go to cover the expense associated with the close to 300 systems we have in the field today.

We're going to go proactively, make sure that those units are operating with the latest components with the best reliability and technology.

And then I guess maybe a related question for Gerry.

Can you just update us on the thought process around changing the revenue recognition policy on the GenCore?

Is this something that we should be thinking about at the end of the year or is it still just too early to assess that?

I would say it's still too early.

Obviously we're still in the stage of gaining experience on where our (technical difficulty) real warranty liability is going forward.

So as we continue to evaluate that we will -- under current circumstances we will continue to defer our revenue and spread it out over the expected warranty period of the units.

Steve, I just want to point out -- this is Roger -- that we're not just putting out one standard GenCore unit, we're putting out many variations off of that so that one fundamental design may have five, six, seven related designs all of which have their own unique signature of both failure modes and performance requirements and are also located in different environments.

So it's not like it's a simple one product fits all.

Okay.

And that feeds into the complexity of how you design a meaningful warranty recognition program when you have small numbers aggregating maybe to several hundred units, but the small numbers themselves make it difficult to assign a warranty reserve.

Right, right.

Okay, and then maybe again for Gerry.

Can you provide us some direction on modeling for Cellex and General Hydrogen?

Are we thinking about a couple million a quarter of incremental revenues primarily on the R&D contract side plus $2 million to $5 million on the SG&A?

Just can you give us any additional color there?

We're still in the process of working on plans and projections for the remainder of this year.

We do have roughly $4 million of contract revenue with the Canadian government already locked in, but we are continuing to evaluate with our teammates in Canada what our numbers are going to look like for the rest of this year and going into 2008.

Okay.

And then the focus this year obviously looks to be on the installation side, you've got roughly 300 units due in the second half.

Can you talk a little bit about the number of projects and the geographies that will get you there?

In other words, do you have good visibility on that or are there still quite a few things that need to happen either on the order side or the release side to get there?

This is Allan Greenberg.

We have a very targeted sales strategy focused on specific regions and specific customers and that's where our focus has been and a lot of the installations have occurred around fulfilling those orders.

There's a strong interest in those countries that have successful pilots and are expanding the implementations.

So as those orders are fulfilled we expect new orders.

I am now building out the sales team, we're expanding our activities so we're starting to see orders in new accounts which we expect through successful implementations that those will expand as well.

The regions that we're formally focusing on are the North American regions, the South American region where there's strong interest, the EMEA area still is an important region for us and there's a lot of activity from a business development standpoint now in Asia and in Russia.

So we're pretty optimistic that the customers we've engaged continue to work with us.

We've targeted most of the major carriers in the markets that we've gone after and we see positive results in those field trials leading to more extensive implementations.

Okay.

Maybe a different way -- of the 300 expected in the second half roughly what percent will come out of existing backlog?

I'm going to ask Brad to address that, Steve.

If you want to look for the total of 400 installs comes from, if you want to think of it in round fractions, think of it as two-thirds will come from orders that we previously received and one-third will come from orders yet to be received, if you want to think about that.

And as far as geographies, I would say we're looking at key installations will be for the 400, South America will contribute, North America will contribute significantly.

We are expecting, as Allan mentioned, projects in South America, hopefully some new orders that are very close to coming in will also be installed this year in South America.

One area where in the backlog that's probably taken a little longer than we've expected is the Middle East related to some other contingencies related to air-conditioning that we've had.

We had some developments there recently where we expected that opportunity could pick up in the second half where we earlier had designed and delivered an air-conditioning solution that the customer required and tested it earlier this spring and the test was successful functionally, but they wanted some additional changes related to how the unit was designed to minimize the impact on their current infrastructure, their hub.

So we've made some of those design changes, have those prototypes in house and then are undergoing testing and we expect to put those at the customer in the Middle East in the very near future.

So with that second round of design changes there we expect that that will open up relief from backlog in the Middle East later this year.

Okay, thank you very much.

Pearce Hamond, Simmons & Co.

Int'l.

Good morning.

Based on the charge that you just went through with Steve, I was wondering if you could quantify on a percentage basis the availability of your units so that when they were called upon what percentage were able to run and how will this charge help you increase that?

Can you quantify that?

Yes, this is Brad Johnson.

I think there's a couple of things that we can talk about there.

One is the number of times that we've been called to operate and have not operated.

Based on the knowledge we have, which isn't 100% but a reasonably high percentage of the customer expectations that's really been limited to about two times that we can think of of the 270 units that we know of.

Another number that we can talk about is availability and we, as mentioned earlier, we spent a significant time at our customer sites with the units that have been out there and we've measured those -- the availability in the mid 90%.

We did a study based on last year that we put out at the beginning of this year that compared very favorably to the IEEE study on generators.

So we believe we're really competitive being in that mid to high 90 percentage availability with generators.

We haven't updated that for results through the first six months of this year, but based on just knowledge of what's happening I would say we're staying right in that range, there's no significant change on the availability.

I'd add that Allan Greenberg has seen with one specific customer, who we're expecting a rather significant order from, that their availability went from -- with their standard case it went from about 75 -- 70% to 99% waith the fuel cell solution.

Is that correct, Allan?

Yes, we're supporting a company in Latin America where the grid is extremely unreliable and we've been able to maintain through an eight-month pilots three-nines availability, so that's 99.9% uptime.

And their alternative technologies in this harsh environment were only able to provide between 40 and 97% uptime.

So this is a significant improvement in their performance at those sites.

Okay, great.

And if you could elaborate on the relationship with Tyco, how is that proceeding?

So the Tyco contract is up for renewal and we're working very closely with Tyco on renewing the contract.

We're working closely with them in certain customers in North America and they're working with us in Latin America.

So I think based on the adoption we're seeing and our renewed activity I brought in a channel organization to work with Tyco, we're seeing more activity and more interest.

And the timing for that renewal you think?

I'm not exactly sure when it is but it's sometime this summer.

But I think we're working together on the joint plan and I'm fairly optimistic that we'll continue to work together.

Great.

And just as clarification, one last question to what Steve was asking before.

So for R&D for modeling purposes we should think in terms of that 3 million type figure moving forward for the rest of this year per quarter -- R&D contract revenue?

We are expecting to have a good chunk of R&D contract revenue come in in the second half of the year.

So yes, I think you can kind of be consistent with what you've seen here, maybe a little bit lower.

Okay, thank you very much.

John Spatz, Citigroup.

Good morning, gentlemen.

Just a quick question on the National Guard deployment.

Is that a decentralized or centralized purchasing decision, i.e.

where was the sale made?

And perhaps a point or two on why New Mexico was selected.

I'm not sure that I know the exact answer to that question.

I think, Allan, do you have that?

This was a centralized decision made for New Mexico, but certainly interest in other National Guard facilities as a model that we're exploring rollouts to other areas.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS).

Walter Nasdeo, Ardour Capital.

Good morning.

I'd like to jump back over to the Cellex and General Hydrogen side for a moment if I can.

After you get all consolidated in Richmond what's your expectation for total employees up there?

Walter, this is Mark.

I would say right now there's full-time employees somewhere in the mid 70s.

We expect, depending on the product plans, that that may increase slightly.

That's going to be driven by a number of factors.

But primarily we're trying to figure out what's the most aggressive way we can get into the market with a complete product family.

We'll flex our organizational size off of that, but that's where we are currently.

Okay.

When you look at the two -- and I have to be honest with you, I only know General Hydrogen, I don't know Cellex as well.

When you look at the technologies and the way each company was developing what did you look at as the differentiator there between the two of them?

It really was the application space that they were targeting initially.

So Cellex, as we talked about, was coming at it from the pallet truck perspective, going after where the large fleets were deployed primarily in distribution center types of environments where you have large retail operations and have a back office that needed to move product from manufacturer through to their retail outlet stores.

So they were very focused on that environment which tends to be predominantly the Class 3 pallet trucks and some Class 2 reach trucks.

We found GH's strategy very complementary in that they were coming at it from the industrial marketplace or the manufacturing sector, if you will, and looking at the Class 1 sit down classic sort of fork truck that you imagine when you hear the word fork truck.

Automotive sectors, industrial sectors where large numbers of those trucks were deployed.

Again, they would have some number of Class 2 and Class 1 deployed, but for the most part they -- all three classes essentially.

But they were focused on the larger trucks.

And when we looked at putting the two companies together we really realized that we would very quickly sooner be able to get at all three classes of trucks.

So we were both looking at Class 2 as an enabler to their targeted segments, how they were going to get there was a bit different.

So they really are quite complementary and when we looked at the customer lists there was very little overlap which we also felt was intriguing from a perspective of the customers they were targeting initially.

(multiple speakers) expectation then is to start rolling these off the line?

Our current expectation is we will begin rolling the Class 3 trucks off the line here in Latham this year.

Okay, so do you have any indication as far as orders or have you established a backlog in this yet or anything like that?

Yes, we have around 30 machines that are currently in the field today and a backlog as of the end of the second quarter that was around 60.

And that's kind of a blend or is that just the Class 3s?

That's a blend.

And I would say just an expectation setting that we're working hard to be able to ship that backlog by the end of the year.

And just quick, what's Plug Power's now total employee headcount?

Our total employee headcount is about 380 worldwide.

Okay, thanks, guys.

Appreciate it.

Jeff Osborne, Thomas Weisel Partners.

Great.

good morning.

Just on the GH and Cellex side, can you just talk about ASP trends there and then also just any macro commentary about what you're seeing in terms of total units either for '07 or '08?

Yes, Jeff, what we're seeing in terms of pricing is that the deals are really probably all going to be on a negotiated basis, so the number of factors that go into the value proposition is actually pretty substantial, so the price points that can be achieved really are quite dependent on the application, the environment, how many trucks, what flavor of trucks are going on, it drives a number of things like service costs, obviously the upfront capital cost, but also the cost of hydrogen.

So it's very deal specific I would say.

Obviously the larger class trucks have a higher price point in terms of the upfront box than the smaller trucks.

Just to kind of give you some sense, think about it in the -- somewhere as low as maybe 12,000 to 15,000 at the very low-end and as high as 60,000 to 70,000 kind of in the portfolio when you think across the various classes.

But again, each of those is usually a multiple deal transaction where you're talking about multiple types of trucks, multiple units and each of those I expect are going to be negotiated.

Understood.

Is more than two-thirds of the 60 in backlog Class 1 from GH or is that kind of a rough way of looking at it?

The majority of the backlog actually is Class 3.

Majority is Class 3.

Okay, very good.

And just a few more questions.

On the $2 million charge in terms of the additional orders for GenCore, why wouldn't that customer just wait for you to fix your hardware, software or supplier problems that you're having in the field before proceeding?

There are two things that are operating here.

One is that there's an awful lot of examination of the product going on.

So people are curious and eager to try it and we don't want to slow that process down.

The second is that, to what Brad is saying, that our ultimate customer, most of these changes are actually invisible to the customer and our proactive engagement.

We have a lot of things going on.

The service people that we have in the field, we're trying to train them at the same time using our expertise to help them do this.

Our customers are learning with us shoulder to shoulder how best to apply this technology in their applications.

So our on-site proactive visits have a multitude of reasons in doing this.

And so we're staying very proactive, our customers are engaged with us and are knowledgeable and I'll ask Allan to add in.

Go ahead, Allan.

I'll let Brad comment.

Yes, this is Brad Johnson; I have one comment.

As Roger mentioned, most of these things will be invisible to our customers, they haven't seen it, they've seen very high availability when called upon, so that's there.

The other issue is for many of the changes that we're talking about we've actually built that into the product that's shipping today.

There really is only one future change that actually was driven for a cost reduction that will come later that will also be tagged to improving availability.

So a lot of the changes on electronics and controls and some of the other components are in the products that our shipping today.

We're now taking those components and going and putting them in the 270 units that are in the field.

So that's a key point I think that needs to be recognized.

And I think there's another element here is that though we have set very high standards for the performance of our system, our system offers the opportunity for higher reliability and performance than the traditional alternatives they seek.

So I think it's important that our clients recognize that there's maybe room for us to improve, but we provide greater predictability and reliability than the technologies that they're currently deploying.

Very good.

And then just the release mentions the 25% cost reduction plan for GenCore for the year.

Is that charge included in that figure or is this a onetime item?

Actually the 25% is related to our manufacturing cost and this is service cost that would not be included in that aspect.

Very good.

And then just can you quantify the reduction plans for R&D?

You mentioned in the prepared statement that you'd be reducing R&D moving forward.

Just how should we think about that line item?

Well, I think what we're looking at there is for the R&D that we have underway for the various projects we're continuing to look at partners who are interested in those initiatives and are contributing dollars to help defray some of that cost.

So in terms of our resources we're not looking to reduce our R&D resources but to get some revenue to offset some of what we're already spending.

So the expenditure amount would be kind of flattish through the back half of the year here?

That's correct depending on, again, as Mark mentioned, what we need to do to try to accelerate some of what we have going on with Cellex and GH.

So we may have some additional R&D resources we may want to add there to push that out.

Very good.

And then I may have missed it, but did you give a sense of the size of units for forklifts either this year or next in terms of the industry as a whole and what the growth projections are, just what you're seeing in terms of interactions there with potential customers?

No, you didn't miss it, Jeff, we didn't give that.

What I would tell you from an industry perspective, a couple of numbers to keep in mind.

It's about an installed base of 3 million electronic trucks across the three classes globally, annual shipments somewhere around 400,000.

The battery sales into those applications on both new trucks and retros is an annual market of about $1.5 billion.

So there's substantial market opportunity that we're chasing just to sort of frame that, the equivalent battery sold in the telecom application we're chasing is about $1.9 billion.

So they're both very substantial markets.

We haven't yet come through providing guidance in terms of what the actual penetration that we would be seeing.

I would tell you that our expectation is that the rollout will be phased in that there will be initial test periods of maybe one to five or six trucks followed by an initial deployment that would be 50 to 60 kind of range before you would go to a complete implementation in a distribution center or an operation.

To put it in context, you should think that there's 200 to 300 trucks running around at a typical distribution center or a large automotive manufacturing plant; it's measured in multiple hundreds in terms of a particular facility.

So again, just envision that there's an initial test and acclimation period you need to go through, then a first bite at the apple that wouldn't be a complete center on the way to a complete center or manufacturing plant implementation.

Very good.

I had met with GH about a year ago and I think they were saying the same thing.

So it doesn't sound like things have accelerated at all.

That's what I was just trying to get a sense of.

Thanks and good luck.

Gentlemen, at this time I show no further questions within the queue.

I would like to turn the call back over to Roger Saillant for the closing remarks.

Thank you all for your questions today.

I'd like to end today's call by leaving you with a few key points.

One, we have increased the pace of installs of our GenCore product.

This drives revenue and broadens customer experience with our product.

We set a milestone of 400 installs for the year and we continue to aggressively pursue that milestone.

Two, when Plug Power acquired Cellex Power and General Hydrogen we achieved one of our 2007 milestones by expanding into new fuel cell applications.

Applications which are highly interrelated from a basic technology sense with what we were already doing in the GenCore area.

We also took a major step forward by adding GenDrive as the second commercially viable product line to our portfolio.

By purchasing both companies, we expect to offer a complete mode of power solution to operators of large electric lift truck fleets.

Three, we are seeing increased focus on energy issues in general and commitment to hydrogen fuel cell technology specifically from the highest levels of government and within our target markets.

We believe this commitment will continue to strengthen over time and that Plug Power will benefit greatly as a clear leader in the fuel cell industry.

Ben?

Thank you again for joining us today.

I hope you are as excited as we are with the recent strides Plug Power has taken to remain a leading provider of clean reliable on-site energy solutions.

Again, we appreciate your time and interest in Plug Power.

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.