普拉格能源 (PLUG) 2016 Q4 法說會逐字稿

Greetings, and welcome to the Plug Power fourth-quarter and year-end 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. Is now my pleasure to introduce your host, John Cococcia. Please go ahead, sir.

Thank you. Good morning, and welcome to the Plug Power fourth-quarter and full-year 2016 earnings conference call. This call will include forward-looking statements, including but not limited to statements regarding 2016 and 2017 objectives, including goals related to revenue, sales, bookings, gross margins, and GenKey and GenFuel installations. 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 investors. However, investors are cautioned to not unduly rely on forward-looking statements, because they revolve 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 annual report on Form 10-K for the fiscal year ending December 31, 2015, 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 would like to turn the call over to Plug Power CEO, Andy Marsh.

Good morning, everyone. Two weeks ago, we held a call to provide all of our stakeholders our plans for 2017 and beyond. We also provided insight into our preliminary financial information for our fourth-quarter and year-end 2016.

Paul, today on the call, will provide detailed information which is in line with our presentation two weeks ago. Today on the call, I will be quite brief, providing highlights for 2016, as well as reiterating our goals for 2017. Paul will then come on and again talk about 2016 detailed financial information, as well as his thoughts on the upcoming year. We will then open the floor for questions.

But let me touch on a few highlights for 2016. And obviously sales and bookings, we had continued momentum with both old and new customers. One of our new customers was Carrefour, the second largest retailer in the world. Carrefour will be deploying our largest deployment outside of North America, over 150 units, and those units were shipped in the fourth quarter. Carrefour has aggressive expansion plans, and Plug Power is targeting to become the source of power not only for that fleet, but for many fleets beyond that.

We had four additional new customers in 2016. And between new and old customers, it really supported our contract bookings of $280 million for the year. Had a record year for shipments; over 4,000 GenDrive units were shipped. We constructed 18 hydrogen stations. And we provided fueling out of our own systems every seven seconds in the US; by far, by a factor of 10, more than everyone else in the country combined.

I'm also pleased with our ability to drive cost out of our product and service offering. For the year, we are reporting over 30% gross margin for GenDrive. Only a few years ago, this margin was negative. And Plug's ability to design and improve our products every 18 months, coupled with our ability to globally source components, is one of our core competencies.

We did have some disappointments though. Our biggest disappointment has been our inability to develop a low-cost financing source. This is our top priority for the business in the coming year, and we will be talking more about it soon, as Paul speaks. And it is well-recognized by management and Board that this challenge needs to be addressed.

So more into 2017, we will ship over 5,600 GenDrive units, build 25 fueling stations. This will result in GAAP revenue of over $130 million, a growth of over 50% from 2016. Margins will be between 8% to 12%. And the Company will be EBITDAS-breakeven in the fourth quarter. Contract bookings will continue to grow. We expect $325 million.

So when I take a step back, if you look at gross margin improvements, the Company becoming EBITDAS-positive, our ability to continually grow our bookings, I think this is a real statement that this business can thrive without the US investment tax credit. And I know that has been an overhang on the Company, but I think we are demonstrating that we will be successful with or without the tax credit.

As we talked about two weeks ago, like most mobility fuel cell companies, we see a large market opportunity in China for industrial and commercial vehicles, based on governmental policies. We have not included any deployments in China in our 2017 plan. We have been conservative, because often the speed to deploy new technology often lags projections.

But we are beginning to ship sample units to test and delivery [vans] for on-road op use. We expect there's products to be qualified in the August-September timeframe, and we have projects that are planned targeting deployments in the fourth quarter. And if they occur, that will be upside for the business.

We also have a number of other activities ongoing in China that we will discuss during the coming months. Our plans for China -- I think this is really important, because I have had a number of investors call me about this -- include no additional cash required from our present plan. We will be leveraging the financial resources of our partners to grow this business.

With or without China, 2017 will be a breakout year. As we stated a few years ago, we believe that most vehicles will become electric. Electric vehicles are a simpler design, fundamentally lower-cost and more reliable, and support trends such as asset ownership, autonomy, and society issues like carbon reductions. Fuel cells are the right answers for many electric vehicles. And customers deploying fuel cell electric vehicles will find that if you're deploying forklift trucks to on-road vehicles, robots, drones, or even electric airplanes in the future, Plug Power will be a Company to engage, to have a high-performance, reliable, cost-effective solution.

I say that with a great deal of confidence. I was talking to an officer of one of the largest companies in the world, who reports to their CEO. He says they have been scanning the fuel cell market on the mobility side for industrial applications for three years. And he told me he has visited all of my competitors, and that no one comes close to what Plug Power has achieved, both from a technology as well as a customer perspective, about how you put products in the market. So on that note, I am going to turn it over to Paul, so he can dig into the details for 2016. Paul?

Well, thank you, Andy, and good morning, everybody. First, let me start that there has been no material change from what we disclosed on February 22. Second, we are very pleased with our performance in 2016. These results stem from a lot of hard work from the Plug team, and these efforts have created a lot of positive momentum as we head into 2017.

With a strong fourth quarter, we set a new record for full-year deployments, underscoring the mounting demand for our products. This increasing demand has translated to a positive top-line run rate, and represents a healthy mix of both existing and new blue chip customers. In turn, this top-line performance, combined with increasing focus on design improvements and better supply chain leverage, has resulted in measured margin improvement. Lastly, before we move off of this slide, let me say that, while we demonstrated strong progress in the year on improving operating cash flows, we recognize we still need to make even more progress. This is a key focus for us in 2017.

As Andy mentioned, our fourth quarter capped off a record-setting year for deployments. We deployed 1,204 GenDrive units in the fourth quarter, bringing our total cumulative deployments over 14,800 units. For the full year, we deployed 4,010 total GenDrive units, representing a 10% increase over 2015 activity.

Turning to installs, we completed another five GenKey sites in the fourth quarter, bringing our cumulative sites installed to 42 in the past three years. Also of note, one of our fourth-quarter GenKey sites was our first reformer site completed, where we will generate hydrogen on-site from natural gas. This marks the start of a new product offering that we expect to further develop in 2017. And we believe these kinds of product investments will allow us to continue expanding our addressable market in material handling, and over time, could help open up new markets.

We delivered fourth-quarter GAAP revenue of $32.6 million, representing an 85% increase sequentially. Service revenue came in at approximately $5.1 million, a 3% increase over the same period in 2015. Revenues associated with our power purchase agreements, or PPA as we refer to them, were $4.1 million. And fuel delivery revenues came in at $3.4 million, up 92% and 93% from the same period in 2015, respectively.

The fourth quarter ended with approximately $383 million in contract backlog, up from $236 million at the end of 2015. Our contract backlog is a combination of system deployments planned for the near term, as well as the service and hydrogen delivery commitments over the next few years. This backlog provides a strong base as we work toward our 2017 top-line goal of $130 million. In addition to these top-line GAAP results in 2016, we delivered over $66.6 million in system values to PPA customers, including $16.6 million in the fourth quarter.

As we discussed before in the first quarter of 2016, we began using a different financing approach for our PPA deployments, to improve liquidity and long-term customer economics. In 2015, while the financing methodologies provided for revenue recognition, the financial institutions required the Company to collateralize these arrangements with cash. In 2016, the new approach not only provided for more upfront liquidity, but provided the Company longer-term ability to extract value by retaining the assets.

The alternative financing approach in 2016, however, required different accounting treatment as compared to the arrangements used in 2015 and before, which had required upfront revenue recognition of GenDrive shipments and hydrogen infrastructure deployed. As such, we have continued to provide this year some additional information for context, of what we deployed in 2016 and the cost of those deployments and to provide some comparability to the prior year.

As of December 31, 2016, there were 25 GenKey sites associated with PPAs, as compared to 14 at December 31, 2015. As we have conveyed recently, we are working closely with our key PPA customers to improve the financing terms for the Company, to deploy these systems. This customer is not only excited to continue significantly leveraging this solution, but they are being very collaborative to help the Company find substantially improved financing terms.

Turning to our GAAP gross margin, our ongoing top-line growth, along with design improvements and supply chain leverage, is resonating in our performance, demonstrated by continued significant margin expansion. As a result of our strong fourth-quarter deployments and ongoing cost focus, we reported fourth-quarter GAAP gross margin of $3 million, or 9.2% of sales. As compared to GAAP gross margin in the fourth quarter of 2015 of negative $9.4 million, or negative 24.5% of sales.

The fourth quarter of 2015 included a $10.1 million charge associated with loss contracts, stemming primarily from legacy stack issues, which were by and large, addressed in 2016, with improved designs and membrane upgrades. Excluding the charge in the fourth-quarter 2015, the year-over-year improvement represents a 740-basis point improvement.

It is important to note that we have made tremendous progress in reducing costs. For example, since 2009, our cost per GenDrive unit has fallen nearly 70%, driven by increased volumes, supply chain efficiency, an intense focus on engineering a simpler and less costly product. To highlight this point, for Q4 2016 gross margins for GenDrive and GenFuel infrastructure improved 13% and 29.4%, respectively, when compared to the same time period in 2015.

We have a similar focus on service revenue as we expand our utilization of our site view data and analytics platform, improve the reliability and performance of the core products. Our ultimate goal remains better than 30% gross margin for each of these major revenue lines.

We remain confident the Company has achieved critical mass with regards to its admin and R&D infrastructure. Hence, total OpEx costs continue to trend in line, and remain relatively consistent overall. However, expansion of our product line and services, combined with ongoing focus on product innovation, has resulted in slightly elevated run rate for the research and development, particularly in the fourth quarter.

We remain focused and prudent about where and when we incrementally will invest in new resources. We expect OpEx costs in total to be at similar levels for the near term. In keeping these costs in line, we will continue to see greater leverage on this cost base as we go forward. And this will serve as one of the key drivers putting us on the path for EBITDAS breakeven or better later this year.

The fourth quarter represented an important milestone for Plug Power, as we achieved positive GAAP operating cash flows. It is important to note that this demonstrates we are clearly headed in the right direction, but we still have work to do. As we reflect on 2016, we are most disappointed with our inability to source cheaper cost of capital for project financing and corporate funding solutions. While the situation is common for companies growing into an EBITDAS- and cash flow-positive enterprise, it does not sit well with us, and remains a key focus to improve on.

One example, as I mentioned earlier, is that we are developing better financing approaches for our PPA programs, which will result in more choices, better terms and lower costs for Plug Power. We hope to share more with you on this in our Q1 call.

In regards to our corporate funding options, our continued growth, expansion into new blue chip customers, and traction on our margin performance are some of the key drivers that will continue to open up more cost-effective capital solutions. We sit today only nominally leveraged, as our debt relates to either specific equipment on a small number of projects that have been deployed, or in the case of Green Bay facility, it leverages our restricted cash and will be serviced as that cash is released.

We ended the year with over $46 million in unrestricted cash, and no minimum cash covenants. The elimination of these covenants provides the Company greater flexibility as we support the growth of 2017 and beyond, and as we continue to evaluate a range of additional possible capital solutions. These solutions could include options such as a potential working capital facility, or a term loan to fund the growth anticipated in the second quarter and beyond. It may also include an at-the-market equity program to broaden our tool set as we transition to longer-term options to fund growth.

Although these are just a few examples, as we have conveyed before, our bias, where possible, is to find solutions that minimize dilution to our shareholders. We will be able to share more on these options as we proceed through the year. But we are confident with the options available to us to fund our growth and continue driving down our cost of capital over the long term.

Turning to our guidance, to add to what Andy mentioned earlier, we have a lot of momentum going into 2017. For revenues, we have over $105 million of the 2017 revenue plan currently in backlog, giving us confidence in our ability to hit the number for the full year. We continue to target 50% growth, and will do it with a higher percentage of non-PPA business. With that said, the PPA sites we will deploy in 2017 will represent over $65 million of future revenue and cash flows.

In regards to gross margin, despite the loss of the investment tax credit, we are confident we will not only grow sales, but we will be able to grow our margin profile. We anticipate we will see improvements across all product lines, and will stem from similar themes that we have successfully executed on to date -- increased volume leverage, design enhancements and supply chain leverage.

As we look forward, we have conveyed our expectation for total cash we anticipate to use for 2017, for both operating cash flows and investing. The continued improvement in our product margins and volumes in the second half of 2017 will drive us to positive cash flow and EBITDAS run rates later this year. To that point, given the continued growth forecast, we believe in 2018 forward, we will routinely be achieving positive cash flows and EBITDAS. This concludes our prepared remarks, and I would like to open up the call for any questions.

(Operator Instructions)

Eric Stine, Craig-Hallum Capital.

Good morning, everyone. I will just stick to some quick modeling questions, since you covered this a couple of weeks ago. Just want to clarify on the OpEx -- elevated R&D, maybe some clarity there? I assume that might be related to what you have got going in China. But you said that you expect it to be similar. Is that similar to the fourth quarter level, or are you saying similar year over year? Those would have two different outcomes.

Well, the first part of your question, there is some China development. There is also some development on our new reformer product that we just launched. But I think 14% to 14.5% bogey is what I would kind of use as our run rate numbers for OpEx.

Okay, got it. And then lastly for me, obviously you made very good progress on the GenDrive systems, targeting it in the other parts of the business. Maybe just some things that are limiting you today, whether it is in the service and fuel part of the business, also in the PPA business? Do you have a thought -- obviously you mentioned 30%. But any thoughts or a target when you think those can turn positive at the margin line?

I will let you take that, Paul. I would probably just want to add, on the service side, two weeks ago, we talked about, Craig, the work we have going on, based on our GenSite facility, where we can see every unit in the field. That has given us an opportunity to better-manage our workforce, to better-manage -- make improvements on reduced failure modes.

On those items, we have a great deal of activity in place, to continue to drive down service costs, like we have done with product costs, over the past two to three years. We have the same sort of aggressive program in place. But I will let Paul talk on the more financial end of that question.

I think, we already have made -- obviously have been real successful in driving the margin profile of GenDrives. Infrastructure is probably the next biggest thing in our revenue plan. We have already made, again, good progress there in driving that profit margin profile up. We have a lot of experience in driving costs down on our systems and equipment. And we have utmost confidence as we go into this year and programs in place to continue really ratcheting that up, and productizing it, streamlining that product offering, to get to that 30% profile, within a very near period of time.

Service, as Andy mentioned, being kind of the next bucket. We have already shown some positive quarters in 2016. I think as we go into 2017, we continue to focus on that. I have never seen as much attention as we have put here recently, on reliability and improvement measures on that area. We are really ramping resources to focus on that.

Just by passage of time, I think, as we continue to get greater concentration, we are able to leverage things we have done, like opening up the two depot offices in Chicago and Ohio, where we are able to pool technicians and leverage those. So a number of factors are going to drive there. But I think you will definitely see continued great progress in our service offerings. Those are the big buckets that are really going to contribute to it. But I think that you will see more and more progress as we move through the course of this year.

So, confidence that you've got the potential near-term to get to positive gross margins there, obviously on the way to much larger goals?

Absolutely.

Okay, thanks.

Jeff Osborne, Cowan and Company.

Hey, good morning.

Good morning, Jeff.

Just a couple from my end. Andy, I know you chatted about on the last call a few weeks ago that China was not in the revenue plan. But can you talk about the bookings plan for $325 million? I assume that some --

Good question, Jeff. I actually have not put it in the bookings plan either. That is very conservative. I think that by the end of April, we will have our call, I will be comfortable, Jeff, putting a definitive number out for expected bookings. We are shipping the units, we will be doing the integration in April. At that time -- and I will probably spend a good deal of April in China. And during that time, I think I will be more comfortable putting a number out there. So that $325 million is just material handling.

Got it, that's helpful.

That is a great point, Jeff. I did not bring that up, and I should have highlighted that.

Excellent. And if we go back maybe 18 months ago -- switching gears here -- back when the balance sheet was a little bit more robust, you were talking about possibly going down the M&A path for reformation. And here you are, you won a deal -- I assume you did not develop your own internally. But how do we talk about, A, whose technology you're using, what experience you have building a reformer-based system? And then, B, as you install that, what the margins are, assuming it is third-party equipment? I assume it will be a bit of a drag on gross margins, but certainly helps the top line?

I will take the technology question, and then I will turn it over to Paul for the margin question, Jeff. We have been working with a Company for almost the entire time I have been here, looking at reformer technology. It's a European company, quite capable. And they have 20 to reformers in the field today. We have worked closely with them on how to drive down costs.

And look, I think it is a relationship that we would like to see evolve. And as our business become stronger, I think, opportunities how they could become closer to us, is certainly a potential. But look, our main focus has been, continue to grow revenue, continue to grow margin. And we want to turn this business cash flow-positive before we become too aggressive on M&A activities. And that really will be the determination when the time to bring technology, such as reformers in-house, we think, will make sense.

I appreciate the detail. Paul, any thoughts on the margin?

Yes. I think the good news is, this is largely an equipment and infrastructure sale. Like GenDrives and our current infrastructure designs, Plug has tremendous experience at design improvements and cost-downs. It took us 15,000 GenDrives to get to 38%. It's not going to take us that many hydrogen infrastructure sites to get to 30%-plus profile.

If you think about reformers, this being our first site, there is a lot of learning that goes on in that, and tweaking. As we launch that solution in our product set and we do more of them, it will be a fairly steep curve, as we continue to tweak that. So I think, like our other product offerings, we absolutely are extremely confident that we can get that into that 30%-plus profit profile. It will be on a faster pace than even the major equipment offerings that we have already launched.

Excellent. The last question I had is -- I appreciate the candidness about the challenges that you faced in 2016 with the financing solution. So many companies only talk about the positives, and not the negatives. So again, thank you for that.

To that extent, it sounds like you are still in negotiations as it relates to nailing down a solution for 2017. I get the fact that there's going to be more cash sales this year, on a relative basis, to third-party PPAs, or third-party financing. But as we look at the guidance -- not only the bookings number, but also the unit number that you provided for GenDrive -- how do we think about the risk in the event that, that solution doesn't manifest itself over the next couple of months?

Jeff, our close partner in the PPA agreements understands this issue, and in many ways, we have been quite frank with them about the issues. We have an understanding in principle, and we are trying to work through the details to make sure that it will work for both parties. So I would expect that over the next month or so, you will probably be hearing more from the Company about some of our business activities. It is, quite honestly, the issue that I think the Board and management feels really good about 80% of the business in this issue, with how to resolve the cash flows issues with the PPAs.

Making sure we are generating more cash today is an issue that we are completely focused on. I can tell you, there's actually meetings going on now, as we speak here, that Paul and I will move to after the call. And we recognize, it is the two big issues last year that confront the business.

And on the ITC issue, I think that we have been able to position greater value with our customers, and that's helped a great deal on pricing. On the PPA issue and the financing issue, I think we are at the ten-yard line, and the right ten-yard line.

That is good to hear. It sounds like you've got a busy two months ahead of you then, if you are going to be spending time in China and nailing that business down, and then also getting the PPAs. So I wish you the best of luck with both of those endeavors.

Jeff, I suspect I have a busy five years ahead of me. But hopefully, all going in the right direction.

There you go. Good luck.

(Operator Instructions)

Sameer Joshi, Rodman & Renshaw.

Thanks, good morning, Andy, Paul and John.

Good morning.

Most of the questions and issues were addressed in the last call, and on this call so far, but just some bookkeeping questions. Your net loss was around $19.2 million. So I'm trying to reconcile, was there any other corporate debt-related recapitalization costs or warrant liability costs that brought this number down from what I would expect?

Yes, we tried to articulate it in the press release. But just for sake of clarity, I think you are aware that we went through a number of capital initiatives in the fourth quarter to better-position our capital structure and our debt terms. And we incurred some charges associated with those actions.

So I think it was -- well, we disclosed it was $0.03 impact, it was $5 million of various charges and write-offs of fees and so forth that were associated with those numerous actions. So in our mind, a one-time event there that impacted results in the fourth quarter, but obviously wouldn't be something we would incur every quarter.

Right. Thanks for that clarification. Just two more bookkeeping questions, and then I have a question about China. What is the shares outstanding number, most recent?

It is $191 million, I think, is what we have.

Okay. And what is the debt amount? Is it $[40] million?

We really only have -- the debt right now, we have this facility with Green Bank, which is around $25 million, associated with the leveraging of our restricted cash that will get serviced as that cash releases. The only other financing we have on our books is, we have capital leases which, as I mentioned, were very specific to some projects that got deployed last year.

But the limitation of collateral and focus on that capital lease is unique and specific to those projects, it is not broader than that. We sit in a pretty good position, I think, in terms of flexibility and ability to move forward with additional options.

So Paul, when I look at -- so the Green Bank loan is paid back as restricted cash comes off of our balance sheet.

Yes.

And the project debt is actually paid for by the PPA stream, into the business.

That' s right.

Understood. That was my understanding as well. So that is a question about, in absence of project financing partnership, I know it doesn't mean that it probably will happen, but if that doesn't come through, would you be able to use any of your own cash? Or are there plans -- I know you mentioned, Paul, fund growth. But does this fall into that category?

I'm going to take this one. I think I addressed it with Jeff before, is that, it is a specific customer that we are focused on which represents the project financing. And my ability to fund project financing at the right rate is obviously not as strong as some of the blue chip customers I have. And our confidence level that this will be resolved before the next conference call is extremely high. We recognize that we can't finance projects long term the way we have done it in 2016, as well as our key customer understands that.

I think on the last call -- thanks for that answer. Moving on to China, on the last call, we got the impression that the ProGen, that you're targeting to deliver the first 100 units during the year. There is a possibly that, that number might be higher. Has there been any more clarity that you have gained in the last month?

Over the last two weeks --

Two weeks, sorry, yes.

We've had a -- even yesterday, I had meetings here, liaisoning with people from our partners in China. The business could be significantly larger than the 100 units being deployed. But as I mentioned, projects for new technologies sometimes -- often there's delays. And instead of sitting here in the fourth quarter discussing the delays in the programs, we thought it would be better for investors to let them know that there is a certain risk profile associated with how fast deployments occur.

We are going to trucks, we're going to on raw road testing. It will be the first time flexing -- even though the supply chain looks almost identical, it will be the first time flexing that supply chain. I think when you start thinking about project risk and timing, we think it is prudent to think about this as a 2018 activity. That being said, if everything went perfect, the numbers could be significantly higher then just the 100. I can tell you, I have been on very few programs in my life -- from the first wireless deployments, to broadband deployments, to GenDrive deployments -- that everything went off perfectly.

And so I am really excited about the market potential. I'm really pleased, not only with the partner we have with Furui, but other partners we will be talking about. I'm just cautious until those first couple hundred units are running on the road and everything is running fine and everyone is pleased.

We just want to make sure the time risk -- and I view it as a time risk, not an opportunity risk -- that people put that into their thinking, so that they have a fair perspective about what will happen. That being said, China is the place the electric vehicle market is going to explode. Plug is a Company that is going to be there.

That is great, actually. And just to clarify, the $130 million target doesn't include these revenues, am I right?

That is correct. It includes zero revenue from China, including, it does not include the 100 units.

Great. Thanks for that, Andy.

Okay.

Carter Driscoll, FBR Capital Markets.

Hey, guys. Good morning.

Hey, Carter.

Can I just start, Paul, reiterate some of the commentary you gave with guidance? If I heard correctly, you said $105 million of the expected $130 million was in backlog. You're expecting a higher percentage of non-PPA revenue this year. And then the third was over, what, $65 million of future cash flows in 2017 associated with that line item? Are those correct?

Yes. The third bullet though that you mentioned -- just for clarity, those programs that we will deploy with those PPAs this year, what we have in the plan that we've shared and our goals, would generate $65 million of future revenue and cash flows. Obviously some of that would get recognized this year, as is in our plan. We are just trying to provide additional color as to what those programs will translate into.

And that is predominantly the PPA revenues we generate out of that. But there is some fuel component as well, that we generate for those sites. So the $65 million is kind of a holistic view as to what that would generate in terms of future cash flows.

Okay. But you are not specifying what percentage in 2017 versus beyond 2017, correct?

We did not break that out, no. I think these are, on average, six-, seven-year terms. So when you think about -- I think we have nine sites, what we've talked about in our goals. So you can do some averaging math of how that might play. But in terms of this year, if you assume evenly spread through the year, would probably be the best way to think about that.

Okay, that is helpful, thank you. Andy, I realize there is not a lot you can add to what you talked about in terms of addressing with your large PPA partner. Can I at least ask, are your discussions talking about just trying to improve the cash flow terms for future deployments? Or is there any potential of reworking existing PPAs?

Let me watch how I answer this. I think the main goal is to make sure we receive the maximum cash upfront. So I think we, quite honestly, aren't really good in the financing business. And other people, especially the blue chip customers, are better. How we escape the financing business and fund it upfront is really the focus of the discussion. And quite honestly, in a very simplistic term, make sure we get more cash today than it has cost me to put it out the door.

Okay, that is fair, thank you for that. The next question I have is, the service margin surprised me a little bit, on the downside. Was there anything particular in the fourth quarter to make it at least a percentage of sales -- I realize it is a low number now -- but its percent of sales, why it picked up?

Because it was coming off of a positive number in 3Q. I was just trying to get a sense of the run rate. Obviously it's tied into your hitting your volume goals and things of that nature, and then better-utilization of existing resources. But is there anything specific in 4Q that was a one-off?

I think that if you look at the usage of our equipment and sites, during the Christmas season, Thanksgiving season -- I think this is probably a bit of a learning here -- you see 40% of the usage of the equipment during the year, 50% probably during the last three months. And you just get more wear and tear on the equipment. I think that is probably a learning we need to evolve into our model, to make sure those costs are maybe averaged out, or project what is going to happen in the fourth.

But that is primarily the driver. I think the positive is, a lot of our customers moved a lot more goods with our products than they did ever before, and they wore their equipment out a little harder. The first three quarters, it's a lot easier on the equipment.

My last question is -- so similar to, I think, your commentary about using your partner's balance sheet a little bit more, and their better access to capital, or at more attractive terms, is that a similar approach in the way you are targeting China? You've talked about a low initial CapEx. But do you have enough clarity in how you expect those plans to evolve in terms of establishing a local supply chain in China?

Would you directly participate in that, be a supplier of technology? How do you see that specifically evolving? I'm trying to compare and contrast it with one of your competitors in Ballard, and what they have set up. And just trying to get a sense of -- is that a similar type of strategy you are going to utilize?

I would say, first, talking about the immediate deployments in 2017, they will be shipped out of this factory here. And the working capital to support that activity, as well as some of the development expense, will come from those partners in 2018, and I would think agreements will be cut in 2017.

We see probably joint-venture structures slightly different than our competitor. We are much more interested in larger ownership positions, and speaking in terms of higher ownership positions, licensing positions. And we will probably focus on a few partners, not just a single partner. But looking at people with -- especially for -- I will call the critical partners, someone with deep balance sheets that can support this business in the long run. So I do see it evolving similar to our competitor, but some differences in how we may be thinking about how to achieve longer-term value.

And then my last question. I believe, Andy, that you, during the update call, alluded to winning some additional deployments at non-Walmart customers in North America. If you can, talk about who specifically? Can you confirm that these were repeat wins? And maybe characterize their end-market business, if you cannot identify them?

Some of them are -- I think during the last earnings call, I kind of threw them into three categories -- traditional customers, new customers and customers who did their first deployment in 2016. The majority of the bookings for the fourth quarter were for customers who fell in that category. They did their first deployment in 2016, and now they are doing more.

I will take the rest of mine offline. Thanks, guys.

Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

I would like to thank people for the call today. We are looking forward to communicating more and more with our investors, and this is really a bit of a difference in structure here today. We try to use the earnings call as a time for Paul, really, to dominate the financial discussions. We have to have a few more events during the year which are more strategic in nature, like our call two weeks ago, to keep investors abreast not only of the financial trends, but the long-term strategic trends for Plug Power for 2018 and beyond. So thank you, everyone. I appreciate the time.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.