普拉格能源 (PLUG) 2011 Q3 法說會逐字稿

Greetings, and welcome to the Plug Power's third quarter financial results conference 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 third quarter results for 2011. Andy Marsh, CEO, and Gerry Anderson, CFO, will be on this call today. This call will 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 2011. These statements are based on current expectations that are subject to certain assumptions, risks, and uncertainties, any of which are difficult to predict or beyond our control and that may cause our actual result to differ materially from the expectations in our forward-looking statements. We encourage our listeners to refer our SEC filings for a complete recital of the Safe Harbor statement, as well as other risks and uncertainties discussed under item 1-A, risk factors, in our annual report on form 10-K for the fiscal year ended December 31st, 2010, and filed with the Securities and Exchange Commission on March 31st, 2011. 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 the call over to Andy Marsh.

Thank you, Cathy. Good morning, everyone, and thank you for joining our call. The upcoming fourth quarter is critical engaging the short and mid-term success for Plug Power. We will ship over 1,000 units this quarter, and we will be introducing into manufacturing two platforms that dramatically changes our product cost, while simultaneously improving performance. Additionally, we are forecasting up to 1,000 units in orders.

In the fourth quarter, the results will show Plug Power breaking records for units shipped by a factor of four, and for the first time in history having a positive gross margin quarter. I believe investors should be monitoring the fourth quarter as a precursor of our future.

Now I'd like to move into a more detailed discussion of our sales traction and our fourth quarter execution plan. Year-to-date, Plug Power has received purchase orders for 1,460 GenDrive systems, and plan to receive orders for another 1,000 units by year's end. By way of comparison, Plug Power received year-to-date orders for 104 systems at the close of the third quarter in 2010. This year-to-year comparison demonstrates that Plug has already increased order volume by 14 times.

Our corporate customer accounts have significantly grown as well. This past quarter Procter and Gamble joined the ranks of Wal-Mart, Coca-Cola, and Sysco Foods as a repeat marquee customer embracing the benefits of Plug Power's fuel cell solutions.

Orders received in the third quarter include Wal-Mart Cornwall with 155 units, Coke San Leandro with 19 units, P&G Alexandria with 45 units, P&G Oxnard 49 units, P&G Greensborough with 129 units, Wegmans with 75 units, and follow-on orders were also received from our present customer base as part of the expected growth of their fleets.

Taking a look at some of the corporate count opportunities, P&G is a new significant customer in the third quarter. P&G operates over 450 manufacturing and distribution centers. P&G chose Plug Power's fuel cells to power their fleets in the three facilities to reduce labor costs and eliminate their battery [room], and reduce their [corporate] emissions. The three facilities are all targeted to be converted in the fourth quarter.

Another key customer for Plug Power is Sysco Foods, the global leader in industrial food distribution. Sysco has been a corporate customer since 2009. GenDrive fleets currently operate Sysco sites in Houston, Philadelphia, and Royal, Virginia. Sysco San Antonio site is deploying units in the fourth quarter. Additionally, orders have been placed at Sysco sites in Los Angeles, Riverside, Boston, and Long Island. With a total fleet size of 12,000 units, Plug Power is targeting a long-term goal to convert or install GenDrive systems at seven to 10 Sysco sites per year.

I'd now like to turn to a discussion of Plug Powers fourth quarter execution strategy. Plug Power had set a shipping schedule in the fourth quarter to meet its annual targets of shipping 1,600 systems. Shippings in the fourth quarter are scheduled for CVS, three Sysco sites, Wenco, Coke San Leandro, one new Wal-Mart site, three P&G sites, Newark Farm Markets, Wegmans, and our first site with Kroger, the second largest food retailer in the United States. We will also be deploying our first units in (inaudible) key factory in Europe.

Turning to a discussion of gross margins in the fourth quarter, almost 65% of product and service revenue for the year will be realized in the fourth quarter. In the quarter, Plug Power will also begin to see the positive margin impacts of the lower cost platforms. Presently, we are shipping a mixture of new platforms and old platforms units, as we reduce our inventories of parties for the older platform designs.

Based upon the mix of products we will ship in quarter four, we expect our gross margins to be in the range of 5% to 10% of product and service revenues. As discussed earlier, Plug Power's positive gross margin growth will be largely attributed to the introduction of our new platforms that use 30% fewer components and requires one-third the labor time to assemble.

Approximately 47% of 2011 -- fourth quarter 2011 shipments will incorporate the new platform design. If Plug Power was shipping all new platforms in the fourth quarter of 2011, the gross margin dollars would be enhanced by approximately $2 million to $2.5 million. As I mentioned earlier, the fourth quarter is the precursor of our future performance. Investors will be able to gauge the midterm profitability of Plug Power and our sales traction clearly by our fourth quarter results.

I'd now like to turn the call over to Gerry Anderson for a detailed discussion of our third quarter financials.

Thank you, Andy, and good morning, everyone. As we closed out the third quarter of 2011, it has been slightly over one year since Plug Power has had commercial availability of a full product set, allowing customers to fully convert from battery-based operations to the efficiency of GenDrive fuel cells. We now have over 1,500 units running in commercial applications, at 24 sites, with customers like Sysco Foods, Wal-Mart, Coca-Cola, and Bridgestone, using our products at multiple operating sites. And at the end of the quarter, we had another 1,535 units worth about $30 million in billings in the backlog, the majority of which are scheduled to ship over the remainder of this year.

In the quarter just completed, we added 474 units to the backlog, with an invoice value of slightly more than $11 million, and shipped 235 units out of the backlog. The year-to-date ship total stands at 452 units. With what we have already noted in our backlog for scheduled delivery by year-end, we are expecting a record quarter to close out our 2011 fiscal year.

Reviewing our operating results for the third quarter of 2011, total revenue was $5.5 million, a 3,000 -- a $300,000 decrease over quarter three of last year, and was comprised of $4.3 million from product and services, $1 million from R&D contracts, and $163,000 from license technology revenue. A $483,000 decline in product and service revenue over the comparable prior year quarter is primarily related to a decrease in deferred revenue recognition of $1.6 million, associated with deals booked in prior periods and under previously followed revenue recognition policies. Absent deferred revenue, the quarter-over-quarter performance would have resulted in a 46% increase in product and service revenue.

Additionally, of the 235 GenDrives shipped during the quarter, only 195 units were recognized in product and service revenue. Forty units are being recognized under R&D contract revenue, as they pertain to two Department of Defense contracts we briefly discussed in last quarter's call.

For a more detailed review of our revenue recognition policies, as well as other accounting policies, we encourage you to review our filings with the SEC.

Our total cost of revenue for the third quarter of 2011, was $9.3 million, and was comprised of $7.6 million for product and service cost of revenue, and $1.7 million for cost of R&D contract revenue. Our $3.3 million negative product and service gross margin for the quarter resulted from several factors. First, all of the units delivered in the quarter were current platform designs, which have more than a 30% higher material cost than the new platforms that we'll begin shipping in quarter four.

Second, with about $1 million of overhead charged to cost of goods sold each quarter, the 235 units shipped in quarter three each have to absorb about $4,200 in overhead. By way of comparison, shipping 1,000 units in quarter four will result in a fourfold reduction in overhead coverage per unit to about $1,000 per unit.

Lastly, during the quarter, we took $925,000 in charges to cost of goods sold for inventory obsolescence and component upgrade accruals for some units in the installed base. The plan component upgrades will enhance GenDrive performance for customers and reduce lifetime service cost on the units for both our customers and Plug Power.

Year-to-date, our product and services cost of goods sold is $19.2 million, resulting in negative product and services gross margin of $7.3 million. As Andy noted earlier, based on the strength of our expected fourth quarter shipments and product mix, we will have positive product and service gross margins in quarter four. However, we now expect that we will not generate high enough margins in the quarter to bring the full year into positive territory. We do expect that as the mix continues to shift to the new platform designs and with continuing supply chain-driven cost-down opportunities, we will achieve our margin goals for 2012.

Our cost of revenue for R&D contracts for the quarter at $1.7 million represented 170% of revenue. As our contracts are largely 50/50 cost-share arrangements, we expect full-year costs and margin results to be comparable for R&D contract revenue, which should finish the year slightly below $4 million.

In our operating expense categories, research and development expenses for the quarter at $1.5 million was at 29%, or $607,000 decline from the prior year comparable quarter, which included costs in our Canadian and Indian operations, which have since been discontinued.

Our engineering resources have been sized to support the GenDrive product roadmap, sustain existing product designs, and service our R&D contracts. We expect solely these factors to continue to be the determinants of our operating R&D spend, and would expect a similar run rate in quarter four.

Selling, general, and administrative expenses at $3.6 million for the quarter was an increase of $176, 000, or 5.1% from the prior year third quarter. We also expect our SG&A run rate to remain fairly similar for the final quarter of the year.

During the quarter, we recognized a gain on the sale of assets in the amount of $673,000 within our operating expenses. This pertains to units that were shipped to one of our customers in 2010, under a master lease agreement with Plug Power, and were subsequently assigned and sold to our lease financing partner, Somerset Capital. A portion of the revenue associated with this assignment and sale was deferred until all deliverables were completed, which occurred in quarter three of 2011.

Our net loss for the quarter ended September 30th, 2011, was $6.3 million, or $0.28 per share on a basic and diluted basis as reported. Weighted average shares outstanding for the quarter were 22.7 million. Net cash used in operating activities for the quarter was $6 million, and year-to-date is $19.2 million. At quarter end, the company had $22.8 million in cash, cash equivalents, and available for sale securities, $24.5 million in working capital, and full availability of our $7 million revolving line of credit with Silicon Valley Bank.

We would also note that our quarter three cash and working capital numbers are inclusive of $525,000 of additional capital raised during the quarter when the final over allotment issuance to our investment banker, Roth Capital.

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

Thank you. We will now conduct a question-and-answer session. (Operator Instructions) Our first question comes from Philip Shen with Roth Capital Partners. Please state your question.

Good morning. Congrats on a nice quarter.

Thanks. Morning, Phil.

Good morning, Phil.

So I was wondering if we can kind of focus in on backlog and expected shipments for the year. I know it sounds like you'll make the 1,600 guidance -- 1,600 shipping -- unit shipment guidance, which is great. And in your lease you talked about having 474 units ordered in the quarter. And then you had -- you wrote that you have orders year-to-date of 1,460 units. Do you expect all those units to ship in 2011?

Yes. For the backlog, Phil, there's about 1,535 units. In the current backlog, there's 1,053 units that are in the shipments for quarter four. There's over -- there's about 17 different deals that we are wrapping up for quarter four for shipment. Additionally, during quarter four, a couple of prospects in our pipeline that we are close to closing would also be targeted to ship this quarter.

Good. Good. So, and then let's move on maybe to 2012, because it sounds like 2011, it is looking relatively solid. I think your prior official guidance was 3,400 to 4,400 units. Is that still in play? And do you think -- would you think there might even be some upside to those numbers?

Phil, this is Andy. Those numbers are still our targets, and that we see no reason to change. Most of the units that we expect to book this coming quarter will be part of the second -- will be part of the 2012 backlog.

Okay. And then so it sounds like for Q4 you have a bunch of deals occurring. How has the overall macroeconomic backdrop affected your business, if at all?

I wouldn't say dramatically, Phil. But I would say that we have seen a few customers become a bit more cautious. We had one deal in the third quarter where the customer stepped back, not because of the value but because of a desire to conserve cash. We've also -- with some of our activities that we're looking forward to for 2012, 2013, I would say that the European debt crisis have made people a bit nervous. But as far as impacting this year and next year, I see it as minor.

It's a large market for this material handling equipment. In North America alone, there's 1.5 million trucks. There's hundred -- well over 100,000 new trucks being deployed this year. And that when you're at this early stage in the company, the economic downturns don't help, but it's not as dramatic as if you are a billion dollar company and the market slips by 5%, it's dramatic to your results. Here we're at the growing pace, and the question is do we grow 100% or 95%.

Right.

So I'm not too -- I certainly am aware and we listen to our customers. But it hasn't been -- we have not felt the impact of it dramatically.

Okay. Earlier in your prepared remarks you talked about product and service revenue being, I think between 5% and 10%. Can you talk about what your overall gross margin expectations might be for the quarter, Q4? Do you think it will be positive for the overall company?

So during my talk, Phil, I made two points. One is that we expect gross margins to be in the range of 5% -- 5% to 10%. And I can understand why you -- and that is for product and service revenue. And that we would expect that if you -- we would expect if we were shipping all new product platforms, and I guess revenue we expect to be in the $25 million range, Gerry?

Twenty to 25, depending on --

Andy Marsh -- $20 million to $25 million. So, Phil, if we were shipping all new platforms this quarter, those gross margin dollars would be about $2 million to $2.5 million higher. Gerry may want to comment on R&D revenue and the impact. But our main focus is on product and service revenue, Phil. And that will be a positive gross margin.

Great.

And, Phil, this is Gerry following up. So again, when you look at the fourth quarter, substantially all of our revenue is going to come from our commercial product sales. The R&D contract revenue, we have basically three government programs that we're continuing to do some work on. And as I mentioned, the two Department of Defense contracts that we've already delivered units on, there are some additional deliverables on that, so we'll recognize a little bit of revenue.

But the R&D contract revenue will not be a material contributor in the quarter, as well as the license revenue technology that already exists. I mean, we've pretty much recognized almost all of that.

Good. And getting back to the product and service revenue. If I recall, and maybe you can correct me if I'm wrong, you were saying that maybe 40% of the shipments in Q4 would be the new platform as opposed to -- is that right?

That is -- forty -- to be exact, Phil, 47%.

Closer to 50% then.

Right.

Even better. So had it been 100%, then what you were talking about here is you would have gotten a much better gross margin benefit.

Right. And would -- so, Phil, if we're talking, we expect it would be at least a 10% bump in those gross margin numbers.

Good. Okay. And then about -- I think you guys did a very good job of kind of maintaining low levels of operating expense in Q3. Do you expect to see similar levels in Q4 or do you expect a slight tick up given the -- all the business activity?

Actually, again, what we've said in the past, Phil, we think we've got this company sized to support growth all the way to 10,000 units, with minor additional expense increases. So we don't see anything on the horizon that would change our run rates significantly, other than potentially some prototype materials that the engineers are consuming on some final design tweaks on the new platform.

Good. And I think that's important to reemphasize, because I think you guys have done a great job of reducing your expense base.

Thanks.

I think that might be all for me for now. I'll jump back in queue. Thanks.

Thanks, Phil.

Thanks, Phil.

(Operator Instructions) We will pause for a couple moments to poll for questions. Thank you. Our next question comes from Alex Black with [Intrainvest]. Please state your question.

Yes. Hi, guys. Just looking forward into 2012. You just talked a little bit about how you see your balance sheet kind of changing, working capital growth. You're looking at 3,200 units shipped or something in that range, what do you think you're going to need in terms of inventory build and working capital?

Okay. This is Gerry speaking. First, think about this fourth quarter, with what we're shipping, we will have quite a substantial book of accounts receivables as we close out the year. But we have not drawn anything on the revolving line of credit that we have with Silicon Valley to support working capital needs. So we still feel quite comfortable that we'll end the year with in the range of $20 million of cash going into 2012. And then most of those receivables will be collected within 60 to 90 days maximum in the start of the year. And that receivable balance will be thrown right back in to bringing in the inventory.

And as we stage the shipments, I think what we've commented on in the past. From the time we take an order to when we ship, we can actually build the units in about 90 days and have them ready. Some of the deliveries stretch out to six to nine months depending on when the fueling stations are available and facilities are available. So we expect to be able to manage through next year with our balance sheet. And I think what we've commented on in 2012, any expected increase in use would be for roughly a $5 million, maybe $5 million to $10 million of additional working capital.

Okay. Thanks.

You're welcome.

Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Marsh for closing comments. Thank you.

Thank you for your questions. I would like to emphasize the fourth quarter is the key to measuring Plug Power's future success. In the fourth quarter, we will ship over 1,000 units, have positive gross margins, and have continual strong sales traction. Our path to profitability will be clear (inaudible) results.

I look forward to talking with many of you on the call today during the coming days. Thank you very much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.