Plug Power - Q2 2024

Transcript

Operator (participant)

Hello, and welcome to the Plug Power Second Quarter 2024 earnings call and webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance, please press star zero. A question-and-answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Meryl Fritz, Marketing and Communications Manager. Please go ahead, Merle.

Meryl Fritz (Marketing and Communications Manager)

Thank you. Welcome to the Plug Power Q2 earnings call. This call will include forward-looking statements. These forward-looking statements include, among others, statements of expectations, beliefs, future plans and strategies, anticipated results from operations and developments, and other matters that are not historical facts. We intend these forward-looking statements to be covered by the Safe Harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We believe that it is important to communicate our future expectations to investors. However, investors are cautioned not to unduly rely on forward-looking statements, and such statements should not be read or understood as a guarantee of future performance or results.

Such statements are based upon the current expectations, estimates, forecasts, and projections, as well as the current beliefs and assumptions of management, and are subject to significant risks and uncertainties that could cause actual results or performance to differ materially from those discussed as a result of various factors, including but not limited to, the risks and uncertainties discussed under Item 1A, Risk Factors in our annual report on Form 10-K for the fiscal year ending December 31, 2023, subsequent quarterly reports on Form 10-Q, and other reports we file from time to time with the Securities and Exchange Commission. These forward-looking statements speak only of day in which these 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 Plug Power's CEO, Andy Marsh.

Andy Marsh (CEO)

Thank you, Meryl, and good morning, everyone, and thank you for joining us today. I'm here to share the progress and strategic developments Plug has achieved in the second quarter of 2024. This quarter marks a crucial phase in Plug Power's journey as we continue to build our leadership position in the hydrogen economy for the long term, while remaining focused on operational improvements in the short term. I think this one's important. In the second quarter, we successfully reached the final commissioning stage at 55 megawatts of electrolyzers, representing an expected $70 million in revenue. We weren't able to recognize much of that revenue, but much of that revenue has already been... Much of that future revenue, we've already received the cash for.

We're on track to deploy an additional 100 megawatts of electrolyzers by the end of the year, reinforcing our leadership position in the hydrogen industry and supporting the global shift towards renewable energy power sources. This deployment reflects the growing customer's demand and our ability to deliver cutting-edge solutions. Our partnership with Olin Corporation is progressing well, with our new hydrogen plant in Louisiana expected to begin producing liquid hydrogen in the fourth quarter. Now, this project really exemplifies our capacity to enhance hydrogen production capabilities and accelerate the adoption of clean energy solutions across various sectors. And, from a future point of view, we've also secured 7.5 gigawatts in basic design and engineering package contracts, and specifically 3 gigawatts with Green Ammonia in Australia. This collaboration underscores our technology prowess and ability to support sustainable projects worldwide.

Our electrolyzer technology is among the best-performing products we've developed, offering really the company a competitive advantage. Now, look, the hydrogen fuel cell market really has not progressed as rapidly as we expected, but Plug remains committed to strengthening our leadership position and focusing on operational improvements. Market development, you know, has been slowed by government policy ambiguity, impacting the timing of customers' decision-making processes. Despite these challenges, we are confident that our strategic initiatives will ensure profitable growth as the market develop. Look, we see it happening now. The government policies are maturing and will support increased adoption and market penetration of hydrogen. Now, for example, the electrolyzer market in Europe is. You know, you see the demand starting, and the final investment decisions are coming along.

So when you're working on these final investment decisions for projects that are over billions of dollars, you have to do significant due diligence and engineering, and really, it's part of what our customers are doing today. We're deeply involved with our Basic Design and Engineering Packages, which is a key component of their efforts. We're actively engaging with partner to navigate these complexities and to ensure the successful deployment of our solutions. Now, if you really look at that 7.5 gigawatts, even if only one quarter of the activity leads to revenue, that's a- that could exceed $1.5 billion of revenue over the time, highlighting the substantial potential of this market.... Look, I think this is no news to anyone. Financially, we're committed to strengthening our cash management practices and ensure profitable growth.

We have, when we look at, our expectations in raising prices, we've really exceeded our expectations. I think it's due to our strong relationships and seamless integration into many of our customers' operations have proven to be beneficial, which makes them willing to accept the price increase. So we are laser-focused on cash management. We're focused on our profitable sales, operational efficiency, and reducing operational expense. Now, when I take a look back at those statements, it's one of the main reasons I've asked Dean to join us. I really want to highlight the appo intment of Dean Fullerton as our COO. Look, he brings an exceptional track record from Amazon. I've known Dean for almost a decade. He successfully led global engineering services and spearheaded hydrogen economy initiatives at Amazon.

His extensive expertise and leadership will be instrumental in advancing our operational efficiency, driving profitability, and executing our strategic goals. I'm confident that Dean's vision experience will greatly benefit Plug as we continue to innovate and lead in the hydrogen economy. With that, I would like to give Dean a few minutes to share a few words and give a high-level view of his goals and plans for driving our success forward.

Dean Fullerton (COO)

Thank you, Andy. Thanks, everybody, for joining the call. You know, this is my week two, but I came into this position eyes wide open and know the challenges that we're facing. The areas that I wanna focus on mostly all focus around cost efficiency and cost out. Several of the areas I plan to focus on are getting my arms around the cost by function. I want to identify the opportunities to reduce costs and wring cost out. I want to assign owners to each of those initiatives and drive those to completion. My focus is gonna be on building the green hydrogen plants, do it safely, on time, under budget, with a high level of quality. Another area of focus is going to be producing green hydrogen, again, on time and cost effectively, profitably.

Implementing systems at our customer sites, first of all, with a high level of safety, and then a focus on on-time, and making sure that we're doing that cost effectively and profitably with a high level of quality. And then the last one, area that I wanna focus on is reducing our inventory. Our inventory level, as everyone knows, is too high, and we need to focus on getting that cost down as well. All of these with a focus on reaching profitability. That's really my immediate focus in joining Plug, and I believe that we will achieve that.

Andy Marsh (CEO)

Paul?

Paul Middleton (CFO)

Thanks, Andy. A few comments from the finance team here. The first half for Plug reflects a critical inflection point in the ongoing transformation of the company. As we've discussed, we've embarked on a journey a few years ago to significantly broaden our solutions in the hydrogen economy and vertically integrate on our hydrogen supply, with the added ambition of doing it based on green hydrogen. Given multiple market dynamics, which have tempered growth in 2024, we have continued to nurture these offerings while doubling down on optimizing the operations and cash management.

In the first half of 2024, we scaled up numerous product offerings that have culminated into meaningful deployment and sales into the market and set the stage for continued sales expansion in the back half of 2024 and 2025 onward, including a broad range of electrolyzer products, hydrogen storage and distribution solutions, and high-powered stationary systems, to name a few. We commissioned and have scaled up the first green hydrogen plant, which, combined with the Tennessee facility we recommissioned, provides us 25 tons per day of capacity and close to half of our current annual hydrogen needs, which we have made great progress on our third facility in Louisiana that will provide us an additional 15 tons per day by year-end. We focused heavily on optimizing the workforce for the company.

Given the rapid growth over the recent years, we have added a lot of resources, and this year we have worked at optimizing that resource pool to maximize leverage. Since January 1, we've reduced the global workforce by over 15% through the Q1 restructuring and ongoing attrition, where we've not backfilled. We've adjusted pricing across many equipment, fuel, and service platforms, which the impact can be seen in our Q2 results, particularly for fuel and service, and these pricing impacts will be even greater as the year progresses, as we get full periods under these structures and launch additional pricing measures. We've completed many rooftop consolidations and have additional warehouses and facilities we are in the process of consolidating to our two main manufacturing sites in Albany and Rochester, New York. We've increased focus on asset leverage, particularly inventory.

We've made a lot of investment over the last two years to enable the successful launch of many new product offerings, and this year, the focus is on optimizing these resources, and we expect meaningful reduction in the second half as sales continue to ramp, which will provide a meaningful source of liquidity. Another significant accomplishment in the first half is the remediation of the material weakness, which will be reflected in our second quarter 10-Q filing. Being a growing, nascent new enterprise has made it challenging for the company to be sure we have the right processes and controls as we scale, and we have made significant investments in resources and systems to improve our controls and accounting processes, and this has enabled us to address the residual issues to resolve that material weakness.

Looking at Q2 more specifically, we have made progress on our sales, cost down, and cash management initiatives, and I would highlight, as an example, the level of electrolyzers deployed, which represents a clear inflection point on this ramping activity. But these new generation offerings, with nuanced commercial contracts and products being used in much larger customer project deployments, makes it challenging on the timing on revenue recognition. On a positive, as Andy mentioned, for the majority of the programs deployed, where the revenue will be recognized in the second half, we've already delivered, we've transferred the title, and collected most of the cash via milestones. So this is truly a factor of timing.

In addition, this large quantity of programs provides a substantial base of experience and insight to accelerate deployments based on learnings and the ability to constructively improve commercial terms to benefit the company financially and to enhance the accounting of these activities. Net cash used in operations, combined with CapEx, is down year-over-year, 30% from lower CapEx and inventory reductions. We expect the cash burn rate to improve even further over the second half as we continue to curtail CapEx and leverage working capital further with sales and margin growth. Turning to the second half, we are laser-focused on growing sales and margins, improving cash management. Our strategy includes many initiatives, such as expanding our hydrogen network with Louisiana and leveraging Georgia and Tennessee, while taking advantage of the PTC.

Driving more equipment sales, given our expanded manufacturing capacity, which does not require more investment and provides the opportunity to readily source 3-4 times our current volumes. Continue driving down cost downs with further workforce optimization, completing targeted rooftop consolidations, driving additional leverage on our material vendors, and driving enhanced fuel network efficiency and service cost profiles, and leveraging recent price increases and yielding full annual benefits as these continue to expand. In terms of liquidity, I would share that we have a strong, effectively unlevered balance sheet that we can lean on for liquidity and provide opportunities from a number of different sources. Our plan is to lean on the balance sheet for incremental capital needs in the near term. First, we have a substantial pool of restricted cash backing past project financings that releases quarterly at $200 million per year.

We've discussed at length the opportunity to leverage inventory reductions, and we're targeting an additional reduction of $200 million-$250 million by year-end. Sales growth, price increases, improved mix, and continued cost downs will continue to improve operating cash flows. Based on the new transfer rules, we are about 2 weeks away from closing our first significant ITC transfer with a well-known, significant market participant. This will yield around $31 million for the ITC associated with the liquefier at the Georgia plant. We've been pursuing varied debt facilities and are working with a party interested in equipment financing that we think can close in the next 4 weeks and is targeting a large facility platform with a meaningful first draw. Lastly, we're working closely with the DOE to finalize the $1.7 billion loan facility. We've made tremendous progress.

We meet with them regularly and are meeting again in two weeks to continue their final due diligence and move the process along. We're extremely clear on the actions and the processes to successfully close this facility, and equally important, the DOE are clear in their interest and support to get this closed quickly. This facility is anticipated to provide immediate liquidity and enable us to accelerate the Texas Green Hydrogen facility build-out. I'll now turn it back to Andy.

Andy Marsh (CEO)

Okay, great. Thank you, Paul. Thank you, Dean. And, Kevin, we're ready for questions.

Operator (participant)

Thank you, sir. Well, I'll be conducting a question and answer session. If you'd like to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. One moment, please, while we poll for questions. And once again, that's star one to be placed in the question queue. Our first question is coming from James West, from Evercore ISI. Your line is now live.

James West (Senior Managing Director)

Hey, good morning, morning, team. Morning, Andy.

Andy Marsh (CEO)

Good morning, James.

James West (Senior Managing Director)

So if I'm reading the financials correctly and your commentary correctly, it looks like there were some $50-ish million of electrolyzer sales that were not recognized in revenue during the quarter, despite being, you know, delivered. So I wanted to just, you know, one, just kind of confirm that that was the case, 'cause if that is the case, then you would have beat handily the, you know, our expectations on revenue. And then, two, on the hydrogen fuel cells, the margin had a very significant improvement. And of course, that's – I think a lot of that's driven by the startup of your, you know, 2 and soon 3 facilities here producing green hydrogen for your own internal or your customer supply.

How should we think about those margins for hydrogen fuel as we kind of get into the second half of this year? So two kind of questions around, I guess, kind of around the quarter, a bit towards the back half of this year, but I think they make up a pretty important inflection point or improvement here that we're gonna see here in the second half.

Andy Marsh (CEO)

So James, I'm gonna let Paul take the first one, and I'll, I'll talk a little bit about the second one. I'm sure Paul will chime in there, too.

Paul Middleton (CFO)

Yeah, and your math is right. It's just over $50 million. It's a, you know, meaningful number that reflects the such a step function, you know, change in the deployment of electrolyzers and how big that, you know, activity is to launch that. And yes, that will be that would have been part of the Q2 numbers, and will, you know, be recognized in the second half.

Andy Marsh (CEO)

... No, I think one of the important items there, Paul, is these systems are producing hydrogen, right? It is really, you know, we're really kind of on the back end of documentation and training process, and because of, I think, accounting rule, not to get too technical, is it 605?

Sanjay Shrestha (CSO)

606, yeah.

Andy Marsh (CEO)

606, that, from a contractual point of view, you know, that's just a final step, but, the level of activity and work that's required is pretty minimal. So it's a big deal. And James, you're right about the hydrogen, but it's only really the start. We're beginning to see the impact of the price increases and some of the impact of Georgia and Tennessee. You know, since July here, Tennessee and Georgia's been operating 93% of the time, which will have a significant, and that's a really good number. You know, for example, the storm came through yesterday, the other day, and we turned the plant off for 24 hours to make sure employees were safe.

I think you're gonna see continuous improvement in margins, driven by the price increases, and there's still a little bit more that you're going to see, coupled with the fact that you're going to have increased output out of Tennessee and Georgia, and then when St. Gabriel's come online, we're in a much, much better position.

Sanjay Shrestha (CSO)

Okay, got it. That's perfect. Thanks, guys.

Andy Marsh (CEO)

Thanks, James.

Operator (participant)

Thank you. Next question today is coming from Colin Rusch from Oppenheimer. Your line is now live.

Colin Rusch (Managing Director)

Thanks so much, guys. You know, as you have seen the timeline adjust for some of the industry growth, can you talk a little bit about what's happening with your suppliers and the supply chain and, you know, whether any of those folks are backing away from some of the commitments that they've made to you?

Andy Marsh (CEO)

Yeah, that's a good-- you know, it's... And Colin, I especially see the challenges more on the fuel sales side of the market. I think on the-- and it's not really with the suppliers backing away yet, but look, this has been challenging for all suppliers. I-- you know, I spent some time in Europe about two weeks ago and had some discussions with other people in this industry. But on the electrolyzer side, it's clear this market's growing, expanding, and it's really geared towards more industrial applications. You've heard me mention green ammonia, concrete, steel.

I think on the fuel cell side, I think, you know, people believe it's coming, but just like we're managing, for example, our stationary product to make sure the investments we're making, where we, you know, ultimately believe that's our dominant product in time, that we're just managing the speed of that activity, as far as investments go, because we believe in the 2030s, that's the revenue driver for Plug, both for fuel cells and hydrogen. So, I haven't seen anyone say, "We're not gonna do it. We're not engaged." I mean, three months ago, I was at a conference, a hydrogen conference in Rotterdam, which had 6,000 folks, and every supplier wanted to talk to me. I think everybody's a, you know, we're hoping that this would accelerate faster.

That being said, you look at that 7.5 gigawatts of basic design engineering work we're doing. You look at, you know, I didn't mention much the fuel cell business, but we can see, for example, our material handling business getting stronger, in the second half of the year. So, it's painful, Colin, and, you know, it's discussions you have to have, but, we have not. I haven't had anybody come to me and say, "We're going to increase prices. We don't wanna do business with you." That really hasn't been the tenor.

Colin Rusch (Managing Director)

That's incredibly helpful, Andy. And then just on the demand side for hydrogen, can you talk a little bit about the diversity of customers you're working with and the trend lines in terms of offtake sizes? You know, it seems to me that there's some incremental diversity of industries that are taking the hydrogen and, you know, maybe starting with smaller deals and growing into larger deals. And that's it for me. Thanks.

Andy Marsh (CEO)

Colin, I'm going to turn that to Sanjay.

Sanjay Shrestha (CSO)

Hey, Colin, how are you? So, again, on this question, right, as we've talked about in the past, our primary objective have been: how do we drive the cost of hydrogen down for our existing customers, right? With the plans that are coming online, Georgia, Tennessee, Louisiana. But once we get to that 40 tons of production, the way you should think about the cadence of how things will unfold is we will likely also work with some of the industrial gas customers from a swap perspective. Those discussions are going on. As you said, it will start with a small volume, but could grow into bigger. Second piece of the opportunity we're seeing with some of the mobility application, different folks talking about that, the numbers could actually grow and grow pretty substantially when you look a few years out.

That's really one of the things we're also trying to do, right, is how do you make sure the offtake agreements are going to get a lot more bankable, so that you can also start to think about capital sourcing of financing, the build of the new plants going forward. So, again, lots of discussion going on, lots of conversation happening from a prioritization standpoint, get costs down, do what we need to do for our existing customer, and do spot agreements with some that are in the need of hydrogen on a short term and an immediate basis, and really start to structure contract in a way where this becomes a lot more bankable deals, and we can start to think about a lot of different sources of capital.

Colin Rusch (Managing Director)

Perfect. Thanks a lot, guys.

Andy Marsh (CEO)

Thanks, Colin.

Operator (participant)

Thank you. Next question is coming from Craig Irwin from Roth Capital Partners. Your line is now live.

Andy Marsh (CEO)

Good morning, Craig.

Craig Irwin (Managing Director and Senior Analyst)

Hey, Andy, thanks for taking the questions. So I should start off by saying congrats on the, the PTC for Georgia. It's a nice milestone to see the company, you know, collecting that, that, that very important subsidy. So can you maybe talk about, you know, the-- or get precise about the, the level of PTC you're able to collect?

Andy Marsh (CEO)

Yeah.

Craig Irwin (Managing Director and Senior Analyst)

There has been uncertainty in the language. Then can you talk about other plants that are eligible for this or that you think should be eligible for this, that are, you know, in construction on the drawing board? How should this take shape?

Andy Marsh (CEO)

Yeah, good question, Craig. And, and let me, I'm gonna. I'm probably gonna say a little bit too much here, but let me kind of step back and say that, for Georgia, we worked diligently to think through, how one can leverage renewable energy credits, how, you know, how the, you know, how we measure the electricity, how we measure the hydrogen coming out. And we worked with consultants and lawyers and others to make sure with the present policy guidelines, which are more strict than anything anyone expects to come, that we would be able to receive the PTC. And Paul, I think it amounts to about $2.60 a kilogram, once you-

Craig Irwin (Managing Director and Senior Analyst)

Yeah

Andy Marsh (CEO)

Think about the costs. And Sanjay and Paul are both shaking their heads in agreement, Craig. So that's how we were able to do it. And look, you know, for the second part of your question, I think it's really clear that the regulations on the Three Pillars are going to become much looser. We won't be surprised if there's some announcement after the Democratic convention and a further announcement after the election. But you see people who were strong supporters of the Three Pillars like Heinrich in New Mexico, who's backed off significantly. And there's a lot of engagement between the Senate, who really wrote the bill, and the executive branch to make sure that congressional intention is met in the regulations. And certainly, Chevron has helped in that evolution.

We're working really closely in making sure we understand, in a very systematic fashion, how, you know... And we're not-- I'm not going to say we're definitely sure, but how we bring Texas and New York in, for example, to make sure both of those facilities would be eligible for the PTC. I'm optimistic, but, but, it is, it is certainly evolving. Luckily, you know, we've been able to engage with folks who are, on the legal side, on the technology side. That gives us a, a great deal of comfort that we'll figure it out. But the looser regulations, I'm going to use the word looser. What I'm really saying is regulations that match the r- the law, will certainly help grow this economy, even hydrogen economy, much quicker.

That message is really coming strongly from senators to the executive branch today.

Craig Irwin (Managing Director and Senior Analyst)

Thank you for that, Andy. So my second question is about the balance sheet, right? So I know every day you think about, you know, how what can we do different? What can we do to lower costs? But I know you also think cash every day, right? Cash has been, cash has been something important for you to manage over the last, you know, couple of years, and you're doing a really good job at this point. The $950 million in restricted cash on the balance sheet, you know, that is coming off, as you said, this year. Can you maybe talk about whether or not there might be a way to bring this off faster?

Is this something that, you know, we're, we're stuck waiting for the, the turnover of these PPAs that are, you know, underlying the, the commitment to keep this as restricted? Or do you have maybe a little more flexibility in there, hopefully, than, than what was originally calculated?

Andy Marsh (CEO)

Thanks, Craig. That's a good question. And yes, it's something I think about 24 hours a day. I spend a lot of time thinking about liquidity and how we can best source liquidity for the company. And that certainly is a meaningful pool. I mean, effectively, it's like a deferred receivable, right? And so we have leveraged that in the past, as you probably remember, with Generate Capital, as the, you know, we factored—effectively factored that receivable in the past. So that could be a solution, as an example, as a potential opportunity, as well as... You know, I always say success begets success.

And so as we continue to grow and scale and we show improvement, you know, certainly one of the things that we'll do, and, you know, probably won't be in the next quarter, or maybe not before year-end, but could be early next year, as we show progress, is start approaching the institutions that hold that and say: Do you really need that kind of coverage on your outstanding exposure? So, there's a lot of ways we can approach that, but it is an incredibly meaningful asset that we continue to think about how to best leverage and how can we, you know, access the liquidity off of that asset base.

Craig Irwin (Managing Director and Senior Analyst)

Thank you. Well, congrats on the operating progress. I'll go ahead and hop back in the queue.

Andy Marsh (CEO)

Thanks, Craig.

Operator (participant)

Thank you. Next question today is coming from Manav Gupta from UBS. Your line is now live.

Manav Gupta (Executive Director)

Morning, guys. I just wanted to focus on the revenue-

Andy Marsh (CEO)

Good morning, Manav.

Manav Gupta (Executive Director)

Good morning, sir. So the revenue guidance, $825 million-$925 million, trying to understand what could drive you towards the top end of that range. You know, in, in a good environment, what drives you towards the top end of that range?

Andy Marsh (CEO)

Sure. I'm going to take a quick overview of this, and then I will let Paul add on. I think that, if you look at our business, I would say there's three items. One is the electrolyzer business and making sure we commission and get the fulfillment of every item in the contract on time. With some of the challenges we had here in the second quarter with the final i's and t's, you know, that we need to make sure that... And Sanjay, I know, is a laser focus on making it happen. The orders are there, the products are being built. We feel very comfortable about that, but it's the recognition of revenue, which has been a, we wanted to be cautious on because of what we experienced this quarter.

I think the second item, there's a 1 and 0 world with our liquefiers. Sanjay has been—I'm gonna let him kind of add on to this after I get done, but in that 1 and 0 world, that can swing things $50 million with one order. That's, you know, there's some real good projects he's working on, but, you know, he sits back and wonders, is it third quarter, is it fourth quarter, is it first quarter? And, you know, the third item is that the demand of the material handling industry is stronger than reflected. But we've changed the business model on our customers by moving away from using the PPA and setting them up with leasing partners. We've made some really good progress there, and we have customers who now are using their own third-party leasing partners.

It's an industry where leasing is common. So, I can tell you, you know, there's one customer where it's 300-400 units in the auto industry, which, is now, you know, using a third party to help finance the project. How that evolves over the second half of the year, you know, I, I'm looking at material handling, think it's called 165-175, and it could be over 200 if, we're successful with that activity. Sanjay, would you like to add to that?

Sanjay Shrestha (CSO)

I think, Andy, you summed it up very well, but just, Manav, on the liquefier side, right? Our industry position, we feel pretty good about based on all the customer feedback. As Andy said, right, what's really happening here is these are big-ticket items, and, you know, we're very active in a lot of different areas. Our 15-ton liquefier to our 30-ton liquefiers, we believe we have one of the best energy efficiency in the market. Our pricing seems pretty attractive. You know, we also are actually deploying this liquefier even in our Texas plant. So the learnings and the value, everything we can bring to the customer is bar none. Having said that, as Andy said, right, do they get to FID in Q3? Does it end up becoming an opportunity in Q4?

There are some. We've seen some of those FID get pushed to the right by a quarter or two, right? We do believe some could come home here in Q4, but if it doesn't, then it ends up becoming really a 2025 opportunity rather than a 2024 opportunity.

Andy Marsh (CEO)

Yeah. And when you think about liquefier, Sanjay, it's really a North American event.

Sanjay Shrestha (CSO)

So far.

Andy Marsh (CEO)

Yeah, so far, clarity in the regulations. You know, people don't, people want to do the projects, but they also don't want to leave money on the table.

Sanjay Shrestha (CSO)

Absolutely.

Andy Marsh (CEO)

And that is, so this final clarification of the regulations, I think, is really important to accelerating the market.

Sanjay Shrestha (CSO)

100%. Absolutely.

Manav Gupta (Executive Director)

Thank you, guys. I turn it over.

Andy Marsh (CEO)

Okay.

Operator (participant)

Thank you. Next question today is coming from Bill Peterson from JP Morgan. Your line is now live.

Bill Peterson (Senior Analyst)

Yeah. Hi, good morning, Andy and team,

Andy Marsh (CEO)

Good morning, Bill.

Bill Peterson (Senior Analyst)

So first question I'd like to ask is about the sort of your core materials handling business. We've seen, we've seen revenues kind of come in light. If we think about, like, a first half 2024 versus first half 2023 or even the prior year, I know you talked about ASP uplift, maybe that and some recent, you know, demand has been shifting on that. But are customers hesitant to deploy more equipment now because of this, this, I don't know, price increase? Or is there concerns about the company, given the going concern from earlier in the year? Or is it really more of a matter of the market, just limited warehouse activity, things like that? So and then just tied in, like, do we still see the seasonal off lift in the back half of the year?

What contribution do you see in the back half, and how should we think about growth in 2025?

Andy Marsh (CEO)

Yeah. So Bill, look, you know, I'm not gonna kid you that the price increases and the activities associated with the going concern certainly represented a shot to the system. I, you know, I have... You know, as many of you know, I am at heart a believer in you deal with the cards you have and think how you can get better. But in many ways, it actually opened up the engagement with customers, and it allowed us to start having the serious discussions about how to change the business model. And we have moved away from PPAs, which is good, which has impacted the initial growth of those customers because, you know, as I mentioned in the previous question,...

We've had to move to third-party providers of leasing for the customers, you know, almost like dealerships and cars, but we've had to work through that with third-party providers who also had tax appetites. We've made great progress there. We expect the second half of material handling to be at least, you know, in the range of 1.75-2 times higher than the first half of the year. You know, we spent a lot of times looking at those numbers and customers. Over the past 2-3 weeks, Sanjay, I think we've had 2-3 new customers, some of them with rather large deployments. We think the growth rate for material handling in 2025 comes back to normal.

So, you know, it's been a challenging exercise, but it actually has taught us, in many ways, the meaning of our value proposition. I've had one of our larger customers tell us the value proposition breaks down at $11 a kilogram for hydrogen. That's a real great data point, because when you think about that $11, you know, we're out there about $8.50 today, and that shows that there's value being created, and customers recognize it. But, look, it's, there's a lot of discussions when you have those two big issues you mentioned, but I feel that we've really been able to overcome those challenges. Sanjay, would you-

Dean Fullerton (COO)

Appreciate the call there, Andy.

Andy Marsh (CEO)

Thanks, Bill.

Operator (participant)

Thank you. Next question today is coming from Dushyant Ailani from Jefferies. Your line is now live.

Dushyant Ailani (VP)

Good morning. Thank you for taking my questions. Dean, congrats on the new role. Maybe this is for you. I know you have been there for two weeks now, and you have kind of, you know, talked about some of the areas of, you know, cost efficiency and cost outs. Maybe could you talk a little bit about what some of the low-hanging fruits are, where we could see that come from? And then secondly, you know, how do you guys think about, you know, the margin cadence for the second half of 2024? And I'll leave it there. Thank you.

Andy Marsh (CEO)

So Dushyant. Good morning. I'll let you say, Andy. I'll let Paul take the second part of that, and I'll let Dean take the first part.

Dean Fullerton (COO)

Yeah. I think it's a little too early to provide any details on this call. But, you know, I've talked with Andy and many people a couple months before joining. I've been aware of where the challenges are, and in my first two weeks, I've been digging into that. And, as I mentioned, a lot of it's around manufacturing, and it's reducing our inventory. It's getting cost-effective when it comes to producing green hydrogen and implementing our fuel cells and our systems in the field. And that's really where my focus is gonna be, diving deep into those cost structures, identifying where we can wring those costs out and lower those costs and get to the point where we'll be profitable in each of these lines of businesses.

And a lot of it is gonna be around identifying those opportunities and the rigor and the discipline with managing through each of those projects and tracking those to the point of profitability. This isn't gonna happen immediately, but to your point, there's definitely low-hanging fruit and short-term things we're gonna focus on, and then there's obviously bigger monsters that are gonna take you know a longer-term view of.

Paul Middleton (CFO)

Yeah, and I would just, I guess on the margin progression, you know, as you guys have seen historically, we've always had this phenomenon of the two-thirds, one-third, where there's two-thirds in the half of the sales in the second half. That's certainly what we're seeing this year. That implies doubling the sales in the second half. And Plug, you know, has tremendous volume leverage opportunity. So that has a big impact for us, in addition to the, you know, getting full quarter benefits of all of these cost downs and price increases that we've been rolling out.

On the fuel side, you know, Andy talked about Georgia and Tennessee being up and getting full quarter impact of those, as well as we've made real good strides on fuel efficiency measures, and that's really gonna be impactful as well as we move through the balance of the year. So you will see certainly positive and continued progress in Q3 and even more progress in Q4 as we move through the balance of the year.

Dushyant Ailani (VP)

Thank you.

Operator (participant)

Thank you. As a reminder, that's star one to be placed in the question queue. Our next question is coming from Sharif Elmaghrabi from BTIG. Your line is now live.

Sherif Elmaghrabi (Equity Research Associate)

Hey, good morning, team. Thanks for taking my questions.

Andy Marsh (CEO)

Good morning, Sharif.

Sherif Elmaghrabi (Equity Research Associate)

Morning, Andy. So I've got a couple on Louisiana. Again, first off, can you tell us how hydrogen production is gonna be divvied up there? Is it a straight 50/50 split between yourselves and Olin?

Andy Marsh (CEO)

Yeah. So I'm gonna let Sanjay take this. Sanjay sits on the board of the joint venture-

Dean Fullerton (COO)

Right.

Andy Marsh (CEO)

I'm gonna let him handle that question.

Sanjay Shrestha (CSO)

Yeah. So Sharif, on that, you know, so obviously it's a 50/50 JV from an ownership standpoint, but Plug is responsible for marketing all that hydrogen, right? So, that's what would happen. We would actually consolidate as Plug, number one. Number two, we'll be responsible for marketing, pricing, strategy, and everything else. So the access of that hydrogen between the partners, Plug will take a leading role in terms of how it gets priced, how it gets marketed, and who it goes to.

Sherif Elmaghrabi (Equity Research Associate)

Okay, that's helpful. And then for my follow-up, do you need to further refine the output of the chlor-alkali process at Louisiana to produce 15 tons of liquid? And if so, is the margin benefit there - what is the margin benefit there relative to your other projects?

Sanjay Shrestha (CSO)

Yeah, sure. Keep in mind, right, we've already done something like this before with Olin, right? We have an existing plant in Tennessee, so we know what exactly has to happen.

Andy Marsh (CEO)

Yeah, even though we own 100%.

Sanjay Shrestha (CSO)

Exactly. We own 100% of Tennessee, so yes, you have to purify, then you also have to increase the pressure based on what the pressure that hydrogen comes out from the Olin side. Almost think of this like a pipeline coming into our liquefier. You know, not a whole lot different than, you know, the PEM electrolyzer. It's a slightly different kind of an electrolysis process, right? So yes, you have to purify that. You have to increase the pressure as it goes into the liquefier. Look, the reason we're doing this partnership is because we both believe that economic value of, you know, them just selling the gaseous hydrogen versus Olin also getting into the liquid hydrogen market is a win-win situation for them. We see this being a low-cost opportunity for us, so it's a win-win situation for us as well.

Look, I'd rather not get into the specifics of exactly what that cost looks like and everything else, as we're continuing to also do the pricing negotiations. But similar to Tennessee, and frankly, if anything, maybe even marginally better than the cost profile in Tennessee, we feel pretty good about what this is gonna bring to the table for us from a cost reduction, as well as expanding the market opportunity for that hydrogen.

Andy Marsh (CEO)

Yeah.

Sanjay Shrestha (CSO)

Anything you want to add, Andy?

Andy Marsh (CEO)

Yeah, I would just say, if just the picture in your head, Sherif, the hydrogen coming out, you know, is, as Sanjay mentioned, purified before it goes in the liquefier. But that waste stream hydrogen and purification system essentially replaces the electrolyzer and rectifier and substations, and the rest of Louisiana is exactly a duplicate of Georgia.

Sanjay Shrestha (CSO)

Yeah.

Andy Marsh (CEO)

So it's, you know, a very straightforward ... It's just essentially doing that one block differently. And I use the word differently, as Sanjay said, exactly how we do it in Tennessee.

Sanjay Shrestha (CSO)

Exactly.

Sherif Elmaghrabi (Equity Research Associate)

Okay, that's helpful. Thank you. Thank you both.

Operator (participant)

Thank you. Next question is coming from Chris Tsung from Wolfe Research. Your line is now live.

Chris Tsung (Senior Associate)

Hi, good morning. Thank you for taking my questions.

Andy Marsh (CEO)

Good morning, Chris.

Chris Tsung (Senior Associate)

Good morning, Andy. I'll start with, I saw at least one competitor announce capacity reservations agreements with the electrolyzers developers developing, like, hydrogen hubs. Is that something you're also pursuing? And maybe any updates on your participation in the three hubs that have officially launched? Thanks.

Andy Marsh (CEO)

Yeah. Well, I'll let you take the feedstock, and then I'll talk about the hubs.

Sanjay Shrestha (CSO)

So, again, I think, as a part of this 7-gigawatt basic engineering design package, right, we are starting to have conversation with the customer. You know, some of these opportunity are multi-gigawatt opportunity, right? So it's a mega project for them. Obviously, it's a mega project for us. As Andy talked about it, even if we actually do one quarter of that, it's a substantial revenue opportunity, but we're gonna need to make sure that we're planning the capacity the right way, right? What does that reservation look like? What the cadence of stack production needs to look like, and that's one area that, as Dean talked about, you know, him and I are gonna be working very closely together to make sure that it's being planned properly, we're thinking through the reservation right. You know, how do we manage that? It's a win-win for both parties.

Now, there is some discussion going on that, we're having with other customers that are not a part of this 7.5 gigawatt of basic engineering design package, where they're talking about, potentially doing a reservation as they are looking at mega opportunity in the European market. So some of those discussions are happening as well. But one another thing we're also trying to be very, very careful about in this market is, there are projects and there are projects, right? We're really trying to make sure we're aligning with the customer in terms of helping them with what we bring to the table, but also making sure that the projects are, in fact, gonna eventually get to that final investment decision criteria, but there's a lot of things that has to happen. Funding has to come in play.

So, we do have some of those opportunities brewing as well. Could be pretty meaningful and substantial, and that is not a part of the 7.5 gigawatt of basic engineering design package that we're talking about right now. It would be incremental to that.

Andy Marsh (CEO)

Yeah. On the hubs, you know, first, I don't want to get ahead of hubs announcements as far as what they want to say about the details. But, as we've talked about before, every hub in the US, Plug is participating in, including the announcement of West Virginia, where they have details. So, we're pleased that they're moving ahead. I think over the next year, there's even with the hubs which have come to agreement, there's still a great deal of planning and work to continue. And I can tell you there's a team at Plug, on the business side that, as well as the technical side, that's working with the key decision makers at all the hubs to make sure that they evolve, you know, evolve, and that... Look, we're there.

We're at the table, and that's a key, that's a key item. I think people have to realize, and I've, I've said this before, the PTC and the DOE loans are really the short-term vehicles for the U.S. government to drive hydrogen production. Long-term, the hydrogen hubs across the United States are really important for building this industry. And look, that's a, there's still lots of work to go on to really capture that vision. On top of that, there's the technology investment, where Plug was a leading company in receiving grants from the DOE, where about 20%-25% of that revenue or activity investment Plug is involved with. A lot of it associated with our plant in Rochester, where there's technology improvements for both electrolyzers and fuel cells built in.

Those two won't be overnight, but they're really important for the U.S. having from a national security point of view, from a jobs point of view, as well as for a clean climate point of view.

Chris Tsung (Senior Associate)

Thanks, that's really helpful color, and just for a follow-up, I think Dean touched on this, and the high inventory levels is one of his priorities, but are you able to provide some context on what's in inventory broken out by product line?

Andy Marsh (CEO)

You know, I think that, Paul, I don't think we make that, do we make that public?

Paul Middleton (CFO)

No.

Andy Marsh (CEO)

Yeah. And I think that probably, you know, I would just say, you know, probably a lot, you know, there's probably a lot to support our energy build-out this year, and we do have goals that we can reduce that inventory down to about $700 million by year-end, supporting all the product lines.

Chris Tsung (Senior Associate)

All right, fair enough. Thanks so much for your time. I'll turn it over-

Andy Marsh (CEO)

Okay. Thanks, Chris.

Operator (participant)

Thank you. Next question is coming from Skye Landon from Redburn Atlantic. Your line is now live.

Skye Landon (VP and Equity Research Analyst)

Hi. Thanks, guys. You mentioned that you're potentially expecting some news on the 45V rules after the Democratic convention and that you'd expect a further announcement after the election. I mean, I appreciate timing is, perhaps, uncertain on this, but perhaps you could talk us through your current thinking on how quickly this could come through, and if you still think it's a 2024 event. And then related to this, from your conversations with industry and customers, how quickly after the clarification on the rules do you expect to start seeing green hydrogen FIDs start flowing?

Andy Marsh (CEO)

Yeah-

Skye Landon (VP and Equity Research Analyst)

And then a second question. Sorry, and a second question then on OpEx costs, perhaps. Expectations were slightly beat again in 2Q after they also beat in 1Q. Maybe you could run through the work that's been done here and talk about if there's any more costs to come out going forward. Thanks.

Andy Marsh (CEO)

I'll let Paul handle the second part of that question, Skye. I think where you will see potential changes after the convention probably has to do with the you know, with the Three Pillars, and I know you're well versed in the Three Pillars, Skye. I think you'll see relaxation associated with additionality, and I think that nuclear power as well as hydropower and maybe states with renewable energy programs receiving relaxation on additionality. I think when you look at post the election, you may see that the regulation, the regulations associated with time matching will start looking more like Europe, and I think the regionality issues will be slightly less restrictive. And I think that's probably what will happen.

And I when you look at it, obviously, I think, I think we may have talked before the Chevron announcement, and I told you Chevron was gonna have a dramatic impact, especially on those two other items, and I think you'll start seeing that. I think from a decision-making for FID, you know, I think many of these programs, it takes probably 18 months to get to FID. I think in many of the U.S. programs, the companies, I, I know of some significant programs where work's being done, but I think it's a year for the big projects, I mean, the gigawatt scale projects, after the announcement to get to where you're actually issuing POs. So I think that's probably the timeframe once the reg-- and this is especially with the electrolyzers.

I think there may be smaller deployments, which will happen more rapidly than that, but when you're talking about investing $2 billion-$3 billion, it's gonna take time. Paul?

Paul Middleton (CFO)

Yeah, and on the OpEx side, you know, as you've made reference, I mean, we've been able to demonstrate that we've, you know, the benefits of our actions of curtailing and optimizing the workforce. Some of the rooftop consolidations obviously are, you know, some of the most of the impact is in operations, but there's certainly a piece of that that benefits the OpEx as well. And I would tell you, as we move forward to the balance of the year, we're gonna maintain our discipline and focus on making sure that we're, you know, where we can continue to optimize, that we're doing that, and that we're not investing in incremental costs in the near term on things that aren't benefiting the short term.

You know, so we're really being scrutinous in the things we're doing and trying to keep that curtailed and down, and we expect that to continue.

Skye Landon (VP and Equity Research Analyst)

Great. Thanks, Andy. Thanks, Paul.

Andy Marsh (CEO)

Thanks, Skye.

Operator (participant)

Thank you. Our final question today is coming from Jordan Levy from Truist Securities. Your line is now live.

Henry Roberts (Equity Research Associate)

Hi, all. It's Henry on for Jordan here. Appreciate you squeezing me in at the end.

Andy Marsh (CEO)

Hi, Henry.

Henry Roberts (Equity Research Associate)

Hi. You touched briefly on this, Andy, before. I just wanna get anything more you have on how production has gone at Georgia and Tennessee over the last quarter. So any kind of big operational items or learnings that have come up, that you plan to take away for future, future plans?

Andy Marsh (CEO)

Yeah. I think, Jordan, one of the big learnings, and this is really important, and it has dramatically improved the efficiency of the plant. It's really controlling. You have to remember, this is the first plant in the world that this has happened, is controlling the interaction between the output of the electrolyzers with the liquefier. And we have seen from the month of May, from the month of May to today, just a dramatic improvement that in our control loop, and it's been great work by one of our engineers about making sure the output of the electrolyzers always are in sync with the production output of the liquefiers. And if you put too much hydrogen in, you're gonna be wasting hydrogen. And that has been a learning that I think is uniquely positioned Plug as we fine-tune that controller.

We've had some. You know, there's been, you know, the plant itself, I think in, was it May or June? Was it? I think June was up 93% of the time. So we feel really good about that plant. And I think with. I think a lot of it has to do, as I mentioned, you know, so I mentioned, you know, the hurricane came through, or the really rain came through that facility. We had to shut everything down for a day, and that's just kind of a, and that's gonna happen. But, you know, I think we're probably, you know, the fellow who built the plant, you know, who came from, one of the leading oil companies, told me it takes six months to burn in a plant, right?

I think we're about at the stage where that plant's burned in, right.

Henry Roberts (Equity Research Associate)

Thanks for that. And then just a quick one on the balance sheet follow-up. Can you just remind us again on any, on the cadence for that restricted cash flow release, that kind of $200 million annual? Is there any seasonality that we should be aware of for that?

Andy Marsh (CEO)

There's some fluctuations, but I think using $50 million as a proxy is a pretty good estimate per quarter.

Henry Roberts (Equity Research Associate)

Thank you all.

Operator (participant)

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Andy for any further closing comments.

Andy Marsh (CEO)

Thank you, Kevin. I, I'd like to remind people the short term and the long term. The short term is really driving this company to be operational, efficient, and profitable. But the long term is critical. You look at the activities going on with the basic design engineering work, you look at the activities and the deployments with electrolyzers. You know, nobody's doing what we're doing with 10 electrolyzers anywhere in the world. You look, and I haven't spoken much about our stationary products. You know, one of the leading data center operators came to me and said, "We have visited 14 people who have talked about building stationary products. They tell us we're far ahead in the race." Plug's goal is not only to be operational, efficient, and profitable, but continue to grow at a rapid pace.

I believe between our ability to build hydrogen plants, and on top of that, our fuel cells, we continue to strive to make improvements and develop products which are unique and will be valuable for the development of the hydrogen economy. I look forward to talking to many of you at investor conferences as well as at the next earnings call. Thank you, everyone.

Operator (participant)

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day.