Greetings and welcome to the Plug Power Inc. Second Quarter 2016 Earnings Call. [Operator Instructions] A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Teal Vivacqua, Director of Marketing. Thank you. You may begin.

Thank you. Good morning and welcome to the Plug Power second quarter 2016 earnings conference call. This call will include forward-looking statements, including but not limited to, statements regarding 2016 objectives, including those related to revenue, sales, bookings, gross margins, and GenKey and GenFuel installations. 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, risks and uncertainties discussed under item 1A, risk factors, in our annual report on Form 10-K for the fiscal year ending December 31, 2015, as well as other reports we file from time to time with the SEC. These forward-looking statements speak only as of the day on which the statements are made and we do not undertake or intend to update any forward-looking statements after this call. At this point, I'd like to turn the call over to Plug Power's CEO, Andy Marsh.

Thank you, Teal. Good morning, everyone. Thank you for joining the Plug Power second quarter 2016 earnings call. I'm looking forward to share with you our results for the quarter, but also an update on our long-term strategy, which incorporates both new applications for our hybrid fuel cell solutions and how we see the market for hydrogen evolving in the coming year. Before I get started, I want to remind everyone about the terminology we'll be using during the call. As you recall, we adopted new methods to finance our PPA transactions in the first quarter, which changes the way we record revenues and costs. While we highlight GAAP, we will refer to adjusted revenues, adjusted gross margins, and adjusted earnings per share, which is based on previous financing models to allow for a meaningful year-over-year comparison, and more importantly, convey our overall progress in sales growth and cost-downs. Now let me share with you some of the highlights of the quarter. I'd like to start out by discussing our bookings, which came in at a very strong $63 million for the quarter, and $135 million year-to-date through Q2. We've set an aggressive target of 275 million in bookings for the year. And the results so far put us on track to achieve that goal. In terms of revenue, Plug Power recognized 20.5 million of GAAP revenue, with the adjusted equivalent of $37.9 million. When compared on an apples-to-apples basis with the same year in 2015, this shows 58% revenue growth. I'd also like to highlight that our recurring revenue increased by 99% on a year b year basis. In the quarter, we saw significant sales activity. Starting in Europe, we expanded our GenDrive installation with FM Logistics and added Carrefour as a new customer. FM Logistics, an important and…

Thank you, Andy, and good morning, everybody. As we have discussed many times, some of our customers access our hydrogen and fuel cell solution through a power purchase agreement, also known as a PPA. In previous years, we have been using a more traditional sale-leaseback approach to finance our PPA deployments. Starting in 2016, we are utilizing new approaches to finance our PPA programs to accelerate the deal cash flows and help maximize overall return on the deal. These new approaches require different accounting treatment for revenue and margin recognition. Therefore, to provide better comparability to prior periods and transparency to what we are delivering in deployments and cost-downs this year, we believe it's important to convey the 2016 PPA deals on a basis as if we had financed these current deals in a similar way as by previous years. Three of our deployments in the second quarter were PPA programs. The equipment at these three PPA sites, if we had financed these deployments with financing on terms similar to previous years, the total revenue and total margin that we would have realized would've been $17.4 million and $5.7 million, respectively. The key takeaway is that compared to the prior-year, Plug continues to grow sales with both direct customers and PPA programs. And Plug continues to make big strides in our margin profile. This adjusted view is important to increase transparency about what we are accomplishing commercially and to provide our stakeholders a basis for context, comparability and consistency. Most importantly, however, is how we manage and think about the business. And I am confident this will continue to be a meaningful approach to our stakeholders this year as we transition to more robust PPA financing solutions. Looking at our revenue for the quarter, Plug achieved growth year-over-year and sequentially…

Thank you. Ladies and gentlemen, we will now be conducting our question-and-answer session. [Operator Instructions] our first question comes from the line of Eric Stine from Craig Hallum. Please go ahead.

Maybe just start with the PPAs in the quarter. I think that the amount this quarter was greater than you forecast on the left school. I think the last call, you kind of thought it would be about 25 million spread out over the last three quarters of the year. So, just curious how we should think about the rest of the year playing out. Was this just an especially heavy quarter based on specific projects, or is this the kind of level you expect going forward?

Let me -- I'm going to hand it off to Paul. I would expect that for the remainder of the year, it'll be in the $17 million to $20 million range. Paul, you may want to add on to.

Is that per quarter or for the year?

No, for the year.

For the year, okay.

Yes. Paul, would you like to add?

Yes, I think that's a fair guess or a fair allocation of our forecast. And there are some variations in site sizes that play into it a little bit, but I think for the balance of the year, that's a good illustration of what we were thinking for the balance of the year.

Okay. Got it. Maybe just turning to some of the GenKey wins, I know you called out Baldor. But just curious, and maybe you're limited as to what you can disclose, but you talked about the leading retailer with the global presence in kind of a timeframe. Is there any way that you can kind of characterize the size, the potential number of sites, how you expect it to maybe play out?

Sure. So that, so Eric, that retailer has well over 40 sites. We will be doing our first deployment in the third quarter, probably bridge the two quarters. And we believe there's potential in our discussions that over the next 12 to 18 months, it could be 5 to 6 additional sites of the same size. So this first site will actually have, the first deployment will be over 200 units and that site could grow to be as large as 400 units. So we're pretty excited about that one. You add on top of that our success with Carrefour in Europe, the second quarter, and you start looking at, I know one of the criticisms of the Company has been our over-reliance on Wal-Mart. And bookings for the quarter, Wal-Mart represented only about 15% of the bookings.

Okay.

So you take a step back, these questions about diversification, I think we've demonstrated that in the past quarter. And quite honestly, the sales funnel looks good for the rest of the year. We stood behind the $275 million number and I see bookings accelerating. We're pretty bullish about our bookings number and our ability, quite honestly, to expand of the business is really just beginning beyond material hand.

Okay. You mentioned Carrefour. Any…

Which actually, I'm going to editorialize here just a minute. One thing I think people often forget, that we actually announce deals and they actually happen. We have over 11,000 units in the field. Nobody else comes close to that number for all fuel cell products. We're still doing over 90% of the hydrogen refueling to the company. And if I sound a little frustrated, it's because I think the message isn't getting across and we haven't done a great job. But this Company is really unique in that it's really, when you look at mobility applications, we're the only commercial fuel cell company yet. And that's really what distinguishes Plug Power. Now, enough of my editorial argument.

No, that's okay; that was good. I just, you've been at Carrefour, maybe it's too early in that, but given their size, given that they're kind of the, I don't know, international version of Wal-Mart or on that same level. Any thoughts on how you anticipated following a similar path, thoughts in terms of potential sites, that sort of thing?

So if you really think about Wal-Mart, it took a much longer time because I didn't have any products to start when I started with Wal-Mart. So what we really did, well, I should say the first real full cut-over was Washington Courthouse. Within a year, we did a much larger deal with Wal-Mart. And the discussions and relationships that we've been establishing with Carrefour, our goal, and I think their goal, was to deploy this technology more broadly.

Got it. Last one for me, this is more high-level, but you had the recent partnership with Hi Gear and the reformer technology. Just curious, thoughts on how you think that expands your market, how many forklifts. It needs what that will enable you to do in terms of number of forklifts and making the economics work at a site.

I think that first, we are doing our first deployments with Hi Gear in the fourth quarter, so we are very excited about that. And what Hi Gear does for us more than anything else is that in the long run and it won't be immediately. Immediately, I think the cost delta between reformers and liquid hydrogen is about equal because you have to really think through, with reformers, how to make sure you will always have hydrogen there. It's kind of relatively simple with liquid. It's kind of like a gasoline station. You don't run out of gasoline at gasoline stations and quite honestly, we don't run out of hydrogen. Now you're putting a device onsite that has to run and generate hydrogen all the time. We've put in, just to make sure that there's always hydrogen onsite, but as we grow more and more confident in the performance of reformers, you can see a dramatic cost reduction next year of our cost of hydrogen. It's probably half, on a variable basis, for the cost of hydrogen generating onsite. And once we hit that point, I we've hit an inflection point in the business where we're growing rapidly. I actually think it opens up a whole other inflection point. It makes value propositions even stronger. And I think 12 months from now, when we're talking about new bookings, I would think about a third to 40% of them are going to be reformer based. And I think many of those will be customers we weren't projecting being Plug Power customers at that time.

Thank you. Our next question comes from the line of Jack O'Brien from Cowen and Company. Please go ahead.

First on Europe, congratulations on the progress there. Just wondering if you're going to be using internally manufactured fuel cells for those projects or source them from a third party? And then any commentary on what the expected gross margin profile for the European sales are going to look alike compared to your U.S. business?

So, I'm a kind of hands on guy. Everything Plug Power does, we build and design ourselves. And the core expertise of this Company, when I look at it, includes three items. One is that we had developed the most sophisticated systems in the world, most of those components either designed or specified by Plug Power. No one is better at building hydrogen infrastructure and we've continuously driven down the cost. And third and foremost, the capability that's sometimes forgotten and I'm just staring at it now is our network operating center, where I'm looking at all 11,000 units in the field and every hydrogen fueling that's taking place at the moment. So we do we're a, I would say I probably think a little bit like Tesla and SpaceX. I think that vertically integrated companies at this stage provide customers with better cost and higher quality, and I think we're demonstrating that day in and day out.

Okay, understood.

Because I don't buy anybody else's things and put them in my products; they're made by engine work.

Okay. And then as your expectations for the fuel cell tax credit get pushed out past the election cycle, can you comment on how this is impacting your conversations with both existing and potential customers in the U.S?

That's a fair question and I think that just as we've been fairly open about the -- we believe it's a high, high likelihood it'll be passed. And many of the legislators have offered to reach out to customers for us and provide them a state of affairs. So we have seen limited impact to date.

Okay. Got it. Thanks very much.

Thank you. Our next question comes from the line of Carter Driscoll from FBR. Please go ahead.

So getting back to the momentum you're building in Europe, so can you maybe just talk a little, Andy, about the challenges you face about having the same pipeline infrastructure and sourcing hydrogen and what that does maybe vis-a-vis where you talked about kind of the same path you're hoping that Carrefour takes versus Wal-Mart and the potential margin impact, at least in the first kind of initial phases, how you think about sourcing? And I have a couple of follow-ups.

So let me separate short term versus long term, Carter. It's really as much in Europe really probably drove my thinking to move faster to reformers than I originally intended. And I would expect that in the long run, and when I'm saying the long run, 18 months to 3 years, most of our deployments in Europe will be vis-a-vis reformers. I think in the short run, we have been working with the industrial gas providers and also building some infrastructure in Europe ourselves. For example, with the coal rights deal that we announced previously, Plug is doing the infrastructure to support that deal. And I think that most of the deals in Europe will be Plug supported infrastructure with hydrogen provided by large European providers like LINDY and Air Liquide. In the long run, I believe Europe will be mostly hydrogen generational onsite. And I think in Europe, I think that's going to be required to have the acceleration we've seen in the States. It also quite honestly, as I mentioned before, reduces the cost of hydrogen in the long run and strengthens the value proposition.

Is it fair to assume the first installation at Carrefour is under a PPA model?

No.

No?

It's not. And to be honest with you, I don't know if it's capped or if it's a purchase or a lease deal, but it's not a PPA.

Got it. Next question, you talked about obviously, you have a dramatic increase from internally-sourced stacks expected in the second half versus the first half. Can you talk maybe about what that does to your margin profile over time? Obviously, you talked about being [indiscernible] to provide the control of the entire equipment from a process and a quality standpoint. Obviously, volumes will help drive your cost-downs. But talk about how that shift impacts maybe the second half of this year, your margin profile versus the first half, and then what does mean longer term? Do you expect to go 100% sourced internally or would you like to always have a second source as your partnership with Ballard? And then do you have the capacity to potentially go 100% as you're currently configured in Latham?

So there are ways, let me kind of take them one by one. On the margin side, if you think about the improvements to the margins from the fourth quarter to the second quarter, we stepped it up to 39%. I think we were in the 34% range at the end of the fourth quarter and that's with 40% Plug internal stack. I think the GenDrive business itself long term can be a 45% gross margin-plus business. As far as stack sourcing goes, you can double, you can dual-source without having dual-source membranes, dual-source plates and other items, which would position one to always have two sources for some of the components that are built up and used in making a stack.

Okay. And then maybe could you, can you talk about the agreements you have with Fed Ex, the range extender versus the kind of ground mile, and the ability to potentially fork it over to other buyers, the timing of when you think the pilot might turn into an actual PO, and maybe some type of margin expectation versus your traditional GenDrive?

I would answer the last one first. I would think margin expectations are in the similar range and we're working with more than Fed Ex on range extender programs at the moment. And the timing of these things, look, I've been around this industry for a while now and other industries before this. My belief is that this application makes economical sense and that you could see deployment of larger scales in 12 months or 18 months where you're talking 500 to 1,000 units. And it could be larger. But one has to think through, in this market like any other market, is how one delivers hydrogen. And one of the nice features of delivery vans is the fact that they come home every night. And it's been. When I look at markets, that's really what I think about is how do you fuel the unit. And there's a value proposition for people like Fed Ex in the fact that they believe in electrification, but if electrification doesn't let them deliver all their packages in a day, electrification with just a battery. Electrification with fuel cells and a battery provides them with run time, which makes the value great to them. So I believe this is a market that could start taking off in the next 12 to 18 months. I believe there's a value proposition there, but as I've always focused people, it's all about the hydrogen. And if you don't understand the hydrogen, you're not going to get there and it's one of Plug's core strengths. And so these markets, I'm hoping for bigger numbers, but I think the numbers I gave you are probably realistic today.

Perfect. I'll take the rest of mine offline. I appreciate you answering all my questions.

Thank you. [Operator Instructions] Our next question comes from the line of Craig Irwin from ROTH Capital Partners. Please go ahead.

Good morning and congratulations on the strong deliveries in the quarter.

Thanks, Craig.

I wanted to ask a little bit about the PPAs and the profitability of the PPAs. So, in the pro forma that you shared with us, it looks like you have sort of low 30s gross margin on the transfer of equipment into PPAs. And when we look at the disclosure spec from your 10 K, it looks like in 2014, when they were sort of steady state on that first one you did a couple of years ago, we had maybe just over 50% gross margin. But then the last two quarters, we've been sort of tapering down. I was wondering if you could maybe help us understand what drives the profit volatility in here, if this is really just origination expenses for PPAs not yet executed, or if there's a cycle of profitability over the life of the contract?

Craig, you know what? Maybe we can talk about this at 1.45 because actually, the profitability of PPAs have been going up for Plug Power. So, we may be looking at different data sets, or maybe it's the way go over the as the financial team is really at a whole level of sophistication how information is presented over the past 9 months. But the facts are and I'll let Paul comment on it over the past year and half, each of the PPAs every quarter I think has become more profitable.

So then the original PPA that was executed a few years ago is still very robustly profitable? And this is probably just recognition issues on the front end of the contracts if we're looking at the straight disclosure of gross margins?

Well, I think so when we started doing the 2014 sites and the PPA program, as we've said, we were doing it with sale leaseback financing. So, for all intents and purposes, the sale of those assets to the banks were like sales to customers. And we had them we'd have a margin profile on that trending very similar to what we were doing with direct customers. So as we as Andy has alluded, as we've grown the margin profile and we've driven cost downs on our GenDrives and hydrogen platforms, we've seen that the relative cost come down. So the margin profile has gone up. I think as Andy said, when we talk this afternoon, maybe we can help kind of correlate the facts and point out the right make sure we're all looking at the same data set. So I apologize if it's confusing but.

No problem, we can definitely do that offline. Then the next question I wanted to ask.

And Craig, I just want to make sure everyone else knows on the line that the PPAs are improving. And I just don't want people to think that we're presenting information a little bit late, but they are improving.

Excellent. So then the next question I wanted to ask about, Andy, is you've been producing your own stack internally for a little more than 9 months now. I know that the peanut plug has to have a roadmap on continued cost reductions, not just for the stack, but for the whole GenDrive system. Can you maybe share with us some of the larger items that are potentially in your plan for '17 and '18, something that could maybe continue to drive the economics to more attractive economics versus what you offer now? And maybe help mitigate some of the risk around the ITC, if that wasn't to go the way that it should.

Well, I think that first off, Craig, is as you know I come from the telecom industry. And it's always been my belief that Plug is in the very early stages of cost downs for fuel cells. I started working wireless in 1983 and I've told this story before. The products that I designed back then, now you can buy for 1/10 the cost with 10 times the performance. And I was working with state of-the-art activity. Plug is in a similar position. When you go from stack design, from changing loadings, different plate technologies, to how one sizes and uses the lithium batteries associated with our stacks, which are built into the system a higher level of electrical integration. And probably just as important, we really think about products and service together. We view every fuel cell as a future part of the Internet of Things. In the control center that we have in place here today, we eventually expect that we'll be able to talk directly to every unit in the field, control every unit in the field, know what every unit in the field is doing in real time. We know a lot today, but not only do we see tremendous cost downs in kind of the base platforms now, but we also see tremendous cost down, higher quality products, more efficient products. If you look at our value proposition, our stacks and systems using flux-backs of 15% to 20% use less hydrogen: than the present systems. If you think about 15% to 20% less hydrogen:, that's a significant, that's makes the value proposition stronger. So when we think about cost downs, we think about it very holistically, how to drive down the cost of all elements that touch GenDrive during its lifetime, from hydrogen, from stacks, from service costs. We also have continues activity on how to simplify and reduce the cost of hydrogen, infrastructure, which we believe can become a significant business for Plug in the future. Because I don't think anybody has built 35, 36-plus systems that are actually used every day, and has delivered -- as I'm looking at my chart on the wall across the hallway here -- has already delivered 2.6 million kilograms of hydrogen.

Thank you. Ladies and gentlemen, that is all the time we have for questions for today. I would now like to turn the floor back over to Mr. Andy Marsh for closing comments.

Well, thank you, everyone. It was a very strong bookings quarter for Plug Power. We've shown significant improvements in gross margin. I do want to highlight one more time, we are the only fuel cell company in the world for mobility applications that have actually put units in the field in large quantities that have to work every day because we have the most demanding customers in the world, and we meet their needs. Well, thank you. I look forward to talking to you in the future. Bye now.

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