Teal Vivacqua - Director of Marketing Communications Andy Marsh - President and Chief Executive Officer Paul Middleton - Chief Financial Officer

Chris Souther - Cowen Carter Driscoll - B. Riley FBR Eric Stine - Craig-Hallum Amit Dayal - H.C. Wainwright

Ladies and gentlemen, greetings and welcome to the Plug Power second quarter 2018 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. It is now my pleasure to introduce your host Teal Vivacqua, Director of Marketing. Thank you, Teal. You may begin.

Thank you. Good morning and welcome to the Plug Power 2018 second quarter earnings call. This call will include forward-looking statements, including, but not limited to statements about our expectations regarding full year 2018 revenue, deployments of GenKey sites and GenDrive units, gross margin, bookings, liquidity and cash collections in usage and the impact of the Amazon and Walmart relationships and the revenue to be derived from those relationships and our outlook for 2018, including growth, future cost reductions, expansion in Europe, further testing and expansion of applications for ProGen, including opportunities in the on-road electric vehicle market and achieving positive cash flow and gross service margins. We intend these forward-looking statements to be covered by the Safe Harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We believe that it is important to communicate our future expectations to investors. However, investors are cautioned not to unduly rely on forward-looking statements because they involve risks and uncertainties and actual results may differ materially from those discussed as a result of various factors, including but not limited to the risks and uncertainties discussed under item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ending December 31, 2017 and our definitive proxy statement on Schedule 14A filed with the SEC on March 30, 2018, as well as other reports we file from time-to-time with the SEC. These forward-looking statements speak only as the day that they are made 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 good morning everyone. We have developed a unique set of capabilities and relationship at Plug Power. As the pioneer in developing the commercial mobility market for fuel cells, some times it's been a struggle but the results of our work are starting to become visible in our financial statements and we believe we will provide dividends in other markets in the future. Just take and look and compare our quarter-to-quarter performance. Gross revenues of $39.9 million in the second quarter 2018, an increase of over 75% over the second quarter of 2017, adjusted gross margins of 8.1% versus negative 1.5% in the second quarter of 2017. When you look at those numbers, you can see the benefit of our relationships with Amazon and Walmart and our sales performance. The in-house stack and global sourcing ability we have developed really demonstrate our ability to continue to reduce costs and showing up in our gross margins. Hydrogen gross margins were positive, a first for Plug Power and service is improving as the labor utilization has improved and our products have continued to become more reliable. With these improvements we are projecting our revenue will jump up 25% for the year and we will reach EBITDAS breakeven in the second half. In the third quarter, we are projecting revenues in the range of $47 million to $52 million and EBITDAS between minus $3 million and zero million dollars. We remain focused on building a material handling market for fuel cells, a market with over six million forklift trucks and an application in which we believe our product value proposition addresses over 40% of the market. There are other market opportunities for Plug Power and the capabilities we have developed fuel cell MEA with stacks, a service network with unparalleled reach, leadership position designed in building hydrogen fueling station and customer relationships that are unique in the industry. We know that these capabilities can be leveraged across a broad range of applications. Our success in the first market will allow us the opportunity to be selective in choosing our next market and future partners. We are seeing interest in our solutions for delivery vans and ground support equipment globally. Our deployments to-date suggest that these applications are much more environmentally benign as we are used to operating in harsh and rapidly changing environments. Example of our ability to offer products in new application is our delivery vans for FedEx that has been running spectacularly. Finally, let me reemphasize. Plug's building a big business in material handling and starting to see the financial benefits. We were by far the leader in real-world commercial applications. Our GenDrive products have operated over 180 million hours. We are starting to leverage our expertise and will be moving appropriately in other markets. And as the segment for mobile fuel cells could grow, Plug Power is will position for the future. Paul and I are now available to take your questions. Hello?

Adam, we can now open the line for questions, please.

So while we are waiting or the line to be open for questions, let me just highlight a few successes that we have had. For example, we added new customer, we deployed our first units with this quarter. One of the largest retailer in the U.S. had 150 unit deployment, quite exciting. We also had the one of our products qualified a global system integrator for backup power systems which they are looking to be deploying and have reached markets in China, India and Africa and they will be utilizing Plug Power's products. We are very excited about both applications and both recent wins and the business is looking quite positive. On that note, Teal, we are ready for Q&A? Teal?

Yes. We are just trying to connect with our operator, Andy. Just one more moment. We may have lost our operator.

[Operator Instructions]. Our first question comes from the line of Chris Souther from Cowen. Your line is live.

Hi. Good morning.

Good morning Chris.

I just wanted to see if you could walk through what are the levers to improving gross margin the third quarter and fourth quarter? Can you walk us through some of the puts and takes you guys are looking for there?

Paul, do you want to take that, answer that question?

Yes, absolutely. I think it's a combination. First of all, as we have talked a lot. We make really good margins on our equipment sales and we are benefiting from increased favorable mix as we sell more equipment in the second half. As we have talked about in the past, we do about 60%, 70% of our business in the second half. So we expect nice volumes and that should contribute nicely to the overall margin mix. Secondly, we continue to push heavily on cost down. And so a lot of the things that we are doing in service in terms of labor leverage on our units in the field as well part cost on those units and reducing that burn rate, continue to contribute. And then as you have seen, the improvement that we have made on fuel we expect continuing making progress and sustain those improvements as we go into the second half. So the combination of those really should continued to really drive more operating leverage and we should enjoy those benefits going into the second half and going into next year.

That's helpful. And then I was wondering if you could maybe touch on the FedEx program. It's great to see vehicle on the road. What is kind of the timeline that guys are looking for there?

Sure. I will take that one. So we have been operating a FedEx van and actually for the last 31 days, it has been filling and running with no interaction between Plug Power and FedEx on keeping the truck on the road. We have a meeting scheduled at the end of August to talk about the rollout of the next 20 units with FedEx and Workhorse. And we should be able to provide more insight at the beginning of the third quarter, but the discussions with FedEx and quite honestly, they are quite happy with the unit. There was a presentation to the DoE and FedEx presented and one of their competitors presented a solution with fuel cells. We have been working on the program for the same time. The competitor is not even at the integration stage yet. So I think it's a statement of the capabilities Plug has developed. And one of the statements I made, which is really, I think, is critical when you think about a program like that. Plug is used to working on in operations in forklift trucks where you see 50Gs of shock and vibration. You are operating in freezers at minus 30 degrees, stay in, drive it out at 50 degrees. Quite honestly, working on these delivery vans is a dream because the environment is so stable and consistent. And these units have shock absorbers. And it's a much, much simpler application because of all the capabilities we have developed over time.

Thanks. And then kind of a last one. How should we think about the cash burn in the second half of the year and overall liquidity? I know next year looks like you guys were looking to move into positive cash flow. So I just wondered, can you say how you guys think about that for the back half here?

Paul, do you want to take that one?

Sure, absolutely. Actually, if you look at last year in the fourth quarter in terms of the turn of all that volume, we saw substantial positive operating cash flows effect. It certainly helped our free cash flow benefit. And we expect a similar turn this year. The overall volumes in the first half were up and for the year will be up. And as that second half build starts to convert, we should actually, we are forecasting actually positive free cash flows in the second half and obviously improved margins and improved EBITDAS helps a lot in that as well. So I think we are in a very good position. We have actually also closed two of the first PPA finance programs this year under the new structure that we have struck which has been improved greatly given the reinstatement of the ITC. That's providing tremendous spread, both overall economically as well as cash liquidity in those transactions. And we expect as we close more of those in the second half, those will add and make us stronger as well. And as we sit today, we really don't have a lot of debt compared to our overall asset and enterprise value. Green Bank is our only real facility. It's about $25 million and that will be 100% serviced by the release of restricted cash of which a substantial amount gets released in the second half of this year. And so we will end the year with a fairly nominal position there. So we have a pretty good, we have wide range of options available to us. And so, we sit in a good spot as we navigate the balance of the year and on into next year.

Thanks guys. I will hop in the queue.

Thanks Chris.

Thank you. Our next question comes from line of Carter Driscoll from B. Riley FBR. You are now live.

Good morning Carter.

Good morning Andy. Good morning Paul. Good morning Teal. Hopefully surviving the lovely summer we are having. First question is, can you talk about maybe just the contribution from Amazon and Walmart for the strong revenue performance in 2Q? and the retailer that you highlighted, the 150 units, the expectations of their continued engagement in the second half of the year? I have a few follow-ups.

So Paul, I will take the second half of the question and I will let you take the first part. Paul and I are in different spots. So we are trying to coordinate here. So what we know about the new customers, I would expect that with the deployment that's going on at the moment, during the next six months, they will be validating the value proposition. This retailer has well over 35 distribution centers. And as we found, when you at Walmart and Amazon, both of them large retailers, large fleets, heavy usage of assets, working, in Walmart's case, working at freezers. This customer has a very, very similar profile. And we know the results we had with Walmart in improving their productivity and improving their operations and there is no reason for me to believe we can't prove that again with this customer. It's one that, quite honestly, I have been working on for five or six years. So we are really excited to bring it into the fold.

That's good to hear.

I think when you think about a deal like that, the relationships with Amazon and Walmart certainly helps when we are positioning products. Paul, do you want to take the first part of that question?

Sure Andy. Just for context, as we look at Q2 as an example, we are benefiting from growth in Amazon. Last year, when we won the award, we had two sites in the first quarter and then we did the bulk of their 2017 deployments in the third quarter. This year, working with them and being able to spread that out a little more. We actually achieved three sites in Q2 and there was actually incremental volume in the quarter from additional programs as well outside of the Amazon and Walmart, so nice traction. And Walmart continues to add sites. We continue to see increase there. Today, the most recent programs we do with them have not been under revenue recognition. So you see it in the increase PPA payments but you don't see as much of an impact our GAAP statements as you do from Amazon and some of the other customers in terms of the traction. But we expect both of those and these other customer momentum to continue on into the second half.

I am sorry, just to be clear, you are talking about the PPA structure is just Walmart, right? The new customers have not adopted the PPA structure?

Right, yes. Sorry, yes.

Okay. All right. Andy, in the prepared remarks, you talked about and I think you have been very consistent in trying to find the right partner in China, so maybe a twofold question. Has the tariff back and forth had any impact on discussions there or scope of changes? And it sounds as though what's important, as like you have said consistently, it's finding the right partner. But are you at all changing that year-end as the timeline you might be able to find such a partner? Is that a little bit more of a date now?

I think that's a really good question, Carter. And as I have continued to take a very balanced approach to China. So many of the issue there in the press about [indiscernible] Plug Power's shareholders have invested quite heavily in. So we have been engaging with partners and we are down to two discussions at the moment with companies that we believe have similar, at least, an appreciation of Western business values from their past relationships. The process is progressing. Just knowing where we are today and just having understanding of just the legal steps and business steps that would have to be taken, I am not at the point where I am saying this is going to be the partner and I am not at the point that I am saying Plug is going to be entering this market. So I would not expect anything this year. I think part of it actually, Carter, is that the opportunity to the company are broad. I really believe we are kind of in a unique position that I don't have to do something. And the work we have done with FedEx has helped us engage with other people globally, especially in Europe and North America. And I think that I look at those opportunities, I look at the breadth in the material handling market, the ground support equipment, it won't be ready this year. But I have some really four or five active discussions going on with people who know me, in most cases. And I look at those opportunities, I think in the near-term and I am talking 2018, 2019, 2020, I think there are better opportunities. But we will continue to pursue and discuss the China. But I haven't seen a deal I want to take yet.

And just maybe a little more clarification, is it because some of the old issues of China in terms of them wanting more IPs than you are willing to give up, the economics, the scope of the agreement isn't or the discussion aren't what you are hoping for? Just trying to get a sense here.

I would say IP and the breadth of the requests.

Okay.

So IP is big concern.

Yes. No doubt. Can we talk maybe broadly about cost because big gradually and obviously, possible margins on the fuel side, continuing progress at least in positive territory on the service side, which should only grow? Do you expect as you continue grow that you will maintain positive fuel margins or at least directionally move in positive territory? And then talk about some cost downs, the new plate technology and maybe on the infrastructure side as well from an equipment perspective?

Great. So let me start with hydrogen. And with hydrogen, it was good quarter. Now we have made progress in improving our hydrogen margins by tweaking the efficiency of our systems, by deploying novel systems like the first two we did in the number two and number three of our hybrid systems which include reformers and liquid tanks in the past quarter. I think hydrogen today, over the coming year, we will have variations, up and down, just based on some customer mix and usage. But in general, today hydrogen is a sale, resale business with a few sites having reformers which we control the price. I think that when you think out in 2019, 2020, the sale, resale portion of the business will be in the 5% margin. The real opportunity is in these hybrid systems that help drive down cost because the gas generates in their system from a variable basis, but always you have to consider the fixed cost is significantly lower. And I think it's an opportunity for Plug to leverage our relationships and in time grow that margin. So if I was modeling that margin, I would treat it like a typical sale, resale business for the next few years, at least.

Okay. Any update on potentially doing a return to base centralized production model? You talked about maybe a couple of different territories in the Northeast.

Yes. Actually we are and probably most people don't know, we actually have, not a lot of people, but we have a rather large facility, large, it's about 50,000 square foot facility in Chicago area where we have considered putting some onsite generation there for distribution with our hub and spoke model. So that work is ongoing, especially we believe that could really help support small customers and provide system backup for large customers and become a profit center for Plug Power.

Maybe just two more quick ones for me. Are you shipping all MEAs now from Rochester?

So Carter, actually as we speak, the first one for us are coming off the line. I would expect to do somewhere in the range of 100 to 600 stacks this with our own MEAs.

Okay. Got it.

I think it's really exciting though. So you asked about cost and what we see is that stacks represent about 205 to 25% of our cost structure for our products. By using our own MEAs, we see that our stack prices can reduce by 25%. And look, it's not going to be overnight but once we get to scales of using 1,000 to 1,500 units a year with our own MEAs, we should start seeing the impact to that directly in our financial statements. Plus the added benefit of Rochester, as I think I have mentioned this before, the folks we hire are all GM engineers and they have been extremely helpful in us developing our thought process, how to address other on-road mobility applications.

You talk about interest for delivery vans and ground support on a global basis. Maybe could you call out what territories maybe we haven't discussed? And maybe wrap that in with a discussion of the progress in Europe? I know you have made some inroads with Carrefour group and just maybe talk about the environment in Europe as well? Thanks.

Yes. So we did two new small deployments in Europe in the second quarter. And Carrefour has been going really well. I mean I look at the weekly reports and like I mentioned in the previous retail customers, we have been doing studies for the value proposition and I thing both them and us are pleased with the progress to-date. At the end of third quarter here, we will be going to France with leadership to talk about next steps. So I think they are pleased, we are pleased. We are happy we have two new opportunities there. And we are also, as the work we have going on with mobile products like delivery van, we are actually engaging with the companies in Europe on that activity. The ground support equipment, we are looking actively to one of the three main continents, in China, U.S, with one of our present customers and also in Europe with a few sites.

Okay. Appreciate taking all the questions. I will get back. Thank you.

Sure, Carter.

Ladies and gentlemen, our next question comes from the line of Eric Stine from Craig-Hallum. Your line is now live.

Good morning Eric.

Good morning everyone. Well, most questions have been asked here early in the call, but maybe I am going to stick with two. You talked about the retail customer, that it took you five to six years and so maybe you are in the same boat on this one. But you have been talking about a third mega customer, Just maybe an update on where that stands? You confidence level in the past has been quite on that one.

Yes. So it always unfortunately take longer than you hope, especially when you are dealing with large customers. It's been about nine to 12 months negotiations. We are moving ahead. I am positive. And I really want to emphasize that when we provided guidance for the year in this quarter, that is not included. So it has no impact on our guidance. And Eric, once I sign, you guys will be the first ones to know, the people on the phone here, the shareholders.

Right. Maybe second one just on the metal stack. So it sounds like that's end of the year, so it will start to impact things in fiscal 2019. I know you going to use that across the platform, but is it a more ideal application? Is this really geared towards on-road, just given it's characteristics? Obviously it's got benefits in materials handling, but just maybe talk a little bit how you are thinking about the impact of that stack as you get into fiscal 2019?

Sure. First, it is designed for all our applications. But it is a big step to help us more aggressively into on-road applications since the power density, I think we have shown before, is the same as best-in-class in the industry. So higher packaging density our actually are very beneficial in material handling in driving down cost and improving the value proposition. Kind of an interesting example, in the previous quarter, we were able to work with one of the large OEMs and eliminate some of the weight we had to put in our units and we were able to increase the size of our tank by 40%, 50% which strengthened the value proposition. Those units have been deployed with Walmart and really add a great deal, it makes our case even more compelling. Our second thought is too is that material handling is going to drive the volume of our MEAs during the next couple of years. And to develop metal plates and by using it across the product line, the cost structure of all our products will be lower in cost. So that's really the thought process there. It's always better, as I think everyone knows that, design a product, leverage scope economy and push it across your business. And with the plate technology, it will be easy for us to reach 125 kilowatt which really opens up most applications for on-road vehicles for Plug. I have got to tell you, it is the best and most interesting product Plug has developed during my tenure.

Good. Thanks for that. I will jump back in the line and let others ask questions. Thanks.

[Operator Instructions]. Our next question comes from the line of Amit Dayal with H.C. Wainwright. Your line is now live.

Good morning Amit.

Just a question around the guidance. Most of my other questions have been asked. It looks like, just from all the commentary on the call, you guys are tracking well for the year. So I am wondering why the guidance hasn't been narrowed down a little bit more?

Well, that's actually a good question. It's one that having been around this business now, this material handling industry for five or six years, we have orders in house that exceed the low end of our guidance for certain. Now we really want to make sure that we don't disappoint anyone and if somebody pushes something out to the first quarter, that we are well positioned to hit our guide and then to not be at the low end of the guidance but be at a position that people look at the numbers and know that they can trust Plug Power when they give a number. So we are just making sure that any variability that can happen that we are in a position to address. Obviously when we come to the fourth quarter, I am going to give you some pretty tight guidance for the fourth quarter and that will allow us to be able to give a little bit tighter spread.

Got it. And then in terms of seasonality associated with the retail side of things, should we expect the third quarter to once again be the strongest for the year?

I would suspect and if you look at the math, we have done so far about $70 million, I am saying another $50 million this quarter. So the third quarter and fourth quarter, I think both will strong.

Got it. I guess that's all I have and most of my other questions were asked. I will follow-up offline. Thank you.

Great. Well, I believe there is no other question. I want to thank everyone for joining the Plug Power conference call. And I would like to reemphasize that we are focused on building a big business in material handling. You can see the financial benefits. And all that expertise that I think it's so hard sometimes to explain all the capabilities we have developed in, not only products, but the whole range of the business, from finance to sales to aftermarket service to manufacturing. We are really unique in the PEM fuel cell industry. And I think that's when the paid customers and potential partners come to our facility, that's really what awes them after talking to other folks in the industry. So thank you for your time today and look forward to the third quarter.

Thank you. Ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your line at this time and log off your computer. Thank you for participation and have a wonderful day.