普拉格能源 (PLUG) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Plug Power Third Quarter 2017 Earnings Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, John Cococcia.

Please go ahead, sir.

Thank you.

Good morning, and welcome to the Plug Power Third Quarter 2017 Earnings Conference Call.

This call will include forward-looking statements, including but not limited to statements about our expectations regarding full-year 2017 revenue, deployments of GenKey sites and GenDrive units, gross margin, bookings, liquidity and cash collections and usage, the impact of the Amazon and Walmart relationships and the revenue to be derived from those relationships, and our outlook for 2018 including growth, future cost reductions, expansion in Europe, further testing and expansion of applications for ProGen including opportunities in the on-road electric vehicle market and achieving positive cash flow and gross service margins.

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 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 annual report on Form 10-K for the fiscal year ending December 31, 2016, and our definitive proxy statement on Schedule 14A filed with the SEC on May 23, 2017, 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's CEO, Andy Marsh.

Thank you, John, and thank you, everyone, for joining Plug Power's third quarter conference call.

This morning we announced our third quarter earnings.

Just as a reminder, as in the first quarter, we changed the structure of the earnings release to a shareholder letter.

This format is one used by other technology companies and we believe this approach provides greater detail and transparency and was well received by investors in the first and second quarters.

The shareholder letter provides management's insights into the company's third quarter performance and our outlook for the remainder of the year.

Like the last two earnings calls, management will review the highlights for the quarter as well as our outlooks for the remainder of 2017.

Most of this call will be devoted to questions and answers.

The first half of 2017 was focused on closing major deals with Walmart and Amazon.

In the past quarter we started executing on those deals.

And in the third quarter we shipped 2,753 GenDrive units, a unit increase of over 200% from our previous quarter.

Over 95% of these units utilize Plug Power manufactured stacks.

We deployed 9 hydrogen stations at our customers' sites.

Just to give you some perspective, Plug Power has deployed almost twice as many fueling stations compared to the number of consumer stations in the US.

We had GAAP gross revenues of over $61.4 million, an increase of 250% from our prior year.

We saw the results from modifying our financing structure for PPA deployments.

The new structure utilized to finance 4 PPAs in the quarter, generated proceeds exceeding the cost of equipment by over $3.1 million.

We completed $44 million in new bookings, bringing the year-to-date total to nearly $160 million with wins from two new automotive companies and a new material handling customer, Asko, via Toyota Material Handling Norway.

Plug also continued to reduce costs and improve gross margins with an increase of adjusted gross margins to approximately 11% versus approximately 2% the prior year.

The company experienced an improvement in gross margin across all our recurring revenue streams from previous quarters, demonstrating our continued focus to improve these long-term revenue programs.

On the product side, the rapid ramp of our supply chain impacted gross margins by approximately 5% from our expected run rate.

But this is a positive indicator of future margin improvements for the company.

We believe with our continual efforts to enhance our product design, improve the efficiency of our service organization, this trend will accelerate in the future.

Before turning the call over to Q&A, I'd like to highlight one fact.

No publicly traded fuel cell company ever executed a quarter anywhere close to Plug Power's recent quarter.

This quarter demonstrated Plug's ability to deliver fuel cells and hydrogen infrastructure to some of the most demanding customers in the world.

The knowhow to develop and ship commercial grade product at scale is critical for the evolving market for fuel cell electric vehicles when we talk to potential partners.

When one considers trends beyond carbon reductions, such as electrification and transportation, mega cities, autonomy and sharing economy, fuel cells are the ideal power source for applications requiring range, fast fueling, and heavy asset utilization.

Our first projects in this area for on-road fuel cell electric vehicles with Dongfeng and FedEx were successful, having accumulated over 1,000 kilometers and growing every day.

But they were just the start.

Though material handling is our near and midterm focus, we are beginning to thoughtfully develop other applications as was our vision laid out over 5 years ago that forklift trucks were just our foundation into the broader electric vehicle market.

Paul and I will now take questions.

(Operator Instructions) Sameer Joshi, Rodman & Renshaw.

As you gear up for or continue to deliver against the Amazon and Walmart orders, do you expect any additional investment in the manufacturing capability that affected your Q3 results on the gross level?

When we look at the 3Q results on the gross margin level, the real issue I think was really, as I mentioned in the talk, it probably impacted our gross margins by approximately 5%.

And that really was going, that was really a result of expediting the supply chain.

If you recall, the Amazon orders were received in April of 2017.

And between then and the end of the third quarter, we delivered 2,753 products.

So the ramping of the supply chain I think was really our biggest challenge.

As far as the manufacturing goes, we have increased over the past quarter, but I would not say it impacted the results, our ability to manufacture more stacks.

We've streamlined our manufacturing facility to be a more progressive assembly type operation.

But I really can't say it was capital requirements or future capital requirements that will impact our gross margins.

As I noted in the earnings shareholders' letter, we actually have capacity to manufacture 15,000 fuel cells a year at our Latham facility.

As far as the provision for a common stock warrant goes for these orders, what period do you expect this to play out?

In other words, what do you expect the timeline for the $600 million worth of orders to be executed on?

I'll let Paul talk about the warrants and how that will be managed.

I think the timeline, I think we've mentioned before we think this is probably a 4 to 5-year type activity.

Paul?

Yeah, I guess I would just add that as you can probably imagine, it kind of goes, it's allocated against those revenues, so we'll have a proportionate amount that will be recognized in that duration until they hit that $600 million mark for each of them, being Walmart and Amazon.

Okay.

As far as the Toyota Material Handling order goes, do you expect or are you already in talks with them for non-material handling or on-road opportunities that they might have?

Or is this a totally separate division?

Structurally, Toyota Material Handling is owned, Toyota Motors owns about 20% of Toyota Material Handling, so it is a quite separate division and operation.

One last one for me.

For your outlook or guidance for 2017, I just wanted to make sure that the 100 or so ProGen units that you would be shipping to China, that they are not included in this guidance.

Is that right?

That is correct.

I've been cautious about China.

And I believe it's going to be a big market.

I also believe you have to pick the right partner to protect your long-term intellectual property position.

And the company has gone out and we've hired advisors to really help us thoughtfully think through China.

We could put, if I wanted to put 100 units on the road today, I could.

But I'm thinking about what it means for this business 2 to 3 years from now.

We'll move into China when we make sure that Plug's position is secure for the long term.

Eric Stine, Craig-Hallum.

I just wanted to follow up quick on the Toyota Materials Handling order.

What caught my eye is you working more closely with an OEM and to this point I guess the majority has been retrofits.

So just some thoughts there.

Do you foresee that as this goes more mainstream with Walmart, with Amazon, with other customers, that OEM interest has picked up and that that kind of evolves going forward?

I think that's right, Eric.

And when I think about it, and I want to make sure we put this in the appropriate perspective, look, one of the items we've done really well with the company was think through the retrofit models for fuel cells into forklift trucks.

Because there is a lot more old forklift trucks out there than new ones manufactured each year.

That being said, we have been, especially in Europe, have been working closely with a number of OEMs, leveraging their sales channels to position our products.

I think that trend will continue and I think as we become better at smaller hydrogen systems, we'll open up similar channels here in the States.

And we actually do work closely with the 3 or 4 really large OEMs in the States on a more informal basis.

But long term, and I'm talking 5 to 7 years from now, when we think about our ProGen engine, I can envision, and we've done some work in this area, where our engines will be sold directly to forklift truck manufacturers.

And I suspect we will continue to provide hydrogen infrastructure and hydrogen service long term.

That's how I really believe it will evolve out.

That's helpful.

Maybe I'll just turn to bookings.

So you reiterated that goal, so that's a big number for 4Q.

But you've got confidence in it, so maybe just the visibility you've got into it, what you've secured to date in the fourth quarter and kind of what gives you confidence that you reach that number that you have reiterated.

I think Paul put a small caveat in the shareholders letter is that we're engaged with a number of big customers.

Some of them are customers today.

We know their build plans, we know their order expectations.

The only caveat I would put in it is that will it be December?

I believe so.

Some could slip into January, but our confidence order that that order flow is coming is high.

Got it.

Okay, maybe last one for me, you mentioned the 2 new customers, manufacturers in the auto sector.

I doubt you're able to give the names, but maybe could you just talk about the initial size and maybe their eventual plans as you see them?

Both of these orders, like most, I think Amazon is a perfect example.

I started with one site and then a year later we, or actually 7, 8 months later, we deployed more.

These are conversions at portions of facilities to really demonstrate and make sure that technology meets the customers' needs.

We have no reason to believe they won't, and I would expect that it would be similar rollouts like we have seen with other customers post that point.

Chris Souther, Cowen and Company.

Congrats on the great progress here.

Looking at the cash flow on the fourth quarter, can you guys kind of walk through how you get to that $40 million -- $45 million particularly if inventory is up?

Are kind of the warrant payments, are they kind of recognized in the free cash flow?

And how exactly does that restricted cash become unrestricted?

Thanks.

The biggest impact to that number, which obviously is going to be positive, is the fact that we have such a substantial amount of collections.

Andy talked about all the volume that we did for Amazon as an example in the third quarter.

Most of that gets collected in the fourth quarter.

So quite frankly, the short answer is, we've just got a substantial amount.

If you look at the third quarter end results, we ended the quarter with over $50 million in receivables.

So that's the net is that we are building and we're doing some things in terms of working capital, but the big delta for the quarter is that most of the volume that we've delivered this year is actually going to be collected in, the collections will happen in Q4.

Got it, that's helpful.

And then as far as the pull into kind of the first quarter there, is that kind of shipments that are moved back from the fourth quarter?

Is that moved up from the second quarter of 2018?

I guess it would make sense if Amazon, Walmart kind of took a break around the holidays, but just wanted to get an idea of how we should think of the seasonality going forward there.

It's not pushback from this year, it's actually pull forward into next year.

So as we get closer to 2018, we work closer with these long term customers on their longer term programs, and from the excitement of the deployments we've done this year, the desire to have those pulled up to be ready for the holidays, a combination of events that have pulled those programs up to earlier in Q1 than we originally anticipated.

So if we're going to have those ready to go live early January, obviously that means we have to do a lot of that work in the fourth quarter to be ready for it.

I look at it as a high-class problem and a good opportunity and we're excited as we keep pushing forward that they're pulling these programs forward.

That's definitely good to hear.

Then just kind of looking forward on the gross margins, how do you guys kind of look at that evolving over the next couple of quarters as far as if that could be influenced by kind of PPA treatment?

How do you guys kind of think of that?

I think first and foremost, obviously mix helps a great deal.

So as we continue to sell more equipment, which is our most favorable margin profile, that obviously has a very positive impact on margin.

Second to that, the ops teams and the service teams and the infrastructure groups continue to make great traction, great efforts towards reducing cost.

So we've got a number of programs that we have been rolling out, continue to roll out, that will continue to improve margin further in our service, our fuel and our equipment lines.

We expect you're going to see continued progression, both in terms of total dollars because we have a higher mix with equipment, then you're going to see better run rates given the programs that we're rolling out that are improving each of those product and service lines.

Perfect, thanks a lot for the good detail, and I'll hop back in the queue.

Thanks.

(Operator Instructions) Carter Driscoll, B. Riley FBR.

My first question, just a point of clarification.

So from what I read in the script, you did one Walmart deployment in the quarter, but if I read correctly, there were multiple PPA deployments, is that correct?

Yes.

So what we closed in the quarter was the financing and funding for 4 sites.

3 of those had been done in Q2, but just the timing of getting the Walmart agreement closed and getting the funding program with our primary bank Wells Fargo closed, happened in July.

So we've closed and funded on 4 sites.

But operationally there was just the 1 site, the other 3 had happened earlier.

We still have a number of PPA sites that will go live in Q4 and we'll close and fund on those as well.

I was basically just trying to get at that it's still Walmart, it's just the timing of when you close the financing from past installs, not necessarily that there was any change to Amazon being all cash sales.

That's right.

Yes, that is right.

Can you talk about, obviously you must be happy at least in the initial draft of federal tax reform legislation for the ITC to be back extended for fuel cells.

Can you talk about your expectation of this potentially passing and what that could potentially do to some of your discussions going forward assuming it does pass?

Sure, Carter.

I, like most people, don't understand exactly what will happen in Congress.

There's lots of variables there.

I think it's really important though that the resistance quite honestly to these types of tax credits are higher in the House than in the Senate.

When you look at the fact that the Reed Bill which had over 115 co-sponsors, 8 members of Ways & Means support it, Republicans were co-sponsors of the bill, the fact that the House understands not only the fairness but the value for American jobs of this legislation is important.

I think that there's probably two paths forward.

One path is associated with the fact that if tax reform does happen, I think the likelihood of this credit being included obviously is dramatically improved.

It's much easier being in legislation than trying to talk yourself into it.

I think the second aspect I think that's -- there's a second path where if there is issues with not being able to come to terms, but to get funding for the government post December 15th, there's more of an omnibus.

I think this kind of -- our bill, the bill we're involved with has significant support among Democrats too.

I think the likelihood could be high.

But look, it's Washington.

We're in much better position than we were a month ago, but anything could happen.

I think the impact to our business, I think could really brighten the outlook for next year.

I have had a few customers who either have held back or the tax credit probably would have tipped the deal over, and I think it could be a significant accelerator to revenue and margin over the coming year if the bill passes.

Appreciate that color.

Can you talk about, one particular -- has helped your service margins improve, I mean obviously there's certainly more units out and spreading across -- the service personnel are getting better leverage there.

Is there anything else in particular other than having more units in the field that you can share with us in terms of your expectation?

I think the important item, when you look at service costs, it's really two items.

It's personnel and stack replacements.

And we have been doing some experiments and some work.

If you really look at stacks, stacks really come down to two basic skills.

One is the design of plates and the other is electrochemistry.

And we've been looking at formulations and have shown formulations that have extended the life of our stack significantly.

We expect to start rolling out those formulations early next year and I think the combination of longer life stacks and more efficient use of labor, those two items probably are 70% of my costs.

And I think we can dramatically change the game over the coming years with just making the stacks run a little bit longer.

And I think the business becomes a lot healthier on the service line.

Probably it's one of the hidden values of us really going back into stack development, the fact that we're really controlling the equation for the performance of the system.

You touched on, I guess really I think publicly identified your one Chinese partner that you're comfortable with.

Can you talk about where you are in the process of vetting some of the others?

You talked about retaining an advisor, talk about maybe what end markets they may be in if different than Dongfeng and/or would they bring different types of characteristics to the relationship that you could work synergistically with Dongfeng or would it be a separate partner and just be a different line of business potentially?

When I think about -- when you look at, Carter, where the market is going for fuel cell electric vehicles, the first market, and this has been defined in a McKinsey report that was presented by the Hydrogen Council of New York City, forklift trucks, buses, delivery vans are viewed as the first real commercially viable businesses.

And light duty trucks.

So if you look at who we're taking to, they fall in all 4 of those categories.

So there are folks we're talking to who manufacture buses or manufacture trucks in China, as well as some which are in the supply chain.

We're talking to folks who are in the logistics business.

And they are the kind of partners we're looking to work with.

But as I mentioned before, and we have a rather set schedule.

We have a set agenda and set engagements and look, it has to work for us long term.

This is really important.

If 6 months from now I conclude this isn't going to work long term for Plug, and I say I, I mean management team and Board, will not do it.

But if we find the right partner, we find the right opportunities, we understand how Plug can continue to grow with that business, we'll do it.

Then last one for me, can you talk about when you signed Amazon, obviously another bellwether customer, but I think a lot of the focus was on the fulfillment centers but also the tech collaboration piece which I know you find very valuable as well.

Can you talk about what you have or have not done?

I realize this was a very blockbuster quarter for you, so it probably was not first and foremost.

But have you begun any type of development work with them?

Maybe talk about some of the other maybe competitors that are trying to do similar type of work with them?

Any additional color would be helpful.

Thank you.

Here, Carter, I probably have to be a little respectful, but if you think about the obvious applications for the last mile, the advantages fuel cells can bring, hey look, fuel cells have -- if you really look at the world, fuel cells versus lithium batteries, where fuel cells win is energy density and range.

So if you think about things like delivery vans, they are the applications where fuel cells make the greatest sense.

And they are the kind of applications not only are we looking at internally, but talking to our key partners about how they engage with them to develop those kinds of products.

Craig Irwin, ROTH Capital Partners.

So, Andy, obviously really encouraging to see ITC collected for fuel cells in the chairman's mark.

Can you clarify for us, historically my understanding is that the benefit of the ITC accrued to Plug in the negotiated sales price of the lift trucks in the contracts that you had with your legacy customers?

And as a second part of the question, can you maybe comment about how you would expect the potential reinstatement of the ITC to impact profitability of shipments for Amazon and Walmart?

I mean is this something that you had previously discussed for them or is this something you'll need to go back and ask for your fair piece?

Let me take -- so Craig, in -- first, it is a real significant move to us that the ITC is included.

And we think that from a product perspective, you can almost think of about half of that accruing to Plug Power.

In some of the contracts, that had been established.

The ITC is incorporated, they have the right to that ITC.

And with some of the other customers, that's a benefit that would accrue to Plug.

So that's why I kind of would split the baby in half.

For new customers going forward, really in new deals going forward, it really impacts the price we can sell our products for.

Okay, maybe you can comment if I ask the question this way.

Do you have a preexisting arrangement to split the benefit of the ITC with your marquee customers Walmart and Amazon?

Or is this something that would need to be negotiated on the potential reinstatement?

With some it's in place, with others it's not.

Excellent.

And then the bookings expectation for the back end of the year, I know there is a lot of uncertainty given the potential positive things out there, but can you clarify for us, you've said before that there were no warrant grant agreements that you would pursue for large contracts.

Can you just confirm for us again that the large bookings that you expect in the backend of the year are not being discussed as potential warrant grant customers?

That is true.

I will confirm that again, Craig.

Thank you.

We have reached the end of our question and answer session.

I'd like to turn the floor back over to Andy for any further or closing comments.

Thank you, everyone, I appreciate your time today.

I just would like to reiterate again, the company shipped 2,753 units, 200% from prior quarter.

We deployed 9 hydrogen stations.

No one has ever done what Plug manufacturing team and design team accomplished this past quarter.

Thank you, everyone, and look forward to talking to everyone soon.

Bye now.

Thank you.

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