普拉格能源 (PLUG) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Plug Power Fourth Quarter and Year-end 2017 Earnings Call.

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

I would now like to turn the conference over to your host, Teal Vivacqua, Director of Marketing Communications.

Thank you.

Please go ahead.

Thank you.

Good morning, and welcome to the Plug Power 2018 Business Update 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 collection 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, 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 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 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, Teal, and thank you, everyone, for joining Plug Power's fourth quarter and year-end conference call.

This morning, we announced our fourth quarter and year-end earnings.

Just as a reminder, in the first quarter of 2017, we changed the structure of our earning release to a shareholder letter.

The shareholder letter provides management's insights in the company's prior performance and our outlook for 2018.

On February 8, Plug Power provided highlights for 2017 and set expectations for 2018.

During the brief formal presentation today, Plug Power will focus on 2018 and devote most of the call to questions and answers.

So let us start with our focus for 2018, is to grow revenue and our target this year are $155 million to $180 million and achieve EBITDAS breakeven in the second half of the year.

Critical in that effort is reduction in both service cost and hydrogen.

Service cost reductions are being achieved by our longer-life stacks and higher utilization of our service staff.

Hydrogen cost reductions are being achieved via the efficiency improvements of our hydrogen fueling systems.

The second item which is important to growing the business is expand our footprint with present customers, completing multi-site agreements with the largest retailers and manufacturers, European business growth and simplified fueling stations to facilitate smaller distribution centers.

We expect more success in all of these endeavors in the coming year.

During the last call, news was breaking that the investment tax credit for fuel cells was on the verge of passing, an event that occurred the next day.

The law in effect through 2022 allows many of our customers and banking partners to receive an immediate 30% tax credit on their purchases of fuel cell devices, with some reductions in the outer years.

This law will be helpful to Plug Power's long-term revenue growth, gross margin enhancement and cash flows, with significant benefits in 2019.

Plug Power expects some financial recoveries for deals completed in 2017, which will be beneficial to this year's cash flows.

I'd like to emphasize that the company has demonstrated the ability to rapidly grow without the investment tax credit, as demonstrated by our 55% top line growth in 2017, but believe this will be an additional accelerator for the business.

Today, we also provided a bit more insight into our China activity.

We've engaged Barclays to assist us in identifying, engaging and negotiating a JV with potential partners.

Plug Power's goal is to have a partner with strong market access and internal demand that will allow the company to have a significant ownership position with protective governance rights and a commitment to a long-term partnership.

To date, Plug Power has received more than a half dozen term sheets based on these objectives from Plug.

The 6 leading companies have market capitalizations on average of over $15 billion.

Assuming, and this is important, that our partnership criterias are met, we target selection of a JV partner in the near to midterm.

But to conclude, I'd like to reiterate that our priority remains building a profitable material handling business.

Value proposition is proven, the world largest retailer and the world's largest Internet retailer are doing mass deployments of our solution.

The promise of this material handling market should not be understated.

Though large, our deployments have captured less than 1% of the forklifts running in the world, leaving headroom for growth.

In addition, McKinsey predicts that this will be the common solution across the industry in time, with our leading-edge products, advanced stacks and experience in fueling.

Plug Power's products are applicable to a variety of industries.

The growing strength in our core market and our robust technology foundation positions Plug to enter these markets when entering makes business sense.

Paul and I are now available for questions.

(Operator Instructions) Our first question comes from Chris Souther with Cowen.

It looked like R&D was up slightly in the quarter.

Should we be thinking of that as a new run rate for 2018?

Or were there any onetime projects in there?

I think we actually -- I think it's consistent and we'll expect it to be consistent as we go forward.

There may have been a little bit of product development investments but nothing of size or necessarily any onetime events that you would discount.

So I think that's a good proxy.

Okay, that's helpful.

And then, you guys have discussed some of the progress you made evaluating partners in China.

Would you be able to give any color on specific applications you've been looking at there?

Is it buses, trucks, any passenger vehicles?

Just trying to get some more insight into the market strategy there.

Sure.

When we look at the markets, and I think this is generally accepted, when you look at what's been outlined by the global Hydrogen Council, which is, as you know, a conglomeration of 20 of the leading fuel cell and hydrogen companies and energy companies in the world, when you look at it, the first real markets in China will be commercial markets, that being trucks, delivery vans, buses.

And I think the later markets will be passenger vehicles.

And I think it's generally accepted in China that, that's probably 5 years out.

Part of the people we are speaking with have capabilities, like many large Chinese conglomerates, which go across both commercial and passenger vehicles.

I would believe that any success in the next 3 to 5 years will be more geared towards the commercial vehicle market.

Okay.

And then the last one, coming back to the U.S., what has the feedback been on the tax credit extension?

Has that had any impact on the sales pipeline or customer discussions?

Chris, that's -- I mean, I think that's -- if there's a catalyst that's -- for this business, it really is associated with -- in the near term, it's really associated with the ITC.

When I take a look, since the passage of the IT, our customer engagements have significantly accelerated.

And look, our customers have assumed, and we haven't necessarily assumed this, that the ITC would never exist.

Many of them are going back and reviewing their business cases.

And I really think that the big benefit will be in 2019.

But we're going to see benefits, some benefits in this year, especially on the bookings side as well as on the margin side, with the passage of the ITC.

It was a big deal.

And I think that when one thinks about our success in growing this business without the ITC over the past year, this is going to be an additional accelerator, and as I mentioned, especially in 2019, just because of our customers' planning cycles.

Our next question comes from Chip Moore with Canaccord.

So maybe just following up on that last one.

I think you talked about potential for maybe a little modest benefit from ITC this year.

So I guess you're just staying conservative in the guidance, leaving that for '19, just the prudent thing to do would be the first question.

And then some of the cash flow benefit you could see from recovery, any way to quantify that at all?

I will handle the first question and I'll let Paul take the second question.

And that I think when I look at it, Chip, these are big customers we deal with in Plug and they have planning cycles.

And you want to catch these customers at the right time.

Certainly, many of them have reengaged with us at a different level.

But one thing I don't want to do here is make promises for something that could happen in the fourth quarter, and it slips into the first quarter during negotiations.

That's -- when you're also dealing with these large customers, it's positive that they're not that quick to change once you're in, but they're also not -- you also have to work through their internal processes.

So I do believe that this is going to be quite beneficial, both on the revenue growth side and margin growth.

We're only a month into this, though.

And as I mentioned before, we are -- we may have maintained faith that it was going to pass during the -- since the late 2015.

Customers are a little bit more cautious and were not nearly as deeply engaged as we were.

So I think that the activity certainly is accelerating.

It's going to be beneficial.

It's hard to put exact numbers around it today.

Paul, do you want to talk about recovery?

Yes, I think the good news is we have a very strong relationship with our financing partners.

They continue to be supportive.

They recognize that this ITC passage comes largely from the efforts that Plug and a few other industry leaders have driven.

And they want to be fair in this process and they also have a long view in terms of working with us.

And so we're actually still in the throes of the final negotiations and resolution of that, so the number is not resolved exactly.

I will tell you it will be meaningful, and I will tell you that it's kind of -- to give you some context, it's associated with the 5 projects that we did with these lenders last year.

And those financings in total were kind of in the $20 million range for the project financing.

So more to come as we refine that and we kind of work through that discussion with them.

But we think it will be meaningful and we think it will happen fairly relatively soon.

Got it.

That's helpful.

Appreciate that.

And I guess, moving on, any update -- I think it's been about a month since the last call, but on that third potential retailer in North America, any changes in those conversations?

I would just say this, Chip.

The ITC has been quite, quite beneficial in that effort.

Post the passage, our engagement level and the negotiations have accelerated rapidly.

Got it.

That's fair.

And I guess, just lastly, bigger picture, how you're thinking about stack improvements, I guess, more for balance of '18?

And then, at the Investor Day, we talked about that potential step function transitioning to metal plate technology.

Where do those efforts sort of stand?

Sure.

It's on schedule, Chip.

And as I think Keith presented at Investor Day, we will be testing prototypes in the second half of this year, with product ramps scheduled for the first half of 2019.

So we are on plan to achieving that goal.

Our next question comes from Eric Stine with Craig-Hallum.

Just coming back to the ITC a little bit.

I mean, obviously, this is more of a 2019 event, and it's probably more about bookings this year.

I mean, should we think about this more as it's new customers that can now get their pencil out again, see if this works for them and come back to discussions with you?

Or is it potentially something where your existing customers speed up their installations?

How should we think about that?

I know I'm going to sound like a lawyer here.

Both, Eric, and it's certainly -- it encourages our current customers to move quicker, the economics just becomes so much stronger.

And it also allows others to try.

So I think this has -- will have benefits with both, and our sales effort is actively engaged on both of those areas you mentioned.

I also think -- it also will help with smaller customers also, as it makes the economics again much more attractive.

Got it, got it.

Okay.

Maybe last one.

I mean, I'm sure things obviously haven't changed a whole lot in the last month.

But just curious, update on FedEx, where that stands and the deployment of the vehicles and maybe your expectations for that piece of the business in 2018?

Yes, that's a good question, Eric.

And it's -- as I've mentioned before, most of our staff is very, very focused on making sure we hit the financial targets today.

Folks like Keith Schmid and myself have spent a good deal of time, not only with FedEx but other activities like that.

So we do have a fueling station here and we're deploying products here in the Albany area now.

I can -- I was actually watching on the screen, because it has a GPS built into our unit -- of the units running around Albany.

And we're seeing really good performance with the units there.

One item that I don't think folks really can fully appreciate it, the requirements for these kind of products are actually much simpler than our material handling unit.

They don't have to go through the environmental stress.

They don't have to run as many hours.

And we're really pleased with what we see.

And we do have a couple, and I'm going to say -- and again, they're not at the top of the funnel.

They're not at the bottom of the funnel, but there is some global activity we have going on in regions of the world where hydrogen fueling stations are being put in place.

And we are pursuing those opportunities based on the success of the ProGen platform running the FedEx truck.

And we're continuing to look for opportunities, especially again in California, in the United States, with the delivery providers where fuel cell-powered vehicles or fuel cell hybrid vehicles, as this truck, really makes a lot of sense.

So I couldn't be more pleased with the performance of the units and I wish all the environments I worked in were like this, Eric.

Okay.

No, understood.

And just to clarify though, I mean, your guidance for 2018 is really materials handling.

You're not including China, FedEx, any of that?

It is, it is 99.5% material -- actually, it's 99 -- probably 92%, 93% material handling.

There's probably another 5%, 6% is some of the backup power units I do and about 1%, 0.5% other activities.

(Operator Instructions) Our next question comes from Carter Driscoll with B. Riley FBR.

So first question is, and not to beat the ITC to death, but the kind of the true-up that you could potentially see, does that give you more confidence in reaching EBITDAS breakeven?

Or could you even potentially generate positive EBITDAS in the latter part of the year, if you -- if the true-up really does come in the second half of this year?

I would say, Carter, that -- and I'll let Paul comment, too.

It obviously makes that path simpler.

And I don't want to use the word more confident.

It just provides, I'll say, additional buffer and that -- so when we say EBITDAS breakeven in the second half of the year, that means that the summation of the third quarter and fourth quarter will be EBITDAS breakeven.

Paul, do you want to add to that?

Yes, I think that's right.

And the reality is it's incremental value to Plug.

And it's a meaningful -- will be a meaningful impact.

So obviously, it's a positive and helps that front.

In terms of the -- maybe qualifying some of the Chinese term sheets or potential joint ventures, could you talk maybe just about some of the potential scope and/or structure of the term sheets?

So would some include say, fueling infrastructure and others might not?

Would some target a different section of -- or segment of the commercial vehicle space?

Just some level of clarity, I think, would be helpful.

I realize no real impact to 2018, but trying to get a sense vis-à-vis some of your competitors and what they have structured so far in China, localization component, things of that nature.

Sure.

So I think that a couple of items that we have focused on, Carter, that have very high level, I'm not looking for something that just generates short-term revenue for Plug Power.

We are playing -- we like to have short-term revenue, but it's much more geared towards finding partners which have a long-term vision and has a long-term vision of Plug with a substantial ownership position during that time.

I think the second item is that we are looking to do joint ventures with companies that have demonstrated in or are leaders in the sale of commercial vehicles or have access to those leaders.

And what also we have found attractive is that they may have internal demand that can help instantly build a business.

I think I would imagine that this JV would have some capability to manufacture and assemble locally.

I also believe that this JV will be focused on -- when it comes to hydrogen infrastructure, I think they'll probably be less of an emphasis on that.

And using the capabilities of -- that's being developed in China at the moment, it strikes me -- the infrastructure portion of it strikes me as more of a government activity as much as a -- and so I don't -- I'm not as anxious just to jump into that.

I think there's a lot more complexity in China that's going to be associated with where it goes, who's paying for it.

And I think there's a lot of complexity and I think there's a lot of capability and a lot of volume associated with fuel cell systems.

Does that help you, Carter?

It does.

Just maybe as a quick follow-up, do you have any concerns given the increasingly hostile rhetoric coming out of the current administration in terms of IP and/or potential negative effects from increasingly hostile trade rhetoric?

I mean, does that have any impact on your thoughts or structure, potential structure of the JVs at all?

Yes, I'll say this when it comes to IP.

That's probably where we've been spending most of our time -- I shouldn't say most of our time, but there's a good deal of effort on internally how you structure IP protection so that we don't lose all we've gained over the years.

So that is a concern.

Now when it comes to government policy, we -- I was down in D.C. last week and understanding what's going on in the trading activity and with CFIUS, I -- it certainly is in our thought process as we think about structuring it.

And look, we'll keep abreast of it.

And when I put caveats about the right business deal for Plug, that's when we'll do it and certainly thinking about government relations -- government activity here in the States comes into that equation.

Okay.

Maybe shifting gears a little bit.

Help me understand the PPA margins in 4Q '17, a little bit surprising and maybe just the factors that contributed to that and how that potentially continues into 2018 or moderates?

I'm going to turn that one to Paul.

Yes, I think, well, in general, I just would start with just our retail customers, they have higher peak usage of units in the fourth quarter, so the ports cost and other service costs will be slightly higher.

But in general, I would say it's really kind of a tale of 2 stories.

One is legacy sites and legacy deals and go-forward deals.

And so one of the major things that happened in 2017, as we've talked about, has been the improvement of the financing of those programs.

And so we are already seeing the benefits, the significant benefit in those structures.

And as we go forward, that will only continue to improve.

And as you look at the things that we're experiencing in our other product lines and other customers with cost curves on equipment cost and service and running those businesses, they continue to improve.

And I think the combination of those continued cost downs across equipment and service lines and financing cost for those programs, you're going to continue to see a very positive trend with some overhang of those legacy deals, particularly the ones in '16 and '17, where the financing costs were quite higher.

So I think we will see -- we do expect and we'll see positive trends in that category as we go into 2018 and beyond.

Okay.

So you see more of the 4Q as just a kind of 1Q blip in terms of just timing perspective?

A combination of timing and overhang of some of the legacy deals.

And as we go into '18, we certainly start -- we'll see that to turn positive.

Okay.

Maybe just a quick update, Andy, on Europe.

You obviously had a nice move with Carrefour.

You had some other single initiatives with guys like FM Logistics.

Obviously, there's a big retailing whale out there.

Give me the -- your perspective on where you stand in Europe in terms of progress in 2018?

Sure.

It is -- during my prepared remarks, Carter, I did mention that Europe is one of our focuses.

And just to give you a feel, I mean, I'm heading to Europe on Monday.

And we're really focused, as you mentioned, on the large retailers, the large manufacturers and especially in areas which have been promoting hydrogen, such as the U.K., France, Germany.

And we're looking not only at new names from Europe, but leveraging our North American successes in Europe.

And we have -- I think over the past year, we've put together systems which will make it easier for us to sell.

We have a small office, a distribution office in Belgium that helps support customers.

We have service staff already in Europe, the success in the effort.

We have a sales team represented in all those key countries.

And Jose Crespo and myself believe that there is a real opportunity in Europe that, in many ways, it's a different environment than the U.S. And it's not that our U.S. customers don't care about sustainability.

Bottom line, making sure that sustainable solutions lower their costs are a big driver.

I wouldn't say the Europeans are that much different, but they are probably more aggressive in thinking about meeting their carbon goals.

So I think that the business, business, Plug, has really matured over the past year.

So we obviously have not been perfect.

But the systems, the skill sets are really in place.

The relationships with the customers, I think that Jose and I both feel now is really the time to put that big push into Europe.

And it's quite honestly one of the reasons I'm heading there.

I'll be speaking in the U.K. this week.

I'll be over in Germany, just because we really think there's -- now is the time.

And this business has grown up a lot.

I look at our processes, our systems, the improvements in our products and we're ready for a global footprint, which may not have been the case 18 months ago.

Okay.

And then maybe last one for me.

Automotive customer you talked about, any chance or timing on when you could name the customer?

You're talking about the China -- I just want to make sure we're on the same...

I think you had talked about a...

Q4, there was, yes.

We haven't disclosed it.

As you know, with customers, sometimes they are a little sensitive as to disclosing names.

So we just haven't disclosed that yet.

Our next question comes from Colin Rusch with Oppenheimer & Co.

Carter, Paul reminded me what it was.

Now I know the deal you're talking about.

And let's make sure we're clear.

That's a material handling customer who is in the auto industry and that deal is actually closed.

I just can't announce it.

We'll go ahead over to the next question to Colin Rusch with Oppenheimer & Co.

Can you just give us a sense of how that inventory position is going to trend throughout the year?

Are you going to be able to work that down a bit and how much so?

Go ahead, Paul.

The answer is, yes and substantially.

I mean, I think we have a pretty big target to reduce that investment this year.

It will be gated kind of in parallel with the growth of the volume.

But based on current programs, we think we can pull that down at least kind of in the 30% or more range, if not higher.

And that just comes with increased discipline, a focus on running the business and working closer with our key supply chain partners.

And so we're pretty comfortable.

I think the last half of the last year was, as we've talked publicly, it was not dealing with the substantial ramp in the business that we had and we've successfully deployed those programs.

And as we go forward with increasing volumes, increasing throughput through the facility, it affords us more latitude to be more disciplined and more thoughtful about -- and more proactive about tightening the reins on some of those key operating metrics, and that certainly will be one of them.

Perfect.

And then Andy, you talked a little bit about infrastructure in China.

And obviously, there's a lot of moving parts here.

But you've had plenty of experience and you've had lots of conversations with folks.

What are you looking for as kind of key milestones to -- as an indicator that things are really moving forward from an infrastructure standpoint?

Yes, I think that -- when I think about China, Colin, I think that there's 3 areas.

And even in the United States, people need to think about these 3 areas.

Obviously, we're more mature here.

First is generation and delivery capability.

And when you think about China, most of the -- there's only 1.5 tons, a ton of liquid hydrogen.

And for moving and transporting large quantities of hydrogen that's needed, there needs to be liquid plants brought online.

And there are people engaged in that activity in China, but I think that looking at generation capability is step one.

And that's, I think in some ways, the markets -- the market will move faster once hydrogen is available.

The second item, which is probably more a question of time, is associated with the requirements of hydrogen availability on the highway, hydrogen -- the level of hydrogen that can be stored at a location.

And there are committees in place in China to address those issues.

And I would think the second half of the year, you'll see those issues go away.

And I think the third item is that I'd be keeping an eye open for international partnerships in the hydrogen side with the large gas providers, people like Air Liquide and Air Products.

They really assist on maturing the network faster.

And I think those are kind of the elements I'd be looking at.

I think -- I haven't felt I've had to be as eager, because I've known -- we've been there enough that we knew these were challenges and issues.

That being said, look, China is best at resolving these kind of problems.

There's some advantages to highly centralized governments that can make decisions rapidly and China wants to do this.

And as they did with electric vehicles, they want to do the same with fuel cells and we expect it to happen.

(Operator Instructions) Our next question comes from Amit Dayal with H.C. Wainwright.

Most of my questions have been asked.

Just in regards to your efforts in China, does Barclays' involvement in the process signal maybe your interest in getting strategic investment from one of these JV partners you're considering?

No, I asked Barclays to help us because look, they have a fairly big presence in Asia.

The team that -- and they've been involved in these engagements for -- they've been involved in engaging with the leadership at some of these large Chinese entities.

And I thought they were a critical adviser to the activity because it's sometimes difficult to really ascertain who really has the business and wherewithal to be able to complete a JV successfully.

And I -- they've given me access to chairmans of companies, which are 75x, 100x or larger than Plug, access that I normally couldn't get.

They brought brand to the discussion, and we're working with them and they're working with us and can help us negotiate the right deal.

What comes out of the final negotiations across a broad range of issues, some of that's very, very open today.

Understood.

And just maybe in regards to warrants associated with Amazon and Walmart, et cetera, is this basically driven by the [developments] that are happening?

Or is there a schedule you're following?

If you could remind me of that aspect, please.

The warrant costs, you mean?

Yes.

Yes, so it goes proportionate with the revenue that we recognize for those 2 customers over time.

And as you may remember, both of them have a -- the broader programs are correlated with $600 million of volume from each of them.

So as we recognize that over time, there will be a proportionate amount of the warrant cost that's recognized with it.

So what -- that's the schedule.

Got it.

And then maybe on the margins front, we're seeing some improvements happening.

Cash flows are showing improvements driven by that.

For 2018, should we expect sort of a steady improvement in margins?

Or will this continue to fluctuate a little bit as revenue mix shifts between quarter to quarter?

Our -- well, you're always going to have some seasonality, and I think we've talked publicly about 60%, 65% of our business will happen in the second half typically, just because of those factors.

And so volume obviously plays some correlation to that.

But fundamentally, we expect and we are working and our plan is to continue improving those margins.

We've got specific -- Andy talked about the organization being focused on some pretty specific things.

And so our focus and energy is really at continuing to reduce the costs, improve efficiencies and drive that margin profile.

I think you're seeing that.

On the system's margin profile for Q4, it was comparative on 25% less volume from last year in the Q4 rates.

That just shows you that we're continuing to drive that cost curve down, and continue to add substantial volume -- substantial margin impact as we grow volumes further this year.

There are no further questions at this time.

I'll turn it back to Andrew Marsh for closing remarks.

Thank you for joining our conference call, and we're looking forward to 2018 and looking forward to talking to you once again in May.

Thank you, everyone.

This concludes today's conference.

All parties may disconnect.

Have a good day.