On May 19, PLUG hosted the first of six presentations on it's PowerTrip tour. The focus of this presentation was on sales growth and margin improvements.
CEO Andy Marsh announced a new big box retail customer with 1 site (177 GenDrive units) fully deployed as of early May. This customer has over 100 distribution centers in the US, and could easily become a regular customer. Andy reiterated confidence in 2015 guidance, which stands at $100mm in revenue and $200mm in bookings. To get to $200mm in bookings:
- $46mm already booked as of the end of the first quarter.
- $113mm in business from existing customers at > 90% probability, including about 8-10 WMT sites in 2015.
- $208mm in near-term opportunities, of which they only need to convert about 25% to meet plan.
Andy then discussed his medium-term plan, which I found very interesting. Andy sees an addressable market for PLUG of about $5bn annually. He sees $500mm in annual revenues as the goal for 3-5 years out, broken out as follows:
- $260mm from GenDrive units sold to present customers.
- $100mm from selling H2, infrastructure, and service sold to present customers.
- $80mm from new accounts. (this sounds low to me, but conservative is good)
- $60mm in international sales.
Critical to PLUG's success is the infrastructure to deliver H2 where it is needed. Currently, each site has a liquid storage tank for H2 which receives deliveries about once a week. This tank supplies the refilling stations located inside the center. Given the high cost of the H2 storage tank and related equipment (about $1mm give or take), the change to PLUG GenDrive from lead-acid batteries only makes sense for "larger" distribution centers (>about 50 trucks). For smaller centers, H2 would need to be more accessible without on-site storage and infrastructure. Similarly, applications that require significantly more H2 (such as refrigeration TRUs) would require better infrastructure to avoid daily (or more often) refilling of the liquid tanks. So Andy is very focused on H2 not only as a potential product, but as a way to make PLUG products more accessible to a wider range of customers and applications.
After Andy gave the update, COO Keith Schmid spoke in depth about goals for gross margins for the balance of 2015 and beyond.
Keith targets about 29% gross margins by the fourth quarter of 2015 for the GenDrive product (the cornerstone of the GenKey product suite). He plans to achieve this goal with several key initiatives:
1. Design improvements. Each generation of GenDrive products includes improvements in functionality as well as reductions in cost to manufacture. By replacing costly parts (or those parts that take extensive time to install), manufacturing costs can be reduced. The next major design changes will hit market during the third quarter of this year.
2. Volume. With increasing sales, obviously PLUG can spread fixed costs over a larger number of units. In addition, though, PLUG gains leverage with suppliers for longer runs and better pricing. In addition, PLUG gains flexibility to use custom-made parts previously unavailable for smaller volumes. All in all, higher volumes have tremendous effects on reducing costs and improving gross margins.
For the rest of the product suite, which includes GenFuel and GenCare, Keith and team plan for positive gross margins by the end of the year. To get there, volume is critical to achieve economies of scale. In addition, drastic improvements in diagnostic software mean technicans can get units back up and running quickly, with minimal need to escalate issues.
On a long-term basis, Keith thinks 30% + gross margins are possible across the board, with SG&A at around 20% of sales, for a net EBITDA margin number of 10% to approaching 20%.
If we put Andy's $500mm 3-5 year plan together with Keith's 10% + EBITDA targets, here is where we see valuation:
$1Bn EV at 10x EV / EBITDA
$131mm cash on the B/S as of 3/2015, with $0 debt
Potential Market Cap: $1,131mm, or $6.54 / share.
Of interest: Plug Power Site Visit
Disclaimer: Plug Power has never made any money. Take our opinions with a grain of salt.