Plug Power Inc. (PLUG) Q4 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Plug Power Inc. Fourth Quarter Year-end 2018 Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Teal Vivacqua, Director, Marketing Communications. Thank you. You may begin.

Thank you. Good morning, and welcome to the Plug Power 2018 Fourth Quarter and Full Year Earnings Call. This call will include forward-looking statements. 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 risks and uncertainties discussed under item 1A Risk Factors in our annual report on Form 10-K for the fiscal year ending December 31, 2017, as well as other reports we filed from time-to-time with the SEC. These forward-looking statements speak only as of the day in which the statements are made and we do not undertake to 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.

Good morning, and thank you for joining the call today. In January, we had our annual update call prior to the earnings release, provides our investors, partners, customers and employees a recap of the prior year and provide an outlook for the upcoming year. Today, we'll provide an update to both our results for the fourth quarter as well as a reminder of our plans for 2019, which is really described in detail in the shareholder letter. I will just review a few highlights and then we'll open the floor for questions. Some highlights for the fourth quarter in 2018, include fourth quarter gross bookings of $62.1 million versus $32.9 million gross billings in fourth quarter of 2017. The company 2018 had total gross billings of $184.8 million, a 42% increase versus 2017. We're really excited about the fact that we had our first positive adjusted EBITDA quarter in 2018 in the fourth quarter of $500,000. The first positive quarter in the company's history. We've achieved that by delivering over 1,900 0 emission electric vehicles in the fourth quarter. We also, in 2018, produced our first ProGen metal plate stacks, our metal stacks are 2.5x denser than our prior technology and offer 25% cost reduction at volume. And finally, production in first units utilizing Plug Power design and manufactured fuel cell membrane with the target building of over 400,000 membranes in the coming year. This year, we expect it to become the largest manufacturer of proton exchange membrane in the United States. That's not to say 2018 did not have some challenges, such as the unfortunate event that occurred in -- at P&G in May. Investigation is not complete. A Plug Power and the supplier of the carbon fiber tank have identified that the supplier had improperly qualified the tank to the ISO standards. Since the tank was improperly qualified, the supplier is completely funding a replacement program for approximately 3,000 tanks in the field. This program will have no financial impact to Plug Power. The work in 2019 will build upon our success in 2018. The majority of our revenue will be dominated by our material handling business. Our success in building out this segment will allow us to achieve $235 million to $245 million in gross billings and adjusted EBITDA positive in 2019. Our fourth quarter run rate for both gross billings and adjusted EBITDAS should provide investors a high level of confidence in Plug Power's ability to achieve these goals. Additionally, 2019 will also include our ongoing improvements in service costs and hydrogen efficiency, coupled with an intense sales effort to expand this business in North America and Europe. Value proposition is strong. Our service performance for our largest customers have been almost flawless and the pull for our products is increasing, especially in heavy usage applications like food distribution and automotive manufacturing. With 25,000 0 emission electric vehicles in the field, Plug Power is the most experienced company in providing fuel cell and hybrid solutions in e-mobility applications. E-mobility applications using fuel cells are ideal for heavy asset utilization applications like forklift trucks, delivery vans, ground support equipment, heavy-duty vehicles, autonomous-guided vehicles and aerial taxis. The benefits of fuel cells in e-mobility applications, include fast fueling, longer range, higher power density and simpler infrastructure for fleet vehicles. It could give our work in the past year with respect to membrane design, the manufacturing, stack development and our ProGen line have been focused on developing a suite of high performance, low-cost modules that can be easily adapted in a multitude of e-mobility applications. As our business grows, these applications will represent a larger percentage of our revenue. In the coming year, Plug Power is committed to making 4 major business announcements, and I assure investors some of them will be new e-mobility applications. Paul and I are now available for your questions.

[Operator Instructions]. Our first question is coming from Colin Rusch of Oppenheimer. We'll move onto the next question. Our next question is coming from Carter Driscoll of B. Riley FBR.

Well, it's quite a dizzy of a comment, you slept in there at the end of the prepared remarks, Andy. You talked about 4 major announcements this year, may be you could give additional color. Some of them related to, obviously, your core material handling business, some e-mobility relative to what you've been pursuing over the last couple of years is there something within those announcements that is completely unexpected, at least, find what the street, you believe, is thinking about what you're pursuing?

That's good question, Carter. Let me see if I can kind of give a broad -- some broad strokes. First, we've been working on some of the activities and deals for over a year. And obviously, from my comments, some of them will deal with e-mobility applications. And I think that those announcements may come sooner rather than later. We've also -- today, our distribution channels for -- our material handling equipment is limited to our direct sales force. I think you'll see a global distribution agreement with -- a company with a much larger balance sheet that can really help accelerate the growth of our products, not here in North America, but in Europe and Asia, as well as even maybe in some other wealthier countries in South America. I also thank Carter that, look, there's been a great deal of announcements on hydrogen being made by the industrial gas companies. I think that you see folks like Air Products building 2 liquid plants. Air Liquide building a liquid plant, Praxair building a liquid plant. Also, I believe you'll see may be a partnership with us in one of those large industrial gas companies. Mainly because quite honestly, we're the biggest user of liquid hydrogen in the U.S. These companies are increasing their capacities of 50%, and I think lots of them want to be the prime supplier to Plug Power and partner with Plug Power in the future.

Okay. That's very helpful. Maybe more specifically, some of the technology agreements, particularly with Amazon was to focus on other types of mobility applications. Is it fair to assume that something is -- 1 of those 4 could be with one of your existing partners?

Yes.

Okay. All right. Let me leave it there. So obviously, you had a very strong end of the year, are you reached your first quarter of adjusted EBITDAS profitability. You talked about on a blended basis. I'm assuming you're still going to have a kind of a second half tilt because of the influence of Amazon and Walmart. Could you talk, a, if that's still your expectation for the bookings that you provided, what are the kind of puts and takes to get you the lower end of the range versus potentially the higher end of the range? And then, do you see an opportunity to potentially still add a sizable customer, maybe not in the size of those two whether domestically or EU in 2019?

I'm going to hand that off to Paul, Carter, and maybe I'll answer the last one after you get that. Paul?

Yes. I think -- so the short answer to your question, Carter, yes, we expect a similar seasonality when you look at the concentration of distributor business and automotive tends to be more back-end loaded than front end. But we continue to get good traction across those customers. And I think what you will see is continued growth year-over-year, quarter-over-quarter, kind of Q1 being bigger than Q1 last year kind of thing. So you'll continue to see that trend. But on the overall mix of sales, yes, it'll be more back-end loaded. But on a run-rate basis, it's a good chance we end the year in a position where we're getting closer to that $60 million a quarter, every quarter as we go forward such that, which is kind of our magic breakeven, so we expect that to be a good position. And as we go through the year, I think that now when we're showing it in Q4 now, but all of the things that we're doing and continue to do from a cost down reduction, you'll see that, that continue to grow. And a lot of things Andy talked about in terms of business announcements and other things, those will be upside to our traction and what we see following the year. So when we think about getting equal or better to that, it's about really trying to drive some of those elements, if we can capitalize on some of that this year.

And just maybe...

Go ahead Carter, I'm sorry.

No, no, please continue because I was going to take -- I was just going to ask you a different question.

Okay. I was just going to add Carter to your last question. I'm obviously frustrated, we haven't made another big announcement in material handling. I remind myself of how long it took me to close that -- took us, as an organization, to close Amazon and Walmart and I remain quite confident.

Okay. Maybe just Paul, there are margin downtick in equipment and services, this quarter was a little surprising. Is it all related to the SECs kind of squeezing, again, in terms of reporting metrics or was there some other exogenous effect? I was a little surprised that the equipment sale margin being down sequentially.

Well, you have to net out the customer warrants depending on the analysis in your apples-and-apples. And yes, they're now having us allocate that across product lines, which makes comparability a little bit more challenging. But the other factor that factors in for us is mix with hydrogen infrastructure. If we have a quarter where there's a higher percentage of that, the good news is, all of the product lines continue to grow in terms of their margin profiles, but the best margin profile we have is GenDrives and hydrogen infrastructure is in the mid-teens and growing nicely and continuing to grow and -- but from a mix standpoint on the overall margin of that product line, it can be impactful. The other thing is we had probably a little bit higher than average stationary sales in Q4. So again, very nice margin profile in that business, but not quite the same that we get on the forklift GenDrive. So that impacts it, but fundamentally, if you look at the bottom line between all of them, they continue to go north in terms of the margin profiles and we expect that trend to continue as we go forward.

And Paul, in the fourth quarter, the comparison is dominated by the way we have to recognize launch across the product lines. Is that correct?

Yes. Unfortunately, it's kind of SKUs numbers in the comparison a bit.

Okay. And that applies to the service line of that as well?

Yes.

Our next question is coming from Colin Rusch of Oppenheimer.

Can you talk a little bit about the development that you're seeing on -- from Tier 1s in terms of powertrain development, for lightening and power -- light and medium-duty vehicles. It seems to me that we were seeing some movement on that front. We just love to see what you're seeing in terms of engagement?

So Colin, the answer is that -- and I'm going to separate some of the activity out. There is obviously folks like Toyota and Honda, GM developing their own technology I think there are a number of OEMs, both in, I'll call, Tier 1 auto space as well as in other providers of engines and motors, and we're seeing -- matter of fact, we have a visitor from one of those companies here today. So that engagement level is certainly much higher. We also are seeing globally that there are -- what I would qualify as more integrator to -- may buy 4 chassis, attach electric motors, build delivery vans and other vehicles. And we are seeing a good deal of activity in that area. And that really comes to the part of the ProGen engine that how we think about the market. We -- it's hard to pick out who is going to be the winners, who is going to be the losers. What we believe is that by making a box, it's very easy for someone to apply that's denser than the competition. We're not going to be in position to having to pick winners in the e-mobility space. It has implication, certainly, to our sales channels and our efforts, but that's really has been the heart of our work on membranes, our work on stacks, our work on engines and how we can best deploy not only the light-duty vehicles, but in other applications because quite honestly there's about 4, 5 power levels, not a whole lot different than how one thinks about lithium batteries and really that's how we're attacking the market.

Okay. That's super helpful. And then, just from a working capital perspective, have you guys migrated up to higher levels of revenue? How should we think about the accounts receivable? I may have missed it, but assuming that you're going to see a little bit of unwind in the first part of this year, but I just want to understand the working capital needs for the company.

Yes. I think, I guess, specific to receivables, one thing that works in our favor is because of the tax credit, the company -- our customers and the banks that they use to finance these are incentivized to get them close before quarter ends. And so we haven't traditionally had a big AR balance, it's kind of worked in our favor in that regard. I do expect it to grow just by sheer volume of time in growth company, but I don't -- I think even with the growth that we'll have this year, which I think if you look to the midpoint of our range meaning 30%, I don't know if AR goes up that much, but you will see it tick up a bit. And even on the inventory front, I think we continue to work with our vendors and our production processes and things that we're doing that if anything I hope that, that actually comes down slightly, as we continue to run more lean and get better at planning and working through the supply chain process, but I always say if business ticks up unexpectedly, you get a big -- one of the big win, you get one of these announcements that Andy is talking about. Then we have to have a surge. It's a high-class problem. But from an everyday run in the business standpoint, I don't think that that's -- we should expect a big -- necessarily a big number there to manifest this year. Hope that answers...

Our next question is coming from Sameer Joshi of H.C. Wainwright.

So just a clarification on the e-mobility announcement that we should be expecting. Is it with FedEx or is it with someone else?

I'm going to -- Sameer, I hate ducking questions, but I'm going to just be a little non-committal on that question. So the answer is, we expect it soon.

Okay, okay. In terms of the guidance you have provided and also the deals that you expect to announce, should we expect that these deals are incremental or additional to the guidance that you have provided? Or is it baked into the guidance?

That's a good question. I think when one things about the guidance and, as you know, we've been able -- over the past last year, we were able to increase guidance as the year went on, I think a good deal of the announcements will have more implications to 2020. But you may see some marginal -- you may see some increases -- slight increases in revenue and slight increases of margins based on these announcements. I obviously hope it's bigger, but the guidance is based on what we have a very, very high confidence level of achieving.

Understood. In response to one of the questions, you also mentioned that the stationary power in the fourth quarter was stronger than you expected. Do you expect that segment to continue to grow at a stronger pace?

Sameer, I do, but I think it will be intermittent. It's been publicly discussed. We've been working with the Southern Company for almost 3 years now, supporting their buildout of their new network. We do have deals pending in other areas. Some of that through partners from a global perspective, leveraging our ProGen module into back-up power applications. But I think that, that business will be your regular for the coming -- I would say the coming few years. And then I think that like material handling, we'll start getting a higher level of predictability. Fuel cells do have some advantages in LTE and 5G networks. Ones able to deploy the products in cabinet, unlike diesel generators at a much higher density than those products, which allow customers to save footprint, be able to integrate into cabinet, revenue-producing radios and able to make a smaller footprint. So there's actually a value proposition in 4G and 5G that really did not exist in previous deployments because not to go into detail, those networks will build on top of each other. The world's changing. I think that's good for Plug Power and the industry over the next 3 to 5 years.

Understood. And just one more. How much of the ProGen that has been shipped right now actually contains the metal stack? Or is it going to be a slow deployment?

Going to be a slow deployment. We've been thoughtful. We aren't aggressive. We've been shipping a lot. I would say that we're starting out by shipping products with the membranes. And this year, we expect to be shipping 400,000 membranes. And I think by year-end, you'll see some of our products like Class 1s incorporating the ProGen stack, the metal plate stack. I think you hit on the interesting point, which I really want to highlight. The engine used in our future GenDrives will be identical from a technology point of view as the engines that are used -- that will be used in on-road vehicles and other applications, again, really highlighting our focus on how to leverage scope -- scale and scope economies.

[Operator Instructions]. Our next question is coming from Eric Stine of Craig-Hallum.

So just a couple from me. You talked about it early in the prepared remarks and potentially tying up with the industrial gas company, and so maybe the answer is similar as part of that, but just given the investment in the space and as a way to possibly improve margins there, I mean, just where do you stand in terms of Plug potentially owning the tank and then being able to source hydrogen, given that there's been a lot of investment there, source hydrogen from the lowest-cost provider?

Eric, I've actually been doing a little of that already. We probably own a dozen tanks. So that is an activity that we continue to pursue.

And potentially -- well, I mean, I guess, potentially if you tie up with someone maybe it changes that or if something that helps you on the margin side?

Yes.

Okay. And then, maybe last one from me and good to hear that potentially there is an EV announcement here in the somewhat near term, but when you talk about autonomous vehicles, maybe just a reminder for us, what Plug's experience there is to this point, if I'm not mistaken? I mean, you do or you've got quite a few autonomous vehicles in materials handling already in the field.

That is correct, Eric. We have over probably 1,500 units, which are operating with Plug Power fuel cells, which are autonomous in warehouses and manufacturing facilities, and we expect that to continue to expand in 2019. Also, it gives me an opportunity to highlight the work we're doing with Rensselaer on robotic fueling of our GenDrive units. So I would expect in the next year, we'll be deploying some units at the AGVs, we'll be able to just pull up to and robotic arm will feed the unit and the unit will fill up and be back on the road, which when one thinks that the future of lights out, warehouses and manufacturing facilities and maybe on-road fueling, it will be -- I think, it's a huge step forward for us.

Our next question is coming from Chip Moore of Canaccord Genuity.

I wanted to just circle back to guidance. I think, when we talked in January, we were talking about 70% to 75% coverage out of shippable backlog, it's been a couple of months. Any updates on visibility for the outlook?

I would say that we're probably -- obviously we've ticked up a little higher. We've -- we're probably closer at 77%, 78% range. I'm not really concerned. I actually [indiscernible]. We're pretty -- it's not -- it's just execution every day and our sales team has been able to deliver orders year-in and year-out.

Got it. And Andy, just wanted to follow up, when you talked about the telecom network expansion opportunity, right, as we look 3-plus years out and we really start to see that 5G buildout and cell tower densification, is there a way to size the opportunity in that space? And how can you position yourself to take advantage of that?

Two items, and I'm going to separate North America and say, Asia. And we do have a direct sales force and strong relation -- if you start thinking about people like AT&T, Verizon, Sprint, T-Mobile, all of them have deployed Plug Power fuel cells in their networks chip. And part of our -- part of the challenges in that business has always been density. And if you think about, what I'll call, the first-generation 5G, you'll be adding in more cabinets and you'll become denser. And to us, that's really where the opportunity is and the opportunities will most likely be in urban and suburban areas where users will be able to, as I mentioned, put more functionality in their cabinet, integrate our products and eliminate diesel generators with the new buildout and probably more important to us, gives us a simple way to deliver hydrogen to those sites. So I think that's one aspect. I think there's probably another opportunity there associated with -- I think, this is a little later with the rural deployments. It can be a low-cost way for service providers to provide bandwidth to the home, broadband to homes, and I think there'll be some opportunities there. But when I look at if you have density and we can deliver hydrogen effectively if you have density, and we do today for the Southern Company. And when I look at these new networks, there is a huge opportunity just because of how the large service providers are looking to build it out and with all of them might have qualified product already.

Our next question is coming from Chris Souther of Cowen.

Can you talk a bit about the shift towards kind of more purpose build fuel cell power lift trucks and NexGen Class 1 products starting production this month, just want to get an idea of the puts and takes for both Plug and the customers from initial cost perspective, sales distribution and service perspective, total cost of ownership? And also, whether the -- you'd mentioned the global distribution partner potential, is that around kind of servicing more purpose-built lifts? Or what is kind of the strategy with that?

So Chris, when we think about the work we've done with ProGens, metal stacks and membranes is how we can make units that were applicable across a long, wide range of applications. So that's kind of step one is that, that work has been done. And that's important to us because it does help us drive down long-term costs and makes it easier to service the units as well as continuously improve the units. From a distribution point of view, again, it almost makes the way we're designing this, service becomes much simpler that these can become almost replaceable boxes that you don't have to have a great deal of capability to service a unit. And I think over the past year and a half, as we've watched our service costs -- as watched our uptime of our units continue to improve and as we watch the simplicity of building hydrogen infrastructure as we mass produce it, that we felt -- finally found comfortable that we could start leveraging distributors and people with a much wider, broader footprint than Plug Power to sell and distribute our products. And that's really, I think, the combination of those 3 items will allow us to continue to grow our business in the core material handling business, but use all those learnings. And when you have 25,000 units in the fuel, you get much more learnings than others may get and be able to move those same products, base products into more mobility-oriented applications, as I mentioned everything from ground support equipment to delivery vans and autonomous-guided vehicles and maybe someday in the future aerial taxis.

I appreciate the color there. And then can you give an idea of, kind of, percent of revenue that's Walmart and Amazon in 2018? And what is kind of baked into 2019 guidance with that? And maybe just kind of where the real growth leverage are going to be as far as those two customers versus kind of some of the new things you're talking about in the food and automotive? That would be great.

You want to give that a shot, Paul?

Yes. I think, I'm going to use the approximation of about 50%-or-so. And I think, we continue to get traction with additional customers, but as Walmart and Amazon continues to grow on their base too, it kind of keeps that percentage in check. I think you will see over time and probably in 2019 that, that percentage goes down as a percentage of revenue, just given traction we're getting another -- with others customers and another programs. And so exact numbers for 2019, it's hard to say. But I think it's in that 50-ish range and plus or minus and may be slightly lower as we go forward.

Okay. So it's kind of both growing but just the other pieces are starting to grow a little faster?

Yes.

At this time, I'd like to turn the floor back over to Mr. Marsh for closing comments.

Thank you, everyone, for joining our earnings call. And if you like to hear more from us, today I'm hosting a core session to answer questions from the general public. The open session will provide me an opportunity to discuss numerous topics ranging from Plug Power's business to the role of hydrogen fuel cells in today's energy economy. You can access the session directly at core or from the link on Plug Power's home page. Thank you, everyone, for your time today.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.