普拉格能源 (PLUG) 2010 Q2 法說會逐字稿

Greetings and welcome to the Plug Power second-quarter 2010 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) As a reminder this conference is being recorded.

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

Good morning. Thank you for joining Plug Power to discuss our second-quarter results for 2010. Andy Marsh, CEO, and Gerry Anderson, CFO, will be on this call today.

This call will also be archived on our website at PlugPower.com in the investor section under presentations. 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 2010.

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 may cause our actual results to differ materially from the expectations in our forward-looking statements, including statements regarding the risk that unit orders will not ship, be installed, and/or convert to revenue in whole or in part; the cost and timing of developing our products and our ability to raise the necessary capital to fund such development cost; the ability to achieve the forecasted gross margin on the sale of our products; the actual net cash used for operating expenses may exceed the projected net cash for operating expenses; the cost and availability of fuel and fueling infrastructures for our products; market acceptance of our GenDrive system; our ability to establish and maintain relationships with third parties with respect to product development, manufacturing, distribution, and servicing, and the supply of key product components; the cost and availability of components and parts for our products; our ability to develop commercially viable products; our ability to reduce product and manufacturing cost; our ability to successfully expand our product lines; our ability to improve system reliability for GenDrive; competitive factors such as price competition and competition from other traditional and alternative energy companies; our ability to manufacture products on a large-scale commercial basis; our ability to protect our intellectual property; the cost of complying with current and future government regulations; and other risks and uncertainties discussed under Item 1A, Risk Factors, in our annual report on Form 10-K for the fiscal year ended December 31, 2009, filed with the Securities and Exchange Commission on March 16, 2010, and 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. Thank you for joining our call.

I would like to begin today's call with a discussion of the current state of the North American material handling fuel cell market. I will then highlight our second-quarter sales activities, operations, expense reduction, government initiatives, and strategic partnerships before turning the call over to Gerry Anderson.

In an increasing environmentally conscious society, companies worldwide are seeking more efficient and sustainable business practices. As a desire for alternative energy solutions grows, fuel cells will continue to play a critical role in the global movement to reduce dependence on carbon-based fuels. A leader in fuel cell integrations for products under 25 kilowatts, Plug Power is revolutionizing this industry with the onset of the first commercially viable market for fuel cells. With more than 660 material handling fuel cell products in the field, and over 1.5 million hours of run time, Plug Power's GenDrive product suite offers customers a cost-effective alternative power solution that increases productivity, lowers operating costs, and reduces carbon footprint.

Our long-standing strategic relationship with industry leaders such as the Raymond Corporation and Bauer Power System has forged the path to success with our key commercial accounts. Enjoying over 85% of the fuel cell market share in the material handling market, Plug Power's marquee customer base has grown to include Sysco, Walmart Canada, Wegmans, BMW, Coca-Cola Consolidated, FedEx Freight, GENCO, Central Grocers, Nestle Waters, Kimberly-Clark, Bridgestone, and United Natural Foods.

The strength of this customer base mirrors the strength of the GenDrive value proposition for today's $4 billion North American material handling market. By eliminating battery droop and battery changeout, our customers report productivity increases of 15% to 30% as operators move more power to [store and ship], trucks run longer at maximum speed, and the units are refueled in as little as 60 seconds at compact fueling stations.

Additionally, independent customer analyses demonstrate carbon emissions could be reduced by more than 25% annually for the entire facility, and greenhouse gas emissions could be reduced by up to 80% on-site for fork truck operations.

Customer success and strong improving value proposition having encouraged Plug Power to presently focus our business on the North American material handling fuel cell market, while continuing to solidify the strength of our supply chain and strategic partnerships. Looking forward, Plug Power will capitalize on this expertise as we seek international expansion of the material handling market opportunity in concert with our customers and partners.

I would like to now move into a discussion of Plug Power developments since our last conference call. My belief in the near-term possibilities for the material handling market grows every day, after attending such events as the Sysco grand opening and the United Natural Foods ribbon-cutting event. On June 17, Sysco celebrated the grand opening of their highly efficient distribution center in Houston, Texas, showcasing their fleet of 98 GenDrive power Raymond forklifts. Larry Pulliam, Executive Vice President Food Service Operations for Sysco commented -- Sysco is committed to energy and operational efficiency and constantly strives to find a greener way of doing business. We are proud to introduce our first installation without battery infrastructure for a pallet truck fleet and hope that this may lead to further conversions at other facilities.

Similarly, on August 4, 2010, United Natural Foods hosted a ribbon-cutting event at their 352,000 square foot distribution center in Sarasota, Florida. During the event, I had the opportunity hear David Matthews, VP of UNFI's Eastern region, describe the linkage between UNFI's sustainability efforts, their corporate mission to distribute natural foods, and how fuel cells bolster their company image.

Both the Sysco and United Natural Foods events illustrate that socially responsible companies are enjoying both the productivity increases and environmental value Plug Power's GenDrive product suite offers today.

I would like now to speak in more detail about our current sales activity. We are in negotiations with Sysco for multiple locations representing both greenfield and brownfield sales opportunity. If we are successful, this order will represent the first multisite deal with a single customer.

I would like to provide some benchmarks for measuring Plug Power's path to success. First, a deal with Sysco for multiple facilities will put us in a position to meet our 2010 shipment milestone of 1,100 units. With 100 distribution centers, Sysco continues to consider additional GenDrive orders for their greenfield sites, which are new constructions, and brownfield opportunities, which are distribution center conversions.

Second, Plug Power needs four to five new customers in the second half of 2010 to position us to reach our 2011 goals. Most importantly, by the second quarter of 2011, we must add another large count outside Sysco to have a viable opportunity to achieve our sales targets of 2,200 units in 2012.

Regarding future sales movement, our active funnel has more than 200 customers. In the past four months we have held trials with six customers, with six additional trials scheduled for the third quarter. These trials with these customers alone represent an opportunity to sell over 50,000 systems.

When viewing our customer set as a whole, the material handling business expects to range anywhere from 1,500 to 2,500 system orders this year. As discussed, this projection is based on the expectation we have with Sysco and with our expectation for an additional four to five new customer orders this year.

Plug Power has also pursued several government initiatives to complement our sales activity. Although neither the most recent Sysco order nor the Walmart Canada order required government support, to close the deal Plug Power coordinated efforts with both Congressman Tonko and Senator Schumer to augment fuel-cell tax credit. The current fuel cell tax credits.

On April 28 Congressman Tonko, a longtime advocate of alternative energies in New York's small business community, introduced legislation in the House that seeks to amend Section 30B of the Energy Policy Act of 2005, also known as the alternative motor vehicle credit. The proposed legislation expands the definition of fuel-cell vehicles to include fuel-cell power material handling vehicles. Following the introduction of this language in the House, Plug Power warmly welcomed both Congressman Tonko and Senator Schumer for a visit at the Company headquarters on June 2, where both gentlemen toured our manufacturing facility and spoke about the anticipated green job creation in the fuel cell manufacturing supply chain.

Shortly thereafter on July 19, Senators Schumer and Grassley introduced complementary legislation in the Senate. To quote Senator Schumer -- we have one of the world's preeminent manufacturers of fuel cell right here. But due to the arbitrary federal regulation, it is not able to compete on a level playing field. That has to change. Fuel cells save energy and help the environment regardless of whether they are attached to a car or a forklift. And they should be treated equally. By leveling the playing field we have the potential to create hundreds of jobs here in the capital region, but also at fuel cell part manufacturers all over the state.

Plug Power's work on this tax policy seeks to place fuel-cell tax incentives on par with other incentives in the energy industry set aside for oil, wind, and solar. Though we are closing deals without this legislation, with the support of the US government we believe that the market for fuel cell based products will accelerate and will benefit the nation's overall alternative energy strategy.

Moving to a discussion of our operation activity, on July 15 Plug Power and Bauer Power Systems announced that the two companies have extended their existing supply agreement effective immediately through 2014. Bauer will remain the exclusive supplier of fuel cell stack for Plug Power's full suite of GenDrive power units. In addition, Plug Power will become the exclusive system integrator for Bauer fuel cell stacks to solutions addressing the material handling market in North America. The previous agreement was due to expire December 31, 2010.

Bauer and Plug Power's technology has been integrated, tested, and improved over the lifetime of the GenDrive product to become the world's most reliable fuel cell power solution for the material handling industry. This mutual exclusivity portion positions Bauer and Plug Power as the industry leaders, committed to driving commercial activity and growth.

Moving forward, Plug Power and Bauer will continue to look for ways to expand this relationship as Plug Power expands its material handling business.

Regarding GenDrive shipment activity, year to date Plug Power has shipped 191 units with a backlog of 576 units as of June 30, 2010. Our current challenges entails rapidly closing several of the deals we have in our pipeline and are far along in our sales process.

Upon doing this, we then need to mobilize our supply chain and industrial gas partners and our manufacturing capacity for a robust rollout at customer sites in the fourth quarter of this year. As such, with the timely closing of some deals, Plug Power believes our GenDrive shipment milestone of 1,100 units set earlier this year is still achievable.

I would now like to turn to a discussion of Plug Power's efforts to reduce expenses. Plug Power has made tremendous strides in advancing the commercialization of fuel cell solutions for backup power, continuous power, and motor power applications. The fuel cell industry, like many new emerging industries, has been challenged with adoption rates and the unpredictable sales cycle associated with selling new game-changing technology.

Despite the long-term economic and environmental advantages, many customers have been cautious in making their decision to replace incumbent power technologies. In this economic climate, customers who still enjoy the flexibility to make widescale conversions to fuel-cell technology do so at a slow and cautious pace.

Accordingly, the commercialization of fuel cell technology has moved slower than anticipated, impacting several critical areas of the fuel cell industry, particularly supply chain growth and cost reduction.

On May 27 Plug Power announced its intention to consolidate its operations, centralizing all activity in its headquarters in Latham, New York. Upon completing this restructuring, which is expected to be done by year's end, the Company will have reduced its workforce by half, closing offices in India, British Columbia, Tennessee, and Ohio. Plug Power has refocused all business, technical, and sales activity solely on the commercialization of our GenDrive product line. In doing so, Plug Power selected the market where the value proposition and customer pool is strongest.

With the full implementation of the restructuring plan, Plug Power's operating expenses are expected to decrease by $12 million to $15 million annually, preserving necessary capital to accelerate market adoption in the material handling market. With one central location and the focus behind one successful market segment, Plug Power remains committed to a path to profitability with the shipment of 3,500 to 4,000 units in 2012.

I would like now to turn the call over to Gerry Anderson to discuss our performance metrics in greater detail.

Thank you, Andy, and good morning, everyone. Plug Power's second-quarter performance on orders and shipments is again testimony to the volatility and lumpiness the fuel cell industry experiences in trying to predict short-term results. Even so, as Andy has already noted, we remain committed to delivering on our GenDrive goals for the full year based on the number of prospects we have that are far along in the sales process.

GenDrive shipments for the quarter were 91 units, and year to date we are at 191 units compared to 186 for the comparable prior-year period. Our second-quarter shipments were impacted by delays in getting some components, primarily electronic boards and wiring harnesses, to complete unit builds. As such, our inventory levels have increased from the end of the first quarter by $3.4 million, as we have many builds underway and awaiting parts to complete the builds. Additionally, during the quarter, we had one large scheduled shipment delayed until the fourth quarter to accommodate a change order request from the customer.

In addition to the GenDrive orders, we shipped six GenCore units during the quarter to fulfill an open purchase order and clear our remaining GenCore backlog.

Total GenDrive backlog at the end of the quarter was 576 units, a decrease of 83 units from our quarter-one backlog based on eight new unit orders less 91 units shipped. The invoiceable value of the GenDrive backlog at the end of the quarter was $13.6 million.

With our restructuring plan announced on May 27, the Company determined that it will not directly pursue opportunities related to its GenSys business and is actively looking at alternative options related to such business and its associated intellectual property. Based on our decisions around our India GenSys business, we no longer expect to fulfill our shipment target of 1,000 GenSys units for the year; but we are maintaining our target of 1,100 GenDrive shipments for 2010.

In order accomplish this, we will need to close a few of the deals in our pipeline within the next few weeks and work through some long lead component sourcing issues to ensure we have timely availability of inventory. This in turn will allow us to properly balance our manufacturing capacity to complete all needed builds by year-end. We will also need to work closely with our gas partners to have fueling station assets available and ready for deployment at new customer sites.

Turning to operating results for the second quarter of 2010, total revenue was $3.1 million, a $117,000 or 4% decrease over the prior-year comparable quarter and was comprised of $2.3 million from products and services and $778,000 from research and development contracts.

The product and service revenue increase of $1 million over the prior year's second quarter is due primarily to our adoption of revenue recognition guidance under ASU 2009-13, whereby the Company now recognizes revenue from equipment sales upon delivery rather than as a single unit of accounting with other deliverables such as maintenance, which in the past has caused us to spread revenue recognition over the applicable service period. This change accounted for $800,000 of the $1 million total increase.

We would also note that the adoption of ASU 2009-13 is accounted for retrospectively to January 1, 2010, for Plug Power. Accordingly, $1.6 million of previously deferred revenue for shipments in quarter one has been retrospectively recorded to revenue in quarter one and is reflected in our year-to-date totals, which have been published in our press release today.

All shipments and customer deals booked prior to January 1, 2010, will continue to be accounted for under our previous revenue recognition method. Our deferred product revenue reported on our balance sheet at June 30, 2010, was $4.4 million, all of which we expect to recognize over the remaining contractual terms or as contingencies expire.

Included in the deferred balances is $1.4 million associated with shipments in the second quarter of this year for a deal that has a contract contingency that we expect to have satisfied within the next several weeks. Upon satisfaction of that contingency, the entire $1.4 million will be brought into income immediately.

Our revenue recognition policies as well as other accounting policies are more fully detailed in our filings with the SEC. We encourage you to review these documents for further explanations of our policies.

One last point we would like to make relative to our product and service revenue pertains to our previously stated guidance for the year. As we noted in the past, we expected the GenDrive and GenSys products to contribute on an equal basis to the mid $40 million to low $50 million revenue target we set for the year. Absent the GenSys contribution, we would expect our revenue target for 2010 to be roughly one-half of our previous guidance or in the low to mid $20 million range.

R&D contract revenue at $778,000 is a $1.2 million or 60% decline from the prior-year comparable quarter. As discussed in last quarter's call, we have three major R&D contract programs we are performing work on this year. But we expect the bulk of our efforts in 2010 and beyond to be focused on commercial sales activities and the resultant product and service revenue instead of R&D contract revenue. For the full year, we anticipate that R&D contract revenue will be in the $3 million to $4 million range.

Our total cost of revenue for the second quarter of 2010 was $6.2 million and was comprised of $4.5 million for product and service cost of revenue and $1.7 million for cost of R&D contract revenue. Product and service cost of revenue increased $2.8 million or 160% from the comparable prior-year quarter. This is attributable in large part to a 646% increase in units shipped, as we shipped only 13 GenCore units in quarter two of last year versus the 91 GenDrive and six GenCores in quarter two of 2010.

Our cost of revenue for R&D contracts decreased from the prior-year quarter by $1 million or 38%, which relates to the fewer number of contract deals we are working on. The three major programs we are performing work on are all 50-50 cost share arrangements, which means the programs are designed to pay $1 of revenue for every $2 in cost of R&D contract revenue.

In our operating expense categories, research and development expenses were $4.4 million for the quarter compared to $4 million for the prior-year comparable quarter. The $424,000 or 11% increase is largely due to our earlier efforts to ramp our GenSys business in India.

Our selling, general, and administrative expenses for the quarter were $10.5 million, an increase of $6 million or 137% from the prior year's second quarter. This is inclusive of the $6.4 million in one-time charges for the restructuring plan we announced on May 27, 2010. As Andy commented on earlier, the restructuring plan, once fully implemented, is expected to lower our operating expense run rate by $12 million to $15 million annually.

Our net loss for the quarter ended June 30, 2010, was $18.5 million or $0.14 per share on a basic and diluted basis. Weighted average shares outstanding for the quarter were 131.2 million.

Net cash used in operating activities for the quarter were $13.5 million, with an additional $829,000 used for capital equipment purchases. On June 30, 2010, the Company had $35.8 million in cash, cash equivalents, and available for sale securities; $2.3 million in restricted cash balances; and $33 million in working capital.

In relation to our previously announced milestone for 2010, which targeted operating cash used in the high $20 million range, we would now reset that target to be in the mid $30 million to low $40 million range. This increase in cash use is largely driven by the timing of shipments and working capital requirements to carry inventory and receivable balances, and the timing of our full implementation of the restructuring plan, and payment of the one-time charges.

In concluding I would also like to comment on the other two guidance milestones we established for this year -- gross margin percentage in the midteens and EBITDAS in the mid $20 million loss range. While we expect both to be below our previously stated targets, we are still evaluating the impact of our recent decisions and our current operating environment; and we are not prepared at this time to provide revised guidance for these measures.

We would now like to open the call to any questions.

(Operator Instructions) Steve Sanders, Stephens Inc.

Hi. This is the [Zach Larkin] on for Steve. Thanks for taking the call. Just first off, quick question on how to think about the R&D. Or sorry, about the restructuring expenses going forward.

Do you guys have a sense -- are they going to be in similar level, lower, for 3Q, 4Q? How should we think about that?

Well, I think, the restructuring charges -- again there may be some minor revisions but we think we have plugged everything that we expect to incur. As we go forward it is mostly payment on some of those remaining obligations. We still have some severance obligations we have to deal with. We have some settlement issues with vendors in our contract manufacturer in India, as well as some remaining lease obligations that we have for our facilities in Ohio, India, and British Columbia which we obviously expect to honor.

Okay, but we're thinking 50%, 20% of what was booked this quarter? Any sense on that? Or it's something you not want to disclose in that detail?

Are you asking in terms of actually writing the checks to pay for those restructuring charges?

I'm just trying to think -- we had a big hit this quarter, obviously. We have got a lot of them booked. With the flowthrough coming through in 3Q and 4Q, just trying to get a sense of how to model that going forward.

Yes, I would not expect that there will be any material adjustments to that restructuring charge. You may see some minor swings; but at this time we are not prepared to comment any further on it.

Great, okay. Then are you expecting the $10 million to $12 million in savings to come into effect then fully in 2011 from the restructuring, and then hit that level going forward?

Yes, and again, based on what our current run rate was, upon completing that restructuring we would expect to save $12 million to $15 million in annual operating expenses. And as Andy noted, we expect to have substantially all of the restructuring task completed by the end of the year.

Okay, great. Then on with the new accounting policies, are you expecting any revenue shifts or anything like that to occur in 3 Q? Or with the changes that were made in 2Q should we expect revenues to track pretty closely to shipments and everything going forward?

Yes, the good news there is now that we have switched to the new revenue recognition policy you should see better alignment of our revenue from sales and shipments and cost of goods sold. We still will have some deferred revenue rolling into the P&L each quarter based on the book of business that we have for shipments prior to 2010. But on our go-forward business we feel that it will be better alignment of our actual activities to our costs to generate those business opportunities.

Okay. Great. Thank you very much.

Stuart Bush, RBC Capital Markets.

Yes, hi, guys. Good morning. I would like some color on why you are sticking with this 1,100 GenDrive guidance shipment level? I mean, customer orders have been slow and you are saying that customers are cautious. And the economic conditions really don't seem to have changed that much since last quarter.

Last quarter you said you would expect to book 1,500 to 2,500 orders in the quarter. So what gives you the confidence that things have changed here and will really come together here in the next couple of weeks?

So, Stuart, I am on the verge of what I believe is the most significant deal ever done in the fuel cell industry. I wouldn't be calling out Sysco's name today if we did not think that was a real activity.

We are looking at five distribution centers. I have Letter of Intent for two of those five distribution centers. We're working through the final details. I am about to do an order with Sysco in North America at a competitive price that I think is a game-changer in the industry.

So, that is why I am excited about the 1,100 units this year and it's why that for the year we believe 1,500 to 2,500 orders are achievable.

Okay, so --?

Stuart, even this morning I wish I could've changed the script. I had a letter from Sysco Boston where they made their commitment. I had a letter from Sysco Front Royal in Virginia late yesterday where they made their commitment.

So this business is going to be made this way. Sysco this year will allow us to achieve the 2011 numbers.

We also need about four or five new deals to allow us to be in position for 2012 with other customers. We have 12 -- we have six trials complete, six going on. We also are talking to what I would call -- we have our list of 10 top customers. And one of those 10 top customers we need to do also another significant deal in the second quarter of 2012 to achieve our targets.

The bad economic times forced me to make a decision to focus on GenDrive only. So as I see, I still have the best GenSys product in the world. But this GenDrive market is real today.

I walked off the UNFI facility on Tuesday and I said to myself -- last year at this time I could have never gone anyplace in the world where there was a facility cut over completely to fuel cells. I walked the facility at UNFI; I walked the facility at Houston a couple weeks ago. And it is close to it.

I know that if I were you I would want to see the results. And when we get the orders, I think Gerry is quite honest and frank that we are working supply-chain issues. It is not going to -- the issue is going to be working the supply chain, in my belief, not working the sales opportunity.

I know this call -- you read the script and you think, boy, this is not a great call. I have got to tell you, this is the best call I have ever had because I see the market developing. I see the market happening.

And I have not felt -- I am sleeping much better the last three or four weeks than I have slept in a long time.

Okay, great. Can you give me some idea? Did you guys take the 199 GenSys systems out of backlog? And is there are any charges left to taking those out of backlog?

Stuart, that's correct. We will not be filling that order. They have been removed from the backlog.

Included in the restructuring charges of $6.4 million is our estimates of what we need to do to settle our vendor obligations and our contractor obligations in India. So we have tried to incorporate all of that.

In addition, there are some materials and components for GenSys, including some finished units that we still have that we will be using in a DOE program. And as we look to find an interested party to advance that technology, we may be able to sell some of that material.

Okay. Gerry, why were you able to qualify to change the revenue accounting treatment? I thought that it was required that you surpass a certain volume level in order to qualify that.

Actually, Stuart, the revenue guidance that came out under 2009-13, which dealt with the prior -- I don't want to get into too many details, but there is vendor-specific objective evidence that was required on these multiple deliverables.

The new ruling that is out there in working through with our external auditors, we're able to utilize some of our fair value expectations on the separate components of our deals, the maintenance, warranty and the equipment sales. So at this time, we have got agreement from our external accountants that we meet the requirements; and we were able to adopt that revenue recognition policy.

Okay. One last question. What is the contingency needed to satisfy that $1.4 million order in backlog?

Basically the contingency revolves around having all of the necessary elements of a hydrogen-based facility signed up and agreed to by the customer. That facility is up and running. There are some remaining issues that they were working on with the fueling station that they want to be comfortable with. Upon that, they will sign that, the release, and we will be on our way.

Okay. Thanks, guys.

(Operator Instructions) There are no further questions in the queue at this time. I would now like to turn the call back over to Andy Marsh for closing comments.

Thank you for your questions. Without a doubt, fuel cell technology will be part of the solutions to the overall global alternative energy strategy.

Plug Power is taking a giant step by commercializing the material handling fuel cell market -- the first viable market for fuel cell technology. Ask Sysco, Walmart Canada, BMW, Wegmans, and UNFI. Fuel cells are making a difference in distribution centers around North America today.

It is Plug Power's mission to ensure this technology thrives as our country builds a sustainable alternative energy future. Thank you, everyone.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.