Plug Power Management Discusses Q2 2013 Results - Earnings Call Transcript

| About: Plug Power, (PLUG)

Plug Power (NASDAQ:PLUG)

Q2 2013 Earnings Call

August 08, 2013 10:00 am ET


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

Joe Makowski


Matt Koranda - Roth Capital Partners, LLC, Research Division


Greetings, and welcome to the Plug Power 2013 Second Quarter Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Andy Marsh, President and Chief Executive Officer for Plug Power. Thank you, sir. You may begin.

Andrew J. Marsh

Good morning. Thank you for joining Plug Power to discuss our 2013 second quarter results. I am Andy Marsh, the company's CEO. And we'll be joined today by Joe Makowski, our Chief Accounting Officer on today's call. Our Interim CFO, Dave Waldek, is on vacation. Once finished, this call will be archived on our website at in the Investor Relations section under Presentations.

The conference call will contain forward-looking statements within the 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, any of which are difficult to predict, or 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, and our annual report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on April 1, 2013. Plug Power does not intend to and undertakes no duty to update any forward-looking statements, as a result of new information for future events.

Now on to the call. We took a step forward in the second quarter 2013 after the challenging first 4.5 months of the year. The funding from Air Liquide in May, which we discussed on the last earnings call, provided industrial validation and has been a catalyst with customers, investors and employees.

I'd like to review some examples of the impact of this investment. First, of the $7.5 million in new orders received during the second quarter, $6.1 million occur between the date the investment was announced and the end of the second quarter. On the last conference call, I announced the target at $20 million U.S. fee in bookings in the period from May 15 to September 15. We are on target to meet that goal, and we will announce our results by the end of September for bookings.

Second, since the Air Liquide investment, the stock price has increased from $0.16 a share to $0.48 a share at closing yesterday. While simultaneously, 16 million warrants were exercised. This was an appreciation of the stock of 200%.

Third, employee engagement and ownership for the business grows every day, as many of my teammates sense our success and pending profitability. As one reviews the second quarter results, it's clear we still have challenges. I'd like to reflect on these results based on the financial outline that was provided to reach EBITDA breakeven that was provided on the last conference call. By mid-2014, the combined service and government activities net income breakeven. Two, the worse case for material cost of sales price is targeted at 67% in mid-2014. Three, fully burdened product labor will be approximately $1.2 million on a quarterly basis. And four, cash expense for design and SG&A will be approximately $3.1 million on a quarterly basis. Based on these assumptions, the company will have to ship approximately 675 units and generate $13.5 million in product revenue to achieve EBITDA's profitability. Our internal targets are to achieve this goal in the second or third quarter of 2014. So let us review the status of each of these items individually.

In the second quarter, Plug Power lost approximately $1.8 million combined from government programs and service business. Service margins were $700,000 higher than expected for the quarter, all associated with the performance of our high power products. Our low power products met our cost expectations for the quarter and are continuing to decline. The service costs for our high power products are primarily due to stack order management issues and compressor failures. Both are previously known problems, which we have discussed and identified technical solutions. These solutions are now being fully implemented in the field, and this work will be finished by the end of the year. Completion will allow our mean time between failure for a unit to be below a forklift truck and is aligned with our financial targets for 2014.

More importantly are our customers happy with Plug Power service performance? I personally met with a number of customers over the past quarter. I would like to take a moment and reflect on a meeting I attended this week with a customer, who operates a fleet in food distribution with over 160 units. They have seen the average uptime for the GenDrive fuel cells in their fleet, improve from 96% to 99.4% this year. This is a 75% improvement in uptime. They've also seen 5x improvement in the time to repair a unit. The customer is happy with the GenDrive fuel cells, but Plug Power is not. And we believe our quality can take another step forward. We're targeting another 2x improvement in the coming year and have a clear roadmap to reach that aggressive goal.

The gross margins for our new product shipped in the second quarter were in line with our expectation based on shipment volumes. We also expect to see a 10% reduction in material cost in the coming year, as a result of component cost reductions via negotiation and parts substitution. For a technology in early stages of deployment, the learning curve is in line with comparable technologies. In summary, new product cost projections are in line with our 2014 goals.

Some of the customers who received the products in the second quarter includes Carter's, Sysco Riverside, BMW and P&G. The sales for BMW and P&G Mehoopany were for brownfield sites, where lead acid batteries were previously powered with electric forklift truck fleets. GenDrive sales to Carters and Sysco Riverside were for new construction greenfield facilities.

I'd like to highlight the Sysco Riverside facility, which uses a natural gas reformer to generate its hydrogen. Some of our customers at smaller sites are moving to this technology because at a level below 100 kilograms of hydrogen per day, it is often more competitive than using liquid hydrogen. The deployment of this technology expands Plug Power's addressable market in the United States by approximately $1 billion.

Third, an important element of our financial formula for reaching EBITDA's breakeven is management of our expenses. Plug Power's cash expenses in the second quarter came in as expected. And finally, booking new product revenue at a run rate of $13.5 million per quarter is required to reach EBITDA's breakeven. The run rate of $6.1 million in the last 45 days of this second quarter demonstrates that this target is within reach. A significant order was received from Mercedes, who are adding 123 units to their fleet in Huntsville, Alabama. This is for use in the new Mercedes logistics center located adjacent to their manufacturing facility. This is another customer like Wal-Mart, P&G, Sysco and BMW, to name a few, who are repeat buyers of this technology.

Plug Power has invested in the development at many large Fortune 500 companies in the past 4 years. Our customers today own over 250,000 forklift trucks. To reach profitability, the company needs only a small share of their overall grid business, approximately 3,000 units a year. Our large customers, who have deployed units at multiple sites, have always ordered units, ordered sites serially -- one at the time. The customers would purchase one site, validate the unit's performance and then order the next site. We have now reached the point with some customers, who we will be seeing in the near future, ordering multiple sites in parallel. In our sales cycle, this is a next major step in achieving our near-term sales goal. It is clear, GenDrive's value proposition of improving product productivity while realizing environmental benefits, is bearing fruit and is being recognized by our customers and will be driving the accelerated deployment of our products.

When one considers the buying power of our present customers and our continual quest to develop new business and expand geographically in Europe, through our JV with Air Liquide HyPulsion, the revenue opportunity for the company in this segment within 3 years is multiple hundreds of millions of dollars on an annual basis.

And finally, I would like to remind listeners that the company is the premiere integrator of PEM fuel cells technology without question. We have over 4,000 units in the field. With most units operating as many hours in a year as a car will experience in a lifetime. No one has done what we have done. This is demonstrated by the fact 90% of hydrogen refuelings in the United States will be filling Plug Power products. Long term, we will replace diesel engines and batteries in a wide range of applications. Today, we're exploring these new markets via third-party funding.

Specifically, our roadmap expands in the ground support equipment, a market with 62,000 units in the United States alone; transportation refrigeration units, a market with 290,000 units in the U.S.; and range extenders, a new market with near-term government funding support. Expansion into these markets with use of the current GenDrive architecture positions the company as a supplier for on-road automotive applications. We plan to focus on these new markets that result in higher gross margins and lower required OpEx.

I'd now like to turn the discussion over to Joe Makowski for a discussion of our second quarter results.

Joe Makowski

Thank you, Andy, and good morning, everyone. We shipped 246 GenDrive units during the second quarter of 2013. As of the end of June 2013, our backlog was comprised of 1,229 unit orders for total of $21.7 million.

Product and service revenue for the second quarter was $7.1 million, an increase from $6 million from the first quarter of 2013 and comparable to $7.2 million from the second quarter of 2012. Cost of goods sold for products and services for the second quarter 2013 was $9 million. The gross margin for products and services for the second quarter 2013 was a loss of $1.8 million, an improvement compared to the gross margin loss of $2 million for the proceeding first quarter of 2013. The products and services gross margin loss for the second quarter 2012 was $1.4 million. The gross margin loss in the second quarter 2013 resulted primarily from fixed overhead cost associated with the number of units shipped compared to our capacity, as well as costs incurred to service the install base.

Research and development contract revenue for the quarter were $367,000, compared to $400,000 during the preceding first quarter 2013 and $458,000 from the second quarter of 2012. In our operating expense categories, selling, general and administrative expenses were $3.2 million for the quarter, compared to $2.9 million in the preceding first quarter 2013 and $3.6 million in the second quarter of 2012. The decline in SG&A expenses from the prior year is attributable to the restructuring plan announced in December of 2012. Research and development expenses for the quarter was $824,000, compared to $750,000 in the preceding first quarter 2013 and $1.6 million during the second quarter of 2012.

The operating loss for the quarter was $6.6 million, compared to an operating loss of $6.4 million in the preceding first quarter 2013 and $7.5 million in the second quarter of 2012. Our net loss for the quarter was $9.3 million or $0.14 per share on a basic and diluted basis. Included in the net loss for the second quarter 2013 was a $5.8 million noncash charge related to the change in fair value of common stock warrants, as well as a $3.2 million gain on the May 2013 sale to Air Liquide of 25% of our equity interest in our joint venture, HyPulsion.

In total, our net loss for the quarter included $7.5 million in noncash expenses from a combination of depreciation, amortization, noncash stock compensation and a change in fair value of stock warrants. The net loss for the proceeding first quarter of 2013 was $8.6 million or $0.18 per share. The net loss was $6.5 million or $0.17 per share for the second quarter of 2012. Weighted average shares outstanding for the quarter were $68.7 million. EBITDA loss for the quarter was $5.1 million, compared to an EBITDA loss of $4.8 million in the first quarter of 2013; and the EBITDA loss of $6 million in the second quarter of 2012. Net cash used in operating activities for the quarter was $5 million. As of June 30, 2013, the company had $7.4 million in cash and cash equivalents and $11.1 million in working capital.

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

Question-and-Answer Session


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

Matt Koranda - Roth Capital Partners, LLC, Research Division

This is Matt on for Phil. Andy, you mentioned on the last call, you had a high probability sales funnel of about $100 million. And you mentioned, specifically, some near-term opportunities of $20 million within the next 120 days. Could you give us some color on your progress in turning some of this funnel into bookings?

Andrew J. Marsh

I think very good progress, Matt. And I would say, with 3 of our larger customers, we are in the final stages of discussions to close multiple sites at once, which I mentioned on the call was really different than what we've seen before. I am -- my confidence level that by September 15, which is the end of that 120-day period, that we will achieve, if not exceed, that target. The funding from Air Liquide helped us a great deal in opening up the discussions. And I think that everyone will be happy with the list of customers we will be bringing to the table, who have used GenDrive before and are now -- and who have many, many distribution centers or manufacturing facilities, and will be purchasing multiple sites over the coming months. I wish I could give you the exact names, Matt.

Matt Koranda - Roth Capital Partners, LLC, Research Division

That's great color though. Just one more if I may. This is probably in keeping with what you've mentioned here. But you mentioned, I think for 2014, there was a shipment target of around 3,000 units to about 20 distribution centers or manufacturing facilities. Maybe you could just give us a bit of color about how it breaks down between customers. You mentioned 3 customers that may be large orders. Are the remainder sort of equal amounts spread out, kind of smaller orders as well, or are you looking at some other large orders in there as well?

Andrew J. Marsh

Right. So I would expect there's 3 to 4 customers, Matt, that will represent about 1,500 units. The other 1,500 units, about half of that will come from customers, who are Plug Power's customers today; and about 750 units will come from new customers, who we've been working with over the coming year -- over the past year. Does that help, Matt?

Matt Koranda - Roth Capital Partners, LLC, Research Division

Yes, that's very helpful. And that's it for me.


[Operator Instructions] Mr. Marsh, it appears we have reached the end of the question-and-answer session. I would now like to turn the floor back over to you for closing comments.

Andrew J. Marsh

Thank you. I look forward to talking to you, many of you individually, over the next coming days. And I look forward talking to all of you on the third quarter conference call. So thank you, everyone.


Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

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