Greetings, and welcome to Plug's Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note that this conference is being recorded. I will now turn the conference over to our host, Teal Hoyos, Senior Director, Marketing and Communications. Thank you. You may begin.

Thank you. Welcome to the 2022 second quarter update call. This call will include forward-looking statements. These forward-looking statements contain projections of our future results of operations or of our financial position or other forward-looking information. 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 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 1A Risk Factors and the annual report on Form 10-K for the fiscal 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 on 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 Plug's CEO, Andy Marsh.

Thank you, Teal, and thank you, everyone, for attending Plug's second quarter conference call. The last week has been a monumental week for the world, the U.S., the fuel cell and hydrogen industry and Plug with the passing of the Inflation Reduction Act through the Senate. The recently passed bill would enact a clean hydrogen production tax credit, the PTC to incentivize the production of clean hydrogen, providing a major inflection for the world to achieve net zero by 2050 and for hydrogen, especially green hydrogen to provide 20% of the world's energy. This bill provides a trifecta effect. It's good for climate, it's good for jobs and it's good for national security. Our electrolyzer business has benefited from the push in Europe to become energy independent from corrupt regimes. We are seeing the benefit as our orders already have exceeded by 50% our projection for the year, with most of that coming from Europe. Now the momentum will grow rapidly here in the States with the PTC as demonstrated by our deal with New Fortress Energy, a 120-megawatt order, which was announced last week, which can grow to 500 megawatts. With the passage of the act, we expect a boom for our electrolyzer and green hydrogen business. All applications that use gray hydrogen today such as fertilizer manufacturing will now be able to buy green hydrogen at a competitive price with gray. Applications that are looking to move to hydrogen like steel and concrete manufacturing and natural gas heating will have a path to dramatically reduce their carbon footprint cost competitively. Everyone wants green hydrogen. Now there is a path that makes it competitive. We believe the first big markets for green hydrogen will be these industrial applications where it's simpler to substitute green hydrogen for other feedstocks. And remember, these applications represent 26% of the world's CO2 footprint. Cost-effective green hydrogen will also help us to expand our application business more rapidly. As hydrogen becomes more plentiful and cost-effective, all of our applications like our Microsoft stationary product offering, HYVIA vans and of course, powering material handling equipment become more attractive. This bill is good for all our stakeholders, including customers, shareholders, our employees, and the communities. For our shareholders, as mentioned in our Investor Letter, we will move up our path to profitability by six months. Finally, before Q&A, I would like to highlight Plug's priorities beyond our revenue goals of $900 million to $925 million in 2022 and $3 billion in 2025. First and foremost, our path to profitability in 2024. This includes the following key initiatives: one, commissioning 70 tons of green hydrogen in 2022 and 500 by 2025 in the U.S. and 1,000 tons globally by 2028. Our hydrogen business will reach more than 30% gross margins in 2024. The math is quite simple via a combination of vertical integration and the PTC. Obviously, we are reviewing the possibilities of building more plants sooner than later to leverage our leadership position; two, and you can see it, our service business will be gross margin breakeven by year's end and growing to 30% gross margin by the start of 2024. We are already experiencing significant improvements with the latest versions of our products. And look, scale matters. So our goal is to sell more electrolyzers, sell more green hydrogen, sell more fuel cells, especially for our stationary products, HYVIA, and of course, our material handling business; and four, the full deployment of our highly optimized and automated Gigafactory and Vista site that will drive down our costs of manufacturing and improve our quality. These are showcase manufacturing sites, not just for the fuel cell industries but across all industries. And finally, success with our four JVs, SK, HYVIA, ACCIONA, and Fortescue. Executing on these strategies alone will allow us to continue and expand upon our industry leadership position. Of course, we won't stop here, but my team knows executing the above is our top priority. Paul, Sanjay, and I are now open for your questions.

And our first question comes from Colin Rusch with Oppenheimer.

I guess this is maybe a question for Sanjay. Looking at the green hydrogen opportunity in the U.S., I'm curious about the maturity of the conversations with potential industrial users. And a sense of volume that you could start converting relatively quickly as well as your land position for incremental facilities and maturity of conversations with power sourcing, which it looks like it could get pretty competitive fairly quickly.

Yes. So Colin, great question. Let me take the second part of the question first, right? So one of the things we've been spending a lot of time doing, and you've heard us say this before as well. One of our biggest focus is sourcing the right location so that we can get the right price of power, which is renewable power. The level of activity on that, both internally as well as working with a third party, if anything, has picked up quite a bit. So as Andy mentioned in his prepared remarks, we're actually looking to build more plants faster, not the other way around, number 1. Number 2, what we're really looking to do is, and we've taken this approach, right, where when hydro is the best solution, we go for that hydro and then we think about how can we expand our facility even with that hydropower electricity. Second, we then look at wind source, what are the right locations for that? How do you get the complementary power there? There's a lot of activity going on beyond some of the things we've talked to you all about in Texas. There are other locations that are pretty far along. Please stay tuned. We'll be able to talk about that even more. And in terms of solar, obviously, we're looking at multiple locations in the regions that you can think about. One of the things we're really doing is how do you not only look at the land, but how can you expand that? How could you think about a larger solar plant? How do you really think about approach like net energy meter and how do you really drive the cost of that electricity down? And we're even evaluating some of the options surrounding nuclear if the price of power is right. So the discussion, both internal work as well as with the third party is very, very robust. And Colin, as you can imagine, we are focused on one goal, and only one goal, and that is how do you drive that cost of renewable electricity down so that we can continue to drive the cost of green hydrogen down. And on the industrial front, as you saw in our shareholder letter, and as Andy touched on it, with this PTC, it really opens all markets for us. Green hydrogen is now economical versus gray hydrogen in every single one of those applications. You have seen some of the announcements here even before the PTC was enacted, as Andy talked about this 120-megawatt electrolyzer opportunity. When you really think about the amount of the hydrogen that is gray hydrogen being used in industrial applications today, that really creates a very substantial opportunity for us. So now again, this is a recent event here. There's going to be a lot of activity. We fully anticipate that. And even if only 20% of those applications go with on-site electrolyzers, you're talking about a 10-plus gigawatt electrolyzer opportunity in this industrial sector for us as well. Would you like to add anything?

No. Perfect. Anything else, Colin?

Yes. No, I'd like to talk a little bit about supply chain for both the electrolyzer and the fuel cells. I mean, obviously, this is kind of a watershed moment for the industry and you've got stressed out in front of a lot of competitors in terms of scaling up. But I'm curious about your supply chain and their preparedness to really respond to how big this could get and how fast you guys want to move.

Yes, Colin, I want to take a moment to highlight three key aspects of our supply chain. First, it involves design. Regarding our PEM electrolyzer design, we anticipate soon achieving double the power, which will simplify our supply chain significantly. The second aspect is ensuring we have the right people in place. The reason I believe we won’t face supply issues this year is due to the leadership team we’ve established. For instance, I've brought on Dave Mindnich from Tesla, who was instrumental in their Reno facility's operations. We have been focused for some time on building strong relationships with suppliers. Thirdly, our own manufacturing capabilities play a crucial role. The facilities we’ve developed in Rochester and Vista are pivotal, and we now have a team that has been effectively managing our supply chain for years. We are also working on simplifying designs to reduce parts, which aids both cost and supply chain efficiency. Our aim is to maintain our leadership position. While I don’t want to minimize the challenges we face daily with supply chain issues—because we certainly do—it's worth noting that although it's a constant effort, it feels less intense than before.

Our next question comes from James West with Evercore ISI.

So Andy, clearly, a lot of game-changing action here recently. One of the things I wanted to hone in on, and this is before we even talk about the PTC, is the data center, the successful test that you had with Microsoft and the opening up of that market. Could you maybe talk through what the next steps are and how that will evolve? And how do you get to that? I think you put out a $40 billion market opportunity number.

And James, first, it was a significant milestone. The collaboration with Microsoft to design that product spanned two and a half years. We have already developed the next-generation product, which is expected to launch to Microsoft and others in the fourth quarter. In our letter, we outlined figures for this market, projecting around 200 megawatts of activity over the next 18 months. The numbers are just beginning to emerge, James. We are actively engaging with all data center operators, and this application is also relevant to the challenges many are facing with powering electric vehicles. Interestingly, our initial major deployments will likely involve generating hydrogen outside of town to power stationary products. This may not seem obvious at first, but it could represent our largest market opportunity. Additionally, as we scale this product, we plan for continuous generation, targeting 200 megawatts of deployment for SK by the end of 2024. This presents a tremendous opportunity for us and marks the start of something significant. When considering the role of these systems in the future of peaker plants, combined with the efforts Sanjay is leading on pipelines and green hydrogen generation, it aligns with a broader vision. The $40 billion estimate primarily reflects what is happening in data centers.

Right. Okay. Okay. Got it. That's very helpful, Andy. And then the other thing you announced earlier in the quarter was the port in Antwerp and that you'll be building a large-scale facility there. That seems like another big deal, but also probably the first and maybe a series of port applications that you might look to exercise on. Is that fair?

Yes, absolutely. If you look at that port, it is the second largest chemical port in the world. They are planning to add a green hydrogen pipeline at that port to supply all the chemical plants. We are looking to scale it, and about 300 miles away is where around 60% of the population in Europe is located. It presents an ideal situation for Plug to expand our HYVIA business and material handling business in stationary applications. Here in the U.S., I believe there are significant opportunities for hydrogen hubs. I recently met with Senator Ossoff in Georgia, and we discussed the potential for hydrogen hubs there. The Port of Savannah is a primary focus. Additionally, when I met with Senator Manchin in West Virginia, we explored the possibility of transporting hydrogen from West Virginia to the Great Lakes. Ports and hydrogen transportation represent a substantial opportunity.

Our next question comes from Alex Kania with Wolfe Research.

How should we consider the PTC in relation to pricing? In the short term, with fixed price contracts, it seems like the PTC could be beneficial, potentially easing immediate margin challenges. However, over the long term, I'm interested in your thoughts on what the PTC signifies for your negotiations on green hydrogen deals going forward.

Yes. I think really good question, Alex. Look, I think that when you think about the near term and contracts we have, the company will be able to capture most of that PTC. I think that like other industries, there will be some sharing along the line. Obviously, those who invest the most, which is us, will capture the majority but I think that's how it will evolve.

Great. Thanks for that. And then maybe a follow-up just thinking about...

I don't think it's much different than what you see with other credits. I think what shouldn't be forgotten though is a more competitive hydrogen price makes all our applications. And quite honestly, everybody's applications more interesting. So it's a great opportunity for our apps. And it's a great opportunity for us to provide green hydrogen to others.

That makes sense. And maybe just thinking about now the fact that the U.S. is looking to have a pretty supportive policy environment. And it looks like Europe is aiming for something with repower. I mean how do you think about kind of balancing your focus? Do you think you can kind of scale both of those continents in the way that you hope? Or now does this kind of maybe defer it a little bit more attention towards the U.S.?

That's a really interesting question, and you must have heard my testimony for the Energy Committee where I mentioned that without policy, our focus would shift more rapidly to Europe. Currently, we believe the two best market opportunities for Plug are in the U.S. and Europe. We plan to leverage our partnerships more in Europe, while in the States we will be handling most efforts independently. For example, in Spain, partnering with ACCIONA provides excellent opportunities for solar. Our activities in the wind belt in Denmark with H2 Energy and other initiatives will also be a priority, particularly with the Renault joint venture where we're looking to utilize their strengths. In Europe, it will be more about partnerships and collaborations. In the U.S., we will take a leadership role. However, without this bill, a larger portion of our focus would have shifted to Europe. Now, I think we can adopt a more balanced strategy. I also want to emphasize that in the last two years, Plug has made more investments in Europe than any other pure-play hydrogen company. Plug operates as both an American and a European company.

Our next question comes from Bill Peterson with JPMorgan.

It's good to see the Inflation Reduction Act passed after a couple of setbacks. But I wanted to actually follow up on that last question on Europe. We saw the IPCEI Hy2Tech come to EUR 5.4 billion in funding. We see a lot of logos on there, but not Plug directly, we see a lot of your partners. I guess, is there a path for Plug to directly benefit in this? So does it entail local manufacturing? I'm just kind of dovetail on that last question, like how does Plug benefit from that? And what does Plug need to do to benefit more?

No, I think our primary focus has been on our partnerships. If you look at HYVIA, while the numbers haven't been announced yet, the level of support it has received is substantial. This has been our main initiative for on-road vehicles. We also have activities in Belgium supported by the Belgian government. As we are seen as more European, I'm encouraged by my invitation to France and my dinner with Macron, which indicates that Plug is increasingly recognized across Europe. As our presence becomes more prominent, we'll have the opportunity to engage more directly. For now, we believed it was best to maximize our cash resources to support our activities in line with our business goals, and HYVIA has proven to be the best approach. I can assure you, Bill, that this strategy has really paid off.

Terrific. You mentioned earlier that electric cars and stationary energy are the primary markets. I believe you will see some progress in that area later this year as the second half progresses. Can you provide insight into how significant that opportunity is, especially considering it misses the current run rate? More importantly, how does that business outlook appear over the next few years, given that it may not be the largest stationary opportunity in the short term, but certainly one of the more significant ones?

From Plug's perspective, the stationary market is set to grow more rapidly than on-road vehicles in the next two to three years. This growth is driven by two main applications: powering electric vehicles and the data center market. Companies like Microsoft are aiming to eliminate all diesel by 2025 or 2030, which represents a significant opportunity for Plug. By 2024, we believe that this segment of our business could account for over 20% to 25% of our total business. On the on-road side, HYVIA plans to have 100,000 vehicles on the road by 2030, providing a solid roadmap. Additionally, we have 20 customers set to pilot our products in the next six months, which is double what we anticipated at the start of the year, indicating that the business opportunities are substantial.

Our next question comes from P.J. Juvekar with Citi.

Yes. Great news with PTC. And just a question on sort of levelized cost of hydrogen. Where do you think that cost is today on the U.S. Gulf Coast, which is the biggest market for hydrogen in the U.S.? And where do you think it goes post PTC? I'm just trying to get how quickly with the heavy-duty industry like refining and steel would start converting to green hydrogen.

I'm going to turn that over to Sanjay here, P.J.

So P.J., when we discuss gray hydrogen, we need to differentiate between on-site gaseous gray hydrogen and liquid hydrogen. Despite the volatility in commodity prices, on-site gray hydrogen for industries like refining or ammonia production is likely around $1.50 per kilogram. If we consider that range of $1.25 to $1.50 and factor in an on-site electrolyzer with electricity costs of $0.04 per kilowatt hour, along with the capital costs and the production tax credit, we find that green hydrogen is becoming economically viable across various applications. While it may take time for the industry to mature, that is the trend we are seeing. Expanding on the liquid hydrogen market and its use in long-distance transportation and mobility applications, our goal has never been to charge more than diesel but to achieve parity with diesel prices. Analyzing these figures suggests that, from a liquid hydrogen perspective, market prices could comfortably sit in the $4 to $5 range upon delivery. With the production tax credit, this path becomes even clearer, enabling us to maintain favorable pricing and achieve returns on our plant. It's important to note that we have been working on building this green hydrogen plant for quite some time, and our efforts distinguish us as a significant player and provide a competitive edge for Plug.

Great. And clearly, you guys have been ahead in terms of building out this green hydrogen infrastructure. So congrats to you guys. I guess my second question is with this PTC demand for green hydrogen takes off, which it will, your electrolyzer orders could also go up, just like what you've seen with hydrogen energy and New Fortress energy. Do you have enough capacity at Rochester? Was Rochester built with PTC in mind or do you need to expand more, even more?

That's a great question, P.J. Ideally, I would expand further on this. Earlier, I mentioned that we anticipate reaching a capacity of about 100 megawatts a month in Rochester by October. There is potential to optimize that facility and possibly increase it to around 150 or 160 megawatts. We also see opportunities for design improvements. Particularly in Europe, we will explore ways to expand our manufacturing presence to cater to that market, and we've already had some preliminary discussions about it. I believe this is a significant opportunity for us. One of our strengths is that the plant was designed for easy replication, meaning that constructing another plant would take approximately 15 months. As we review this option, especially for Europe, we are positioning ourselves well to seize this opportunity. Building a plant and then duplicating it is much more straightforward than creating the first one. By the way, I used to have a full head of hair before we began this journey, P.J.

And our next question comes from Eric Stine with Craig-Hallum.

There's been a lot of discussion about the PTC and the decreasing cost of hydrogen. You've mentioned in the past the possibility of expanding to smaller locations for materials handling. I'm curious about your current thoughts on that. Is it still a goal? How would that impact our market opportunities?

I don't mention this often, Eric, but acquiring ACT and our trailers has actually made it easier to manage smaller hydrogen facilities. It has lowered the cost of infrastructure, and we have successfully launched smaller sites and are planning to do more. We see that the combination of reduced hydrogen costs and simpler on-site hydrogen infrastructure allows for easier trailer swap outs, which ties into our regional activities. Jose and his team have quietly rolled out a few of these initiatives. We believe this presents a significant opportunity, especially now that fuel costs, which have been a major expense, will be considerably lower.

And any thoughts on how that expands the market opportunity? Might be a tough question.

So I think at the Plug Symposium, Jose pointed out the path to how that business could be a $3 billion to $4 billion business opportunity with smaller scale. We really had that begin to ramp in the '25, '26 time frame. We haven't done any new projections. But obviously, when you can think about what Jose was pointing at and with the lower cost of hydrogen, you could see that being pulled in. That's a real good question.

Got it. That's helpful. And maybe just last one for me. In the release, you mentioned two kind of still customers in Europe that you are targeting. Just wondering if you can give any details there, whether it's potential timing, size, etcetera?

Yes. We're in the final stages. I've been eagerly checking my phone for updates. We have identified three pedestal customers for this year, and I expect we will announce all of them before our fourth-quarter call. Two are in Europe and one is in the United States. Additionally, my earlier comment about our increasingly European presence is significant; we currently have over 300 people in Europe, which has greatly aided in demonstrating our commitment to customers.

And our next question comes from Chris Souther with B. Riley.

Can you maybe talk a little bit about the $15 billion electrolyzer sales funnel? Curious if you could frame the activity by geography and maybe the time line customers are looking for potential deliveries. And curious, does the PTC potentially change your strategy within the U.S. around electrolyzer sales versus owning the infrastructure yourselves?

Yes, a really good question. So Chris, probably 70%, 80% of that funnel today is Europe and the Middle East, and that is the heart of the funnel. Just to give you a feel, there are about just for our smaller 5-megawatt system, there's over 350 opportunities in our funnel. Everything from bottle manufacturing, which you wouldn't think a lot about, but folks are looking to run their furnaces with a percent of hydrogen to concrete manufacturing, steel manufacturing. There's a lot of smaller projects that, quite honestly, are easier to deploy rapidly because they don't have essentially, they're self-contained systems. Most of our shipments, which will be about $140 million of electrolyzers in the second half will be like 5-megawatt containers. I think this time next year when we report the third quarter, I suspect about 30% to 45% of our revenue will be coming from our electrolyzer business. I think by 2025, it could be as much as that.

Okay. And then does the PTC potentially change the strategy within the U.S., maybe around selling versus building out the infrastructure yourselves? Or would you kind of just take the potential growth of a market as an opportunity to do both?

Really good question, Chris. This management team has been thinking about that question a good deal. I think you could end up in circumstances where you could build a hydrogen plant to support a fertilizer facility, own a portion of that plant, and be able to generate liquid hydrogen to support our customers. Without going into great detail, we actually see that with the proliferation of our electrolyzer business, we may develop a different model for partnerships and building some of the plants, which, as I mentioned in the letter, could help us expand much more rapidly with partners. I was in a meeting today with someone looking to build a 1 gigawatt electrolyzer plant here in Texas. One of the discussions we had was, could we own a portion of that plant so we could use it as part of our offtake? It would reduce, obviously, our capital cost and provide us an opportunity to really expand and grow more rapidly. The answer to your question is we have been giving that a lot of thought.

Our next question comes from Sameer Joshi with H.C. Wainwright.

The chart that you have in your letter on Page 3, does that take into account a delivered cost of hydrogen? Or does it assume localized production?

I'll let Sanjay take that. I'm just going to add, it doesn't really matter if you're delivering gray hydrogen or green hydrogen, the delivery costs are going to be the same. But go ahead, Sanjay.

That's right, Andy. But Sameer, that is really on-site, right? So that does not take into consideration the delivery cost, that chart itself.

Got it. Okay. And then maybe this one for Paul. Can you just let us know what is happening with the inventory buildup over the last two quarters? Is that like planned inventory buildup? Or is that some delay in sales?

Yes, there's a lot of expectation for the second half. Historically, our sales distribution is about one-third in the first half and two-thirds in the second half. We anticipate that our sales in the second half will exceed nearly all of last year, so it's a significant effort. We're increasing production and expanding facilities to support that growth, especially looking towards the early part of next year. I don't expect the current growth momentum to continue into the second half; it will level off, and we know it will, but it's really focused on the growth we are preparing to achieve for the latter part of the year.

Understood. And then last one, also maybe for Paul. On the SG&A sequential increase has been almost $15 million, $16 million. Should we see this level over the next few quarters? Or do you expect further increases in SG&A?

No, at the beginning of the year I mentioned a range of $100 million to $110 million per quarter. This quarter was a bit higher due to the Microsoft programs and some new product launches. However, I believe that $100 million to $110 million is a solid estimate as we move forward.

Our next question comes from Ameet Thakkar with BMO.

Just real quick on the production kind of outlook of 500 tons per day kind of exit rate in 2025. Should we think about all of that as being kind of in the U.S.? Or is that going to be kind of global? Just kind of thinking about how the PTCs might kind of flow to the bottom line?

I'm going to let Sanjay take that one.

Thank you, Andy. As we've noted in previous calls, the target is to reach 500 tons in North America. By 2028, we aim to increase that to 1,000 tons, which also includes Europe. A good question has been raised about whether there could be potential for that 500 tons figure to be higher due to our activities in Europe. The answer is yes, but it's important to clarify that the 500 tons figure specifically refers to North American production by the end of 2025.

Okay. Super. And then just now that you have a kind of line of sight on the PTC. I think you guys had talked about kind of looking for offtakers for about 70% of your very green hydrogen production, the PTC kind of helps, I guess, seemingly kind of derisk some of this as well. Are you guys still thinking about that 70% level? Or would you be kind of willing to keep more production for yourselves? Are you looking to maybe do kind of the opposite and actually ramp up percentage to offtakers?

Yes, that's a great question. There are a couple of important points to make. First, I want to emphasize the significance of the PTC. An additional benefit it provides is capital formation, which is crucial for our financing structure. Currently, most of our investments have centered around equity. As we move forward, this will add more benefits. Our primary focus remains unchanged: we want to ensure our customers are well-served, especially our pedestal customers, so they don't run out of hydrogen. We aim to increase our customer base as well. However, we still maintain our perspective on the 70% loading of the plant for now. As Andy mentioned, we are starting to see opportunities in the stationary market that could boost demand for hydrogen among certain customers, which might lead to loading some plants at 50% instead of 70%, but that is still to be determined. Our view on the 70% loading hasn't shifted, and we do not expect it to drop as we aim to sell out the entire plant based on current trends.

Next question comes from Kashy Harrison with Piper Sandler.

So I was hoping if you could maybe just walk us through your margin expectations for the rest of the year? Gross margin, please?

Yes, the positive aspect is that it will be significantly focused on equipment. If you examine the sales mix and the growth we are seeing, I would say we will certainly experience margin improvement. I anticipate that even in the fourth quarter, it will enter the positive range and may even reach double digits depending on the final mix. There are several important developments underway. We are accelerating our electrolyzer sales, transitioning from scaling the plant in the first half to maximizing production shortly, which represents a substantial change. Additionally, we are making significant progress in fuel and service. In particular, I've been collaborating with the teams on service today, and I'm impressed by the enhancements we've implemented in the field. We have recorded up to a 70% reduction in parts in some cases, illustrating that we are beginning to see the benefits materialize. We expect these advantages to become more apparent in the second half, with a larger improvement as we move into next year. Regarding fuel, we expect to see it take off in the early part of next year as we begin launching those facilities and start collaborating with PTC. Overall, we foresee ongoing progress throughout the year, with considerable advancements in 2023 as these significant events unfold.

That's great to hear. It sounds like you have some new pedestal customers coming on board, which is fantastic. However, I was wondering what feedback you are receiving from your customers regarding the slowdown in the global economy. Do you believe this might impact demand in the material handling sector? Or are you still getting encouraging signals from your pedestal customers indicating they are prepared to continue their growth as we look ahead to 2023?

Yes, that's a great question, Kash. I would say we have two advantages. First, we are attracting new customers that can help offset any potential slowdown. Second, we haven't really experienced a significant decline; we've perhaps seen a slowdown with one customer but increases with others. Often, during challenging periods when labor is hard to obtain and it's tough to cut costs, we actually find ourselves in a stronger position in the sales process. For instance, one of our major customers, whom I've worked with for many years, is committed to making a substantial transition from older battery technology to fuel cells. Overall, while there might be some fluctuations, I haven't observed a decline. Based on my experience during tough times, I've noticed that businesses with a smaller market share and cost-saving advantages tend to be in a better position. This can be a compelling advantage when the economy is slowing and labor is challenging to secure.

I appreciate it. If I could just sneak 1 last one in. I was wondering if you could maybe just give us a refresh on your CapEx outlook moving forward as you think about the U.S. European hydrogen build-out. Wondering if you have any good rule of thumb for maybe thinking about CapEx on a per unit basis just for modeling purposes?

The majority of our capital expenditure is focused on the green hydrogen platform. As Andy mentioned, we are constructing several facilities to expand our production capacity. Additionally, we hope the production tax credit will increase demand even further. Based on our discussions, around $1 billion annually is a reasonable estimate for our expenses. These facilities operate on a large scale, and reaching the target of 500 tons is estimated to require about $1 billion a year in terms of ongoing costs.

I think Sanjay, Paul, and I had a great conversation about why the PTC will make it easier to secure capital. Would you like to add your thoughts?

Happy to do that, Kashy. So, Paul, just to add to what you said, I think the PTC will likely follow the trends we've seen in capital formation within the solar and wind sectors. Initially, the focus was on 10-megawatt solar projects with equity financing. However, with the introduction of the ITC for solar and the PTC for wind, the capital structure evolved so that equity accounted for only 20% of the total capital stack. Moreover, the expected returns on that equity decreased from the mid-teens to single digits, which helped lower the levelized cost of renewable electricity. We are witnessing a similar trend emerging with the PTC for green hydrogen. The sources, types, and availability of capital will increase significantly, allowing us to fund projects without relying solely on high equity capital. We can utilize back leverage and tax equity, among other capital forms, to accelerate our build-out and continue to reduce the cost of green hydrogen, mirroring what occurred in the solar industry over the past decade.

Our next question comes from Sharif Amagrabi with BTIG.

Great. So under the Inflation Reduction Act, PTC aside, is Plug able to take advantage of domestic content requirements for U.S. Steel for additional subsidies? And just to make it two parts. If so, does that equipment need to be tied to a project like the 120-megawatt plant you just announced in Texas?

There's a lot of work ahead. I can say that the PTC will allow us to capture the $3 per kilogram tax credit. Plug currently has a significant amount of domestic content in our products. Like many others, we are not only aiming to meet these requirements but also to shorten our supply chain by becoming more domestically focused. We are continually taking steps to ensure this. This effort isn't limited to the United States; we've been collaborating closely with HYVIA to examine and substitute European content. We're exploring ways to optimize our domestic content to ensure that, whenever it benefits our shareholders, we can take full advantage of the most profitable opportunities for Plug.

Next quarter comes from Tom Curran with Seaport Research Partners.

Andy, across the Atlantic, we've recently heard some prominent industry voices, seasoned utility and energy executives express alarm that the European Commission isn't being realistic on the demand side for pre-hydrogen. Either with regards to which applications will prove economically viable and/or about how urgently they're doing enough to ensure announced projects actually make it to FID. You just shared some encouraging updates on the HYVIA JV in hybrid mobility, the stationary power TAM, progress on these two hoped-for incremental pedestal customers for NH. But could you just take a step back and speak to these concerns at a broader higher level, what is your view on the pace at which key infrastructure projects for adoption usage in Europe are reaching FID?

So Tom, there will be projects that succeed and others that won't, and that's simply how it is. For instance, in Denmark, where I have engaged with the leadership, they are committed to developing 30 gigawatts of wind power, primarily aimed at producing green hydrogen. They are quite serious about this. I have also met with the former Head of Parliament in Denmark, who is actively involved in the pipeline development from Northern Denmark to Germany, which is significant. There are projects I believe are not realistic, while others benefit from a mix of government backing, industrial support, and strong application prospects. There might be some controversy as well. I would also point out that certain players from the traditional energy sector may prefer a slower pace of change.

Right. And I thought you'd appreciate an opportunity to respond directly to some of those doubts and worries. And then, Paul, when it comes to the remainder of the territory that services needs to cover to reach breakeven by year-end. What should be the key drivers from a negative 32% gross margin for 2Q to breakeven as we exit this year?

Yes. Labor leverage will certainly help. However, the most significant impact we're experiencing comes from minimizing touch points through reliability improvements. We have implemented various equations from different components and configurations, along with new software upgrades, leading to numerous solutions for the new units being deployed. We're already observing improved performance right from the start. More importantly, we can retrofit these improvements to our existing fleet. As I mentioned earlier, we're seeing a dramatic reduction in parts. So, it's a combination of this progress and labor leverage. Next year could see us reaching 150 sites. So, what's next?

Plus more hardware.

Yes. We will continue to see progress, and you can expect to see significant traction very soon as those developments unfold.

As well as the accruing benefits of that ever-expanding newly installed base of the latest generation stacks, right?

Yes, absolutely, exactly. And leverage on supply chain to leverage on the labor across the board, absolutely.

Our next question comes from Joseph Spak with RBC Capital Markets.

Andy, you mentioned several times that you believe Plug will be able to maintain the PTC. I just want to clarify whether you mean this will happen eventually or initially, because if you're not passing the PTC through, how can you achieve initial competitiveness in green hydrogen?

I think when you take a step back, there are different aspects to consider. Good question, Joe. The electrolyzer business is something our customers are taking advantage of. As I mentioned, we already have contracts in place with customers for hydrogen that we can fully utilize. Additionally, I mentioned that we would be in a position to share some of the PTC with other customers. That’s how the mix plays out, and I believed that's what I conveyed, but it's been a long call.

It has. I guess maybe secondarily, I don't want to say too much since this is very early days and preliminary. But functionally, I understand the $500 million of incremental cash flow. However, how does it actually work? You're not a taxpayer right now, so I think you need to establish some sort of entity to actually receive that cash and possibly navigate some tax implications.

I'll cut you off really quick. For the first five years, it's direct pay.

So is that $500 million actually revenue, not just a cash inflow from selling credits or something similar?

I actually think it's a reduction of costs.

It's a reduction of costs. Okay. And then lastly, I guess, maybe the big elephant in the room, but permitting, right, which can obviously be very difficult and take longer. Is that the biggest risk to timing that you see? And maybe if you could provide any sort of color on how you see that progressing?

I'll let the guy who deals with permitting every day answer that. Sanjay?

So again, it's like any development business. Joe, right, as you can imagine. There are areas where we're able to do things faster than expected, right? There is a situation where things can actually take a bit longer than expected. But what I would like to highlight here, though, is when you sort of think about when we're talking about 500 tons a day, it's not just a 500 tons opportunity, right? The opportunity is much larger than that. And look, I think we also try to think about if plan A doesn't happen, how will our plan B and potentially plan C be implemented here. to get to that goal. So needless to say, in light of some of the permitting dynamics, which is not going to go away. It's going to be real. It's going to be there. In some cases, it's better than we thought. In some cases, it might not be as good as we thought, but our funnel to get to that 500 tons is obviously much larger than that.

Our next question comes from Praneeth Satish with Wells Fargo.

I have two quick questions. The PTC will definitely support the adoption and cost of green hydrogen. However, another important factor in pricing is the cost of electrolyzers. I'm trying to understand the trend for electrolyzer prices. Do you expect their prices to decrease as you make manufacturing more efficient, or do you believe the demand driven by the PTC will keep electrolyzer prices stable?

I can share that our current plans indicate that 75% of our focus is on the electrical feedstock, which is very telling. As we electrolyze, we expect our price income costs to decrease. However, the feedstock cost is a significant factor, and the critical element will be the output, as the PTC itself will play a major role.

Got it. And you've talked about small green hydrogen facilities and the success there. But I guess I'm kind of wondering if you could talk through the puts and takes of going the other way and building large-scale green hydrogen facilities now with the PTC, making hydrogen prices lower, the market is a lot bigger. So I guess does it make sense at some point to concentrate electrolyzer capacity and then start gasifying the hydrogen and moving it through pipes versus liquefying it? There's a lot of industrial demand in the Gulf Coast. There's a lot of pipeline capacity there. So it seems like a good fit, but curious for your thoughts.

Yes, I'm an engineer, so I believe that having a 5-megawatt electrolyzer on-site is ideal for a bottle manufacturer with 80 plants globally to produce green bottles for beverage makers. This concept applies to various industries, like concrete manufacturing, where small-scale solutions are effective. I strongly support investing in hydrogen pipeline infrastructure. The best use of funding is to build pipelines linked to large-scale green hydrogen plants, as the cost of hydrogen will be lower due to the efficiencies of scale, which do not decrease significantly as plants get larger. Smaller operations tend to drive costs up. A good example of this is our partnership with H2 Energy in Denmark, where green hydrogen will be supplied through a public access pipeline. However, the effectiveness of this approach depends on the specific application, location, and timing. I firmly believe in the potential of hydrogen pipelines.

Our next question comes from Greg Wasikowski with Webber Research.

I'll keep it brief and build off the previous question. Can you elaborate on your observations regarding the development of hydrogen midstream as a whole? You mentioned pipelines, which we've previously discussed as a topic for the future, particularly in terms of scale. Does the PTC influence your perspective on that or on other methods of transporting larger quantities of hydrogen over longer distances?

I'm going to turn it over to Sanjay. I'll just add that the most cost-effective way to transport hydrogen is through pipelines.

Absolutely, Andy. So again, Greg, we have a lot of activity going on in that front. So let me just give you a scenario, right? Think about the optimal wind location where you can actually really be a very large-scale wind farm with a very high capacity factor and really get an optimal levelized cost of that wind electricity, which can actually be a very, very low number. Then you have a large-scale electrolyzer plant, which is what we're doing for our customers, and we can do that for ourselves as well. We are talking to some of the major midstream companies to think through what is that right volume what makes the economics work because you don't want to do a pipeline for a small amount of hydrogen and the economics doesn't work. The way this is probably going to unfold is no different than the existing energy infrastructure, right? Large-scale renewable facility large-scale electrolyzer, gases hydrogen, set via the pipeline, so the economics gets really, really optimized. You can really take very large distances. And for the last mile delivery to get to various customers, you probably would have liquid plans to supplement that network. That is going to unfold. We've got a lot of work going on there. We're then thinking through how do you do large-scale storage in caverns and things like that. So stay tuned. Hopefully, we'll have more to talk about it going forward.

There are no further questions at this time. I'll hand the floor back to Andrew Marsh for closing remarks.

So thank you, everyone, for hanging in there for an hour, 15 minutes, and I look forward to seeing you at the Plug Power Symposium. Our fourth symposium will be October 18 and 19 from our Rochester, New York Gigafactory. This will be a hybrid event. So stay tuned for further event and registration details over the coming months. Thanks, everyone.

Thank you. This concludes today's conference. All parties may disconnect. Have a good day.