普拉格能源 (PLUG) 2015 Q3 法說會逐字稿

Greetings and welcome to the Plug Power 2015 third-quarter results conference call.

(Operator Instructions)

It is now my pleasure to introduce Ms. Teal Vivacqua, Director of Marketing and Communications. Thank you, you may begin.

Thank you. Good morning, and welcome to the Plug Power 2015 third-quarter financial results conference call.

This call will include forward-looking statements including, but not limited to, statements regarding our expectations for future business and financial performance, booking, product shipments, GenKey and GenFuel hydrogen infrastructure, revenue, gross margins and EBITDA, customer geographic and market expansion. We intend these forward-looking statements to be covered by the Safe Harbor provisions for forward-looking statements contained in section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. We believe that it is important to communicate our future expectations to our investors.

However, investors are cautioned not to unduly rely on forward-looking statements, because they involve risks and uncertainties and actual results may differ materially from those discussed as a result of various factors including, but not limited to, the risks and uncertainties discussed under item 1A, Risk Factors, in our on annual report on form 10-K for the fiscal year ending December 31, 2014, as well as other reports we file from time to time with the SEC. These forward-looking statements speak only as of the day on which the statements are made and we do not undertake or intend to update any forward-looking statements after this call.

At this point, I'd like to turn the call over to Plug Power's CEO, Andy Marsh.

Thank you, Teal, and good morning, everyone. Thank you for joining the Plug Power 2015 third-quarter conference call.

Before jumping into the details of the call, I'd like to start by measuring our performance to date versus the milestones that were set out at the start of the year during our January business call. When that call, and this is actually a duplicate of that slide, I outlined the following goals for Plug Power to accomplish in 2015.

Achieve revenue of more than $100 million, realize bookings of more than $200 million, install 15 GenFuel hydrogen storage and dispensing systems. Achieve gross margins of over 25% for our GenDrive product line by the fourth quarter, and to book six new customers. And finally, to continue to make progress in the hydrogen fuel business.

Now that we're three quarters through 2015, let's review how we're doing against our stated milestones. At the end of the third quarter, Plug Power recognized more than $65 million in revenue for the year with $55 million reported over the past two quarters. We expect to achieve $35 million in revenue in the coming quarter to meet our $100 billion sales goal.

Number 2, Plug Power has $166 million in bookings at the end of the third quarter, 83% of our goal and we're in line to meet our stated target.

3, at the end of the third quarter, we have turned on 12 GenFuel infrastructure systems in 2015, with an additional six prepped for commissioning in the fourth quarter. This, in regard to the GenDrive gross margins, we're ahead of our schedule at 17% for the quarter and with the fourth quarter introduction in the next generation class-2 and class-3 products the goal of 25% gross margin is attainable.

We are also excited about our new customers in 2015, including FreezPak, Dietz & Watson, Young's Market, ULine, one that I'll name later. And additionally, I'm heading to Europe after this call and will be signing a contract with a sixth new customer later this week. The customer is a major northern European retailer. With this deal, we will have achieved this goal.

As we acknowledge during the January 2015 business update call, we understand the legitimate criticism in the past that, although we continued to demonstrate industry-leading growth, we're still not meeting our enunciate target. In January, I clearly stated the goals Plug Power's intended to achieve. I also outlined a time frame in which we expected to achieve them.

I am pleased with Plug Power's execution in the business and the fact that we have stayed on track, and on pace to achieve the goals and milestones laid out at the beginning of the year. Later in 2015, we'll announce a date for our January 2016 business update review. Now let's take a look at the third quarter.

I'd like to discuss three subjects: revenue, expansion, and funding. I'll start with revenue. Once again, Plug Power had a record revenue quarter fueled by customer success. Plug Power's solutions continue to save customers money and help them achieve a more productive work force.

Wal-Mart remains a steady key customer, impacting Plug Power's growth. During the third quarter, we continued deployments in new sites including New Katy, Texas and Cleburne, Texas. At this point, Plug Power has 14 sites deployed with Wal-Mart and expects at least another 10 sites in 2016.

Additionally during the quarter, Plug Power completed our first deployment with new GenKey customer ULine in Pleasant Prairie, Wisconsin. Currently, ULine is operating more than 130 GenDrive units between two facilities, and there's room for growth at ULine, as a planned expansion with a second fleet into their newly constructed facilities in the coming months.

By the way, we received that purchase order this morning. In addition to Wal-Mart ULine deployment, Plug Power continued working with customers, including Newark Farmers Market, BMW, AWG and Stihl. We've recognized revenue for 1,221 units this quarter and have already manufactured 454 units.

Moving on to discussion of expansion, in July Plug Power acquired full control of the HyPulsion Hydrogen and Fuel Cell business in Europe. With this expansion, Plug Power is now invested in converting the $20 billion European electric lift market to hydrogen fuel cells.

Plug Power and Air Liquide founded HyPulsion in 2012 to jump start the hydrogen fuel cell market in Europe. The original agreement intended for Plug Power to ultimately control HyPulsion. This was accelerated as a result of Plug Power's success in the North American market, and Plug Power wasted no time in leveraging the tremendous opportunity in Europe.

We have announced Prelodis as our first European customer in September, a full fleet of GenDrive units has been commissioned in north-central France to run in Prelodis' three shift operation. As I mentioned before, European customers share the same value proposition as their material handling counterparts in the North American market. Increasing productivity, through the fast fueling and sustained power level of hydrogen fuel cells versus batteries, remains of value to these customers.

We have our international business development and sales team currently targeting manufacturing customers in Europe including the United Kingdom, Germany and Spain to broaden the use of GenDrive and GenKey. For more than 95% of the forklift trucks in the world, Plug Power's offers a drop in GenDrive product that can convert their battery powered truck to a hydrogen fuel cell powered truck in less than 30 minutes.

And now finally, I'd like to, and this probably excites me the most, to discuss Plug Power Capital, a wholly-owned subsidiary of Plug Power, formed as a capital financing arm that facilitates customer financing, giving customers easy access to third-party leases. Through this financing, which we call GenFund, Plug Power capital will work with its customers and commercial banks to facilitate project funding for the purchase of Plug Power hydrogen and fuel cell solutions.

GenFund lease program represents only the start of our customer financing activities. GenFund will support customers will support who want to directly lease our equipment. We have some customers, like Wal-Mart and others, who would like to take it off their balance sheet via a leaseback program. This type of financing is a very common way to finance solar project and Plug Power is a leader in introducing the concept to the fuel cell industry.

A successful leaseback program is one of the reasons companies like Solar City experience such rapid growth, and Plug Power views this as a broader opportunity to accelerate adoption of our products. We have been in discussion with our financial advisors regarding this activity, and over the next three to six months we'll be making a number of announcements about this program.

I want to highlight and clarify it now. We have no plans to dilute our share, present plans to dilute our shareholders, through an equity raise to support this program. I understand the sensitivity of the issue, and I want to let shareholders know that this program is a win-win for them.

Now I'd like to spend a bit of time discussing margins. GenDrive achieved gross margins of 17% in the past quarter. We reached this level faster than we originally planned, and we expect gross margins to hit 25% and continue to expand throughout 2016, as a result of the new cost reduced GenDrive units that will ship in the fourth quarter.

One of the main contributors to our rapid increase in gross margin is the introduction of Plug Power's own stack technology. Our air-cooled stacks are shipping today in our new class-3 GenDrive products.

Initial shipments of our liquid-cooled stacks will occur this quarter in the new class-2 GenDrive offering. All of our stacks are made in America. The air-cooled stacks are shipped from Plug Power West in Spokane, Washington and the liquid-cooled stacks are manufactured in Latham, New York facilities.

Let's now talk about the margins in our service business. These have continued to improve with year-to-year improvements from minus 33% to minus 21%. Service margins, however, have burdened with premature failures of liquid-cooled stacks used in our class-2 and class-3 products that have shortened their useful life and required premature field replacement.

Margin reduction impact of these failures was about $1 million in this past quarter. We feel that the underlying problem with the stack have been resolved, both through our collaboration with power when enhancing their membrane, and through the introduction of the new Plug Power stack which incorporates an enhanced membrane to eliminate this issue, as well. We're now shipping new and repaired product that will achieve the predicted life.

We still have units in the install base that will fail prematurely over the next six to eight quarters. We have improved the install base in the field resulting in a 30% performance improvement in life. This still does not allow Plug Power to meet the projected life for these stacks.

Since these stacks will fail prematurely, we expect similar costs for stack replacements over the next six to eight quarters until the older stacks are washed out of the systems. Our product's becoming more reliable, and in the long-term we expect the service business to reach gross margins comparable to our GenDrive business.

And finally, our GenFuel hydrogen business has presented itself as a focus for Plug Power during the third quarter and all of 2015. We're continuing to invest in the hydrogen business, as it is a critical piece of the fuel cell puzzle. Plug Power is making greater investments in the research and development of viable GenFuel solutions to support expanding our total servable market globally.

Most of the investments over the past nine months have been cost-reducing in optimizing our infrastructure to make the equipment more efficient and cost effective. GenFuel gross margins will start growing. During our initial deployment, we add higher costs like those we witnessed with GenDrive.

This is not unusual for a new product in the market, but now that GenDrive has become, GenFuel has become mature, improved offering, we are anticipating similar gross margins improvements with GenFuel to that we have experienced in GenDrive. In 2016, our development efforts will be geared towards generation of hydrogen. The Plug Power Latham team, through earlier products, has a great deal of experience in reformation of a multiplicity of gases.

In parallel, the Plug Power West employees are experts in hydrogen purification. We will be increasingly leveraging these two capabilities to expand our product line with the ultimate goal of dramatically increasing our hydrogen gross margins.

In conclusion, we're building a big business at Plug Power. We're making all the necessary moves to enable Plug Power to grow to $500 million in sales from our material handling customers in the next three to five years. But at the same time, I believe that Plug Power is more than that.

I spent a lot of time tapping into my team's expertise to help really understand what Plug Power's good at. And it's quite evident we can apply our technology and human ingenuity to power electric vehicles and building hydrogen infrastructure beyond our current market focus.

And it's just not me saying that. There are facts that support why Plug Power is unmatched in the industry. Our GenDrive fuel cells are reliable.

GenDrive units operate more hours in a year than a passenger car will realize in a lifetime. Our GenDrive units are proven. Collectively, they provide more than 170 million hours combined at customers' locations globally. Our GenFuel infrastructures are proven. Customers perform 4350 fuelings daily from GenFuel dispensers. That's close to 100 million to-date.

We are the market leaders, more than 90% of all hydrogen refueling today, going to Plug Power fuel cells. It should come as no surprise, for the past five years I've emphasized over and over again, that we are laser-focused on the material handling industry. That's how we built the sales momentum we see today, and the real-world experience with hydrogen fuel cells. But 2016 will be different.

It's time to leverage our expert capability in powering electric vehicles and building hydrogen fueling infrastructure for the broader market, that's the gas on our growth. Our teams are going through work now to target the right applications and the right solutions for Plug Power. We're going to move deliberately with the right customers and partners.

As we are going to leverage work and expertise gain, not just in the past year, but over the past 18 years, because it's clear no one powers the world like Plug Power. I'd like now to turn the call over to Paul to discuss the third-quarter results.

Thank you, Andy, and good morning, everyone. I'd like to start off by sharing some financial highlights for the third quarter.

We ended the quarter with over $31.4 million in revenue, representing 58% growth over the third quarter of 2014. This growth stems primarily from the continued commercial traction we are gaining in proliferating our GenKey solution. The third quarter 2015 not only represents sales growth, but equally important, it's another quarter of continued momentum and orders, and build activity preparing for the number of GenKey programs slated for the balance of the year.

Plug recognized revenue associated with 1221 GenDrive units and 7 hydrogen installation sites, compared to 835 GenDrive units and 3 hydrogen installations in the third quarter of 2014. This growth is a clear indication of the traction Plug continues to make in the market.

Total gross margin as a percentage of sales was breakeven for the third quarter of 2015 as compared to a total gross margin loss of 5% in the third quarter 2014. This operating improvement is indicative of our ongoing progress both in terms of volume and cost down initiatives. This improvement in performance is despite higher than average product development costs incurred in the third quarter, for varied product enhancements being launched over the third and fourth quarter.

We recorded approximately $60 million in orders in the third quarter 2015, and ended the quarter with approximately $234 million in backlog. Our backlog is a combination of units and installations planned for the near-term, as well as the service and hydrogen delivery commitments for the next few years. The growth in overall backlog is also indicative of our success in the market, and given the majority of the backlog is associated with long-term revenues, it provides a strong base as we focus on delivering on 2015 forecast and beyond.

We used $13 million in cash for operating activities for the third quarter of 2015, to fund the ongoing commercial efforts as well as required working capital investments. We ended the quarter with over $115 million in cash, cash equivalents and restricted cash, and over $110 million in working capital. In total, we believe it's ample liquidity to support our growth for the balance of 2015 and beyond, and strongly positions us to continue strategically investing in the right path to accelerate long-term growth.

Breaking out revenue for the third quarter, the company recognized product revenue of $18 million. Overall, this compares to $12.6 million in product revenue in the third quarter 2014. The third quarter of 2015 results reflect growth in overall volume, but comparatively a higher concentration of class-3 units which impacts the sales mix.

In addition, the third quarter of 2015 product revenue includes stationary power sales that was more than double the comparable sales in the third quarter of 2014. This also impacts mix. Gross margin for product revenue for the third quarter of 2015, was over $2.8 million positive or 16% of sales, as compared to $1.5 million or 12% of revenue in the third quarter 2014.

Volume certainly contributed to the improvement, but equally important has been the Company's continued focus on product design enhancements, supply chain leverage, and manufacturing process improvements. All of this streamlining is continuing to drive margin enhancement.

Service revenues for the third quarter of 2015 were $13.4 million, compared to $6.9 million in the third quarter 2014. This growth stems primarily from the new GenKey solution and sales associated with seven hydrogen installations in the third quarter 2015, compared to three hydrogen installations in the third quarter 2014. The growth also stems from the growing number of GenCare service contracts and fuel delivery agreements, both associated with the success of the GenKey offering.

Gross margin for service revenues in the third quarter of 2015 was negative in the amount of $2.8 million, or negative 21% of revenue. As compared to negative gross margin of $2.3 million, or negative 33% of revenue in the third quarter of 2014. The margin rate improvement on service revenue stems primarily from the tremendous improvements in our installed GenDrive base and costs to support them.

The Company continues to make great strides in product design and resource leverage. The key drivers that will enable our service business to achieve our longer-term margin profiles. Research and development costs for the third quarter of 2015 were $4.1 million, as compared to $1.6 million in the third quarter of 2014.

The incremental investments are commensurate with the company's growth, including our investments associated with our ongoing stack development, as well as increased investment in productizing our hydrogen infrastructure platform and improving the offering designs. SG&A and amortization expense for the third quarter of 2015 was $8.2 million, as compared to $5.6 million in the third quarter of 2014. The majority of the incremental cost is associated with tremendous sales growth and investments in required resources to support and drive future growth, like the cost associated with the HyPulsion acquisition.

Excluding the change in fair value of common stock warrants of $2.2 million, the net loss on the HyPulsion acquisition transaction activity of $0.1 million, and acquisition and startup costs associated with completing the HyPulsion transaction of $0.9 million, adjusted net loss for the third quarter of 2015 was $11.4 million, as compared to the comparable adjusted net operating loss for the third quarter of 2014 of $7.5 million.

Turning briefly to our view on the full year of 2015, our confidence continues to build and the projections we previously shared of total revenue of 2015 exceeding $100 million. Consistent with our January 2015 stated goals, we believe we will recognize revenue for over 3300 GenDrive units and over 15 new hydrogen infrastructure sites in 2015, as compared to over 2600 GenDrive units and 10 hydrogen infrastructure site in 2014.

As we previously forecasted, we saw a sequential ramp in the third quarter and we anticipate this trend continuing through the balance of the year. In terms of total administration expenses, as we have previously shared, we believe we have approached the required critical mass level and will only need to invest incrementally to support continued growth. Therefore, we see tremendous leverage opportunity in our 2015 forecast and we envision we will leverage this even further as we move into 2016.

In regards to margin expectations, we are seeing and still anticipate sequential improvement throughout the year across all our product and service businesses. Overall gross margin and EBITDA margin rates are moving in the right direction. In the fourth quarter of 2015, we still anticipate we will exceed 25% gross margin on our GenDrive units, driven from increased volume leverage, supply chain cost downs, and product design improvements.

In regards to overall service margins, we still foresee substantial improvements, which will stem from many factors: growth in hydrogen infrastructure, a continued positive blending in the run rate of the newer, more reliable GenDrive designs, and our continued significant progress in addressing uptime issues of installed fleet.

As we move into the final quarter of 2015, we look forward to continue building on our strong platform and sharing with you our continued success. We believe we are making the right market and product investments to not only achieve our 2015 objectives, but equally important set the stage for another successful year in 2016 and beyond.

We will now open up the line for questions.

Thank you. We will now be conducting a question and answer session.

(Operator Instructions)

Our first question comes from Eric Stine with Craig-Hallum. Please proceed with your question. Your line is live.

Hi Andy and Paul.

Hi Eric.

How are you?

I'm fine. So you guys, you laid out the mix on the GenDrive gross margins, but could you just clarify again, I don't know if I missed it but maybe some of the one-time items that meant that was down sequentially.

And then, if you could just talk about the confidence that you have in that, or what you see in sequential improvement in fourth quarter. Is it fully transitioning to the low-powered stacks or any details there would be helpful.

Sure Eric, this is Andy. First, the difference between the second and third quarter is purely mix. Our cost structure for GenDrive remained the same.

We're about to see a dramatic change, though, here in the fourth quarter. We have two, you mentioned the air-cooled stack from Plug Power, but it's actually a bit more than that because we've actually revamped and simplified that product line. Not surprising is one gains more and more experience like any offering and we're still early on the learning curve.

We're about to take another dramatic, make another dramatic improvement in our cost or our class-3 units. A lot of that driven by using the Plug Power stack.

Additionally, we'll have less impact in the second quarter, we're, in the fourth quarter here, we're also introducing a newer version of our class-2 product, again leveraging the new Plug Power stack. And, the impact will be a bit less because we'll be shipping a smaller percentage of the overall units with that stack but well positions us in 2016. So when we say we're confident about the 25%, as I mentioned in the call, we've already manufactured 454 units this quarter and many of them went out with the Plug Power stacks.

Got it. And you're seeing those types of margins?

You've got it.

Okay. Thanks for that. Then maybe just on bookings, just wondering maybe there's some context. I know you're reiterating that you think you'll be over $200 million in bookings. But I mean you're now at $166, so I mean is it fair to say that you expect it to be well over that number or are you looking at that there maybe is a little bit of lumpiness and deceleration in 4Q on the --

Yes, I -- we've stuck to numbers for the year, Eric, and haven't changed them. Could be a little lumpiness, but we're stating publicly it will be $200 million which would be $34 million in bookings, and I think that $200 million number is one that I think investors should use.

Okay. Then last thing, just you mentioned the new customer, and I know we'll get more details in a few weeks, but, I mean, anything you can share there just in terms of size, maybe how it compares to some of the customers you currently have or any way that we can think about what that potentially is.

That's a good question. So one of the customers has somewhere around 30 distribution centers globally, either directly managed or indirectly managed, and the other one has some, has fewer distribution centers, but some very, very large centers with over a thousand forklift trucks. And, I hope to be able to share much more soon with everybody.

Okay. That's it for me. Thanks.

Our next question comes from Matt Koranda with ROTH Capital Partners.

Good morning, Andy and Paul. Thanks for taking my questions.

Good morning, Matt.

Good morning.

So just wanted to clarify, I did jump on to the call a little late so sorry if I missed this in the prepared remarks, but how many of the 396 units that you guys had shipped in prior periods were recognized during the quarter?

All of them. The ones who were shipped the second quarter you're saying?

Yes, yes.

Yes, they rolled into the fourth, the third quarter, yes.

Got it. Okay. And then on a go-forward basis, it does sound like we're going to see less of a lag here. But could you just comment on the implications of the financing developments that you guys have made and are we going to see any more lag between units shipped and recognized, or is it all going to kind of coincide together now going forward?

Coincide together.

Yes, there's definitely narrow and be much more coincided, run together.

Okay. Got it.

And then in terms of the Q4 implied guidance here, I mean you guys are reiterating your full-year guidance for revenues. I think that implies about $35 million in revenue in Q4. Could you talk about maybe the split between product and service revenues, and what are the implications for how many GenDrive units we can expect in the fourth quarter?

Paul, you want to take it? I'll take a crack at it, Paul, unless you got some exact numbers there.

Go ahead.

Why don't you take a crack.

Well, I think, in terms of the units, I think it's going to be relatively proportionate in terms of as you go out, so we don't see a big disparity in that regard in terms of the third quarter mix, I guess I would say.

Let me kind of elaborate just a little bit more. We'll -- I would ratio everything Matt, so if we did 31 this quarter, it probably would be -- if you took each of our lines and did 35 over 31 times the revenue value, you'll be pretty close.

Okay. All right. Got it. We can do that. And then just, sorry. Go ahead, Andy.

This will be probably a little less by that ratio just because it's, it's just grows about 10% per quarter, but it gets you, that will get you in the right range.

Okay. And then the implication I think from the release, you guys said there were about six GenFuel stations in progress. Do you expect to recognize all six of those during Q4?

I would say at least five of them, Matt.

Okay. So that implies roughly five sites.

My COO's in the room shaking his head in agreement, so.

Okay. Got it.

And that implies five sites delivered during Q4? Is that fair to say?

That's fair.

Or are we looking at additional sites as well?

No, I think that's fair to say.

Okay. Got it. And then just looking a little further out, I know you guys probably aren't going to want to provide too much commentary on 2016 just yet given that we're still in 2015, but $234 million in backlog, a lot of that is long-term service revenue. Could you just talk about what portion of that $234 million is in product that could be delivered in 2016 and the visibility you have in into 2016?

No, I, Matt, so when we think about 2016, first let me say this. We, in January, we are going to have an update call we mentioned during the prepared portion of the script, and during that update call we'll give an update for 2015 as well as our projections for 2016.

I think that a good deal of rollouts, and I'll do it in terms of rollouts. I think a good 60% to 70% of the rollouts are well-established and we know what's going on.

Okay. Got it. And then last one, I mean, with the ITC potentially expiring beyond the end of 2016, what are the implications for 2016 specifically, I guess, do you expect to see a pull in of revenue during 2016, and then how would, what would the cadence of revenue look like if the ITC were to expire in 2017 and beyond?

That's a real good question, and we've -- I think that we're certainly keeping a close watch on what's going on in Washington, but we've been planning and operating the business as if the ITC is going to go away. We have a clear financial road map which we've shared with our board for 2017, 2018 and beyond. In many ways, we kind of take a step back because we're so far in the learning curve. The ITC going away could be an advantage versus competition because we've learned and shipped so many units and driven our costs down.

That being said, we're not attempting to over drive customers to deploy in 2016 because Plug's going to be in the same place delivering good units and growing rapidly in 2017, in 2018. We think the ITC being around will help and continue to accelerate this market, so we're a strong supporter of continuation.

So not giving you a direct answer, Matt, as far as I'll give you this direct answer, our plans for 2016 will not include acceleration due to expiration of the tax credit. And, two, the Company is really defining clear plans and share them with many of our customers about what happens post-2016, and we feel we'll be in a strong position, especially those who are earlier on the learning curve in case it does go away.

Got it. That's helpful. One more if I could, in your remarks, I think Andy, had mentioned some dramatic improvements in the class-3 units, beyond just the stack that you guys are introducing your own internal stack, could you just highlight some of the design changes maybe in the class-3 and then if you could maybe with the class-2 as well?

So class-3's actually kind of simpler, Matt. The class-3, the product was designed originally as more of a not surprising, very generic product. It had every bell and whistle you can imagine in there to make sure that we weren't surprised in the field.

As we've gained more and more knowledge of the applications, we've been able to actually simplify the product, so there's probably 30% less components by eliminating duplicity between what happens if this, a high throughput product versus a low throughput product. And if you take a look at it, and I don't know when you were here if you had a chance to look at it, but it's actually a much, much simpler product with less components.

With the class-2 there's less dependence on being liquid-cooled. There's much more dependence on fans and blowers, which again, kind of like the original class-3 product reduction, that simplifying of thermal management of systems has dramatic impacts of cost across the platform.

Look, the next generation after this class-3 and class-2 products and we have road maps out through 2017, 2018, we still see opportunities for dramatic simplification, reduction and costs.

Got it. Thanks Andy. I'll jump back in queue here.

Our next question comes from Carter Driscoll with FBR.

Good morning, gentlemen. Thanks for taking my questions. I wanted to get a sense, with the hydrogen infrastructure, the growth in the installations in terms of new customers versus existing customers driving new sites, just trying to get a sense of that mix as it goes forward and maybe your expectations if that changes over 2016 without necessarily a quantification.

So Carter, this is Andy, again. I will give Paul a chance that I don't believe we've had a customer this year, whether new or old, who hasn't selected our GenKey solution who's doing, who's starting their installation up.

So I don't expect to hit 100% every time, but when we started GenKey, we expected about an acceptance rate of 50%, 60%. It's been more than 90%, and this year I can't think of one that we haven't, not used GenKey, So I think that we're, 95% of the new installations we do next year, I think it's fair to say it will be GenKey. And I think it's because, look, it makes it easier, and nobody cares as much about this market development as Plug, so customers want to have one company that controls their service, controls their product, controls the hydrogen infrastructure just to make their activities simpler.

And it was -- we were directed by customers to do this, Carter, over the last two years, and it seems to be the way people want to buy. And that's, and we expect it to continue in 2016 and beyond.

And I'm assuming that there really isn't any different rate between North America and Europe in terms of the adoption of the solution.

I think that's actually a good question. I think in Europe, like we did here in North America, we'll leverage partners to start. But like North America, what we've found in the long run that being more vertically integrated allows us to better service our customers in the long run as well as provide better quality products and, probably just as important, more margin dollars to Plug Power eventually.

Obviously that's going to filter through the service margin as the scale continues to grow and you get more just chain efficiencies as well. But, a fair statement if we have our, obviously our own assumptions, about that mix shift and the percentage of total GenKey growth. I'm assuming that has a pretty healthy effect on the service margins going forward.

Yes, volume obviously helps a great deal, and the newer units that we're shipping are going to be a big factor as well. Yes, I think that's a fair assumption. As we add these new GenKey deliveries for hydrogen and units it certainly adds a backlog of service and fuel deliveries that are going to be dividends that continue to pay as we leverage those revenues in the next five to six years.

Maybe just a couple more for me. You talked about swapping out some of the stats over time, if I think I heard Andy's prepared remarks, you think that might bleed out over the next six to eight quarters at kind of a steady dollar impact. Is that fair or could that be a decelerating impact over time, or is it just the schedule of when you think some of these stacks are going to have their early failure rates?

Yes, I think, Carter, I think what we saw in the last quarter was an indication, but there's a good deal of analysis going on internally now that we know how far we can push the life of the stacks out in the field, the liquid-cool. I think that, how that plays out during the next six to eight quarters, I think we'll be in a much better position during the January update call to provide more specific numbers.

But I don't expect it to be accelerating.

Okay. Okay. And then just following up on the previous question, in terms of the ITC.

Do you see the introduction once you get all the Is dotted and Ts crossed of the financing arm, is that something that might help mitigate the loss of the ITC in terms of bringing down the cost of capital and making it a more attractive solution because it will be off balance sheet for a number of your customers. Was that one of the ideas behind introducing the financing? Was to get ahead of the expiration of the ITC or was it more of a straightforward, it's easiest for us to sell if we can have a cheaper solution?

I'll answer your question yes and yes. So I see the assets, we believe that there's multiple paths that the Company will take if the ITC goes away. It's a combination of the leasing programs and the value of the assets long-term.

It's combination GenDrive products where we see continual cost reductions and continuing improvements because we really believe we still have room to go, and I think the third area that we see is that there may be some opportunities on the pricing side of the equation.

Fair enough. That's all I had at this time. Thanks for your time.

Okay.

(Operator Instructions)

Our next question comes from Jeff Osborne with Cowen and Company.

Yes, good morning, just a couple questions on my end.

I was wondering, Paul, if you can talk about the services loss of $2.8 million. I think you called out in the prepared remarks that the replacing of the stacks was about $1 million, and you expect to run at that $1 million per-quarter run-rate for the next six to eight quarters, as Carter was asking. But can you just talk about what the other $1.8 million was coming from and what you're doing to address that?

Yes, so Andy had actually talked about the stack. That's one component of the overall equation but the service revenue is a combination of our hydrogen installations, our fuel deliveries and the servicing of the units in those sites, and so I'd say, Andy also talked about the hydrogen infrastructure being really a product that we're focusing on with cost downs. It's a relatively new product for us.

For any of you who have followed us, know that last year was really the first year we started selling that infrastructure. So as we continue to deliver and build on that, both in terms of volume, design improvements as well as just supply chain levered with volume, it's going to kind of enable us to drive those margins down, and we're pretty confident we're going to get those margins in the same projectory we've seen with GenDrives.

And on the fuel, that's today, it's the resale agreements that we have with the big gas companies, but as we go forward, and Andy's talked about, we've looked at a lot of different hydrogen strategies where we think there's plenty of opportunity there to continue leveraging more margin out of that business stream as well.

Got it. And then, Andy, on the Texas wins that you announced with Walmart, [true that] Praxair has a facility in Texas, I was wondering, A, are you using Praxair for those facilities given the location advantage that you have.

And then, B, I would have thought, now that you're four to five years into a relationship with Walmart, that we might start seeing more framework agreements to go over multiple sites at one time. And I think Walmart as close to a dozen sites in Texas. Is that something that's being considered or are you just focused on kind of one-offs still?

Okay. So Jeff, we do have a framework agreement with Walmart, which was signed in February of 2014, if I'm getting my years right. And in that framework agreement we, for additional sites all that's executed is a one-page agreement with Walmart. We signed. They signed. We move on.

We have a clear plan, actually where all sites have been identified through next calendar year where we're going to go, where we're going to deploy. In the call I mentioned at least ten sites.

Those are planning sites and four months, five months prior to the start of a site, we receive a signed addendum and then we're off the races but I can tell you I know every site that we plan to do through next September and we could be adding more on for the remainder of the year.

And just, given your geographic dispersion of them, they seem to be concentrated in clusters. Is Texas the next cluster then?

Yes, Texas and, since many people have found it and figured it out, Florida's in the next cluster after that.

Got it. And then can you just touch on, Andy, in past calls you've talked about acquisitions and the fueling strategy and electrolyzers or whatnot. Where you stand on looking at the M&A pipeline and then related to that question, just assuming you're using cash for an acquisition, if you chose to do so, can you just touch on what the GenFund terms are? Is there any minimum cash balances or debt covenants or just, I didn't see a 10, or sorry, an 8-K about the closing of that.

Clearly, there was some stuff on the internet about it. But, any specifics around the terms would be helpful.

I'll let Paul answer that portion, but let me talk about acquisitions. John Cococcia spends a good deal of time looking at opportunities, primarily focused on hydrogen infrastructure, hydrogen generation and infrastructure. I think, we continue to look at, scan the universe to see if there's someone who could add to our capabilities and not drain our cash. I think there's a number of discussions that we continue to have all the time.

Nothing, nothing, I'll say this, nothing has been signed or agreed to, but if we could find someone who could dramatically increase our capability, not hurt our bottom line, and help grow the market faster and there may be some people like that out there, we would welcome the opportunity to consider bringing them into the Plug Power fold.

I'll let Paul talk a little bit about GenFund and maybe a little bit more about how we see GenFund evolving.

So to date, the way to think about it is we've set this structure up as a platform to be an efficient interface between our customers and sources of capital, so we're all ready and have been working on making that process to finance our customers' offerings and solutions that they choose much more efficiently, and so we've been building relationships with the capital markets and the banks and we've got that momentum already in place. So there's not necessarily, to-date, capital committed specifically to that structure as much as alliances with institutions to drive much more efficient financings and closings of those processes.

But as we move forward, quite frankly, that platform enables Plug to use it in many different strategic ways and as we continue to kind of leverage different sources of capital to fund that, those initiatives, it will continue to be a fairly broad strategic platform that we can use to do that.

Okay. That makes sense. I thought I had read that one of your capital partners had agreed to finance $9 million a month of transactions starting last month, I believe it was, through the end of next year and so you're just saying there's no minimum requirements of any equity value or cash value you need to have on the balance sheet for them to make that capital commitment on their part?

They're a broker that's helped facilitate this structure and they've helped to reach into financial institutions in the capital market much broader, and they're helping us do that much more seamlessly with those institutions. We have had a number of institutions who have signed in kind of non-binding letters of intent to participate, to support more efficient processes, to enable this private label captive financing solution to be operate more independently and more seamless with our customers. So that's really the phase I effort that we're under as we speak.

Got it. And then just last one, sorry for more so many questions, but Andy, you mentioned the northern European retailer you'll be signing a contract for. Is that a trial that you've had? I think at your analyst day you talked about five to six trials that were underway in Europe several months ago, and IKEA obviously being from northern Europe would be a good candidate. But can you just touch on what you're seeing from trial conversion from the HyPulsion?

Sure. So this is a customer that we had a trial going on, so that is a why, look at Prelodis which went from a trial to a deployment. This customer will do the same, and I had a third customer which I would put close in a similar position.

Got it. And then gross margin profile over time should be similar to the 25% range for Europe as that ramps up next year?

Yes.

Great to hear, thanks much, guys.

Okay. Thanks, Jeff.

Thank you. I would now like to turn the floor back over to Andy Marsh for closing comments.

I appreciate everyone's time today and I look forward to providing the updates on our January update call, not only for 2015, but for 2016 and beyond. So thank you, everyone. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.