Plug Power Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 14 speakers on the call.

Operator

Greetings, everyone, As a reminder, please note today's conference is being recorded Tuesday, May 9, 2023. It is now with pleasure that I turn today's conference over to Teal Hoyos, Senior Director of Marketing and Communications. Please go ahead.

Speaker 1

Thank you. Welcome to the 2023 First Quarter Earnings Call. This call will include forward looking statements. These forward looking statements contain projections of future results of operations or of our financial position or other forward looking information. 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.

Speaker 1

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 or understood as a guarantee of future performance or results. Such statements are based upon the current expectations, estimates, Forecasts and projections as well as the current beliefs and assumptions of management and are subject to significant 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, the risks and uncertainties discussed under Item 1A Risk Factors in our annual report on Form 10 ks for the fiscal year ending December 31, 2022. Quarterly reports on Form 10 Q and other reports we file from time to time with the SEC. These forward looking statements speak only as of the day which the statements are made, and we do not undertake or intend to update any forward looking statements After this call or as a result of new information.

Speaker 1

At this point, I would like to turn the call over to Plug's CEO, Andy Marsh.

Speaker 2

Good morning. Thank you everyone for joining the call and thank you Steel. Before I begin the conference call, I want to talk about 2 items. One is that we had a filing this morning where we made a mistake with the date. It certainly got us excited here.

Speaker 2

We put 2024 instead of 2020 3. So if you're reacting to a plug change the guidance for 2023 From $1,400,000,000 is our expected results, we have it. So sorry for any confusion that may have caused. The second, I really like to share a video. Participants on the phone, you'll hear kind of a brief 3 minutes of 32nd periods Silence, while those on the webcast can sit back and enjoy the video.

Speaker 2

If you're on the phone, I'd suggest click into the webcast. It's really worth watching. So, if you can't if you miss it, it will be included in our archives for later viewing. Thank you. Hope you enjoyed the video.

Speaker 2

Really it showcases our Georgia plant and you can find more detailed information on the status in the investor letter. Really to summarize, our plants are already producing gases hydrogen for our customers and we expect it to achieve full production by the end of June. Although we always strive for greater speed, it's really worth noting, we accomplished what we've accomplished since issuing Full notice to proceed under our EPC contract at full production in just 48 weeks. It's a remarkable feat considering that conventional gas companies and I was sitting at CERAWeek listening to 1 CEO talked about 6 years, we estimate, but they usually estimate 4 years of a project of the scale. Additionally, by the end of June, our Georgia plant We have the largest green hydrogen plant in the world that utilizes electrolyzers.

Speaker 2

That's a significant achievement. We plan to commission more plants, Texas, New York and Louisiana this year. This year our focus is really to execute. Our primary goal is to achieve revenue of $1,400,000,000 And that's in 2023, which is supported by several activities including learning to scale our 5 megawatt electrolyzer systems In partnerships with our fabricators, scaling our stationary products to facilitate 20 megawatts in shipments. One of the real competitive advantage is the infrastructure we've established in Rochester and Vista, which enables us to support our business growth.

Speaker 2

Our customers really do recognize our ability to deliver our promises. Thanks to the tools and facilities we possess. Our ability to construct green hydrogen plants is evident in Georgia and we plan to We're going to demonstrate this in Texas and New York, which will eliminate any doubts about our capabilities. I'm going to be walking Georgia today. I'm excited.

Speaker 2

These plans have garnered interest from both equity and debt investors. Moreover, Plug has a range of non diluted solutions that can eliminate the necessity for future equity investments At the present level based on the current business plan. And look, this year we remain focused on government policies. This is an energy company and energy and government policy goes hand in hand, including the IRA And the European Renewable Energy Directive. Although these policies have been helpful, Plug has the opportunity shape their development further.

Speaker 2

We have built this chart to show the lower And expect the case for Plug in 2023. In the expected case, Plug will achieve $1,400,000,000 of revenue $140,000,000 in gross margin dollars. Look, there's really just a couple of key ingredients in meeting that goal. It's shipping our 275 Megawatt electrolyzer systems, which we have orders for, as we learn to build them more efficiently In coordination with our 3 fabricators around the world. We're close to closing 500 megawatts of a large electrolyzer plant system order and there's many more behind that.

Speaker 2

And those opportunities we recognize revenue on an ongoing basis. And selling 60 tons of liquefiers in the next 3 months, I'm sure Sanjay will be happy when the Q and A comes around to talk about that. Also should add, we have the opportunities beyond those to achieve $1,400,000,000 And all of these items do not come to pass, revenue would be about $1,200,000,000 And gross margin be approximately $50,000,000 still with 80% increase in revenue for the year. Finally, I'd like to highlight, this is really important. Our application business when you look at that slide Has very little variability since it's more established.

Speaker 2

During the early years of our application business, We did experience some of those challenges and predictabilities. In some years we exceeded and others we missed our projections. The methodology we just shared gives us a high level, very high level of confidence in the range of outcomes in the next 7 months. Be clear, this is really important because this sometimes gets lost in the chatter. Plug is leading the way In terms of building actual products, real things every day and constructing plants, No, the company is doing what we're doing in the field.

Speaker 2

Our Georgia plant is exceptional and we're excited to showcase it to analysts in the coming months. The feedback we received from our customers have been overwhelmingly positive. When it comes to the application business, We have a remarkable stable business model compared to other companies in the fuel cell industry. This is due to our focus on pedestal customers. Lastly, our range of energy products is unparalleled in the industry and we're rapidly learning how to scale more efficiently Any of our competitors, but more important, our customers really like our products.

Speaker 2

Finally, I don't want to shy away from the facts. Once again, no one is building real products and building plants like plugs. It really separates us. Paul, Sanjay and I are now available for your questions.

Operator

Thank you. We will now start the question and answer session. And our first question comes from the line of Andrew Percoco of Morgan Stanley, please proceed with your question.

Speaker 3

Great. Thanks so much for taking my question here. So just 1st, I want to ask a question around the IRA and some of the treasury interpretations around hourly matching and deliverability and What might that mean for some of your first few plants that you're bringing online? But you still think you'll qualify for the full $3 per kilogram? And what might that mean for your 20252028 grain hydrogen ecosystem targets?

Speaker 2

So Andrew, I'm going to take a step back further than that. I've spent a lot of time especially in the last 2 months in DC Talking to folks in the administration. And remember, the primary purpose of the IRA From my discussions, I believe that when you look at the European Renewable Energy Directives That certainly has had a great deal of influence on those in D. C, which interpret if you interpret that, You can see it's very, very favorable to the approach plug thing since it's important. Now when I look at it, I'll give you two examples where I think that resonates with administrators.

Speaker 2

In my house in Saratoga Springs, I buy power from Vermont Power. Vermont Power every time I buy electricity is generating more renewable energy. Doesn't matter that the electrons that comes through my house come from NYSERDA not nice, comes from National Grid. That's really what's going on. That's fundamentally plug supports generating more renewables, Plug supports generating electrolyzers.

Speaker 2

And I believe from my discussions, that's in line ultimately what the administration will do.

Speaker 3

Great. That's some helpful context. And maybe just switching over to The OpEx trends in the quarter, I think Paul you had mentioned $125,000,000 of OpEx per quarter is the right run rate for 2023, came in a little bit above that In the Q1, how should we think about that trending through the rest of the year? And do you still feel comfortable with your operating income guidance for 2023?

Speaker 4

Yes. So I think what we have been talking about was like in that $125,000,000 $130,000,000 but the biggest delta in the quarter Had to do with our acquisitions. I mean, they continue to do better than we expected. And as you can see, we had to accrue more of consideration in terms of the earn out structures that we set up, should they be successful that they would only pay when and if that happens. So That's a high class problem and it was the primary delta for the quarter.

Speaker 4

But I think in the balance of the year, if you look at it, the $125,000,000 to $130,000,000 is just the right run rate.

Operator

Sorry, our next question comes from the line of James West of Evercore ISI. Please proceed with your question.

Speaker 2

Good morning, James.

Speaker 5

Hey, Andy. Good morning. How are you doing?

Speaker 2

Okay.

Speaker 5

So Andy, I wanted to Talk about hydrogen hubs for a minute. Given that we're really close to the commission that's You can advise the DOE on or make recommendations to the DOE on what's been submitted so far And the DOE should start allocating capital, I believe, at some point in the 4th late 3rd or Q4 and there'll be a big build out. And we've got, of course, Applications from Texas, from California, from Los Angeles and then obviously the Northeast as you know full well. What role does Plug play in that process. I know we have to establish production of green hydrogen and an end market I'd love to hear your thoughts on that.

Speaker 2

So James, and I have to watch because everybody keeps it reminded me, I'm covered by NDAs on the hydrogen hubs. Right. I can say that every site that you mentioned, Every hub, Plug has been engaged in a different levels. And some of them such as The New York hub, our name has been mentioned publicly, West Virginia, the activity going on there with Senator Manchin. I would tell you that things like expansion of our hydrogen plants are engaged in many hubs.

Speaker 2

Leveraging our hydrogen plants or engaged in hubs. Our products Both are stationary, especially our stationary for peaker plants are involved in many hubs. So like you, I expect some money to start filtering out in November, December timeframe. I really don't think real dollars start ramping to late 2025 or early 2026. And my government affairs person is sitting with me here, James, He's shaking his head, yes.

Speaker 2

So that's kind of our Okay.

Speaker 5

Understood. Okay, good. But you As long as you'll be involved there. And then maybe a follow-up for me, not related to the Hubs Hard. But your the start of Georgia is it got pushed now, it's going extremely well.

Speaker 5

What are the kind of the key learnings that you guys have achieved from that start up that you think will make the start ups with the additional Facilities more efficient, faster to keep the timeline in check?

Speaker 2

We probably have a 100 learnings, James. Okay. I think the most important one and you see that it's going on in Texas. In Texas, we've been able to sign an EPC contract, where the EPC contractor is Willing to sign up ahead of time for price and performance. And that's I think a statement that What people have seen you know you can repeat.

Speaker 2

I think that when we look at scaling, We also this plant itself, we will expand it to 30 tons. I don't think We'll be doing too much. It will be less than 50 tons per day just from a the cost. It's It kind of follows a typical cost curve that going from 15% to 30%, probably only increases your Construction cost by 40% and your overall cost by 40%. So I think we're much more focused on plants like Texas and New York that are large, there could be some smaller plants like Golin where the infrastructure is really kind of much simpler.

Speaker 2

I think that's really one of the key learnings we've had. That's but I can I probably could go on and on? Sure. But that's really the heart, I think, of what we found important. Sanjay, you want to add anything?

Speaker 2

No, I agree with that, Andy.

Speaker 6

James, that's really it. I think we understood that scale has a tremendous benefit And all the components that you got to manage and think through it, right? And Learning Subs Georgia, as Andy said, is now allowing us to really go into a time

Operator

Our next question comes from the line of Manav Gupta of UBS. Please proceed with your question.

Speaker 7

Guys, I have two questions and they're kind of related, so I'm going to ask them right upfront.

Speaker 2

Okay. Good morning.

Speaker 7

Good morning, sir. So your press release states something very interesting. It says that you are in final stages of negotiating large Scale project opportunities in U. S, Europe and Asia Pacific representing potential backlogs of 1 gigawatt. So if we can get some more details on that.

Speaker 7

And second is on March announcement, you won a contract to build a 100 Megawatt electrolyzer with Juniper. As I understand, this was a competitive bidding process and you were selected versus your competitors. It kind of indicates you have a very good product out there. So if you could talk a little bit about the March 7 announcement with Uniper. Thank you.

Speaker 2

Go ahead, Sanjay.

Speaker 6

Yes. Again, thank you for that question. First off, When we talk about this over a gigawatt of booking opportunity on the electrolyzer side of the house here in the near term, we're looking at 500 plus megawatt opportunity in Asia Pacific. We're looking at 500 plus megawatt opportunity here in North America. We're looking at another 100 megawatt of opportunity in Europe.

Speaker 6

So please stay tuned. Obviously, in some cases, we're in the contract negotiation. In some cases, we're actually having a lot of discussion about it. We certainly plan to actually close on 1, 2 or all 3 of them here over the course of the next 90 days. And that's really what we're referring to when we talk about that gigawatt Plus bookings outlook in the near term in our electrolyzer business.

Speaker 7

Any details on the Uniper contract?

Speaker 2

Go ahead, Sadu. Yes. Again, I think, look, one of the key things Well, let me Yes, I'm going to start. One of the key items, Plug, is really focused on customers not competitors. And that when you look, I think when people look and see that Plug knows how to scale, Plug knows how to engage with customers, Plug knows how to do projects.

Speaker 2

I think that separates for us from our competition. And when we take customers We have been taking many customers to our Georgia plant to show them. It really provides us a significant differential advantage versus any of the other competitors. When you walk our factory in Rochester, you actually see people making electrolyzer stacks and MEAs. You can't really see that scale anywhere else.

Speaker 2

That's really why we win deals. But we're focused on Well, this is a big market. We're focused on what we can provide, what we can offer. We don't get too worried about competition at the moment. We worry about

Operator

And our next question comes from the line of Greg Lewis of BTIG. Please proceed with your question.

Speaker 8

Yes. Hi. Thank you. Hey, good morning. Thank you for taking the time.

Speaker 8

Squeeze get me in here. So Andy, I guess recently you made that announcement around the Korean JV with Okay. With startup in 2025, I was hoping maybe for some maybe for a little bit of color around The CapEx build of that and then really kind of is this Could we see incremental projects from this initial joint venture?

Speaker 2

Sure. So Greg, We've been working with SK now for over 2 years and the JV was Finalized last year at this time with the final IP agreement done on December 31, 2022. And we're focused on our stationary products. And in the investor letter, I highlighted the fact that There will be a good deal of activity for the stationary products for areas where the grid doesn't exist today. In Korea because of the high electrical costs, our plans with SK starting in 2025, 2026 Is to build 400 megawatts of stationary products and then every year to 2,040, 200 megawatts.

Speaker 2

That in itself, this factory, which between the both of us will probably be in the 150 1,000,000 type range $150,000,000 to $200,000,000 which will be jointly split is really just the beginning of the deployment of the JV. We're already doing with the JV. We're shipping cryogenic trailers this year from Plug. We're Shipping ProGen modules for uses in buses in Korea, which we think ramps to over 1,000 units shortly. We're engaged in electrolyzer projects and our first electrolyzer projects are being shipped.

Speaker 2

So on a wide range of basis, This is going to be a very, very powerful JV. Take a little bit of time, but We're together really accelerating. I think that if you went to the event Look, I was in Australia working on deals and our Chairman was nice enough to go for me. But our Chairman was with the President of South Korea. I think that says a lot about the relationship.

Speaker 8

Okay, great. And then I did want to touch a little on the green hydrogen, The network. Last week was the Advanced Clean Transportation Conference. Clearly, it seems Not surprisingly, California is going to be really the epicenter of hydrogen demand in the U. S.

Speaker 8

It seems like For the foreseeable future, it just seems like a lot of money is going in there, a lot of vehicles on hydrogen are going to be going there. As you think about the network and realizing that green electricity or green renewable power is key servicing that. Should we be thinking about more Hydrogen production plants in and around the California area versus where I get we have a diversified footprint in New York, Southeast, Taxes. But just as it seems like there's just coming more demand from California Or is it really we're just going to be shipping a lot of product there?

Speaker 2

I'm going to let Sanjay answer that. But I'm going to make One comment that should not be overlooked, Greg. The demand for hydrogen itself in applications Like creating e fuels, like mixing with natural gas in the pipeline, With industrial applications like ammonia, probably will be nationwide And probably ramp and be much larger than California. That being said, I'll let Sanjay talk about our California plan As well as other activities we have going on.

Speaker 6

I mean, Greg, you're spot on, right? That is going to be where a lot of demand is for some of the mobility application and things like that. So this is how we're looking at it. 1, we already do have a location that we have identified We're going through all the permitting process going through PG and E, going through Cal ISO to move that project ahead of the site. One of the dynamics as you think about California is while the demand it's a demand center, but you also have a very high price of electricity and you also have a situation where Permitting actually ends up taking longer than many other states.

Speaker 6

So that's a bit of a dichotomy that you got to deal with when you think about how many plants and how do you really build in California. But having said that, we actually are looking at multiple projects. Now I mean multiple, okay, in the neighboring state to be able to support California. We're even looking at some of the opportunity that eventually might even end up making it all the way to California, even in the West Texas area because we've done that before. It really comes down to what is that lowest possible renewable electron we can get?

Speaker 6

What is that cost of the hydrogen and does it make sense to build a plant even without delivery distance and ends up making it a lower cost as it gets into California market, right? So neighboring states, even our project in California and other location is really how we plan to Support, as you rightfully pointed out, the meaningful demand that we see coming from the State of California.

Speaker 8

Okay. Super helpful, Andy, Sanjay. Thanks for the time.

Speaker 2

Thanks, Greg.

Operator

And our next question comes from the line of Bill Peterson of JPMorgan.

Speaker 9

Good morning, Bill. Yes. Hi. Good morning, guys. Good morning, Andy and team.

Speaker 9

Nice to speak with you this morning. I wanted to go to the guidance for the year just to make sure I understand. I think you said it was largely Energy Solutions. But in the last quarter, you talked about 55% kind of You may turn our business, I think 30 plus percent electrolyzers, dollars 100,000,000 in stationary. I think the rest you call it fuel, cryo and so forth with 15%, which I think is around $200,000,000 So what is the difference?

Speaker 9

Where does it come in at $1,200,000,000 and where does it come in at $1,400,000,000 Is it electrolyzers primarily For fuel, if you could help us understand kind of what's changed in the guidance?

Speaker 2

So Bill, What I've tried to I want to be really clear. What I try to say is look, Our ability to predict obviously hasn't been perfect. So we spent lots and lots of time after last quarter Working through to make sure we enunciate to The Street where the risk is in the $1,400,000,000 And if you look at and it's been filed, I think it's going to be refiled with 2023, Jared. If you look at the chart, I wrote Bill with the team here kind of 4 key items. So one of it is, we're shipping 27.5 Megawatt electrolyzers containers this year.

Speaker 2

That's probably around Call that circa $100,000,000 Look, we have the orders for it. It's making sure if We spent a lot of time on execution there and that's a big part of it. If you look at Another big difference Bill is associated with our electrolyzer plants. And the electrolyzer plants you probably can circle another $30,000,000 in revenue. So between those You're 30 to 50, you're probably talking 3 quarters of the difference.

Speaker 2

And then Sanjay has a lot of liquefiers he's looking to ship They're looking to sell in late negotiations and that will get us to the 770. And also on the slide, I did highlight the fact that there's other opportunities in the works But that's really where it all resides. You look for example in the application business, our traditional business, The variation is really about $20,000,000 from expected to the lower case. And in that lower case, it really has to do with the timing of a couple of projects whether they happen in the Q4 or Q1. I wanted to do this chart because I wanted to make sure investors knew how all the numbers lined up.

Speaker 2

I hope that was helpful, Bill. Bill?

Speaker 9

Yes. Sorry about that. Sorry, you talked about Sorry about that. You talked about raising additional potentially raising additional financing. You talked about the DOE loans And ABL and probably you mentioned more to come in the second half of the year.

Speaker 9

Is there a preferred means of raising, I guess, presuming you're looking at the most non dilutive capital as possible, but what is the preferred means doing this as you look at the second half of the year or into next year?

Speaker 2

I'm going to take a step back. I'm going to hand it to the experts to call and Sanjay here. We also may have people invest in the plants themselves, Bill. And we have lots of people who want to take a share, for example, in Georgia. Go ahead, Paul.

Speaker 4

Yes. And I think you touched on it. I mean, obviously, 1st and foremost, it's non dilutive. 2nd is cost of capital. 3rd is flexible capital.

Speaker 4

But again, as Andy said, there's a lot of parties that are interested. And when you look at the breadth of what we're doing and the pace and the And ambition we have to grow and invest and scale. It will probably be a combination of solutions as we continue to move forward. But The good news is we have an incredibly strong balance sheet. It's basically unlevered and we've got this portfolio of plants unfolding that are Profitable portfolio to leverage up and recirculate that capital.

Speaker 4

It puts us in a great position of optionality. And that's when Andy referred, we're working towards the second half. You're going to hear more See more as we work through that in the next in the months to come.

Speaker 2

Okay. Thank you.

Operator

Question comes from the line of Alex Tania of Wolfe Research. Please proceed with your question.

Speaker 10

Great. Thanks. Good morning.

Speaker 2

Good morning, Alex.

Speaker 10

Good morning. Maybe I could take another run at the kind of the IRA guidance and maybe what that means. Do you think that or would you be able to characterize there a bit of decent amount of pent up demand or anything like that once you get Kind of guidance either way in terms of matching or additionality or something like that. So I'm just Wondering if, as you've talked about these incremental opportunities you're seeing over the next 90 days, how much of that would play into just Getting resolution on the IRA rules and even more beyond that, would you could you see kind of a ramp up in Any kind of announcements just once we have that clarity?

Speaker 2

So Alex, I think clarity probably comes August, September just to kind of frame it. And Anytime you have uncertainty, you have folks waiting. And if the policy is defined very similar to The European directive, I think they'll be a slide. I think that Because it will create more and more jobs and allow United States to scale, allow companies to export. I think that will be the outcome.

Speaker 2

If they're very, very restrictive, I still think there will be More activity, but I think a lot of the focus for many companies will be more European focused Then U. S. Focus. So I think if the regulations are too tight, Quite honestly, the IRA would defeat its purpose. I don't think that's going to be the outcome.

Speaker 2

I know of a good deal. I've had fortunate enough to know people in D. C. People are concerned about jobs. People are concerned about the economy.

Speaker 2

People are concerned about the climate. They're concerned about America growing this industry I'm not handing it over to the Chinese, which quite honestly is a big hot button. And I think When the regulation comes in, we're going to everybody is going to be who is sitting here at the table with me is going to be quite happy.

Speaker 10

Great. Thanks. And then maybe just thinking about margins for the balance of the year, I guess. Certainly, gas prices have come down incrementally even since the previous earnings report. Is that kind of a decent incremental tailwind For numbers as kind of upside or have you seen any kind of offsets Maybe the momentum that we've seen on the gas side.

Speaker 2

I'm going to let Sanjay take that one.

Speaker 6

Yes. You're right. I mean, I think, look, there's a quarter lag as we've always said, right? So you will start to see that benefit as you get into Q2, Q3 and Q4 this year, there is going to be some incremental benefit. And obviously, we're spending a lot of time making sure that the gas price being Our supplier actually matches that with how we're looking at it as well, right?

Speaker 6

So the short answer to your question is yes, that's an incremental benefit.

Speaker 10

Great. Thanks very much.

Speaker 2

Thanks, Alex.

Operator

Thank you. And our next question comes from the line of Amit Thakkar of BMO Capital Markets, please proceed with your question.

Speaker 2

Good morning, Amit. Good morning.

Speaker 3

Good morning. Can you hear me?

Speaker 2

Yes, we can.

Speaker 3

Okay, great. Just real quick, I just wanted to kind of level set on CapEx, since you will be bringing on a lot more production online. I think you guys had said About $1,000,000,000 for the year. It looks like for the Q1 was a little bit less than that from a ratable standpoint. I just wanted to make sure that $1,000,000,000 number is kind of still the right number to think about for CapEx for the year?

Speaker 4

Yes, that's our target. I think The good news is the big manufacturing plants are pretty close to done in terms of the spend. So the balance of it is Predominantly, if not all, around the green hydrogen platforms. And as we so the answer is yes, that's our target and we're continuing to advance

Speaker 3

Okay, great. And then, I think Andy had mentioned earlier that like the I guess the big dollars under the DOE program wouldn't start Going through till 25 or 26. So should we think about like some of the other options you're looking at in terms of kind of the ABLs or Selling down equity in the individual plants is kind of like a bridge till we get there or is that something you always contemplated?

Speaker 2

Yes. I don't think and I'll let Paul comment. I don't equate the hydrogen hubs To our own plants being built out. They're really separate activities. And our view is that we want as much hydrogen as available as rapidly as possible as green as possible.

Speaker 2

And so having investors in plants like people who dig up big oil wells, They do that. Who are in that industry, our business model is that We're going to be really, really big. We're going to do some of it with folks. We're going to do some of it independently. And we're going to make sure we get the most attractive Finance deals we can, but there's really no correlation we can meet between the hubs And the loans, do you want to

Speaker 4

add on? Just to clarify, There's multiple things going on at the same time, right? So we're working the hub conversation processes with industry partners as well as the DOE. But apart from that and separate from that and specific to Plug, we're also working a conversation around a specific DOE loan that Joe, could very well fund this year. We talk about all of our capital options in the past that we're working.

Speaker 4

And you mentioned ABL and DOE is 2 of them. There's multiple different capital sources. And with the strength of our balance sheet and the portfolio we're building, We've got lots of parties that are interested that will be this year activities not 'twenty five, 'twenty six. So just want to make sure that's really clear.

Operator

Thank you. Our next question comes from the line of Eric Stine of Craig Hallum. Please proceed with your question.

Speaker 2

Good morning, Eric. Eric?

Operator

Mr. Stein, your line Our next question comes from the line of Colin Rusch of Oppenheimer. Please proceed with your question.

Speaker 2

Thanks, Colin. Good morning, Colin.

Speaker 3

Hey, Andy. As you guys are working through the potential ABL finance providers, can you talk a little bit about what sort of feedback on the operational metrics you need to meet and the duration you need to run these facilities before folks will close on one of these deals?

Speaker 4

Yes. The good news is scale matters. And when you look at how big our balance sheet is, It affords us that opportunity to leverage that up without meeting necessarily traditional metrics. Having said that, as we've publicly talked about, Given the path that we're on, the trajectory on, we're strongly very confident that Early next year, we're moving into positive operating cash flows, given the growth in margin trajectory. So We haven't had a lot of constraints put on us in terms of those traditional metrics because of the we have such a big balance sheet and such a big Green hydrogen portfolio that affords that backing.

Speaker 4

I think the real key for us is as we bridge that leverage it into that next Then move into the positive operating cash flow that opens up as you know traditionally more significantly more Institutional opportunities as we move. So far so good and lots of opportunities without having to worry too much about that In the short term.

Speaker 3

Okay. And then just on from a working capital perspective, as you guys ramp up manufacturing, Just want to get a sense of what the working capital needs are going to be and how much finished goods are in that inventory number that you posted this quarter?

Speaker 4

Yes. So as we've talked publicly, we've specifically been ramping very quickly our electrolyzer and our stationary product platform. So the delta this quarter was Specifically associated with that, we've talked about the fact that we're going to be doubling the production out of our electrolyzer program 2nd quarter and Q1. And we're starting to ship our 1st stationary product, large scale stationary products this quarter. So I think you're going to we will see that level out.

Speaker 4

And as we move through the balance of the year with the leverage we anticipate, we expect it actually to go down. So for the balance of the year, we don't actually expect on a whole that we're going to be relatively flat year over year, Not slightly down from a working capital standpoint.

Speaker 3

That's incredibly helpful. Thanks guys.

Speaker 2

Thanks, Kamal.

Operator

Thank you. Our next question comes from the line of Chris Dendronos of RBC Capital Markets. Please proceed with your question.

Speaker 11

Good morning, guys. Thank you. Good morning. Paul, you kind of just mentioned Good morning. Paul, you just mentioned some positive free cash flow beginning maybe early next year, and I think you all have a target for ops breakeven later this year, maybe Q4.

Speaker 11

So can you maybe talk about kind of the drivers of what takes you there, I guess, versus where you are today? I guess, just Pointing out some of the margins and maybe the PPA area looks kind of particularly soft this quarter. What gets you from where you are today to ops breakeven end of the year and then positive free cash flow next year?

Speaker 4

Yes. I guess really there's a number of things. But first and foremost, we do we make positive margin on equipment. And when you look at Q1 as an example, it's accretive. So every incremental dollar I sell of equipment, it's positive.

Speaker 4

The majority, if not 90 percent of that growth is coming from equipment sales. So that coupled with the fact that we're going to be ramping the leverage Of those plants and those investments in scaling those new products will drive margin profile. So of the balance of the year of 1,200,000,000 Roughly $1,000,000,000 or so is going to be products and equipment sales. And when you look at the scaling margin, which we've traditionally hit in That 25% to 30% plus range that gets you a pretty substantial step function change in margin and accretion. 2nd piece is fuel.

Speaker 4

We've talked a lot about the things that we're doing there in terms of turning on these green hydrogen plants, the abatement of the natural gas, Working with our partners on the distribution networks and field logistics to drive efficiencies, we've talked publicly about ending the year on a breakeven Run rate on fuel and moving into next year quickly changing the paradigm. So those 2 are the sole biggest drivers. And then last second, I guess third to that I would just say we continue to make big strides on service and reliability investments and we have a very concentrated effort. However, that will be more and more smaller PPA and service will be a smaller percentage of what we do as we scale the growth and the curve that we're talking about. It's predominantly going to be product and fuel and more so product in that equation as we move forward for the balance of this year.

Speaker 11

Got it. Thanks. And I guess maybe as my follow-up here.

Speaker 2

Hold on a second, Chris. Paul, maybe you should mention PPA is down just because of the warrant charges.

Speaker 12

Yes. We have a lot

Speaker 4

of non cash charges and so that's up year over year. It was $2,000,000 or so in Q1 of 2022 and was $14,000,000 this year Q1. So that's a non cash charge. It particularly affects PPA and fuel, just in terms of the association with the customer associated with it. And then on the whole, Just so everybody has some context, we run at about $60,000,000 to $70,000,000 a quarter of non cash charges holistically.

Speaker 4

That's why I feel I'm incredibly excited and confident about the growth, the margin leverage, factored with that non cash run rate That gives me confidence to get to those numbers as we move on into next year.

Speaker 11

Got it. Okay. Thank you. And then, yes, I guess just as my follow-up here, reading kind of the front page of the shareholder letter here, It looks like you maybe added a qualifier on the 200 GPD of build out to maybe include under construction. So can you maybe talk about, A, I guess, is that true?

Speaker 11

Are you kind of maybe delaying that a little bit? And then what are the drivers? I think you mentioned some ABL loan, the DOE loan coming in later this year, there's some treasury clarity coming, the hub announcements earlier this year. So is that a function of just, I guess timing or are you maybe slowing things down just to see how these, I guess announcements that are coming with this year might Impact your plans. Thanks.

Speaker 6

So, Andy, let me take that. Yes. So, Chris, no, we're not Changing anything at all, right? I mean, if anything, we just wanted to actually try to provide more granularity after what we've learned from Georgia in terms of how long it takes to go from construction commissioning to full production, right? So there was no change in plans.

Speaker 6

As Andy said, right, we're not waiting for any particular thing for us to continue down the path of getting to that 200 tons number. But all we tried to do was try to actually provide you guys with more granularity based What we've learned from Georgia, what does it take, construction, commissioning, full production, and that's really the tweak that we made there, nothing more than that.

Operator

Thank you. Our next question comes from the line of Kashy Harrison of Piper Sandler.

Speaker 13

Good morning, Andy. So I want to go back to the multiple financing options. Can you give us a sense of what milestones, if any, need to be met from a project perspective before you can get financing? And then should we be thinking about a transaction as a 2023 or 2024 catalyst?

Speaker 2

Want to go, Saje? Yes. Maybe Paul,

Speaker 6

I can take this on the project side on hydrogen plants. So a couple of things, right. So As Paul talked about our loan guarantee program, as Paul talked about our ABL opportunity and as we talked about project level financing. But here is really what we're Looking at cash here, right. First off, I think once our plant is running, let's say, for 12 months, then there is a stable Cash flow that we can highlight to anyone underwriter, right?

Speaker 6

And once we can do that, that allows us to really go even down the path of the debt market, thinking about what is that right debt service Coverage ratio is going to be piece number 1. Piece number 2, now that these plants are coming online, we are also looking at how can you really Sort of like ring fence the plant, if you were thinking about it from a PPA perspective to either way to think about floor pricing on the hydrogen, We should also open up a lot of different kind of financing solution to really support the impact of these plants, right? And I think the way I encourage everybody to think about this is Really what happened in the solar and the wind space, right? When you actually have beginning of the solar and the wind industry, it was 100% equity financed. Then we have PTC, then we have ITC.

Speaker 6

That's really led the financing market to open up in conjunction with also driving Cost of that capital there. So I think you're going to see something like that here in the hydrogen space as well. We're having, as Paul said, multiple different discussion with only Sole focus in mind, what is the best and the lowest cost of capital to continue to drive the growth that we have ahead of us and substantial That's coming down the road. So that's how we're looking at it.

Speaker 13

Thanks for that, Sanjay. And then maybe a question for Paul. Can you refresh us on what's the driver behind the high Restricted cash balance on the balance sheet and whether you would expect a release to unrestricted cash in coming quarters or years? Thank you.

Speaker 4

Yes. So, a lot of long term follow-up, I remember, but for a lot of the Equipment deals that we do in the material handling space, we do we monetize the benefits of the bank the banks for those programs. And So a lot of times we have to post cash to back those deals. We've actually been successful in getting customers. The biggest customer we have as an example who Signs into the Relay Water commitments and we get 70%, 80% of the cash upfront.

Speaker 4

So what you're looking at now is the layers that are adding or kind of the balance of that residual. The good news is we are starting to see The benefits of the new RA on the ITC front. So we've actually closed our first 40% deal. This quarter we're targeting our first 50% ITC deal. That really yields 2 benefits.

Speaker 4

1, that we get more value on the project. And then secondly, We paid the bank less, right? Because they give us the majority of those tax benefits in the deal structure. So we're moving from $0.70 $0.80 on the dollar in some cases $0.50 on the dollar of having a payback on the deal structures. And so And now that we don't have any debt, all of that cash releases to us.

Speaker 4

So and we probably about 20%, 25 per year that it's released into us, what we can use to fund our current operations as well as our near term operations. I expect that to change. As we just talked earlier, as we work continue to work through and move towards positive cash flows, I think you'll see more and more of that Scale down and get released and move towards more traditional institutional financing in the near term.

Operator

Thank you. Our next question comes from the line of Sam Burwell of Jefferies and Company. Please proceed with your question.

Speaker 2

Good morning, Dan. How are you? Meet me

Speaker 12

to it. Doing well. Thanks for squeezing me in at the end. Wanted to unpack something on Slide 4, the financial projections on the It looks like there's a $200,000,000 delta on the revenue line, dollars 90,000,000 delta on the gross margin line. So that implies like a 45% incremental margin, let's say.

Speaker 12

Is that the margin that's associated with the key items that you call out on the right, namely the electrolyzer the liquefiers and then I guess the larger electrolyzer plant or am I thinking about that incorrectly?

Speaker 2

I would think about those on the right on a variable basis Somewhere around 40% gross margin and the rest of it is associated with Sam Inefficiencies in our operation.

Speaker 12

Okay. Understood. That's certainly helpful. And then one last one on financing. I mean is there any way you can quantify like the difference in cost of capital between The DOE project financing and maybe the ABLs, I know I think you guys at least had called out low single digits, but that was a few Fed rate hikes ago.

Speaker 12

So Is the DOE loan going to be something that costs the overnight risk free rate? Is it a spread to that? Is it below that because the DOE wants to subsidize green hydrogen?

Speaker 4

Yes. So I mean nothing is done until it's done. And so it's hard to give you an exact answer, but

Speaker 8

I would

Speaker 4

tell High single digit is not out of the question. If not mid single digit in that range.

Speaker 2

I would also add, Paul, The ABL and the project financing are really 2 separate acts, right?

Speaker 4

Yes. And it doesn't they're not necessarily exclusive, right? So And it could be certainly could be both.

Speaker 12

Got it. Thanks for the color, gents.

Speaker 2

Okay.

Operator

Thank you. And our final question comes from the line of Brett Castelli Please proceed with your question.

Speaker 2

Good morning, Brent. Last but not least.

Speaker 3

Thanks, Andy. I'll leave it at 1, just in the interest of time. With respect to the 2023 guidance and the 60 tons per day of liquefaction And there, is that all 3rd party sales or is any of that for Plug sort of internal use? I just wanted to

Speaker 2

It's all 3rd party. Sajid, do you want to add to that?

Speaker 6

No, absolutely. And it's all 3rd party breadth, and we have multiple Live discussion as we speak right now.

Speaker 2

Okay. Anything else, Brett?

Speaker 3

No, I'm all set. Thank you.

Speaker 2

All right. So I do appreciate everyone joining our call this morning. I would like to take a step back and remind everybody that we expect to do $1,400,000,000 In 2023, and I hope you clearly see the roadmaps and where we have challenges and opportunities. I also I hope folks watch that video and watch Steve Baker, plant manager again Talk about what we built in Georgia. There's a reason The Wall Street Journal has gone to Georgia to see that plant There's a reason The Economist went to Georgia to see that plant because there's nowhere else to go.

Speaker 2

We are doing real things today, whether it's building electrolyzers, Whether it's building large scale stationary projects, let me tell you that's an amazing project and we product and we only talk about briefly. We've built factories. We've scaled. We're ready for this explosion in the hydrogen economy. So I want to thank you for listening today.

Speaker 2

And this year is our execution year and a huge inflection point for the company. Thank you, everyone.

Operator

And that does conclude today's presentation.

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Earnings Conference Call
Plug Power Q1 2023
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