Q3 2022 Plug Power Inc Earnings Call

[music].

Greetings and welcome to the plug power third quarter earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If you would like the opportunity to ask a question. Please press star one on your telephone keypad, if anyone should require.

Operator assistance during the conference. Please press Star Zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Teal Hoyos director marketing communications. Thank you. Please go ahead.

Thank you welcome to the 2022 third quarter update call.

This call will include forward looking statements. These forward looking statements contain projections of our future results of operations or our financial position or other forward looking information.

We intend these forward looking statements to be covered by the safe Harbor provision for forward looking statements contained in section 27, a of the Securities Act of 1933.

Section 21 E Oh, 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.

Such statements should not be read or understood 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 risks and uncertainties discussed under item one a risk factors in our annual report on Form 10-K for the fiscal.

Full year, ending December 31, 2021, as well as other reports we file from time to time with the SEC.

These forward looking statements speak only.

As of the day in 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.

At this point I would like to turn the call over to Pleasant CEO , Andy Marsh well. Thank you Gilles.

So we have published an investor later today that provides details about the quarter status.

Our projects.

Summary of our midterm ambitions.

I noticed some of our company is tough to financially understand in the near term.

It really comes down to two areas the cost of hydrogen and selling more equipment.

The equation for success really comes down to building out our green hydrogen platform, which will transform a negative margin hydrogen business to a growing positive margin business just by turning on the plants.

We've already demonstrated this in Tennessee, we can generate hydrogen at one third the cost were paying from the industrial gas companies today.

We won't be discussing this issue within a year will be in the rear view mirror and the issue will be how to accelerate the plants.

Equipment sales, even for our new Electrolyze your businesses gross margins are already over 15%.

And we're just starting to scale, we've made fuel cells profitable in material handling and now doing this again electrolyze yours and Stationers you put these two items together with the real improvements in service to 'twenty to 'twenty three targets of one point about $4 billion in revenue and exiting.

The year at breakeven operating margins is achievable.

The long term business prospects are even more attractive.

And it all starts with plug doing real things.

I know many of you were at the symposium and you saw a real Giga factory.

Real Electrolyze your systems.

Real vehicles.

Real liquid hydrogen trailers.

Real fueling stations, you're able to touch and feel the hydrogen ecosystem not in some distant future but today.

Now for the future.

Plug is a leader and will continue to be a leader in the energy transition.

We have first mover advantage in the fuel cell and hydrogen industry that we do not intend to seed.

We will have the first green hydrogen network across the United States by 2025.

And when we look out to 'twenty 30 will have the most commercial vehicles on the road.

Through our Reno JV I V.

We will have the largest deployments of Perm Electrolyze yours will be selling fuel cell power plant at scale using our hydrogen.

And many many more activities will be engage with.

Finally.

There are short term challenges, but we have a clear well defined plan that is being demonstrated.

And long term, we're building out our hydrogen ecosystem by ourselves and partners that quite honestly is unmatched in the industry.

Paul and I are now ready to take your questions.

Thank you the floor is now open for questions. If he would like to ask a question. Please press star one on your telephone keypad at this time a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your <unk>.

Handset before pressing the star keys once again Thats Star one to register a question at this time. The first question is coming from Colin Rusch of Oppenheimer. Please go ahead.

Hi, good afternoon, and thank you for taking the question. This is Christian on for Colin Hi, Kristen.

And so the the first question just with a substantial pipeline of opportunities can you discuss how you are down selecting opportunities to pursue and to commit to particularly for electrolyze, our sales and potential hydrogen off take agreements.

Sure I'm going to take the Electrolyze ourselves and find she's sitting here with me and he works the hydrogen off take agreements every day.

So with Electrolyze yours are.

You know there there were a few questions we asked right upfront.

You know there are these huge opportunities.

<unk>.

Does the customer really have access to renewable electricity or electricity at the scale that's required to generate hydrogen may seem like a simple question, but it actually is an important one the second one is do they have you know real projects.

And do they have fundamentally land to be able to build a electrolyze your plant with.

We really make sure we understand what is the application.

What are they doing with the hydrogen.

And the third one is are you know in an industry. Like this you have to always be asking the question.

How is the customer going to quite honestly pay.

And how are they funding and that's kind of the first three items, we look at when.

When we think about doing a deal.

I'm working with the customer when that new HUD side, Jay how do you think about you know hydrogen itself Sally sure Hey, Kristen how are you call a couple of things on that right. So as we mentioned in our shareholder letter you know the plan that we're about to build in Europe , We got six X demand for that and we're just about to break ground trade. So I think the.

Inbound on the off take for the hydrogen actually pretty substantial but this is how we think about it right. We've told you in the past that we do not want to commit more than 80% of the capacity because we want to leave 20% of that capacity to meet you know sort of a peak demand all the planned outages that we've seen in the industry to be able to support our.

As well as the broader hydrogen economy number one number two we have a lot of activity going on here, where you know we're looking at some very very sizable offtake agreements that are five to seven years in term that are focused on mobility market application and we look forward to actually really updating you all here in not too distant future on some of those activity we've got going on.

Second we're also working with some of the industrial gas companies, where it could actually be either like a swap type agreement or those that are not as heavy on the items inside of the business. We're doing some of that work with them as well. So and then another thing we're really prioritizing is as Andy touched on the activity in our stationary business. That's a huge demand driver for our green.

Hydrogen is what we want to make sure that the capacity that we're building is going to be available to support those apps and many of our customers as well and as you guys know we also have deals already with some acquired pedestal customer as well. So the way we are looking at it right now out of that 500 tons, probably about 200 tons of that is going to be for supporting internal.

Activity internal customer and another 200 tons of that is likely going to be the third party broadly speaking largely in the mobility as well as in some of the industrial gas type customers as well.

Sure.

The answers to answer to your question that's incredibly helpful and I appreciate that detail. So then if we think about just the incremental scale up needed for the supply chain for fuel cells are you seeing suppliers scaling to support the additional platforms you know beyond plug or are they.

Really focusing on our interest to you just any color on the supply chain scale up.

That's another good question.

I think many folks on the call were to our Giga factory and you can see help plug is thinking about scaling our own manufacturing operations.

I think when you take a step then now.

Look at our Vista plant, which is 400000 square feet.

Which we were able to built in less than a year to support our business activity so from our own internal capability.

We feel we feel very comfortable with as you know we've hired people who scaled the Tesla business, they're run both our operation and he has worked reporting is the folks who worked in the test is supply chain. We are looking we are very focused on some critical items.

Some of those items or I'll say critical to the performance of the products being she may not think a lot about things like humidifiers.

Hydrogen tanks, and we have efforts not only to.

Supports strong your present suppliers, but we really had a focus on diversifying our supplier base and like many people were very focused on semiconductors and make sure we have the appropriate semiconductors that meet our needs.

I think there's lots of excitement about this industry lots of folks are looking and trying to understand how they can endure and look Oh, we have we have volume today and that makes us attractive.

That's really helpful. Thanks, so much Randy I'll pass it on thanks Kristen.

Thank you. The next question is coming from Bill Peterson of J P. Morgan. Please go ahead.

Yes, hi, good afternoon.

And Andy and team.

Hey, Bill how are you today.

Yeah good good.

Wanted to talk about the I.

I guess the Electrolyze it doesn't it doesn't seem the backlog has grown and I'm wondering if this is a function of.

Maybe more your side or are customers are delaying fid's, perhaps trying to get a better understanding of policy support benefits to the IRA.

Maybe the renegotiated ppas.

I recognize it's probably transient, but I'm just kind of curious on.

What's happening with the backlog and I guess, maybe looking ahead to where do you see more interest coming from as you know you just discuss what your sales folks ammonia refining.

Smaller projects large scale, just kind of get a feel for how we should think about into next year.

So bill I think that.

First.

No.

You know I think that.

The funnel has changed we've probably.

Were modest in the Investor letter.

I think that when you take a look at it.

Key areas, we're seeing activity and is more in the industrial applications.

Where youre looking specifically at opportunities with things.

Things like fertilizer E methanol are really areas, we see lots of activities.

As far as scale and I'm going to separate scale into what projects will be the big projects to ship next year.

I can tell you.

And you May if you saw it at the symposium build the five megawatt platform.

We're seeing it.

Many ways, it's kind of a almost a starter kit.

But we see a lot of interest also in things like bottle manufacturing.

We think next year just to give you a gauge will probably ship about 400 megawatts of that platform.

On top of that there'll be a lot of work done on the development of.

You know more larger scale plants.

But that's kind of how we see it rolling out so the big numbers for backlogs will roll off.

More in the 24 25 time frame, though there'll be some upfront charges that you'll see.

But it'll really so much of its in these.

Industrial markets, where you know as you show it was shown in our.

Our investor letter things like ammonia methanol.

Steel.

You know, even mixing a natural gas pipeline.

There's a lot of work a lot of activity going on there at the moment.

Is that helpful Bill.

Yeah, Yeah, I was just trying to see if there's any just very near term delays, but it feels to me in any case, you're pretty feel good about 'twenty three.

Yeah. So just.

Yes.

The second question I have is.

Stationary power, thanks for giving us the color around how you see 'twenty three 'twenty four evolving.

Can you give us a broad feel for how we should think about sort of pricing per megawatt and how should we think about maybe the margin structure I presume that most skilled the margins are not going to be coming in directly at corporate average, but how should this oh, how should this evolve over the next few years.

I'll make some comments and I'll, let us all.

Pulse in London at the moment I'll, let him.

Add to my comments.

I, you know I think that Oh.

Those projects will primarily next year be.

More geared towards really two applications.

One is a weird.

Grid is not available in and charging evs.

Where I think half of what we ship next year will fall into that category.

I think the second category that is.

He is really more with our traditional customers at their distribution centers will be deploying stationary products and I think Jose.

Our VP of sales in that area.

We are projecting between 2030 megawatts.

We have the capacity and we're driving the supply chain and make sure we could support 60 megawatts just.

Just to give you a gauge.

We think that business overall, because there's more to that business than just the stationary products you have to build the hydrogen infrastructure.

We see that business next year. When you include everything that needs to be included probably somewhere between $1 25 to 150 million in revenue.

Paul I know.

Would you like to add to what I've said.

Yeah, I just would comment on the margin side.

You know.

The real big benefit for plug is that there's a lot of commonality in components in these products and leverage and what we're already established as the base for supply chain manufacturing.

So that is a great platform to kick off from and then too because the sales opportunities in the funnel is growing so fast it will scale faster than than you know.

Other businesses are from early on so you know all of those factors helped.

Mitigate some of that maybe some of the startup effect do you have a ramping newer product. So we absolutely expect that product will you know, we're targeting north of 30% on that product line as we are on any equipment product line.

And I think it will absolutely scale, you know fast in that direction.

So we we we expect it to be accretive next year, and we expect it to grow quickly thereafter.

Hey, Bill I would add one other right.

Is that a.

I think about our pro Gen module.

A lot like a solar panel.

So that project module, which we're selling to Hy Vee.

Is essentially the same pro Jam module from an architecture point of view, especially.

That were.

That we're going to be using in stationary so theres a lot of.

Well, if you think about there's a lot of economies that come from the fact that a dose.

Those product lines are complementary.

And just like the solar industry, how solar panels dramatically reduced in cost because you were building the same thing over and over again in reality, what we're doing in mobility and what we're doing in stationary for the fundamental platform.

It's exactly the same which should really help our cost position next year, but especially long term.

Yeah, Thanks that makes sense thanks for the color.

Thank you. The next question is coming from P. J do you have a car of Citi. Please go ahead.

Yes.

Hi, Good afternoon. This is Eric Petrie on for P. J.

Hi, Eric.

How are you Andy.

Okay.

Could you just give us a little bit of essence as to you know Amazon's 2.1 billion portfolio deal.

Going from forklifts and kind of what's next for them looking at you know what.

Either fuel cell trucks fuel cell power generation Electrolyze versus whats. The next thing that they're looking at yes, yes, yes.

Well, we start with green hydrogen Sanjay.

So as you saw in the shareholder letter right. We did do a <unk> tons per day green hydrogen offtake agreements with Amazon. So again thats just the beginning of many portfolio sales opportunity we can have.

Value of what we talked about our vertically integrated model and all the effort that was put into position of the company to where you are so with that why don't I try to cheat yeah. So.

If you look at our what Amazon said to symposium.

They really highlighted.

The need for hydrogen across a wide variety of applications.

Everywhere from stationary products.

Two on road vehicles.

To Electrolyze yours, and obviously we are engaged.

In all those areas with Amazon.

You know, obviously I can't say too much more.

Because of non disclosure agreements.

But I can tell you from if you listen to what the full shouldn't says.

Brian's over 30000 people in the logistics group at Amazon.

They are a.

Committed degreed hydrogen theyre committed to plug.

We've been their partner now for a long time.

And they're really looking to scale this business with us and obviously the size.

Of what we're looking at with them.

I think you can.

Note that $2.1 billion gives you a feel for the scale.

Thank you and then just turning to light commercial vehicles IV when should we expect kind of going from pilot to commercial orders and we've seen some delays on the truck side as well so just any thoughts there.

So.

No.

First I like to save or no had their investor today.

And Hy Vee it was presented as a model of how they would like to think about their future.

But we have built a facility with them.

That can support deployment of 800.

Vans next year.

We have already identified.

Nine customers, which we've named it and others, who are looking to start using these vehicles.

I can tell you we expect that facility be Hy Vee it expects that facility be sold out next year and the scale from there.

Thank you.

Thank you. The next question is coming from Joe Spak with RBC capital markets. Please go ahead.

Ah thanks.

Hey, good morning, or good afternoon.

Sure.

Look I I know you sort of let off you were talking about some of the modeling difficulties and issues impacting the near term and how you don't think that persist in the future and I can appreciate all that and in the letter you know again, you you talked about a step change in fuel margins for instance, and I know at the symposium you guided that you know minus 35%.

I think for the year, which obviously would be a big step change from from where you're at now but with all due respect I mean, we're going on over a year about hearing about step changes in the margins continue to drag. So I guess I really want to understand your level of confidence. There you also sort of talked about or I think earlier today in response.

So another question some of the some charges for industrial application I'm not sure. If you meant that was for you or for your customers and if that was contemplated so I guess, what I'm really giving you an opportunity to do maybe is you know maybe add a range or some sort of sensitivity around you know how you feel about the gross margins at the fuel level and the overall company for next year.

Joe.

You misunderstood us on two levels here.

And so I'll, let sanjay addressed the hydrogen margins because he's a little perplex. So let me let him explain.

And then after he gets done and I'll ask you more about the industrial comments, yes. So Joe I think look I appreciate the question right.

As Andy mentioned in his prepared remarks, there's really two factors that drive this margin hydrogen and equipment alright. So let me let me take the hydrogen one first so so far you know other than our plant in Tennessee, we have been buying hydrogen from the third parties as you very well know.

And that of hydrogen price has been a function of the price of natural gas and we know what has happened to the price of natural gas strike price of natural gas went up almost 61% in Q2 of this year and there was a lag in terms of what the hydrogen fuel cost for us in Q3, which is why you're seeing the margin deteriorate from Q2 to Q3.

As it relates to what happened to that natural gas prices, but now fast forward right. Now we are commissioning our plant in Georgia before the Arizona, We will start our commissioning of our plant in Saint Gabriel, Louisiana, Arizona, We're expanding in Tennessee, we have multiple other plans that we're starting to break ground on we're starting to make progress on for will.

Have that about 200 tonnes of plant being commissioned by the end of 2023. So as these plants start to produce hydrogen plants come online as Andy said the cost is going to be one third of what we're paying for that third party hydrogen cost and even blending some of the legacy contracts that we have all of whom taper off by <unk>.

2025, with a blend of what are we going to be producing and servicing our customer third party sale that we're going to have we absolutely feel very confident that as you go to the end of 2023, we will exit the year with operating breakeven performance with our fuel business that will create a step change.

Our margin profile and without asking why don't I turn it over to you I guess, how would that confluence with the equipment margin and expansion with the sales yeah.

You know what as such as I've mentioned at the start Joe.

Pretty simple.

[laughter] simple is hard to do but you look at Tennessee, which is about one fifth or capacity. We already are producing hydrogen at one third of the costs that we have to buy it for today.

We're going to have a lot more hydrogen which is our own I think we're looking at 60 tons of our own next year just for our own customers.

That's going to be a very healthy profitable business for us.

It also with the production tax credit.

Some of that will keep.

Some that will give the customers.

And that combination will actually drive a lot more equipment sales.

So I guess.

When I take a look at the hydrogen portion of this is really easy to see if you live it every day.

But I know you I, you know I know that.

No.

Can understand you.

Your thought process Joe.

And your other question, Joe I really didn't understand I didn't really think I said anything.

It must be really missing I, must've, really misspoken or said something that yeah.

Also let me let me I guess first of all I I I I I totally get what you're talking about on an.

The cost of hydrogen coming down I guess my my the point of my question is that underneath that are embedded in that assumption is clearly.

Some glide path on the ramp of plants right to sort of be able to producer on hydrogen and I wanted to that's what I wanted I guess to better understand because clearly if that doesn't occur then the margins will continue to suffer sorry, I guess I wanted to.

Sort of a point estimate seems just a very.

<unk> defined and I wanted to understand maybe like a little bit more of a range of outcomes as you see it on.

On the industrial I thought you had mentioned Andy that you know when you are talking about.

In response to another question some of the.

Industrial applications for for hydrogen you mentioned I thought you had mentioned there might be some upfront charges I didn't understand I didn't know if you meant for your customers or for you.

Oh sure Joe I have no idea, what I said Joe.

But I did if I said that.

<unk>.

There are no upfront charges.

You know I think I think I don't know I must have.

Not being clear there's no upfront charges okay.

Okay, and then when the players when the plants Joe.

You know, Georgia.

You know if you if you go look at our Investor letter.

It's pretty clear, where we are in Georgia.

We will have that plant commission.

By the end of the year the equipments there.

We're already producing hydrogen there.

And as low a low volume with our first Electrolyze yours that had been deployed.

That'll be scaling up and putting up hydrogen.

Production at scale within three months.

If I look at.

What we're doing with OLED.

That plant is an exact copy of what we're doing in Tennessee. The equipments. There I think we scaled additional capacity of Tennessee.

In three months.

So I guess, we don't see it.

Maybe the risk that I understand you may see.

So I guess, we don't see that.

I guess the challenged levels, we see Joe or less than you may think okay fair enough if I, if I could squeeze one more in here.

It looked like there was a little bit of another inventory build I'm wondering how much of that is because of some of the project delays you mentioned or how much is maybe some some buffer to be able to meet demand because of supply chain and like what how should we think about the right level of inventory for what the business is today.

I'm going to let Paul take that one Jeff.

Okay.

Paul Yeah, what yeah, well one thing to keep in context. When you look at the timing of the volume is in sales in context of our guidance.

The volume in Q4 will be could be in the upper ends of double Q3.

So and maybe even more in the range of possibilities.

Working everyday to deliver to all of those those programs and you know so there's a lot of buildup for that and you know that that's really the drive what I would also say is is that you know when you look at the mix of things that we're doing there's a lot of new.

Platforms between our on road E L F or Electrolyzed yours.

Stationary you know new programs in Europe , I mean, there's just a broad you know all of the companies that we've acquired all of them have different mix, you know and in supply chain and scaling opportunities that we're working through that.

To quickly you know we have the fortunate problem of Oh, a big growing backlog and opportunities are scaled to meet all of those so we're focused mainly on delivering and growing that and then you know you you optimize where currently turned on the factory up in Rochester, where we're literally.

Just last weekend turned on production and the new Vista facility.

And Oh and that scale up in that facility was another record time kind of scale up so short answer to your question is as you know I'm I'm a big believer in no inventory I think just in times, the best answer but.

You know you will see it come down and you will see it optimized in the near term.

As we work through scaling each of those individual businesses and volume helps a lot and so third quarter should be a big you know, we'll put a big dent in it.

Thank you sorry fourth quarter.

Yep Yep.

Thanks for that color.

Yeah.

Thank you. The next question is coming from Alex Kania Wolf Research. Please go ahead.

Hi, Alex Hi, Hi, there how are you okay. Good.

Maybe just one simple kind of clarification question just on the on the in the shareholder letter.

It's it's just thinking about interpreting the kind of average fuel molecule cost chart.

Is that based on I guess it assumes you know what your expected level of hydrogen sales or production, it's going to be over that over the course of the next year, but does that also assume something roughly close to natural gas forward curve. So we're kind of looking at kind of peak, let's say margin margin no margin tightness next quarter and then it ends up falling even just pay.

On <unk>, we're looking for gas prices on top of the swap to green.

I'm going to let Jay answer that Alex Alex short answer is yes, we have looked at the futures of the natural gas prices to blend what we buy from the third party on that right. So obviously, that's why you see the peak here hopefully this is the peak here in Q3 from the third party purchases perspective, and it takes into consideration what we expect our production.

To be from all of this different clean hydrogen plant and again, we do have the incremental beneficial benefit of the production tax credit as well so thats why with the PTC with our production. Despite this third party existing contract in place is what gives us the confidence why we believe that exiting next year, we'll be able to get to that operating breakeven.

Sure business.

Okay, great. Thanks, and then.

This was you talked about maybe a little bit in the prepared remarks, but just could you elaborate maybe a little bit more on our discussions with some of these other industrial gas companies I am I, assuming that that would be beyond beyond Olin and then maybe just really with respect to all in if you could maybe talk about you know there's also a discussion in the investor letter about exploring other sites and things like that but just kind of what kind of you.

Given olin's kind of.

Hydrogen production from the chemical processes, you know kind of how big you know could you see that that partnership to ultimately getting to.

So Alex we're just getting the partnership started alright, but obviously, we've been working with all of them for a long time, alright, Tennessee at the plant that he is also a cheap gas coming from OLED. So it's been successful in Tennessee, We expect that success to continue also in Louisiana and as you rightfully pointed out there are starting to have a lot of feed gas available in the market. There's a lot of discussion going on give us some.

Time will be happy to share with you a lot more incremental updates and we're in that discussion and dialogue with our partner right now, but I do want to tap some time here before we can get into more specifics on that but I think you're thinking of logic is the right. One here because they certainly do have a lot of cheap gas available and we're in discussions with them in terms of how can we rapidly expand this part.

And the ship into something much bigger than just the Tennessee, and Louisiana as well that's on OLED side, right and when we were referring about.

Some of the industrial gas opportunities look I mean overtime. This hydrogen should enter into some sort of a swap agreement if youre looking for a green hydrogen if you don't have it at plug has it we're happy to provide that green hydrogen to industrial gas companies as well because it's a big market. We all have to work together number one number two there are some other smaller industrial gas companies.

That actually don't have a lot of hydrogen capacity, probably would like to have that as a part of the portfolio offering as well and that's what we have some of those discussions going on at a pretty advanced stage as a matter of fact, and that's really what we're referring to.

Great. Thanks.

Thanks, Alex.

Once again that is star one if you would like to register a question at this time. The next question is coming from Eric Stine of Craig Hallum. Please go ahead.

Hi, everyone.

Hi, Eric.

So I have been jumping between calls.

Good.

Probably already been asked.

But just curious I mean, I know when you provided the updated guidance back I mean, it was a.

A couple of weeks before the symposium.

You certainly contemplated.

You know a third quarter fourth quarter split.

It was going to be magnified you know I'm just curious how the split actually played out is that I mean was that in line with your expectations and as we think about I think Paul just referred to potentially fourth quarter being to wax.

Third quarter.

It's very you know I'm just wondering are there what are the things that.

Kind of dictate that I mean are there large projects is.

Is it what are the things that could.

He there'll be upside or potentially slipped 23.

Paul I'm going to let you take that one.

Yeah, well the first thing is we've been pretty transparent about scaling the electrolyze your plant in Rochester.

And the volume is dramatically increasing every month and so it's just by the nature of that scaling activity you know a lot of that volume happens in Q4.

The second thing is a lot of these new programs that we have new products that we've been winning and developing and launching.

A lot of them stem from I'm going to call it big lumpy some lumpy contracts.

And you know those were and certainly within our expectation in terms of timing when that would close and it's playing out as we thought and we're closing those now and then.

How close them.

And you know we're working envelope on them. So those were in line.

Then the third thing is just material handling you know every year it tends to flip sometimes Q3 is bigger in terms of timing and sometimes Q4 is bigger in terms of timing and so these big pedestal customers you know they kind of it just it varies with them, but we've actually been you know has been announced are back.

Suppose Liam you know we've been we've we launched and completed a number of new pedestal customer programs, which we knew you know would be.

Kind of the Q4 ish time frame for those to close you know things like the Grainger programs. We've talked about those are all underway as we speak that's the first time, we've done thing for them at scale.

So it's exciting.

And you know things like the Lidar program that we won in another other new pedestal customers. So those are in line. So I'd say by and large it's it's you know.

It's consistent what we.

That's what we thought.

Text of the updated updated guidance we gave.

Okay. That's helpful I will jump back into queue.

Thanks, Eric.

Thank you. The next question is coming from George <unk> of Canaccord. Please go ahead.

Hi, good afternoon, everyone and thank you so much for taking my question.

Hi, George.

Hey.

So just first when you talk about back leveraging plans to recycle capital to.

To build your hydrogen network are you assuming you'll be doing that all on your own or are you looking for more partners or do you need more partners to help finance that build thank you.

Yeah.

Go ahead.

Thank you Andy Hey, George how are you. So look I mean, I think two things on that so obviously, we always explore and see what is that rate structure. Our partnership can look like right.

Partnership with the likes of infrastructure fund our partnership with the likes of just the straight in our strategic funds, that's always an option but.

Given where we are there are two things that will happen right. One is as these plants come online we'll be able to demonstrate what is the cash flow from this plus first thing right. So there'll be a track record of that lets say for 12 months number one number two now with the production tax credit you do have a view on a 10 year forward cash generations us without PTC as well depending on what the spin.

That is between that forces the customer that part is really getting refined here at this point in time, but can we do the back leveraging on this plant on our own answer is yes. We can is that the path. We go down frankly, we're having a lot of discussion at this point in time it depends on what is the optimal solution for us, but this is not different though right then what really has.

And the solar in the wind space when it first kind of got started call. It about 10 years ago right. So first do you have the Doe loan guarantee program for three Mega Solar project, which then led to the back leveraging of those projects you basically have the ITC in the solar space that we can 30% of the capital stack ITC, We've got production tax credit in the wind industry, which then became.

50% to 60% of the capital stack in the wind industry. So there should be no change or no difference in terms of how the capital stack will unfold and the green hydrogen industry as well, but once we actually start to really generate cash from these plans and with the PTC now as a part of this inflation reduction Act, we absolutely believe that we will be able to.

Back leverage there'll probably be some sort of a tax equity at some point fast forward several years out and we will be really able to not have to do this green hydrogen plant with 100% equity balance sheet financing, but we should be able to do that out of the gate probably its 40% equity you know there was a scenario where you could envision that eventually goes down to 20% and that's what we mean when we say we.

Should be able to get four to five times multiplier available capital to really execute on the green hydrogen generation that fourth that we're looking to build.

Okay. Thank you and if I could just ask one follow up I'd love to get your thoughts on <unk>.

A recent a traditional energy activity in renewable natural gas and I'm curious as to how you see that potentially extending more into hydrogen overtime and how you see that potentially playing out. Thank you very much.

You want to give your view that you can start us yeah. It's.

It's an interesting question.

You know.

I think.

Old admittedly.

As renewable electricity.

Comes to scale.

I think the local carbon footprint.

Using.

Green energy, coupled with Electrolyze yours.

Is the long term solution.

I think R&D is a interesting niche market, which supports that transition.

But it's not going to be ultimately the winter.

And you know why.

I I would put it in an analogous to blue hydrogen no I was talking to one of the large funds in the middle East when the sovereign funds and I asked them why are you talking to me when you could be generating blue hydrogen.

All day long and their answer to me once green hydrogen is shown to be competitive with blue hydrogen no one's going to use blue hydrogen and I think the same holds for RMG versus hydrogen.

Absolutely.

Again, just to add to what Andrew just said George I think it's really a question of scale we have.

Believe that the green hydrogen is scaled much much bigger going forward.

Leveraging off of the renewable assets.

Now I'd been on them again, so I'm not against anything that helps accelerate the transition and I think orangey helps accelerate the transition.

Thank you.

Yes.

Thank you. The next question is coming from Sam Burwell of Jefferies. Please go ahead.

Hey, good afternoon, Eddie Hey.

Sam.

Wanted to dig in on kind of the gross margin trajectory a little bit. So I guess first off for for Q and Paul already touched on it a lot like the equipment sales should be up a lot maybe almost a double in <unk>. So that should probably drag the company wide gross margin up but I'm curious how high should.

Or can it go and <unk>, assuming like roughly 20% equipment gross margins there or any other material uplift, we should expect whether it's fuel or service or a P. P. A.

I will let Mr. Middleton take that one Sam.

Yeah I think.

So the short answer is you hit the nail on the head it's a significant delta in equipment sales in the quarter right I mean, the recurring revenue like about it like the layer two layer in.

Trunks overtime, but in short stent like this one where there's a significant.

A step function change in the volume in sales volume largely driven by equipment. So that will certainly have a very significant positive impact.

There are other things you know like.

Yeah, you know the scaling I mentioned a minute ago on Elektra lighter. So if you think about volume out of that facility.

Moving up substantially in the quarter from previous quarters that means you know substantial leverage.

On on on those investments.

We weren't getting those run rates are we are near so.

Those are very positive.

We expect we're seeing a big improvements we see continued improvements in our service offering which affects our service revenues and our P. P. A.

We have a number of programs we've launched this year and you're just starting to see the benefits of those part part terms.

Some cases.

Some of the sites, where we've launched the upgrades.

Being 70% to 80% reduction in part Bob.

So you know those benefits are just starting to really manifest in play through our numbers. We think are the.

The service costs on a unit basis will be down you know.

Fourth quarter.

About 10% to 15% compared to where we were in Q1 as an example, and then there's a bigger step function almost.

As you saw by the chart.

Forecasted to be cut almost in half.

And of course, the next year as those programs continue to pay benefits and new unit rollout with that better mix offering.

So there's a whole host of things that are playing in our favor.

Starting to see some of those benefits certainly in Q4, and then you see it really starting to magnify on into a into next year. You know there are headwinds I mean like fuel.

It's Andre alluded to natural gas prices and other things, but you.

You know those positive events really help.

Put put.

As you know.

More of a positive tailwind to that margin trend.

Okay. That's certainly helpful and then maybe shifting to look at 2023.

And recall from the update that you guys gave on the guidance back in October you said that some projects.

Were pushed out to next year. So is it right to think that there might be less of a quarter on quarter decline in revenues in <unk> versus <unk>. You then like typically you see because of seasonality I'm just trying to get a sense of what we should expect for the trajectory of sales on the equipment side through 2000.

'twenty three and then also how should we think about the margin trajectory for that segment in 2023 is there any fixed cost.

Absorption that should really improve through the year or should it be fairly consistent around that 20% Mark in all four quarters.

Oh that sounds like a question.

Question for you.

Yeah.

Say.

In General I would expect still a one third two third kind of.

Phenomenon in our sales next year for them in terms of the first half second half.

You know we have a number of you know the material handling the dynamic still is still the same where theres still a heavy push for new facilities and even renewals happen starting in kind of the June ish time frame and leading into the busy periods so that dynamic.

Hasn't changed.

Yes, some programs may slide and and that certainly helped Q1 overall volumes are up so that helps so you'll certainly see year over year growth from Q1 of next year to Q1 of 'twenty two.

But I don't know that you know I guess, the best math owed us.

Using a similar.

Split.

If you will.

This year as a proxy for kind of how the quarters might play on a percentage basis into next year.

You know I think.

Having said that you know Q4 is going to be a big quarter for us I mean, it's just the timing of the way the programs are flown in and how the this particular year has flown with material handling timing and you know that that certainly makes Q4 big so it's nothing surprising to us and as we move into next year and work towards hopefully over delivering.

You know, we certainly are that will compound second half activities with all the things that we're chasing to try and as I said over deliver on the volume so for all those reasons.

It will certainly be a lower most likely and then Q4, but.

You know are substantially higher than last year's Q1 and in compounding thereafter.

Yeah.

Ship everything I can this year.

Sorry, just quickly, though what about the the margin trajectory.

Equipment should that be fairly consistent or are there a lot of fixed costs that get absorbed just.

As you ramp up Electra lasers and improve through the year.

Yeah, I think we gave 10% as a whole holistic number for next year and because the dose consistent with volume you'll see you know much.

Stronger margin profiles in the second half both from fuel activities.

And from the equipment sales, but.

No again, I I expect Q1 to be a better margin profile than Q1 of this year.

Expect it to be you know every quarter to be better next year.

Given the build of equipment activities and moving on so you know.

I think.

You know.

Directionally, that's that's probably a well that's certainly how it will play.

Okay, great. Thanks, guys.

Thanks Sam.

Thank you. The next question is coming from Greg Lewis of BT I Qi. Please go ahead.

Thank you and good evening, everybody and thanks for taking my call just one question for me.

Sanjay.

Yes.

And I guess, congrats on bringing on freeze packed met those guys at the symposium Super Super Nice guys and they're Super pumped about the.

Use them plug solutions, you know one of the questions I had and I know you've talked to in the past is about the ability to kind of go in the mid to end of the market.

Yeah, I guess I'm wondering any any update there on the penetration on the mid or mid and small ends of the market and really as you look ahead to 2023.

How are you thinking about that opportunity. Thanks.

So Greg this is Andy.

I spent a lot of time with Jose who runs that business.

I think probably the interesting mix in the fourth quarter is.

Customers, which are smaller probably represents 35% of the shipments this quarter.

I think that's a dramatic change.

And some of that will.

We will continue to improve and I think the.

I've made reference to.

Can you share a bit of the production tax credit to make the value proposition more attractive.

And let us sell more equipment.

And I think you'll see more and more of that so the answer is we're doing.

Much better than smaller applications and I can tell you so.

We were also looking at and there's work going on for much smaller hydrogen infrastructure and I can tell you that I have it we do have solutions that we've developed for Europe and that we're looking to bring them to the United States. It's one of the reasons who's he's been able to be successful.

To start bringing more.

More is to customers in Europe .

Okay, and then I guess I'll just follow up on that Andy. Thanks is there any way to think about the margins on the smaller end versus the larger I mean, I would imagine they have to be at least a little better is that kind of a fair way to think about that so they're listening Greg.

[laughter] well behavior, they need to buy more than yeah, I would just say you know.

I'll, let Paul come in if he has any changes.

Yes, obviously, if you buy more.

Uh huh.

The prices lower than if you buy less.

Across the board for all three elements hydrogen fuel and services.

And I would think we kind of look like.

Any of the companies you follow that.

Had that experience.

Super helpful. Thank you okay.

Thank you. The next question is coming from Amit the car of BMO capital. Please go ahead.

Hi, Amit.

Let me please make sure your line is not muted.

Yeah.

Well with that yes.

Alright the next.

Question is coming from Craig Shere of Tuohy Brothers. Please go ahead.

Hi, Good afternoon, Hi, Greg Hi.

Hi, So so first I just wanted to make sure I understand.

Ralph next year revenue trajectory, we're talking about.

It sounds like maybe in the ballpark of $4 50 to 500 in the first half with every quarter improving sequentially from first to second to third and then as usual third and fourth quarter being kind of a toss up as to what's the top for the year.

Paul do you want to take that.

Yeah, I think that's right you know I think.

You know I I know because we're chasing programs as I said, you know our or my or our goal is to.

To over deliver I mean, we're focused on.

Beating our numbers every year and certainly this year will be strong pressure to push that so we expect a lot of programs to come in the second half as they always do and.

So between the material handling dynamic and and Atlanta, and those big programs and working through the timing of when does the volume.

We'll probably make Q3 before a little bit of a tossup, but most likely Q4 will be a little bit heavier.

Gotcha.

Okay, and then one for Sanjay.

Yeah.

I think Sanjay that are coming out of the supposedly symposium there there's a little confusion I mean, theres been a little horse trading to optimize.

Some of your hydrogen plants.

And get the most scalability the best returns.

And it sounds like you're still targeting.

Yeah like a nameplate commissioning capacity at year end about the same.

But it's possible that the.

Reduction that was previously anticipated the actual H two production through 2023.

Might be a little less than was thought a couple of quarters ago.

And that may restrain the ability to raise guidance.

But the margins beyond 'twenty three should should then proportionately benefit with the combination of the scaled fuel and the eye or a P. T C.

Yeah. So let me let me maybe take a step back right. So Craig as you know when we you I think you would know this pretty well when we talk about commission the plant to full production there was about a three to four months.

And it depends a bit on whether it's essentially our electrolyze there plus local fire or it's just the feed gas and the liquefaction technology right and if it's just a feed available of sort of like this <unk> JV in Louisiana, and what we do in Tennessee the.

Commissioning of that actually it could even be faster than that so I don't know if I would say that word unnecessarily tweaking adjusting the view, we've always said that we wanted to be at 200 tons of commissioning by the end of 2023 and look and you know that we're looking at 70 tons of commissioning this year, but we've gone through a lot of detail on why we are going to be at that 45 to 50 tonnes.

Commissioning by the end of 2022, but from by the end of 2023. Our goal always was to get to that 200 tons of commissioning and that was a mix of project in New York project in Texas right expansion in Georgia expansion in Tennessee, and ongoing work that we're doing in Louisiana, So and from a cadence standpoint, right. The way you should think of.

About is as you go into Q2 of next year, you should start to see the contribution of that low cost hydrogen from Georgia and again in Q2, you should also start to see the contribution of that low cost hydrogen coming from Louisiana, Some gaseous hydrogen coming out of Tennessee, then as you go into the Q4 of 2023, you should start to see some <unk>.

Contribution coming from New York, and Texas, Some incremental contribution again coming from Georgia. As we have told you that we're really looking to get that plant to be 30 tons by the end of the year. There was an existing infrastructure that will be actually a faster moving and by the way Craig. We also have some other projects in the hopper that we're working because it is a development business and we want to make sure that we're thinking about.

And balancing if one project is a month or two behind then we have something else that we can actually backfill that with if he would so that's how I would think about it in terms of the cadence of that and how things will play out in 2023.

Gotcha. Thank you.

Hmm.

Thank you. The next question is coming from Greg Lesniewski of Web for research. Please go ahead.

Hey, good afternoon, Andy how are you doing okay, Greg how about yourself.

Doing well thanks, a couple of quick ones on the pedestal customers and policies I've also been hopping back and forth. So.

Sorry, I had already asked.

I noticed.

We werent.

Not that fast today that just spent a whole hour with us.

Wish you were the only ones I covered [laughter].

On a on the pedestal customers are just noticed since the symposium Lidl is now officially named pedestal. So just curious.

Any color on what has developed since then symposiums and now it's just as simple as you know executing an agreement or if there's anything interesting for us to know there and then also if you could comment on just the relative size of of where that stands versus the rest of the stationary power customer or sorry, the pedestal customers without giving numbers, but kind.

We're a relatively speaking it may rank amongst the others that'd be great. Thanks, sure. So Greg, Yes, we signed contracts after symposium.

So that was pretty exciting so it happened about two days after the symposium.

And Lido has about 150 distribution centers in Europe .

In Europe . So you can kind of start thinking about them as the size of home depot.

Okay, Great very helpful. And then one more just on pedestal customers one that we haven't heard about as much over the last year and a half since the original announcement was G. M. So just wondering if there's any broad based updates there.

Advertising for expansion or different types of applications, whether it be stationary power or et cetera, any update would be great.

So we are doing deployments with GM this quarter.

We've been continuing to work with G M.

Certainly not as many opportunities areas home depot, Walmart and Amazon were lidl, but it's you know I'm pretty pleased with the progress.

Okay, great. Thanks, Andy.

Okay.

Thank you. The next question is coming from Amit <unk> of BMO capital. Please go ahead.

Oh, let's try this again, sorry about that yeah.

[laughter] I'll make it quick because I know, it's been a yeah evening, but just more of a housekeeping question, but you know I noticed in your Investor letter you guys re.

Affirmed your kind of two.

2026, and 2000 2030 revenue and margin targets and did the same for 2023 revenues.

Should we still be thinking about the 10% gross margins for 2023.

They're explicitly.

Yeah, Paul I'll, let you answer, but I think we're standing a the chart that you presented in our margins and performance for 'twenty three 'twenty three 'twenty 'twenty six 'twenty six.

No changes to that.

Great.

Yeah go ahead Paul.

No I was just saying, yes, I agree it's a 10% still our target next year, yes.

And just real quick and then thinking about like a lot of the Electrolyzed your contracts your store.

Equipment Youre selling in Europe is there going to be like a service revenue part of that as well that's going to kind of grow as you deploy more capacity out there.

Yeah, that's actually a good question.

And.

No what we so it's the answer is yes.

What we really haven't talked a lot about is the opportunity for service with Electrolyze yours.

Which when I review with the team.

Maybe.

Much more attractive than material handling.

So we are a lot of the work we're doing in Europe . As you know will be associated with Electrolyze yours and the service business.

When we look at it we think could be.

Very very attractive.

Thank you guys.

Alright, well thanks, everyone.

I appreciate everyone who's on the call today.

Looking forward in January to provide you the annual.

Update with.

You'll happened probably at the end of January we will schedule and thank.

Thank you again.

Bye now.

Yeah.

Ladies and gentlemen. This concludes today's event you may disconnect. Your lines I'll talk off the webcast at this time and enjoy the rest of your day.

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