Plug Power Inc. (PLUG) Earnings Call Transcript & Summary

Greeting, and welcome to the Plug Power Business Update call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Teal Hoyos, Director, Marketing Communications, thank you. Please go ahead.

Thank you. Good morning, and thank you for joining us on today's conference call to discuss the restatement of the company's previously issued financial statements for fiscal year 2018 and 2019 and fiscal quarter 2019 and 2020 and the filing of the company's Form 10-K for the year ended December 31, 2020. Before we begin, I'd like to remind you that we will make forward-looking statements during the course of this call, including, but not limited to, statements regarding our guidance and future financial performance, the timing of our earnings conference call and filing of our Form 10-Q for the quarter ended March 31, 2021 and our plans for remediating the material weakness identified in internal controls over financial report firing as of December 31, 2020. 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, and such statements should not be read as a guarantee of future performance or results. Such statements are subject to risks and uncertainties that could cause actual results or performance to differ materially from those discussed as a result of various factors, including, but not limited to, uncertainties and other risk factors discussed in item Risk Factors in our annual report on Form 10-K for the fiscal year ending December 31, 2020, as well as other risks and uncertainties that are discussed in the reports we file from time to time with the SEC. These forward-looking statements speak only as of the date on which the statements are made, and we do not undertake or intend to update any forward-looking statements after this call. At this point, I would like to turn the call over to Plug Power's CEO, Andy Marsh.

Thank you, Teal, and thank you all for joining us on such short notice. We're pleased to have completed our financial restatement and appreciate the opportunity to update you all on the outcome. We also will be sharing an update on the first quarter, as we outlined in our press release, and we'll spend some time on where we are going and why we're so excited about the value creation opportunities ahead. But first, let me begin by saying that we appreciate the patience of our shareholders as we work through this process together with our auditor, KPMG, over the past 2 months. At Plug Power, we've always prided ourselves on the principles of integrity and transparency. So while we don't want to take too much of your time this morning, after being limited in what we could say as we work through the restatement process, we wanted the opportunity to take you through it. I'll ask Paul to review the key details of the restatement. But before I do that, I want to share 2 important takeaways, which are exactly as we anticipated and told you in March when we identify the need to restate. The first one, the required adjustments were noncash and had no impact on our business operation or economics of our commercial arrangements. And two, this was not an issue of override of controls or misconduct. As we've discussed, we're at the forefront of a new and rapidly developing industry. As such, there were several technical and subjective judgments to be made in how to apply U.S. GAAP. But we're pleased that we've now completed the restatement, have our 10-K on file and moving ahead. As we look to the first quarter, we're working diligently towards completing our 10-Q, it's important to note that we and KPMG are aligned. The digital type needed is simply to complete the typical work performed in connection with every quarterly close and review. We expect to complete that process and announce earnings within the next 30 days. We remain focused on executing our strategy to generate long-term value. We have great confidence in the growth trajectory of the business and the industry, and we are moving ahead with conviction. And both Paul and I will touch on a few areas today that reinforces that confidence. I'll now turn it over to Paul to walk through the specifics of the restatement.

Good morning, everybody. As we previously disclosed and expanded upon in the filing, the primary issues addressed in restatement centered around 4 key concepts. We identified a technical error in how we were reporting the assets and liabilities associated with operating leases, which stems from the adoption of the new lease accounting standard in 2018. We developed our approach after significant input from external accounting advisers as well as discussions with KPMG in the audit process. And subsequently, KPMG issued unqualified audit opinions on the company's 2018 and 2019 financial statements. But with the passage of time and seeing how the transactions flowed, it became apparent, we were accounting for these in a way that overstated the assets and liabilities. The correction was for a reduction of long-term assets and liabilities and relatively equal amounts in all periods. This correction did not have a material effect on the operating results. The second area that we addressed was for reclassification of certain expenses. As we have talked about routinely, the company has and continues to make significant investments to improve service and fuel cost, uptime and fuel efficiency. While these businesses are still early in the maturity curve there was a termination that they achieve sufficient commercial status to merit moving more of the cost of these productivity enhancements to be treated as COGS in lieu of R&D. Hence, we reclassified these costs for the recent years. This did not change the net operating results. Another area that resulted in an adjustment is the impairment of certain long lived assets. The company recorded a noncash charge of $6.4 million in the fourth quarter of 2020. This was not a restatement since it was recorded in the fourth quarter of 2020. This will reduce future depreciation charges. The last area had to do with loss provisions on extended maintenance contracts. We have discussed that the service business is less mature than our equipment business, and we remain focused on reducing costs as we grow this new nascent industry. The cost reduction will come from less parts and better labor leverage, and the company continues to see great progress in its improvement initiatives. However, given the combination of the R&D cost reclassification and our historical trends, we determined it was prudent to record a noncash loss provision on certain existing contracts. This stemmed from a change in our future cost estimates. We included a net charge of $5 million in 2018, a net benefit of $1.6 million in 2019 given the release for some of the 2018 reserves and a net charge of $21 million in 2020. We anticipate this will result in less GAAP expense going forward for existing contracts, having recognized these costs now in the previous periods. We are pleased to put this matter behind us with the restatement and filing of our 10-K, and we plan to use this as an opportunity to improve and come out stronger on the other side, including expanding our resources and improving our systems. To provide some insight on our commercial progress, let me share a few business updates. The update we provided on Monday noted our expectation of recording a more than 60% increase in gross billings and 60% increase in net revenue in the first quarter 2021 as compared to the first quarter of 2020. And for the second quarter, we are forecasting an approximate 50% increase in gross billings and net revenue from the prior year period. We maintained a strong balance sheet with over $5 billion of cash to fund future growth initiatives. And we are reaffirming our previously disclosed annual gross billings targets of $475 million in 2021 to $750 million in 2022 and $1.7 billion in 2024. I will now turn it back to Andy.

As Paul highlighted, growth opportunities remain robust, and we have a strong balance sheet to execute our strategic objective to continue our leadership position in this potential $10 trillion hydrogen economy. We are executing well on our previously highlighted 2021 objectives and are on track to deliver on our financial targets for 2024. We are also on track to build first of a kind green hydrogen generation network in North America. Our electrolyzer business outlook remains robust on a global basis. We see meaningful growth opportunities in new markets including on road, stationary power and backup generation for the data center market. In addition, we're on track to finalize our JV agreements with Renault, SK Group in ACCIONA. Now we remain excited about our material handling business, which we'll be doing more than 60 sites in 2021, deploying over 10,000 GenDrive units. With that, Paul and I would be happy to take your questions.

[Operator Instructions] Our first question today is coming from James West of Evercore ISI.

Andy and Paul, congratulations on getting this a little hiccup behind you. So I have to ask the question. I expect the answer to be no, but I want to just make sure, the -- as you went through this last 2 months of restatements. Did any of this, call it, that need changes to the JVs that you should be closing with Renault, with SK and others that we think are leading to significant growth here. But any changes in those relationships related to the -- this restatement process?

James, we are on track to close the Renault JV in the second quarter. And with SK, I will be heading to South Korea on Sunday night. I have a team there working on the JV formation and the opportunities as we speak here today. So we do not see any -- there's been no slowdown, not only in the activity with the JV, but the business in general.

Okay, okay. Good to know. And then maybe just a follow-up on the data centers. We're seeing a lot of news flow, of course, and I know you guys are piloting some programs and doing a lot of work there. When could we expect to see maybe some more announcements on projects or implementation of utilizing hydrogen with some of these -- the larger data center companies?

James, I would expect to see that announcement during the -- probably late third quarter, deployments are starting earlier than that. And look, I would like just to take a minute to talk about a market that I did not expect in the stationary market for backup, but many of our distribution center customers are asking us to replace their diesel generators potentially for backup power for large distribution centers. They have hydrogen on site. What we're beginning really to see, an ecosystem developing where these customers not only want Plug to put out their fueling stations in vehicles, but to provide the backup hydrogen for their distribution centers. It's really a -- I sat through a board meeting yesterday, and I was just stunned by how integrated our sales process had become.

Our next question is coming from Colin Rusch of Oppenheimer.

Congrats, Paul, in getting this a whole wrap up. You guys -- can you give us an update on-site selection, renewables procurement and some of the customer discussions around the green hydrogen opportunity? Obviously, you've got some pretty big ambitions around that part of the business. And we'd like to get a better sense of how that's progressing here.

So James, I guess, the first headline, I would say, there is we will have 2 plants operational by the end of 2022. That -- when I look at it, Colin, the green hydrogen sourcing we've announced our relationship with NYPA. We well -- ironically, when you think about the first electrical network being built, now we're building one of the first green hydrogen plants and probably the largest ever when it's completed using Niagara Falls Power, which I find a little interesting from a historical perspective. That will be a 45-ton plant. We have a plant that we're working with Brookfield that we expect construction to start by the end of the year or the beginning of the first quarter, which will be a 15-ton plant. We also have a plant outside Dallas, Texas, outside Fort Worth, where for a -- up to a 60-ton plant, we'll probably start at 30 with Apex. And we actually have 4 or 5 other sites under consideration, we've done a real good job at sourcing electricity under $0.035 kilowatt hour, which really makes green hydrogen competitive with gray hydrogen today. And I guess, additionally, I would add, when you start looking at some of the policy initiatives ongoing in D.C. at the moment, built by Senator Heinrich, other bills they are working through house ways and means the President has built back better plant. All of them have substantial subsidies for the generation of green hydrogen, which will be really beneficial to the business.

Excellent. And then just the follow-up is around the capacity expansion that you guys are working on in Rochester, how that's progressing, the availability of labor and construction costs and how that's tracking so far?

It's tracking fine, Colin. I'd love to take you up in the August time frame and show you around, I was there on Saturday with a customer going through the facility. It will be up and running and building electrolyzer products come the August time frame. And it will be completely functional by the end of the year. One of the items I love about what the team has done is, we've built this facility that it can be duplicated anywhere in the world. There's 256 pieces of equipment. And that model is specked out like a product that we can duplicate in France, duplicate in South Korea and duplicate other places of the world, so -- as well as in the United States. So we are well, well positioned. I think more than anyone else in the world to really be able to provide them electrolyzers at scale with our factory in Rochester.

Our next question is coming from Craig Irwin of ROTH Capital Partners.

And I'll also express my congratulations in getting this behind you so quickly. Light-speed versus how we've seen others resolve situations like this. So congratulations are in order.

Thank you, Craig.

Andy, I care a lot about fuel cell trucks. I think you guys have some exciting things on the horizon. The work you did last year with one of your major customers retrofitting some of those refueling stations I think foreshadows the interest out there. Can you maybe update us on what's going on in fuel cell trucks how things are progressing with the identified partners you have now? And do we potentially see other partners over the next couple of quarters?

So Craig, when I step back if I look at the activity, we cleared antitrust with the Renault JV. And we're now able to [ joint sell ] with Renault. We are targeting 10 projects in the next 12 months with 10 different customers to put vehicles on the road. We believe that by we believe this JV will capture 20% of the light commercial vehicle market for fuel cells in Europe, which by 2030, we expect production to be over 100,000 units a year. And these aren't just my projections. It is Renault's projections. They are a dominant player in the BEV market and kind of recognize where fuel cells make sense and where batteries make sense in the application. Our team, Sanjay, Keith Schmid are in multiple negotiations for deployments and for partnerships for heavy duty vehicles. I think you'll see announcements on other classes of trucks from Class 6 to 8 here in North America with customers who want our products, not just partnerships. I would expect you'd see that in the next, call it, 3 to 6 months.

That's fantastic, we look forward to that. My next question is about the potential pricing of third-party offtake agreements for green hydrogen. So you guys are really a leader here. I don't think there's any material green hydrogen being produced globally, or I should say, in any material volume. What are your thoughts about the type of customer that could be an early customer for green hydrogen, and you will have economics that are attractive on production. But what do you think about potential offtake are these likely to be at a significant premium.

I think when I look at -- and I think, Craig, I think in some cases, yes, in some cases, slightly higher than slightly higher than natural gas generated hydrogen. But when we look at, it's a -- if you take a look at liquid hydrogen today at the spigot from natural gas, it's somewhere in the $3 to $4 a kilogram range. With the program and the pricing we have for green hydrogen -- generated hydrogen and as I think you know, Sanjay has done some really important work in understanding where we should build these plants. We believe we can be very competitive with natural gas hydrogen and when I look at it, we now have a product that can be similarly priced or priced at a premium to gray hydrogen. Additionally, it's a much better product. I think our hydrogen group will be order takers instead of having to make big sales pitches because it's going to be a no-brainer. And we're building a lot, but today, there's over 25,000 tons of green hydrogen that's used a year in the U.S., and we're going to have capacity of 500 tons by 2025. And many of that will be used in new transportation markets, but I think it opens a large opportunities in many other applications.

Our next question is coming from Eric Stine of Craig-Hallum.

So I just wanted to just digging a little bit just on the materials -- the material weakness. And maybe steps you're taking confidence that, that is something that you can address and wrap up quickly. Just any details there would be very helpful.

Yes. Sure, Eric. And thanks for the question. The answer is we will address it, and we have addressed it. We've hired a number of people. We've been investing in systems. We're going to continue to invest in people and systems. It's -- there's some technical aspects of it so that you have to go and do a series of kind of documentation and evaluations over a couple of quarters to kind of prove that you've addressed it. But we've more than doubled the finance team in the last 60, 70 days. And we feel pretty confident we've got the right technical resources and the right people to kind of address this going forward. If you look at the outcome of this, really, Andy and I were talking about this morning, I mean, really, these issues kind of summarized around technical accounting and refinement of estimates. And so real goal for us is to continue to keep investing in our systems and our people, and we're doing that, not just in finance across the business as we grow this company that will make us stronger as we can nurture the balance of this year. So I think in very short order, we're going to be announcing closing of that issue and moving forward.

Got it. And then maybe a follow-up, just and obviously, you've had a lot of changes over the last couple of years in options for customers, how you structure arrangements. I mean, after having gone through this process, I mean, do you feel like you've got that in the right place? Do you anticipate that you might have to make any other changes to how customer deals are structured going forward?

Absolutely not. I think we think we've got the right business model and the right approach. And this really had no changes to the fundamentals of the business. It was not really anything stemming to the economics, the outlook, the cash or those deals expected to have any impact in the models, in the customer approaches.

Our next question is coming from Jed Dorsheimer of Canaccord.

Congrats on getting this -- getting through this. I guess, first question, one related to the process? And then one, just on the business. So Andy, maybe just starting with the business first. If you look at the $0.035 per kilowatt hour. I'm just curious, I would assume that, that bypasses transmission and distribution to get that pricing. But want -- so I guess, is that correct? And two, is that wholesale? Or is there any dynamics associated with that in terms of off-peak or certain times of the day? I'm just curious how you got such aggressive pricing there. And then I do have a follow-up.

Yes. I think, Jed, we've done a real good job being before the meter. So everything we negotiated. We're -- for example, when you look at our opportunity and its opportunity in night with the NYPA in Upstate, New York. We're being fed electrical power from Niagara Falls on continuous basis. The site is guaranteed continuous basis of electricity for the site in outside Lancaster PA with our partner, Brookfield. And if you look at APAC, it's a combination, the wind power plant. We'll be providing electricity on a continuous electricity when the wind is not blowing, we'll be -- let me take a step back. The wind plant in Texas. When there's extra power, will be selling it to the grid. When there's -- when the power is reduced, we have an agreement that we continue to receive clean electricity with the associate [ recs ] to make sure that make sure that we're providing our customers green hydrogen at competitive pricing. So I would say our team did a wonderful job negotiating those deals and has been quite aggressive. And look, we've been thinking a lot about places like in West Texas and how you can move hydrogen where we could even get better deals for the cost of electricity. So that's how we've been thinking about it.

Got it. And then just -- As a follow-up, either for Paul or Andy. With respect to reclassification, and more importantly, on a go-forward, so there are some moving parts with respect to both COGS and that of R&D. And I know you're saying that the 2 are kind of netting out. My question is that are these -- are the restatements kind of the expectations on the go forward? Or do you think that you can basically catch-up is COGS are going to be a little bit higher in terms of taking some cost out? And I guess maybe just a second part to that or third, if I could, would be the we are kind of looking at some inflationary market environments. Are you hedged out on the metals with respect COGS? So couple of parts to that COGS question, I guess, but I know that, that will be key to investors.

Yes. I think there was a lot in your question. I hope I address it all, Jed. That's okay. I just want to make sure I get the right -- all the concepts. I guess the short answer is there's puts and takes, but we expect this year to still be positive in the double digits. And as we look and we go forward, thematically, we have, and we've seen improvements on the business, and we continue to see improvements on the business. And fundamentally, just -- I think just for everyone's benefit, when we work with the ops teams and the engineers and the people that do it every day, they look at it holistically, and they think about where we're at and where we're going. The counting is kind of a score-carding after the fact, but they look at it fundamentally in terms of what's included and where we're at. So we still feel incredibly confident about where we're heading and what we'll achieve this year as well as the trajectory that we're on and the improvements that we're going to see and how that's going to yield as we move forward. So hopefully, that helps.

We're able to take one more question, and I apologize, anyone who hasn't been able to get their question in. And I know we'll be more than willing and happy to talk to you after the call if we weren't able to get to you. So I think we have one more.

Our last question today will be coming from Chris Souther of B. Riley.

Just to follow-up with 2 quick ones. On the gross margin piece, maybe just by kind of segment you could talk about what the impacts were there. And kind of the go forward, I'm curious, the impairments. Is that going to have a positive impact on the margin run rate for the PPA agreements with Walmart and whether any of this -- what segment was the stuff you'd previously been counting in R&D now coming under? Is that product segment, additional costs or a different segment?

Yes. It's predominantly around service. And it's around those productivity investments that we've been making in reliability investments. And so -- and when you look at the accruals that we recorded, obviously, the net of that is that you recognize the cost now, which means that you wouldn't have that -- it means less GAAP cost in the future. So the service actually benefits both our service line and the PPA. And those -- the net effect of those entries will, on a go-forward basis, mean, again, less GAAP costs as we move forward.

Got it. Okay. No, that's very helpful. And then the last piece, with all the moving pieces on Amazon related to the warrant revenue reduction there in the K, you state that total revenue with them was negative $310 million or something. Maybe you could just kind of walk through the gross -- from a gross billings perspective, what they -- and any of the other key customers you called out there represent as far as the revenue, I think, in 2020, I think would be helpful in kind of framing how that relationship has grown despite that negative accounting piece of it.

I'm going to just take that for a minute, then I'll hand it off to Paul. The opportunity with Amazon has expanded to not only material handling equipment from hydration stations to selling hydrogen to on-road vehicles, the stationary products. Every electrolyzers every product that Plug touches, we're engaged with Amazon. And the only reason we accelerate the warrants was because we saw that there was benefits to our shareholders and being able to read our income statement much more clearer in the future because the value of those warrants were set at a point in time. So when I look at it, Amazon now -- Amazon is an incredible opportunity way beyond anything we've done to date. The accelerating of the warrants we did because we thought it would make it easier for the reader of our financial statements going forward. Now in the past year, gross billings for Amazon, I think, Paul, were north of $100 million. And so we expect continual growth with Amazon, and one of our key, key partners for the business, Chris. Well, I really appreciate on such short notice for people to call in today. Thank you again and look forward to talking to you at our first quarter conference call soon. Thanks again. Bye now.

Ladies and gentlemen, thank you for your interest in Plug Power. You may disconnect your phone lines or log off the webcast at this time, and have a wonderful day.