Plug Power Inc. (PLUG) Q1 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to Plug Power's 2015 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] It is now my pleasure to introduce Ms. Teal Vivacqua, Director of Marketing and Communications for Plug Power. Thank you, Ms. Vivacqua. You may begin.

Thank you. Good morning, and welcome to the Plug Power 2015 first quarter financial results conference call. This call will include forward-looking statements, including but not limited to statements regarding our expectations for future business and financial performance, bookings, product shipments, revenue, margin, EBITDA, geographic and market expansion, and inorganic growth. 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 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, 2013, as well as other reports we file from time to time with the SEC. These forward-looking statements speak only as of the day on which the statements are made, and we do not undertake or intend to update any forward-looking statements after this call. At this point, I'd like to turn the call over to Plug Power's CEO, Andy Marsh.

Thank you, Teal, and good morning, everyone. Paul will delve into the details for the first quarter later in the call. Would like to highlight how this past quarter set the stage for meeting our 2015 financial projections.

Two, Kroger continues to add sites after deployments at Compton, California, Louisville, Kentucky and Stapleton, Colorado, Plug Power will deploy units at Atlanta, Georgia in the second quarter and Delaware, Ohio in the third quarter. Three, we recently completed deployment for new customer a Big Box retailer at their new distribution center in Ohio. This retailer has more than 100 distribution centers in North America and we are already in discussion for future deployments. We also signed a master sales agreement with a large footwear manufacturer for three sites and I think most important we booked more than $46 million in the first quarter. This will allow us not only to reach our goal of growing more than 50% in revenue in 2015 and also position the company for future growth in 2016. At the end of the quarter, the company had delivered more than 20% of our year end shipping target totaling 670 units. By the end of the first quarter, the company had completed or started seven hydrogen sites which represents more than 40% of the hydrogen stations required to meet our year end shipping. When you add this all in, we will achieve 35% to 40% of our expected revenue for the year by the end of June. Our operation performance in delivering our products and service backed by continued growth with all the new customers support our bullish position for 2015 and beyond.

I now like to discuss our longer term progress increase in gross margins, we think about our material handling business has four activities. GenDrive, the fuel cells used the power forklift trucks this is our oldest product line. GenCare, the aftermarket service for our products, and GenFuel which consists of two items, the hydrogen infrastructure, as well as the delivered hydrogen to our customers. GenDrive gross margins continue to improve and we’ll achieve close to 30% gross margins by year’s end. Few years ago, the margins for these products was less than minus 60%. This turn around can be attributed to simplified design and maturing supply and higher volumes. In the coming year, we have initiatives to continue to reduce the cost of our products via design simplifications and the deployment of our own stacks. We expect the majority of the class three products in the second half of the year, will be Plug Power stacks. We’re not new to the stacks business, with more than 2500 stacks deployed in the stationery market. If one studies to gross margin improvement roadmaps for GenDrive over time, a similar trend is developing for our service activity. Our service business saw a 50% improvement in the past year, our unit uptimes are in excess of 98% and a number of stack failures have been reducing as we make continued improvements to our designs. Long-term, we expect the gross margins of the service business to equal our product offering. With our hydrogen infrastructure which is less than one year old, gross margins are also continuing to expand, a major step in the first quarter was the introduction of the in-house build of the hydrogen infrastructure. Today, what was done in the field over a months period is being built in-house at Plug Power on its gate. This gives us greater quality control, lower product costs for bulk purchases and lower installation cost. Plug Power also built in-house, the indoor fuelling stations to support our business. In summer, with respect to gross margin and sales, I would like to highlight, we demonstrate the company can book and ship products. Our goal of 50% growth this year is clearly achievable. Our GenDrive products demonstrate that we can transition offering from low volume production to our commercially viable offering with growing gross margins. And finally our GenFuel infrastructure and GenCare products are on the same cross roadmaps that we have established for GenDrives. The steps we are taking will allow us to build a very profitable $400 million to $500 million business in material handling in the next four to five years. We entered the material handling market because it could allow Plug Power to build a successful market segment for PEM fuel cells, first in the industry. We believe this market was viable because there is an economic value proposition, have large potential since more than 6 million forklift trucks were operating every day. Our initial focus has been America, but we are becoming more active internationally primarily driven by our present customer relationships and our JV with Air Liquide in Europe. Also, we believe that volume production from selling fuel cells and material handling would help drive down our cost and allow other segments like ground supported equipment and range extenders become viable markets. We've become increasingly convinced of reducing the cost of hydrogen infrastructure and the molecule along with simplifying delivery of hydrogen fuels can exist in expanding our present market and open new opportunities. Internally we are focused more and more on hydrogen, we know how to design fuel cells, and we are becoming experts of building infrastructures. More than seven tons a day of fuel on our products, with much of that fuel being delivered by Plug Power fueling stations, car companies dream of using this level of fuel in the next five to 10 years. We know hydrogen and deliver it today. We have been thoughtful of our approach to hydrogen, we found a strong molecule partner Praxair and we are improving the quality cost and performance of our fueling stations. While continuing to investigate longer term solutions for generation and delivery of hydrogen, we are making substantial progress in building out hydrogen strategy, which is being seen in our products today. In the coming year, as our strategy evolves we’ll become clear and making hydrogen simpler to uses as a fuel represents the opportunity for Plug Power to grow well beyond $500 million. Tim Cortes, our VP of Hydrogen will be presenting our strategy in greater detail during the upcoming Plug Power trip. I would now like to turn the call over to Paul discussing greater detail our first quarter results.

Thank you, Andy and good morning everyone. I would like to start off by sharing some financial highlights from the first quarter. We ended the quarter with over $9.4 million in revenue representing a 69% growth over the first quarter of 2014. This growth stems primarily from our GenKey solution introduced in 2014 and the continuing commercial traction we are gaining in the marketplace. First quarter 2015 represents continued sales momentum and even more important a quarter of build activity preparing for the number of GenKey programs slated for the second quarter and the balance of the year. In addition to the 265 GenDrive unit recognized revenue for the quarter, Plug shipped 419 GenDrive units and made construction progress on seven hydrogen installations. Looking at the gross margin, total gross margin as a percentage of sales was negative 22% for the first quarter of 2015 as compared to the total gross margin of negative 41% for the first quarter of 2014. This significant continued operating improvement is indicative of our ongoing progress both in terms of volume and cost down initiatives. We recorded an excess of $46 million in orders in the first quarter of 2015 and ended the quarter with approximately $165 million in backlog. Our backlog is a combination of units and installations planned for the near-term as well as the service in hydrogen delivery commitments for the next few years. The growth in overall backlog is indicative of our success in the market and provides a strong base as we focus on delivering on 2015 forecast. We used $13.6 million in operating cash for the first quarter of 2015 to fund the ongoing commercial efforts as well as required working capital investments. We ended the quarter with $131.5 million in cash and $155.7 million in working capital, which we believe is more than ample to support our growth in 2015 and beyond, hence strongly positions us to continue strategically investing in the right paths to accelerate long-term growth. Breaking out product revenue for the first quarter, the company recognized revenue of $4.1 million associated with 265 GenDrive units. Overall this compares to $3.2 million in product revenue and 165 GenDrive units in the first quarter of 2014. The first quarter of 2015 results reflect growth in overall volume with comparatively a higher concentration of last three units which impacts the sales mix. In addition, the first quarter of 2015 includes stationary power revenue stemming from our ReliOn acquisition, which only occurred in the second quarter of 2014 and this also impacts mix. Gross margin for product revenue for first quarter 2015 was $0.2 million higher or 6% of sales as compared to $0.3 million loss or 9% of revenue in the first quarter of 2014. Volumes certainly contributed to the improvement, but the company’s continued focus on product design improvements, supply chain leverage and manufacturer process streamlining and continue to drive margin enhancements. Service revenues for the first quarter 2015 were $5.3 million compared to $2.1 million in the first quarter of 2014. This growth stems primarily from the new GenKey solutions and the hydrogen installation revenue in first quarter 2015, with no comparable hydrogen installation revenue in the first quarter of 2014. The growth also stems from the growing number of GenCare service contracts and field delivery agreements, both associated with the success of the GenKey offering. Gross margin for the service revenues in the first quarter of 2015 was negative in the amount of $2.3 million or 44% negative as a percentage of revenue as compared to the total negative gross margin of $2 million or 95% negative as a percentage of revenue in the first quarter of 2014.The margin rate improvement on service revenues stems mainly from tremendous improvements in our installed GenDrive base performance and cost to support them. The company continues to make great strides in product design and resource leverage, the key drivers that will enable our service business to achieve our longer-term margin profiles. Research and development costs for the first quarter of 2015 were $2.9 million as compared to $1.3 million in the first quarter 2014. The incremental investments are commensurate with the company's growth including our investments associated with ReliOn and our ongoing stack development. SG&A and amortization expense for the first quarter of 2015 was $7.8 million as compared to $3.8 million in the first quarter of 2014. The majority of the incremental cost is associated with tremendous sales growth and required resources to support and drive future growth. Net operating loss for the first quarter of 2015 was $12.8 million as compared to the net operating loss for the first quarter of 2014 of $7.4 million. Turning briefly to our view on the full-year of 2015. Our confidence continues to build in the projections we previously shared of total revenue for 2015 exceeding $100 million. And we still see year-over-year growth in shipments and installations as we perceive through the quarters. We believe we will ship over 3300 GenDrive units and complete over 15 new hydrogen infrastructure sites in 2015, as compared to shipping in excess of 2600 GenDrive units and completing 10 hydrogen infrastructure sites in 2014. As previously disclosed, in our January business update, we anticipate in total approximately 35% to 40% of these revenues in the first half of 2015. Also consistent with what we previously shared, the majority of the first half programs are rolling out into second quarter. In terms of total administration expenses, as we had previously shared, we believe we have approached the required critical mass level and will only need to invest incrementally to support continued growth. Therefore, we see tremendous leverage opportunity in our 2015 forecast where we believe the fourth quarter 2015 total administration costs run rate will approach 23% of revenue. In regards to margin expectations, we still anticipate sequential improvement through the year across all our product and service businesses. Overall, gross margin and EBITDAS margin rates are moving in the right direction. In the fourth quarter of 2015, we still anticipate that we will exceed 29% gross margin on our GenDrive units, driven from our increased volume leverage, supply chain cost-downs, and product design improvements. In regards to overall service margins, we still foresee substantial improvements which will stem from many factors: including growth in our hydrogen infrastructure revenues, a continued positive blending in the run rate of the newer, more reliable GenDrive unit designs, and our continued significant progress in addressing uptime issues of installed fleet. We still expect overall growth in revenue and profitability to enable us in the fourth quarter of 2015 to approach a breakeven rate on EBITDAS. Beyond 2015 we see tremendous additional market opportunities in adjacent spaces, opportunities that could double or triple our existing addressable markets, and to capitalize on these opportunities they will require a range of prudent strategic actions and investments. As we progress in 2015, we will have better line of sight of how this translates into near-term profitability trends. In conclusion, we celebrate with all our stakeholders another successful quarter for Plug Power given sales growth and build activity. As we move further into 2015, we look forward with great excitement to continue building on our strong platform and sharing with you all our continued success as we go through the year. We'll now open the line up for questions.

Thank you. [Operator instructions] Our first question comes from Matt Koranda with ROTH Capital Partners. Please state your question.

Good morning, Andy and Paul, thanks for taking for questions.

Hey, good morning, Matt.

Good morning.

Just wanted to clarify on shipments for the quarter or actually units recognized as revenue, the 265 units that were recognized in Q1, is that primarily the size of about 238 units that you guys had shipped in Q4?

Yes.

Okay. And then, what has made up the balance of the units recognized during the quarter, is it just replacement or new units at existing sites?

Yes. Its common trend we see across many of our sites is they launch and deploy, they tend to add units as time goes on. So those largely reflect additional units in the existing customer programs.

Okay. Got it. And then for the 419 units shipped in Q1, just to be clear, the 238 units size that you recognized in Q1 was not counted as shipments in Q1, is that right?

That’s correct.

Okay. Got it. And then, just in terms of the 418 units that shipped during Q1, could you just provide a little of color on why those weren’t recognized as revenue during Q1, is it the financing issue again or what’s going on there?

Yes. It’s really a factor of timing with the commissioning of the sites, its relatively consistent with what we started the year in terms of the deployment planning and one of them is a Big Box retailer, that the hydrogen sites coming online here in the second quarter, other factors that affect timing are things like weather that happened to be in the North. So obviously this was a pretty brutal winter in terms of snow. So varied factors, but the good news is they are again relatively consistent with our deployment planning schedule and both are coming online in the second quarter.

I would like to just add this, Matt, one of the items we’ve done with some of the customers who we have longer term plans with, is able to beginning to talk through how the schedule doing, deployment in the winter and the south and deployment in the summer in the fall in the north to help balance out the load.

Okay. Great. That’s helpful. And then I think one of the things that well, you guys highlighted from the Q4 call was that third-party finance units can sometimes slip just depending on when you guys receive the payment from the financing partner and it seems like you guys have the balance sheet to do some sort of in-house financing product, but, I was wondering if you could comment on your latest thinking around this and whether you may have additional stuff to say on the power trip tour that you guys are dealing or maybe just provide some color for us there?

Okay, but not comment at this point in terms of whether or not you guys could provide some of those financing solutions in house?

It’s not our strategy and we don’t have plans to do that.

Okay. Got it. And just then, couple more here, for Q2 it seems like implied in your commentary is about $26 million to $31 million in revenue for Q2, could you just help us understand how that breaks out between products revenue and service revenue?

Okay. So I’ll give a quick rundown Matt. I would expect that - I’m staring at the numbers here. About 75%, actually a little bit more than that probably more like 80% will be product related that includes both GenDrive and hydrogen infrastructure.

Okay. Got it. And then last one here from me in terms of booking cadence for the year, I was wondering if you could share with us your thoughts on what to expect for the remainder of 2015, I mean it looks like Q1 implies kind of relatively steady, but are there any large customers that are in the pipeline that could create a bulge in anyone particular quarter?

Okay. All right, understood. Just to follow-up on that really quickly, I mean is there a particular quarter where that is more likely to occur than not, or if you can provide any color on that that is great, but after that I'll jump back in queue.

Good question, Matt. Probably I will take - those sort of activities, I would say, I will take a pause on that one.

Okay, fair enough. I will jump back in queue. Thanks guys.

Yes.

Thank you.

[Operator Instructions] Our next question comes from the line of Aditya Satghare with FBR Capital Markets. Please state your question.

Thank you. Good morning all.

Good morning.

Good morning.

Thank you. So few questions here, so firstly on the very higher level, could you maybe talk about as you look at your high potential customers, how many sites do they have, how many sites are you going after and if think about current penetration rates, what kind of discussion are you having with your customers about penetration rates on their sites say two, three years from now?

Now there are in the manufacturing side a good deal of push going on with especially with some of the large auto companies, some which have over 80 sites, one of them we actually have activities going on with five of their sites at the moment. So I think that with our long established customers we could be at that 25%, 30% range at the end of 2016 and for some newer customers in the 10% range. Does that help the issue?

Now there are in the manufacturing side a good deal of push going on with especially with some of the large auto companies, some which have over 80 sites, one of them we actually have activities going on with five of their sites at the moment. So I think that with our long established customers we could be at that 25%, 30% range at the end of 2016 and for some newer customers in the 10% range. Does that help the issue?

Now there are in the manufacturing side a good deal of push going on with especially with some of the large auto companies, some which have over 80 sites, one of them we actually have activities going on with five of their sites at the moment. So I think that with our long established customers we could be at that 25%, 30% range at the end of 2016 and for some newer customers in the 10% range. Does that help the issue?

Very helpful Andy thank you. Second question was I wanted to make sure I understood, you mentioned that half of the low-power stacks would be your internal stacks, I firstly wanted to confirm that and secondly what I wanted to understand was as you incorporate more of the internal stacking into your product, what kind of effort will that have on the service business, I mean does it give you more predictability and does that cause the bigger improvement in the overall service business?

Yes that is actually good question and I would say this, so yes it brings down the REIT bill cost significantly, so that will have a huge impact and our service cost is dominated by stack replacements representing about 70% for both our internal stacks and power stacks we are continuing to make improvements with. So we see a roadmap where we’re looking for in the next two to three years stacks to last the lifetime of a lease, which could have a significant uptick in our stack business. So instead of focusing great deal on rebuild and which we are spending time on, the key item is that to push the life of the stacks so that the total cost of ownership is lower and our margins are higher, but we’re saying with our own stack and actually with improvements we see Ballard making that, we are seeing real life time improvements with the design as we go through the past year.

To be honest, I think we’re pretty well structured, I mean I look about the different functions of the company and we’ve made very prudent investments and a lot of disciplines and as you know, running a $100 million size of business in itself requires a certain level of investment and we've kind of hit that critical mass and I don’t see any gaping holes and any kind of functions of our company, I think there will be some, there could be some nominal incremental investments. But the bigger investments if they came, probably would come from pretty critical strategic ideas and thoughts that we have whether its expansion in the Europe or looking at hydrogen solutions in other places I mean and others are yet to be defined and determined and when they, do develop into something more meaningful in size, we’ll have better visibility in terms of what that looks like, and we’ll share that with you guys as that unfolds. But today, I think we’ve got real opportunity to leverage both our, manufacturing overheard as well as our administrative cost overhead and we're seeing that even in the second quarter, you see the big dip in chart as we progressing and get the sales recognition that we see in the balance of this year. I think you are going to see tremendous leverage as we go forward.

Thank you, guys. Thanks for the advice.

Thank you. Our next question comes from Jeff Osborne with Cowen & Company. Please state your question.

Great, good morning. Just a couple questions on my end, I was wondering Paul if you can update us on the units, not shifts you mentioned 3300 for the year, but units that you expect to recognize revenue on that would be helpful.

In 2015 the total would be an excess of 3300.

IIs that shift or actual revenue recognition for it, I’m just trying to get a sense bit given the…

Yes, Sorry. Yes it would be revenue recognition.

Okay. And then you mentioned 29% gross margins exceeding the fourth quarter for the forklift shipments, the GenDrive shipments, but how do we think about as the ReliOn units ramp up for the utility customer that you have and some of the other product revenue. What would be a good product gross margin you used for the year given that there is a mix issue there?

Well I don’t have the number in front of me, I can get that back to you, but I think, just so you have some perspective I mean GenDrives in total as we look at total 100 million that we forecasted this year, is probably going to be 55% to 60% of that total number. So, a total $100 million in sales, so it’s a pretty big blend in terms of mix as we continue to grow sales for the course of the year. So I think you’re going to see - and if you look at it comparatively, ReliOn is going to show good progress this year, but it’s still going to be kind of 6% to 8% of sales. I think you’re going to see a dilution of its impacts, even though it’s get - we’re showing margin leverage on that business line as well. I think you’re going to see the overall margin mix being heavily concentrated on GenDrives.

Got it. Is there still an intent to design in the ReliOn product into your units this year? I think you had originally talked about sometime in the spring?

Yes, so Andy said, if you look at the back half of this year that stack development that we have been working with that team is going to be about half of the low power stack in the balance for the year. So we’re going to start to see the impact and benefit of that pretty immediate as we progress into the year.

Well, I believe the rely on was about a $0.5 million for the first quarter. And we should see about $2.5 in the second quarter, Jeff

And that’s affiliated with the telecom rollout.

That’s actually mostly still with the utility rollout.

The utility, okay.

Stuck with the Southern rollout, Jeff.

Right. Got you. And then Andy, can you just I’m curious on the hydrogen strategy that you kind of first alluded to six to nine months ago mentioned in passing today. Give us a sense of what your thoughts are there and in any update on the Praxair partnership that you announced several months ago would also be helpful.

Sure. Well, I would say this, Jeff. Prax is for our new deals this year is almost our exclusive partner and Prax is treating us as their distributor to the material handing market and Prax has about half the hydrogen capacity for liquid hydrogen in the U.S. and I have to say the relationship grows stronger and stronger everyday and we’re really pleased with that. When the hydrogen strategy being steady, Jeff. I have not - where we are spending a good deal of times working behind the scenes on how to work through generation, distribution and infrastructure. And I think the first - not surprising, we are trying to make sure that the first efforts are really associated with reducing the cost of our hydrogen infrastructure, as well as making the products a higher quality. And that movement of the hydrogen infrastructure move most of the build in-house, gave us greater control over the product quality, greater controller over cost and really is the first step in building out our product offering for hydrogen infrastructure. We have a few small sites that we have a reduced version of our infrastructure that will be rolled out. So that’s in place. [indiscernible] and Tim Cortes had been spending extended period of time really serving the market, talking to potential partners for reformers, potential partners for items like compressors and really kind of refining what we should be doing ourselves, where should be partnering and how these decisions can help us grow immediately our material handing market, but also could help us to leverage into other markets. We are going to do in Dallas, I think its May 20 in Dallas, May 29 in Dallas, we’re actually going to present and there will be a call in number, Jeff. Where actually, Tim is going for actually for 25, 30 minutes really provide a greater detail on not only our hydrogen plans today but for the future.

Excellent, I look forward to that. Just a couple other quick ones. One, Paul I was wondering if you could break out the SG&A and amortization in the past year, you had had a little bit more disclosure in the press release itself about the actually OpEx levels and I think on the call you just kind of lump those together. So is there a way you can split those up?

Absolutely and because we’re going to be following our Q here shortly, we tried to provide a little bit more crisp information in the press release to focus - to provide the information that where the questions tend to circle around, as well as the things that are highlights, but amortization is roughly 600,000 for the quarter and that will be delineated in the Q filing, and that’s pretty consistent from Q4.

Excellent. And then any trends as it relates to ASP, you called out the mix of Class 3 units, how do we think about, just GenDrive ASP trends as a whole.

They are holding in there, Jeff. And I think because so many of our customers have seen the value that pricing pressure has not been great at the moment. I think that the average selling price, if we don’t see any significant decline in the next year.

Good to hear. And the last one I had is just with Hyster’s acquisition to get into the space, how is that impacting the sales funnel and discussion that you had or anyone taking a pause to investigate their offering overtime, as it’s introduced or is accelerating orders. Just given the tax credit expiration next year. I’m just trying to get a sense of what the moving factors are as you look at some of the pipeline of orders that you have.

And look, we’ll be a tough competitor when the time comes, but you have to go through product offerings - to be quite frank Jeff we really haven’t heard much.

I understand.

Its market base from our customers and I think that whether it helps the acceleration, I can say it has been a prime focus of discussion, it’s got a lot of respect for the people there and I’m sure we will have out battles to come and for all of us what we are doing is making bigger and bigger pie.

I understand. Just the last quick one, does the tax credit come into discussion with these customers, I mean it is only a couple of thousand dollars in the grand scheme of things but how important is that deadline for you in signing deals?

Good to hear. Thanks much.

Okay.

Thank you. [Operator Instructions] Our next question comes from Matt Koranda with ROTH Capital Partners. Please state your question.

Hey guys just quick follow-up for me. I though heard you mentioned Home Depot as a customer Andy just wanted to clarify did you say six to seven sites potentially cut over the next two to three years, just could you kind of talk about the cadence of potential deliveries there, that would be great. Thank you.

Yes. There may been a little slip of the tongue, Matt. So what I said I probably maybe should been a little less straight forward with, but that is correct Matt. I would see six to seven over the next two to three years.

Okay, great. Thank you, Andy.

Okay. End of Q&A

Thank you. We have no further questions at this time. I will turn the conference back to Andrew Marsh for closing remarks.

Well I would like to thank everyone for joining the call today. I would like to finish up by inventing folks of Plug Power trip and we are excited about to visiting six cities in the coming weeks to speak directly with our investors. Hope our big investors come and small investors and everyone in between. Every presentation is going to be unique and just like I mentioned Chris and Jeff to dig more into hydrogen in Dallas, we’re going to have investor have a chance to really meet our management team to discuss important topics like gross margin, sales, hydrogen and policy. I think also I would like to mention everyone those of you especially who are close to Albany, New York, next Tuesday is going to be the first trip and we are offering people not only you will hear from myself and Keith to talk about gross margins, but together two of our facility, both our manufacturing line and R&D center and love to have you all there. So thank you for the time this morning. Bye now.

This concludes today’s conference. All parties may disconnect. Have a good day.