普拉格能源 (PLUG) 2009 Q2 法說會逐字稿

Greetings and welcome to the Plug Power's 2009 second-quarter earnings call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions)

It is now my pleasure to introduce your host, Ms. Cathy Yudzevich, Manager of Investor Relations for Plug Power, Incorporated. Thank you, Ms. Yudzevich; you may now begin.

Good morning. Thank you for joining Plug Power to discuss our 2009 second-quarter operational and financial results. Andy Marsh, CEO, and Gerry Anderson, CFO, will be on this call today. This call will be archived on our 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, expectations regarding revenues and product orders for 2009. These statements are based on current expectations that are subject to certain assumptions, risks, and uncertainties, any 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 timing and quantity of orders, shipments, and installations for our products; our ability to develop commercially viable energy products; the cost and timing of developing our products; market acceptance of our products; and our ability to lower the cost of our products and demonstrate their reliability. Other risks and uncertainties discussed under Item 1A, Risk Factors, in Plug Power's annual report on Form 10-K for the fiscal year ended on December 31, 2008, as filed with the SEC on March 16, 2009, and in the reports we file from time to time with the SEC. 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.

At this time it is my pleasure to turn this call over to Andy Marsh.

Thank you, Cathy. Good morning, everyone, and thank you for joining our call. Plug Power will forge a path to profitability by capitalizing on three distinct business opportunities -- the material handling market, the prime power market, and the residential market.

Combined, these market opportunities represent the pedestals of a viable, sustainable business. Individually, each business targets a market in which our fuel cell systems offer the customer the greatest value as a clean energy solution.

Two of these pedestals, the material handling business and the prime power business, are commercially viable today. Plug Power's final pedestal, the residential power business, remains three years from commercialization.

Today's call will begin with a discussion of these markets and our progress against our 2009 milestones. Gerry Anderson will then discuss our second-quarter financial results. Afterwards, we conclude today's call with a question and answer session and final comments.

I'd like to start today's call with a discussion of our prime power business. On May 28 WTTIL, the tower arm of Tata Teleservices, issued a purchase order for 200 GenSys systems. The total invoiceable value of this contract tops $7 million, making this arrangement the largest commercial contract in Plug Power's history.

60% of the revenue stream generated by this contract is comprised of product sales. The remaining 40% is service and maintenance. All GenSys systems will be delivered before March 31, 2010, and services will be provided for a five-year period. Importantly, Plug Power will be gross margin positive starting with the very first unit we ship.

Plug Power's relationship with Tata is as significant as the purchase order they issued. Representing 10% of the India telecom market, Tata has earned a reputation as a technology leader committed to sustainability. The initial anchor order sets the stage for Plug Power to continue building strong relationships within the Indian telecom community.

Plug Power's GenSys is the ideal energy solution for this market. With a payback time of less than two years, Plug Power's GenSys system replaces a diesel generator and provides primary power where grid power is unreliable or nonexistent. Our product is approximately twice as efficient as a traditional generator and reduces carbon dioxide emissions up to 90%.

Moreover, the rural buildout of the telecom market is relatively untapped, with significant growth opportunities forecasted in the coming year. 70% of the Indian population resides in rural areas lacking reliable grid power, but the India telecom market has only penetrated approximately 13% in this region. Accordingly, telecom towers are expected to grow in rural areas at a rate of 50,000 units per year, in part financially supported by India's Universal Service Obligation Fund, which assists in covering the cost of rural deployments.

In response to the magnitude of this business opportunity, Plug Power recently formed Plug Power Energy India Private Limited, an India entity offering our GenSys solutions. Plug Power India will leverage our core strengths in product development, sales and marketing, and project management, while outsourcing non-core activity.

Plug Power selected contract manufacturing expert, SFO Technologies, for assembly of our GenSys systems in India. As part of this collaboration, SFO will carry all product inventory and offer solutions for manufacturing, supply chain, and support. These arrangements permit Plug Power the flexibility to limit capital expenditures while engaging a high-quality resource.

Fuel and servicing will be outsourced to in-country service providers like Lineage, BrainPower, and HPCL. By eliminating the trans-Atlantic shipment of GenSys fuel cell systems, Plug Power India's in-country presence will reduce direct material costs by 57% by developing an Indian and Asian supply chain and by using Indian labor.

Direct material expenses will continue to decrease as Plug Power India grows our business. This decrease in material expense is also being leveraged to lower cost throughout our Company, especially in the material handling business.

Tata's commitment to our product also donates a critical milestone on Plug Power's path to securing 500 GenSys unit orders this year.

Supporting GenSys sales in India, Colonel Ramanand, the chief operating officer of WTTIL, stated -- Not only is this a green solution for telecom sites in India, but also addresses a need for continuous power, particularly at locations in-country where the power grid is not available. In addition to this, the cheaper cost of power enables us to differentiate our offering to the customers. I am excited at the prospect of installing these fuel cells in our network and look forward to increasing the numbers in the near future.

Plug Power also looks forward to these increased orders for our GenSys solution as we strive to make the prime power business a profitable enterprise. As stated earlier this year, we believe the prime power business will be profitable when we achieve sales of 2,000 units per year.

I'd like now to move on to a discussion of the material handling market. Year-to-date, Plug Power sold 55 units. During the third quarter, we expect to close significant deals with a number of food distributors and retailers.

Plug Power will deploy 35 class 1 units for FedEx Freight in Springfield, Missouri, in late September 2009 as FedEx converts their freight hub equipment from LPG power to fuel cell power. When moving away from LPG power, FedEx opted against traditional battery technologies and sought a clear energy solution that enhanced productivity while reducing overhead and operator downtime. FedEx's commitment to this program followed successful field trials in 2007 and 2008 at their Nashville, Tennessee, and Springfield, Missouri, facilities. FedEx operates approximately 500 freight hubs in North America with approximately 5,500 forklift trucks.

In upcoming months, Plug Power also expects a Fortune 100 company with over 100 distribution centers in North America to move forward with a new greenfield distribution center using GenDrive fuel-cell solutions to power their entire lift truck fleet. Having worked closely with Plug Power since 2001, field testing GenDrive units, this company is planning the startup of the greenfield distribution center in the first quarter 2010.

Although new lift truck sales have slowed by more than 40%, GenDrive's sales opportunities for existing lift truck fleets remains strong. Plug Power continues to target large, high throughput grocery and food distribution customers whose businesses have been less affected by the economic downturn.

Class 2 development plays a key role as we target this high throughput market. Customers who compete in high throughput food and retail segments often design distribution centers with the class 2 product in mind. Plug Power's ability to deliver class 1, 2, and 3 offer these customers a complete energy solution. Accordingly, availability of the class 2 product will significantly expand our available market.

Plug Power will secure 500 GenDrive unit orders during the remainder of the year, which will have positive gross margins. As stated earlier this year, Plug Power's material handling business will be profitable once we reach sales of 4,000 to 5,000 units per year.

Finally, I'd like to turn to the residential power and Plug Power's combined heat and power system. As the cost of energy rises, the need to reduce greenhouse gas emissions become more urgent, and the need for clean, high-efficiency distributed generation becomes increasingly critical, by replacing a traditional heating system with Plug Power's residential GenSys Blue system customers can double their home energy efficiency.

In addition to Plug Power's investment, federal and state governments mark their continuing commitment to GenSys Blue projects by funding the transfer of this technology from the laboratory into several real-world residential and light commercial applications. This year, Plug Power submitted federal and state proposals seeking more than $40 million to fund GenSys Blue market transformation and development.

Plug Power also engaged investment banker Stephens Inc. to explore additional funding opportunities for this market.

I would now like to address the progress we've made against each of our 2009 milestones. First, Plug Power has received 257 units year-to-date against our 1,000 unit order milestone.

Second, Plug Power spent $21.3 million in net operating cash to date, against our net cash milestone of $38 million to $42 million for the full year. This quarter's cash burn rate of $8.5 million reflects the positive financial impact of the 2008 restructurings.

Third, Plug Power is on target to release the GenDrive class 2 product in the fourth quarter, meeting our third milestone.

Finally, Plug Power remains committed to announcing a path and time to profitability in the fourth quarter during our next conference call. At this point, I'd like to turn it over to Gerry Anderson for a discussion of our second-quarter financial results.

Thank you, Andy, and good morning, everyone. As Andy as already noted, during the quarter we had our first substantial order of GenSys product to a commercial customer, totaling 200 units. Additionally, we booked 55 unit orders for GenDrive systems, bringing our second-quarter order total to 255 units.

While year to date we are at 257 unit orders versus our stated goal of 1,000, we would remind everyone that we do expect wide fluctuations in our bookings from quarter-to-quarter. With the opportunities that we presently have in our sales pipeline, we remain confident in our ability to achieve our stated order milestone for the year.

Shipments under product and service sales activity for the second quarter were light at 13 units, all of which were GenCorp backup power systems. Shipments for our material handling products have been impacted by a combination of lead times in getting hydrogen fueling station assets in place, which in some instances can take six months, and the time frames to finalize all aspects of our contracts with customers where government stimulus funding is involved.

Our backlog at the end of the quarter was 526 units, consisting of 115 GenCore, 211 GenDrive, and 200 GenSys systems with an estimated invoiceable value of $13.3 million.

Turning to our statement of operations, total revenue for the second quarter was $3.2 million -- $1.3 million from product and service sales, and $1.9 million from research and development contracts.

Products and service revenue is up $155,000 or 14% from the prior year comparable quarter, resulting from a combination of the larger installed base over which we recognize revenue, and the longer contracts that we typically have for motive power customers, which in effect stretches out our revenue recognition over longer periods.

As noted in prior calls, due to our development stage status, we defer recognition of product and service revenue and instead recognize revenue on a straight-line basis over the service period of each sold system.

At June 30, our deferred product revenue was $3.8 million, a $1.6 million decrease over our 2008 year-end total. The decrease results from the wind-down of many of our older GenCore deals as they come to completion of the revenue recognition cycle under the original contracts.

By way of comparison our typical GenCore deal had a two-year contract over which revenue was deferred; and a typical GenDrive deal runs from five to eight years.

At the end of the quarter, motive power contracts account for approximately 53% of the remaining deferred revenue balances. We expect to recognize the remaining deferred balances over future periods as the service contracts on the associated shipments are fulfilled.

Our second quarter 10-Q will be released on or before August 10 and will provide further explanation of our revenue recognition policies as a development stage company. We encourage you to review that document once it is filed with the SEC.

R&D contract revenue at $1.9 million represents a $1.8 million decline from the prior year's second quarter. We continue to expect our full-year R&D contract revenue to be in the range of $8 million to $9 million.

Delays in awards from the US Department of Energy, as we have previously discussed, got us off to a bit of a slow start for the year; but we are actively beginning work on two new DOE programs that will begin to contribute revenue to Plug in the third quarter. And we expect to earn more than $6 million of revenue over the lives of these new contracts.

Our total cost of revenue for the second quarter of 2009 was $4.5 million and was comprised of $1.8 million for product and service revenue and $2.7 million for R&D contract revenue.

Products and service cost of revenue is down $1.1 million from the prior year's second quarter largely due to 79 fewer unit shipments this year than in last year's comparable quarter. The quarter did include an unfavorable swing of about $500,000 from the first quarter of this year due primarily to adjustments for obsolete inventory.

Our cost of revenue for R&D contracts, comprised of materials, labor, and overhead, represents 141% of R&D contract revenues for the quarter. Cost as a percentage of revenue was favorably impacted by completion of work on a few non-cost-share and low-cost-share programs. Based on the 50-50 cost share nature of the new DOE programs that we have begun work on, we do expect cost as a percentage of revenue to track higher as we complete our fiscal year.

Research and development expenses costs incurred for internally funded R&D programs were $4 million for the second quarter of 2009, down from $8.9 million in the second quarter of 2008. This decreased run rate is largely the result of the two restructurings completed in 2008.

Additionally, on April 1, 2009, Plug Power further reduced R&D expenses by completing a strategic relationship with HyGear B.V., a Dutch hydrogen equipment provider, which effectively transferred certain assets and our Holland-based employees to HyGear, while entering into a service agreement for ongoing product support, technology development, and testing programs.

We do expect a modest increase in R&D spend run rate in future quarters as we focus on our GenSys opportunity in India. The $5 million increase in our operating cash use milestone discussed in last quarter's call addresses this expectation.

Selling, general, and administrative expenses were $4.4 million for the second quarter of 2009, representing a $4 million decrease over the comparable prior-year quarter. Again, Plug Power is benefiting from the effects of the 2008 restructurings implemented to achieve sustainable reductions in our general and administrative expense functions. Like R&D spend, we also expect modest uptick in SG&A spend in support of our India initiative as we move forward.

Our net loss for the quarter ended June 30 was $10.3 million or $0.08 per share on a basic and diluted basis. Weighted average shares outstanding were 129 million for the quarter.

Net cash used in operating activities for the quarter was $8.5 million, our lowest quarterly operating cash consumption in the last 18 quarters. On June 30, 2009, the Company had $80 million in cash, cash equivalents, and available-for-sale securities, and $72.9 million in working capital.

At this time, we would now like to open the call to any questions.

(Operator Instructions) Trey Cobb, Stephens Inc.

Good morning. First, Andy, regarding your confidence in 2009 sales projections and specifically GenDrive orders, you mentioned ongoing negotiations with several major (technical difficulty). Can you give us a sense of the size and the timing of these orders, the breakdown between class 1 and class 3?

Sure. I would expect, Trey, that the majority of the orders will be for class 2 and class 3 products, fundamentally because the food industry and food distribution markets have been less impacted by the economic downturn, and those markets are still spending money and growing.

The orders themselves, to achieve the 500 target for the year, I would expect three to four significant orders, and about half of them coming in the third quarter.

I would also say, Trey, what has been one of the challenges, and I think Gerry referenced it during his discussion, is that the certainly the government tax credits, rebates, and other government programs have been very helpful to the Company, and we are appreciative of the support. But items such as the rules for the tax credit and rebate were just recently issued by the Department of Treasury on July 9; and some of that has caused a slowdown in our ability to close the deals a bit quicker.

We expect that we're over that and that by the end of this quarter, I suspect we will have approximately half of our delta close for our unit orders for the year; and we will complete the rest in the fourth quarter. We're fairly -- I think we're seeing very, very good traction.

I don't know if all the time that I am so clear about how important the class 2 product is for Plug Power. For us to be successful, that our value proposition is strongest when a customer can complete -- can cut over his entire distribution center to hydrogen. Without the class 2 products, many customers are reluctant to move and cut their entire facilities over, because they recognize the payback time is greatest when they can eliminate all their electrical charging equipment.

I was at Central Grocers last week where there were 140 fuel cell power forklift trucks operating. And almost every operator and every manager I talked to in the facility asked me, when could they receive their class 2 product? So that is really critical, really for us to achieving our 4,000 to 5,000 units required to make this a profitable business.

That was very helpful. Thank you for that.

You're welcome, Trey.

Then, as I guess as a follow-on for Andy or for Gerry, could you kind of characterize what percentage of these potential customers are interested in the lease versus buy? Is it something that would be similar to Central Grocers? Or are they more interested in purchasing the equipment?

I'd like to highlight one item, which I think is probably somewhat confusing. It is that Plug Power has no intention of being the lease holder in future deals.

There were some unusual circumstances with Central Grocers where we took on that role. But in no discussions or negotiations we have going on at the moment will Plug Power be holding the lease.

I would expect our customers will use a combination of leasing and purchasing the equipment. When I look at their intentions, I would say that about 60%, 65% of the time they will be purchasing the equipment; and about 35% of the times they will be working lease arrangements very much like they do with forklift trucks today.

But I recognized on the last call in the first-quarter earnings individuals were confused by our intentions. I really want to make sure it's clear to everyone we are not in the leasing business.

Okay, great. Then I guess lastly, just moving to India and the recent order that you receive there, how should we be thinking about the remaining 300 units that are under that LOI that you mentioned on the last call? Does this look like a late 2009, early 2010 event? Or is this something you still feel good about coming in the second half of this year?

I think a portion of the remainder of the 500 will happen in the second half of the year as we come online with production in India. We have been engaging in significant negotiations with a number of other India service providers to also provide systems to complete the 500 targeted orders for the year.

Great. Thanks, guys.

I think also, Trey, I would like to highlight. I hope that during the call it came through clearly that my intentions in India are selling and marketing our products. While every other activity we're really working with partners and outsourcing that activity, and in India, we've cut a wonderful deal with our contract manufacturer where we're not carrying the inventory. And I think that's very important to our balance sheet.

Great. Thank you for taking my questions.

[Julie Coutu], Simmons & Company.

Hi, good morning. Just a quick question going back to the Central Grocers transaction. Just wanted to doublecheck if you're still planning to hopefully get that ITC grant, assuming the Treasury begins accepting applications for that here shortly. I know last quarter you expected to recognize that in Q3.

That's correct, Julie. Right now, where it stands the Treasury will begin accepting applications August 1. We are completing our paperwork to get that application in, and our understanding is that approximately 60 days after receipt of the application you will get the check.

So assuming everything goes smoothly we should hopefully have it right towards the end of the third quarter or at latest early fourth quarter.

Okay, great, and one last question. Just wondering if you could talk a bit about how you see Q3 and Q4 trending in terms of your cash burn guidance, if you see anything in particular in either quarter to cause it to vary greatly from what we saw this past quarter in Q2.

Julie, I think first of all we did a very good job of being disciplined with the cash burn this quarter. I would stick to what we have said in our guidance, that we expect to be between $38 million and $42 million total for the year.

So if you look at where we are year-to-date at slightly over $21 million, that is about a $17 million to $20 million burn roughly that we expect over the latter half of the year.

Okay, great. Thank you very much.

Meghan Moreland, Ardour Capital.

Good morning. I was wondering if you could give me some kind of idea of what the turnaround time is going to be on the product backlog. Also, where do we stand with the Central Grocers shipments? I know at the end of Q1 120 units had been shipped. I think you mentioned just now that 140 units are up and running there.

Are the remainder of the units already there and just waiting to go into use? Also I'm assuming the remainder of the units are also going to be leased.

Meghan, the 140 units -- there were 140 units. I believed all were shipped in the first quarter. Is that correct, Gerry?

That's correct.

So there were 140 units which were shipped in the first quarter and all are installed. We have 80 class 2 units which we're scheduling to ship in the first-quarter 2010; and they will also be the same arrangement from a financial standpoint as the class 3 units that were shipped.

I see. The turnaround time on the remainder of the backlog, is that approximately a year? Could it --?

Sure. I would say, Meghan, the 200 units, as I mentioned, for WTTIL will be shipped by March 31, 2010, as I mentioned during the call. The remainder of backlog for the GenDrive units will be shipped mostly by July -- June of 2010.

With respect to the GenCore units, we would expect that over the next year and a half, two years, for those units to be shipped. They are part of an IT -- they're part of the IFC funded activity in South Africa, and we're seeing that sales of somewhere between 10 to 25 units a quarter for those products.

Okay, great. Thanks.

Thank you. There are no further questions at this time. I would like to turn --

I'd actually like to address one more, because I actually during this call received a question on my e-mail. So I'd like to address that.

During my discussion of the residential market, I mentioned that we've hired Stephens Inc. to look at additional funding for that business. We are not looking for investment today in Plug Power. We view that the residential market -- that one of the options is to spin the residential product line outside of Plug, though Plug would still remain a significant owner in that activity.

When we look at our business and our path to profitability, finding a way to fund that business adequately is one of our challenges. So that we believe that spinning that off independently but retaining an ownership position would be in the best long-term interests of our shareholders.

So I hope that clarifies that statement that I made previously.

Thank you. (Operator Instructions) There are no further questions at this time. I'd like to time the floor back over to Andy Marsh for any additional closing comments you may have.

Thank you. Plug Power is a company delivering clean energy solutions. In the past few months we have formed Plug Power India to manage in-country GenSys sales. We are making great strides in securing large targeted customers for our expanding GenDrive product portfolio. And we continue to seek funding opportunities to fully capitalize the strength and value of our residential solutions.

With continued commitment to the three pedestals of our business, Plug Power is poised to drive towards profitability. I look forward to our next call to outline in detail that path to profitability. Thank you, everyone.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time, and we thank you for your participation. Have a wonderful day.