普拉格能源 (PLUG) 2012 Q2 法說會逐字稿

Greetings and welcome to the Plug Power 2012 second-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 Miss. You may begin.

Good morning, thank you for joining Plug Power to discuss our second-quarter results for 2012. 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 presentation. 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 2012. 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.

We encourage our listeners to refer to our SEC filings for a complete recital of our Safe Harbor statement, as well as 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, 2011, filed with the Securities and Exchange Commission on March 30, 2012. 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 good news today, is that the deployment of our GenDrive systems for the material handling market continue to accelerate. In the second quarter, Plug Power shipped 388 units compared to 73 units in the second quarter of 2011. This is an increase of 432%. Drives were shipped to customers, including Sysco for deployment in their new Boston and Long Island distribution centers, BMW, WinCo, Mercedes, P&G, Alexandria, and Wal-Mart Cornwall.

The recently announced order for Mercedes was received in early April 2012, and all 72 units were installed and operational by early July. This is the quickest cycle time between receiving an order, and deployment at a site requiring a new hydrogen fueling station. Air Products was able to complete this task in under 90 days, an effort that historically has required from 9 to 12 months. We believe this bodes well for the future and our continuing efforts to decrease the cycle time from orders to shipment. The Mercedes site is also the first site that is exclusively using Plug's next generation products, based on our new low and high power platforms.

Other significant deployments in the second quarter included Sysco Boston, new distribution center using 185 Plug Power fuel cells, and Sysco Long Island, another new distribution center, using 67 Plug Power GenDrive units. Also during the quarter, BMW continued to expand their fleet at the facility in Spartanburg, South Carolina. Thus far in 2012, Plug has delivered 60 units, bringing BMW 's total fleet to 161 units as of June 30, 2012, and have another 79 units still to be delivered by year's end.

P&G's site in Greensboro, with129 units, is also now online, as is P&G site in Oxnard, California, where 47 units were deployed. Newark Farmers Market, a leader in wholesale distribution of fruits and vegetables in northeastern United States, serving partners such as the ShopRite grocery chain, deployed 96 units at their New Jersey facility. Additionally, we are in the process of shipping and installing 254 units for the Wal-Mart facility at Washington Court House, Ohio. We continue to be the leader in deploying PEM fuel cells under 25 kilowatts, with over 2,800 units in the field, having 8 million hours of operation. An indicator of our success in the industry, is that in the United States, 19 out of every 20 hydrogen fuelings fills a Plug Power fuel cell.

Another highlight is that all the units currently being shipped are using the next generation platform for our low and high powered products. The cost of these platforms reduces the variable cost for the product by up to 30%. Most of the savings come from a reduction in material costs. Material costs it the largest contributor to our product cost, representing over 80% of the total variable cost of an unit. By the fourth quarter, the expected ratio of material costs to product price will be approximately 65%, and will, we believe, reduce to below 60% in 2013. This is one of the keys to our path to profitability.

In the second quarter, Plug Power achieved positive gross margins for product shipment, if one dismisses [hold backs] due to 1603. As we've discussed previously, the 1603 hold back revenue will be recognized in later quarters in 2012, with no cost to sales. The ability to achieve positive product gross margins show that the product cost reduction and scale production were having the expected impact on margins. As we've discussed over the past two years -- the past year, the two key elements for Plug Power to achieve profitability, are product shipments and material costs. And material cost structure for the new platform will allow us to reach profitability between $70 million to $80 million in annual revenue, which is in line with our previous projection.

Our primary challenge this year has been increasing product orders to achieve our revenue goals. In this area, the Company has had some challenges achieving $9.2 million in orders. Why has it been so slow? Number one, the primary reason has been the speed of deployment. For some of our large customers, the time between orders and final deployments took over one year. As we've discussed in the past, the time for our customers to negotiate contract with an industrial gas provider and installing the hydrogen system can take one year or more. The [IGC] is our key customers now have contracts that can be used as a model for future deployments. This should reduce the cycle time, as witnessed by the Mercedes installation. Our experience has been that our large customers are reluctant to place additional orders until the entire process has been completed, and units operate for a quarter. Example is P&G, who placed orders for three sites last year, which are now only coming online, about six months later than originally projected.

Number two. Many of our customers, about 50%, preferred to lease our products. With the inclusion of the 1603 grant program, we had to find additional leasing partners that could leverage the present tax credits. We have a new partner as of late June that has been offering attractive leasing packages to our customers.

Number three, we also experienced a significant quality issue that had slowed deployments. This problem was caused by an under rated O-ring in our hydrogen fueling system. The supplier of the component took full responsibility for this error. Units that had shipped with the O-ring are being upgraded with appropriate components which impact about two dozen customer sites. While an actual failure was experienced at one site, we proactively addressed the issue. Our customers appreciate our preemptive approach to resolving the issue. In the long run, I believe our response will enhance our reputation with our existing and future customers. I would also like to highlight that none of our customers' operations were impacted by this issue. The slow order flow and some deployments pushed into 2013 has negatively impacted our projections for the year. We have $3.7 million of orders pushed from 2012 delivery to 2013 delivery. Consequently, we are changing the guidance.

Number one, product and service revenue to be between $30 million and $35 million US Two, Product and service gross margins to be between minus 5% and minus 10%, and three, EBITDAS loss to be between $17 million and $19 million. Based on our discussions with customers, we remain cautiously optimistic that bookings can still be over $50 million US in 2012. The issues that have slowed orders have been addressed and we are vigorously pursuing deals in the second half of the year with a sales funnel valued over $120 million. The customers where approximately 90% of these deals are for new construction sites or large facilities.

These are opportunities where we have about been successful in the past. For example, at new battery construction sites, where we have actively engaged customers, we have won about 60% of these sites. Similarly at large facilities, where we've had serious negotiations with customers, approximately 50% have been wins. We can -- are convinced that our business model is sound, that we're pursuing the right customers and opportunities, and with the continued improvement in reducing our product costs, profitability is within reach. Time to orders haves been our challenge, and closing large deals remains our primary focus.

I'd like now to turn the discussion over to Gerry.

Thank you, Andy, and good morning, everyone. For our second quarter of 2012, our product and service revenue was $7.2 million, representing 175% or $4.6 million increase over the prior year's second quarter. While the 388 units shipped in the quarter is the second highest quarterly total in Plug's history, we had expected to be over 500 units. Timing delays, associated with one customer's site readiness pushed over 250 units into our third quarter. To further comment on the impact of timing delays, we have $3.7 million of units in our backlog for two sites that we had projected to ship in quarter four of this year that will now be 2013 shipments. Again, due to customer site readiness.

As Andy has already mentioned, this is a contributing factor to our reduced revenue guidance for the year. An important point to make here, is that we have a timing impact only, not a loss of revenue opportunity due to cancellations. In addition to the product and service revenue recognized during the quarter, we ended quarter two with a total of $7.1 million in deferred revenue on our balance sheet, which pertains to the value of deliverables, such as extended warranties, not yet completed on various deals. Our earnings press release provides a reconciliation table of gross margin, taking into effect these timing issues on a revenue recognition, and the topic is also more thoroughly discussed in our SEC filings.

R&D contract revenue for the quarter was $458,000, a decrease of $1.1 million from the prior year quarter. The majority of our focus and efforts now and going forward, are on our commercial sales activities, so as noted last quarter, we expect our R&D contract revenue to be in the range of $2 million for the full year. Looking at cost of revenue for the quarter, cost of product and service revenue was $8.6 million, resulting in a reported 20% negative gross margin.

Consistent with what we noted in our first quarter call, low shipment volumes adversely impacted our gross margins due to both under absorption of manufacturing overhead and direct labor utilization. Higher material costs on our products was also a factor in the quarter, which we expect to see improve going forward as virtually all shipments now are based on our lower cost platforms. To further Andy's comments on our improving product margins and lower material costs, I would refer you to the reconciliation of gross margin table in our earnings press release.

When adjusted for the deferred revenue impacts, we have improved our margins by 44.3 percentage points year-over-year through June 30, 2012. As we continue to scale the business, we remain confident that we can achieve 20% plus gross margins once we attain annual revenues of $70 million to $80 million. However, with our reduced expectation for shipment volumes this year, meaning fewer units shipped off of new platforms and fewer units to absorb fixed overhead, we are expecting full year product and service gross margins to be in the minus 5% to minus 10% range. Our cost of R&D contract revenue for the quarter was $833,000, resulting in a 82% negative gross margin. The majority of the remaining R&D contracts are 50/50 cost share arrangements, so we do expect similar margin results throughout the remainder of the year.

Our operating expenses for the quarter totaled $5.7 million, and were comprised of research and development expenses at $1.6 million, selling, general, and administrative expenses at $3.6 million, and amortization expenses at $573,000. As we discussed on our last call, we expect our total operating expense run rate to remain fairly consistent, quarter-to-quarter for the year, and it has indeed held at about the $5.7 million per quarter level for the first two quarters.

Our net loss for the quarter ended June 30, 2012 was $6.5 million, or $0.17 per share on a basic and diluted basis as reported. Weighted average shares outstanding for the quarter were $37.9 million, and EBITDAS loss for the quarter was $6 million. Net cash used in operating activities for the quarter was $4.9 million. At the end of the quarter, the Company had $15.9 million in cash, cash equivalents, and available for sale securities, and $25.5 million in working capital. Additionally, the Company had availability of the full $15 million on its revolving line of credit with Silicon Valley Bank.

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

Ladies and gentlemen, at this time, we will be conducting a question and answer session.

(Operator Instructions)

Philip Shen, of Roth Capital Partners.

Hi, Andy, hi, Gerry. Thanks for taking my questions. I wanted to explore the guidance a little bit more, if we could. You guys chalked it up to slower than expected order flows and customer deployment delays. To what degree is $3 natural gas impacting you or your customers? Talk to us about the value proposition. Is it still resonating with customers? And, well, I have some more, but try to address those first, and then I will come back.

So Philip, I would say that the low price of natural gas positively impacts our value proposition, because the price of natural gas and the variable cost of hydrogen are closely tied together, since the source of hydrogen for most deployments in North America, you know, the basic sources is natural gas. When I look at the value proposition, I would say, yes, it is resonating, and as I mentioned, we have a rather large funnel. And I gave a number of $120 million, and Phil, the $120 million is not all the activity we are pursuing, but deals in which we have developed, are far along in the sales process where our customers, where we're going through the details of the value proposition.

What we have found is that when we review the history of our deals and who we're dealing with today, that if we're dealing with the facility where a battery room has to be constructed, either new construction or a site where there is a conversion from LPG to electro trucks, which an industry trend, we have won 60% of those deals, and which have been serious negotiations, and we expect that will continue.

We've also won sites in which are large users of hydrogen, which are over 200 kilograms a day. And we've won about 50% of those deals historically, and we don't see a change in that trend. If you look at about $120 million funnel, about 90% of those deals are associated with either new construction of battery rooms or very large facilities. And about $40 million of that is associated with facilities that require new battery rooms, about $65 million of that is associated with large operations. So we're pursuing the right deals. I believe we're having the right engagement of customers. I think we've had a few factors which have slowed us down the first half. [notice] We expect -- and when I talk to the sales team, we expect a very strong second half and have had discussions with our four or five primary large customers which indicate that they have plans to place significant orders with us.

Okay. That's good. You mentioned in your prepared remarks that there are few cancellations in spite of the reduction guidance, essentially it's a timing issue. Can you actually quantify the degree of cancellations? Can you say that there were zero or, just help us understand the degree, if any, of cancellations?

I'm going to let Gerry take the numbers, but we've never had a customer cancel a site. I think any number Gerry will provide you here is -- they may have changed their mix at the site, and reduced the dollar value at a site, but Gerry, go ahead.

Right. Phil, what I said on the call was that the change in revenue guidance was due to a timing delay of moving shipments into 2013, not due to any cancellations. As Andy has mentioned, we have not had any cancellations. When you look at the backlog today, which is about $28.6 million, roughly the same backlog that we had in the first quarter, two large accounts in that backlog shifted from 2012 to 2013, and one of our large bookings that we completed in the second quarter is also a 2013 expected delivery.

Okay. And just to confirm, you said your backlog is $28.6 million?

That's correct.

Okay. Yes, at one point you had unit shipping guidance of 2,300 units for 2012. If -- on the low end of your guidance range I think you produced revenues from $40 down to $30 million. Commence early, should we reduce -- can we think about unit shipments as being close like 1,700, maybe 1,800 for the year? Is that a good way of thinking about it?

Yes, that's in the ballpark, Phil. We look at about 1,600 to 1,800 units now, this year, targeted for shipment.

Okay. And give us some color on 2013. What are, especially with the shift and the large sales funnel, what are your thoughts on either unit volumes or revenues, for 2013?

I think, Phil, that -- I think the key to that will be the bookings in the second half of the year. If we achieve $40 million of bookings. I would expect that our revenues would be between that $70 million to $80 million level in revenue next year, but the key, to us, when it comes to projections, is that for next year, is the flow of orders in the second half.

Yes. And Gerry, just remind me again, what were your bookings in Q2?

Our new bookings for quarter two is about $6.5 million, year-to-date as we speak today, it's about $9.2 million.

Okay. The other rationale that you had for the slow-down has been, or was, due to the high mix of leasing purchases and to alleviate that situation, you found a new leasing partner. Can you tell us who the new leasing partner is?

We are using Northfield Capital out of Chicago area, and Northfield has funding sources that actually have the tax appetite to utilize the tax credit. Our previous partner, Somerset, was utilizing the 1603 grant in lieu of credit. They don't have the appetite to use the actual tax credit itself, so we needed to line up additional funding sources to be able to absorb that credit in these deals.

Have you stopped working with Somerset, or are you working with both?

No, we have not stopped working with Somerset. Again, right now, we're just trying to expand our availability of financing offerings to our customer base so that we can get these deals done.

Great. About your backlog, what is your mix of greenfield versus brownfield in your backlog?

I don't -- I actually don't know. Do you know, Gerry?

If I look at the backlog right now, well I see -- I know there's three that are greenfields, but I don't have the actual [goal] right now.

Phil, when I think about it, I, I'm going to -- I think that the key word is, facilities requiring new battery rooms. And Gerry, why don't you hand that over to me, I'll take a quick one. And their facilities, for example, at some of the P&G sites, they already use LPG and they are converting to fuel cells, and if -- they were looking to trend towards electric, and because they were looking to go to electric trucks, it forces them to -- it encourages them to move to fuel cells because they would have to construct a battery room. When I use that expanded definition, it would be about 50% of the backlog.

Okay. Good. Let's see. Yes, I think that might do it for now. I think you guys talked about R&D revenues still being about $2 million for 2012, right?

That's correct, Phil.

Okay, great. I'll jump back in queue. Thank you very much.

(Operator Instructions)

Mike Cikos, of Sidoti and Company.

Good morning. I had a question for you regarding the -- I think you were talking about the new units that you would be shipping., and you said there's as much as a 30% savings in material costs with these new units you'll be shipping. And then you mentioned something about a ratio in the 4th quarter, I think it was material to product price? Can you restate that? I'm sorry, I missed it.

No problem, Mike. In the 4th quarter, we expect, and to me, this is the important ratio, Mike, because more than 80% of our total variable costs is associated with materials. And that number is 65% for quarter, for quarter four, and we will be below 60% in 2013. And when I model a $75 million business, Mike, we'll be EBITDAS break even around 58% material to price --

You said it was 58% ratio?

Right, at that number, we will be 58% material to price, at approximately $18 million to $19 million of revenue per quarter. This Company will be EBITDAS positive.

Okay. And that was, I guess, that was my other question. You're saying profitability at $78 million, $70 million to $80 million in sales on an annual basis. That is on an EBITDAS basis then?

That is on an EBITDAS basis.

Right.

Okay. Other question I had for you was regarding the Mercedes order. You had said this is the quickest cycle time you've ever seen based on their ability to get the hydrogen fueling station in place and I wanted to know what your thoughts were, if you thought that was doable again if you see the cycle time starting to slow down, and why, either way?

I think a key item there, Mike, is that what we're seeing is that industrial gas companies are purchasing components for inventory, item number one, so that when they receive an order, there are key items like the liquid tank, light compressors, which are two of the long lead time items, that some of the industrial gas companies are starting to inventory these items.

Item two is that the contract -- contracts between the industrial gas companies and our customers are relatively complicated, and I think that, one, I think the industrial gas companies have been simplifying the contracts with our customers, and two, with some of our large customers, they have established contracts now in place, so that it's really just kind of a rubber stamp from facility to facility. In the Mercedes case, I think, I think the gas companies may have been -- one, they had material, which was really critical, and two, they were, I think, more flexible in their terms.

Okay. Can you also comment on the quality issue that you had mentioned with the hydrogen cooling system?

Yes. It's actually the hydrogen fueling system.

Okay.

Okay. And hydrogen you know is a -- one has to be very cautious with hydrogen, it is a flammable gas, and we had at one customer site, an O-ring that released during operation. And this O-ring release caused a release of hydrogen, and the hydrogen did ignite, but it did not cause any damage to the facility. But we saw the event, worked diligently with the OEM forklift truck provider, with outside resources. After extensive investigation, we found in the system, that one of our suppliers used an O-ring rated for 250 bar, instead of 350 bar. That was a serious issue.

We, once we understood the root cause, we actually reduced the fueling pressure at all our customer stations down to 250 bars, and we have been systematically upgrading all systems with the appropriate O-ring to make sure an event like this never happens again. This was expected to be an once in every 100,000 year type event. It obviously happened earlier, and we took it very serious. I think that our customers appreciate the fact that even though we saw this event only once, we went out and told all our customers. We explained what happened, and we explained what needed to be done, and in general, like many events like this, it gives people time for pause, but I think in the end, this has really enhanced our reputation as a company you can count on, when you're doing business with, to do the right thing.

Just make sure I understand correctly, these O-rings were set at 250 bars instead of the 350?

It was using the wrong, it was the wrong material, Mike, so the material itself was material rated for 250 bar, and not rated for 350 bar, and our operation is 350 bar. And it's an O-ring which is in a component that we purchased, and that component was rated for 350 bar. The company we were buying from made a design mistake, and used the wrong part.

Okay. And are you still working with that supplier now?

We are. I mean, again, I think they stood up, they worked closely with us, they made a design error. They are a large company, I am not going to name their name, but they had revenue over $5 million, so it's not a small company, a lot of capability. Understood the issue that they had. Worked with us to fix it, and we're convinced that the process -- they put in the process in place to make sure this never happens again.

Just a couple more questions on that point and we'll move on. The first question was, how many customers and/or sites did this actually impact?

We went out and reduced pressure at approximately two dozen sites, and probably impacted about 12 to 15 customers. We did tell every customer. There were some customers that were not impacted by it, but we did go out and tell every customer about the event.

Okay. And at this point, have all those customers, or all the sites had those O-rings actually changed?

They will be completed, approximately, by the end of September. There might be a few that linger into October.

Okay. Other question I had for you was regarding the guidance, I'm just a little bit confused. At the end of the first quarter, we took total number of units you projected to ship down from the 2,300 over the course of 2012, from 2,300 down to 1,600, and now we're saying that the total number of units shipped is probably somewhere in the ballpark to 1,600 to 1,800, even though we're taking our revenue guidance down by about $10 million. I wanted to know why the revenue guidance is going down but the unit shipment is actually staying the same.

Actually, we did not change our guidance in quarter one, so I think we reiterated at that point, the 2,300 unit and $40 million of revenue. Because at that time, we still fully expected to ship the units that we had targeted in our backlog. Since that time, we've had two fairly major deals push into 2013, and as Andy talked about, our order flow rate, which we had expected to be around $20 million for the for half of the year, came in at about $9.2. Mike, if you want to talk about that more off-line, I'd be happy to do that. I don't know how we had the confusion, but we'll be happy to work with you to straighten that out.

Okay, that does it for me. Thanks, guys, I appreciate it.

Philip Shen.

Hi, just had a few quick follow-ups. One, in terms of pricing, are you guys seeing any pricing pressure at all from your customers? And what are the pricing trends that you're experiencing, and what do you expect as we go into Q3 and Q4 here?

I would say, Phil, we have not seen any pricing pressure from our customers. When we look at the value proposition when we look at our discussions, we are comfortable that the pricing that we're projecting for, being profitable is between $70 million, $80 million. That -- the decline in price will be minimum.

Okay. And just as a follow-up to the Mercedes question and faster cycle times, obviously, that's a great thing to get the three month turn-around time. To what degree do you expect this type of faster turn-around time across the board? Do you expect this shorter turn-around time to impact maybe a marginal amount or small percentage of your deployments going forward, or do you expect it to become more of a standard with your customers, especially since many of them already have supplier contracts in place?

I think, Phil, that three months is an aggressive schedule, and I think a year from now, 18 months from now, I would hope that would be more the norm. I think that probably realistically we're probably talking for, targeting norms of six months instead of 9 to 12 months.

So you think that -- so let's say historically, hydrogen infrastructure installations and negotiations take 9 to 12 months. Do you think it's a realistic possibility that the cycle time reduction is all in, could get down to six months?

I think that's fair, Phil.

Okay. That certainly is a positive.

Yes. I would say that the work going on at the industrial gas companies, and their commitment to this industry, even with our slow start this year, continues to, they continue -- their interest level continues to increase.

And about the -- quick question about the quality issue that you experienced. What was the financial impact or what do you expect it to be to Plug, given that it was a third party supplier? I can imagine you had to put resources on this to manage, first, to find the root cause, and then to manage the situation and communicate, but was it just an incremental cost to you and the cost was primarily bourne by the supplier? Help us understand what the financial impact was.

Sure, Phil. We have not finalized, in our discussions with our vendor on this, but we expect the impact to be relatively minor to Plug. The vendor has replaced all of the parts at their cost. Obviously, it's our field technicians and our people that are going to do the retrofits, but we are working with the vendor to work out a reasonable resolution to that so the impact to Plug is minor. Great. Okay. That's it for me. Thank you.

It appears we have no further questions at this time. I would now like to turn the floor back to Mr. Marsh for closing comments.

I would just like to thank everyone for joining the call today, and look forward to having more discussions with everyone in the near term future. Thank you.

Operator.

This concludes today's teleconference. Thank you for your participation.