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Plug Power (NASDAQ:PLUG)

Q4 2012 Earnings Call

March 28, 2013 10:00 am ET

Executives

Andrew J. Marsh - Chief Executive Officer, President and Director

Gerald A. Anderson - Chief Financial Officer and Senior Vice President

Analysts

Philip Shen - Roth Capital Partners, LLC, Research Division

Hans Peter Black - Interinvest Corp., Inc.

Operator

Greetings, and welcome to the Plug Power 2012 Fourth Quarter Financial Results Conference Call. [Operator Instructions] As a reminder this conference be recorded. It is now my pleasure to introduce your host, Mr. Andy Marsh, President and CEO. Please go ahead, sir.

Andrew J. Marsh

Good morning. Thank you for joining Plug Power to discuss our 2012 fourth quarter and year-end results. I'm Andy Marsh, the CEO, and we'll be joined by Gerry Anderson, CFO, on today's call. This call will also be archived on our website at plugpower.com in the Investor section under Presentation. The conference call will contain forward-looking statements within meaning of the Private Securities Litigation Reform Act of 1995 including, but not limited to, expectations regarding revenues and product orders for 2013.

These statements are based on current expectations that are subject to certain assumptions, risks and uncertainties, many of which are difficult to predict, are beyond our control and that may cause our actual results to differ materially from the expectations in our forward-looking statements. We encourage our listeners to refer to our SEC filings for a complete recital of our Safe Harbor statement as well as other risks and uncertainties discussed under item 1A Risk Factors in our annual report on Form 10-K for the fiscal year ending December 31, 2011, filed with the SEC on March 30, 2012.

Plug Power does not intend to and undertakes no duty to update any forward-looking statements as a result of new information or future events. Now I would like to discuss our results.

As we discussed during the third quarter conference call, 2012 was a very difficult year for Plug Power. The quality issues that the company has experienced had negative ramifications to sales and margins. Even with these issues, the company was able to maintain our customers and many have become some of our strongest advocates. The core value of Plug Power is that customers come first and we always address our problems with that attitude. In the long run, we believe our approach to customers is beneficial to employees and shareholders. It's also why the customers have remained with us.

The company, even with the challenges, made progress in 2012. The product shipments from our factory in 2012 increased by 36% compared to 2011, increasing from 1,024 units to 1,391 units shipped. Through the introduction of our new product platforms, our material cost has been reduced by an average of 30%. Material cost represent 80% of our product COGS and such is critical to our path to profitability.

Another element key to our path to profitability is service cost. Service cost was significantly higher than anticipated in 2012 because of our quality issues, and we do not expect to reach the previous projected costs for service until the second half of 2013.

When I think about our business, I see that our targeted product cost for meeting our targets and our service costs are reducing. And the key to achieving EBITDA as breakeven is increasing sales, whereas this call in the fourth quarter, we booked $10.3 million in total new orders with P&G, Ace Hardware, Carters, Cisco and BMW. Ace Hardware and Carter's are 2 new customers. Ace Hardware will be using Plug Power's fuel cells for their new warehouse outside Dallas, Texas as well as an order facility, which we refer to as a brownfield in Rocklin, California. Carter's, a leading retailer for children clothes, will be deploying GenDrive in their new facility in Georgia. These customers chose GenDrive after visiting and talking with many of our present customers, visiting deployments and becoming convinced that a GenDrive powering a forklift truck will improve productivity, eliminate the battery room and reduce their greenhouse gases.

I started this discussion emphasizing sales as the key to our profitability. And after the most recent expense reduction in the fourth quarter which reduced the annual run rate by approximately USD 3 million, the company will be EBITDA breakeven between $65 million to $75 million in revenue.

As all of you know, the company is experiencing some capital challenges. The company requires an additional $15 million to $20 million to execute on our business plan to reach EBITDA as breakeven. For this request, the management considers all strategic options in funding the business plan including raising additional capital, asset sales such as selling our building, strategic partnership and the sale of the company. We've engaged Steven to assist us in this process.

In summary, I remain optimistic about the future of Plug Power. We are the premiere system PEM fuel cell integrator without question. Forklift trucks are a more demanding application than even automobiles. In 2 years, we put as many hours on our fuel cells as fuel cells powering automobiles will see in the lifetime of the car. We constantly start and stop and carry and lift up over 6,000 pounds of weight and operate close to 99% of the time. We've deployed units at 37 sites with customers such as Wal-mart, BMW, Cisco, and most recently Lowe's new distribution center in Georgia. Our products are fueled over 6,500x per day and use 4.5 metric tons of hydrogen per day. 95% of the commercially-used hydrogen fuel in the U.S. is filled into a Plug Power product. No one is remotely matching the performance of Plug Power's products in real-life operations. Our technology and operation knowledge uniquely positions Plug Power for the future. It remains the management and board's intent to build a successful marketing material handling and expand into other applications at the appropriate times such as refrigerated trucks, ground support equipment and range extending utility vehicles. I understand that some may consider our prospect's a pure dark. I believe the future for Plug Power is bright and our visions -- ambitions have not been daunted by the past year. We are in the right market with the right customers and taking the steps to reduce our products' cost and expense run rate. We remain focused on the future.

I'd now like to turn the call over the Gerry Anderson to review fourth quarter and year-end financials.

Gerald A. Anderson

Thank you, Andy, and good morning, everyone. As Andy noted, our GenDrive shipments grew to 1,391 units in 2012, which included 518 units shipped in the fourth quarter. 255 of the units deployed in the quarter were under our first Power Purchase Agreement with a customer whereby we essentially bill the customer for the power generated and consumed each month.

I will discuss this arrangement in a little more detail when we talk about our revenue for the year. Additionally, we ended 2012 with $25.9 million in our backlog comprised of 1,309 unit orders for 15 different customers. Product and service revenue for the fourth quarter was $5.7 million and for the full year was $24.4 million, an increase of $1.2 million or 5% from the prior year.

255 units shipped in the quarter were sold to a third party and subsequently leased back by Plug Power to fulfill our obligations under the Power Purchase Agreement we mentioned earlier. These units are treated as capital lease on our balance sheet, and revenue from the Power Purchase Agreement will be recognized ratably over the term of the contract as rental income rather than treating the units as an upfront sale with full revenue recognition at that time. Research and development contract revenue for the quarter was $226,000 and for the year was $1.7 million, a decrease of $2.2 million or 56% from the prior year as we had fewer active contracts being worked and the majority of our resources were committed to our commercial product and service activities.

Cost of goods sold for products and services for the quarter and year were $9.1 million and $37.7 million, an increase of $7 million or 23% over the prior year. The fourth quarter products and services gross margin loss of $3.4 million resulted primarily from our continuing efforts to mitigate the quality issues we experienced last quarter in service fee installed base. Another factor was the unused capacity or absorption of our fixed overhead, as only 1/2 of the units shipped in the quarter were actually built in quarter 4. We have the capacity to build approximately 2,500 units per quarter, though we barely used 10% of our quarterly capacity.

Cost of goods sold for R&D contract revenue was $415,000 for the quarter and $2.8 million for the full year, a decline of $3.4 million or 55% from the prior year due to the lower number of R&D contracts being actively worked.

In our operating expense categories, research and development expense for the quarter and full year was $1.3 million and $5.4 million, a decrease of $0.3 million or 3.9% from the prior year.

The decline is a result of our continued management of discretionary expenses and reimbursement of some engineering expenses by our JV partner offset by lower R&D expenses charged to cost of goods sold and R&D contracts due to fewer active programs being worked on by our engineers.

Selling, general and administrative expenses were $4 million for the quarter and for the full year were $14.6 million, only $0.1 million higher than the prior year as we continue to manage our spending. Fourth quarter included $0.3 million in charges to implement the restructuring plan announced in December. That plan should result in $3 million to $4 million in annual operating expense savings.

Noncash costs for depreciation, amortization and noncash stock compensation included in our profit and loss statement for the quarter and year were $1.7 million and $6.4 million, respectively.

Our net loss for the quarter and year, respectively, was $8.5 million or $0.22 per share and $31.9 million or $0.93 per share on a basic and diluted basis as reported. Weighted average shares outstanding for the quarter and year were 38.2 million and 34.4 million, respectively.

EBITDA loss for the quarter was $7.9 million and for the full year was $30.3 million. Net cash used in operating activities for the quarter and year, respectively, was $4.6 million and $20.2 million. As of December 31, 2012, the company had $9.4 million in cash and cash equivalents and $6.9 million in working capital. Additionally, the company had a $3.4 million draw on its $15 million revolving line of credit with Silicon Valley Bank at year-end.

We would now like to open the call to any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Philip Shen of Roth Capital Partners.

Philip Shen - Roth Capital Partners, LLC, Research Division

So my first question is related to, I guess, revenues and shipments in the quarter. You guys shipped 1,300 units, almost 1,400 units and had about $27 million of revenues. Year-over-year, in the year, revenues were down and -- but shipments were up. Can you talk to us about the mix of the shipments in the quarter and also what -- did you have to cut ASPs to drive shipments in Q4?

Andrew J. Marsh

Phil, I'm going to let Gerry answer, but I think a good deal, that has to do with the Wal-mart order. Correct, Gerry? [Indiscernible] recognition for that?

Gerald A. Anderson

Yes. Right. So Phil, keep in mind on that too, for the units that were shipped in the fourth quarter, almost half of them are treated as a capital leased, so that's on our balance sheet and we'll see the earnings from that over the term of the contract. In terms of the mix, it's our typical mix. You have mostly Class 2s and Class 3s going out on the high throughput, customers like the Wal-marts, Associated Wholesale Grocers. For BMW and companies like that, it's more of the Class 1s. And we really haven't seen much impact on our average selling prices. Keep in mind, we did introduce the new lower-cost air cooled low-cost system, which is a lower average selling price. But again, in terms of our average expectations, we have not seen a lot of price erosion with our customers.

Philip Shen - Roth Capital Partners, LLC, Research Division

Okay. So it comes back to the 205 units that you sold to a leasing partner, and then in turn, you're leasing it back from them, is that correct? And then you're deploying this on Wal-Mart's site?

Gerald A. Anderson

Right, it's 255 units. So in effect, we've sold them to the third party, they own the assets, they take full tax attributes on those assets. We lease them back for deployment at the site to fulfill our obligations under the Power Purchase Agreement.

Philip Shen - Roth Capital Partners, LLC, Research Division

Typically, isn't the leasing partner -- doesn't the partner in turn, once they buy the asset, lease it directly to the customer, so -- and they take you out of the middle? It sounds like...

Gerald A. Anderson

Right. One of the -- again, I don't want to get into too much of the contract with our customer, but one of the issues here was it was not assignable [ph]. So we had to find a way to finance it and still fulfill our obligations under the agreement.

Philip Shen - Roth Capital Partners, LLC, Research Division

Okay. And this agreement is with Wal-Mart, is that right?

Gerald A. Anderson

That's correct.

Andrew J. Marsh

But Gerry, we did receive the cash.

Gerald A. Anderson

Yes. We've been paid for the use [ph].

Philip Shen - Roth Capital Partners, LLC, Research Division

Okay. And then, so talk to us about the bookings that -- how are bookings looking in Q1 of this year?

Andrew J. Marsh

Well, Phil, I think that one of the challenges is the one I'd mentioned is our capital challenges. And that, as you know, we -- we're looking to raise sufficiently more capital in the first quarter than we raised, and that certainly has not helped us with our customer base. They remain supportive. I think the impact has been that it has pushed orders out and slowed down order flow.

Philip Shen - Roth Capital Partners, LLC, Research Division

Okay. Can you give us some sense of what you expect in 2013?

Andrew J. Marsh

Phil, until I resolve the capital issues for the company, I'm going to decline at this point. We're, as you could see on the call -- see on our press release, we have been focusing on strategic investments, raising additional capital, partnerships and potentially selling the company, and our focus is to resolve our capital issues. And we believe once those capital issues are resolved, order flow will significantly increase. But I don't know for certain whether that's going to be mid-April, mid-May, mid-June. And all of that will have an implication to our order flow for the year. So I'm going to be cautious about making a projections on this call.

Operator

Our next question comes from Kevin Greig of Interinvest.

Hans Peter Black - Interinvest Corp., Inc.

Yes. It's actually Hans Black. Listen, I have a little suggestion, and that is, you got to release before market or after. I think you should try to release your numbers 8 in the morning or something and not 15 minutes before a call while markets are open. But that's just a little thought.

Andrew J. Marsh

So Hans, just so you know, we had it loaded at 7:00. NASDAQ had some questions and it delayed the release.

Hans Peter Black - Interinvest Corp., Inc.

All right. Fair enough. Well, look, I'm listening and you know my views, I think we've made them very clear, and we're there to help. I'm a very big believer in your technology and the future of this company. And I think we've stated publicly some of the changes we'd like to see. And I wish you luck and good hunting.

Operator

[Operator Instructions]

Unknown Analyst

Yes, a quick question. Will you again -- well, what's going on with the NASDAQ and will you think the stock price will get above a $1 so your remain in compliance? Or what's the situation there in regards to that whole thing?

Andrew J. Marsh

Okay. So with respect to NASDAQ, the company will be expecting a letter from NASDAQ in mid-April since our price will most likely be below $1 at that time. Generally, that process will allow us an opportunity to present in front of NASDAQ a plan to increase the stock price above $1 -- a $1. I would expect the company would do that. And then we'll have discussions with key shareholders and consider the alternatives if we're not able to increase the stock price. And some of those alternatives could be a reverse stock split if that's what the majority of the shareholders would consider the appropriate next step.

Operator

[Operator Instructions]

Andrew J. Marsh

It doesn't appear that we have any more questions. So I would like to thank everyone for attending the conference call today, and I look forward to our second quarter conference call in May to discuss results for the first quarter 2013. Thank you, everyone.

Operator

This concludes today's teleconference. You may now disconnect your lines at this time, and thank you for your participation.

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