Plug Power Inc (PLUG) Q3 2022 Earnings Call Transcript

Plug Power Inc (NASDAQ:PLUG) Q3 2022 Earnings Call dated Nov. 08, 2022.

Corporate Participants:

Teal Vivacqua Hoyos — Senior Director, Marketing and Communications

Andy Marsh — President and Chief Executive Officer

Sanjay Shrestha — Chief Strategy Officer

Paul Middleton — Chief Financial Officer

Analysts:

Kristen Owen — Oppenheimer — Analyst

Bill Peterson — JP Morgan — Analyst

Eric Petrie — Citi — Analyst

Joseph Spak — RBC Capital Markets — Analyst

Alex Kania — Wolfe Research — Analyst

Eric Stine — Craig-Hallum Capital Group, LLC — Analyst

George Gianarikas — Canaccord Genuity — Analyst

Sam Burwell — Jefferies — Analyst

Gregory Lewis — BTIG — Analyst

Craig Shere — Tuohy Brothers — Analyst

Greg Wasikowski — Webber Research — Analyst

Ameet Thakkar — BMO Capital — Analyst

Presentation:

Operator

Greetings, and welcome to the Plug Power Third Quarter Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Teal Hoyos, Director, Marketing Communications. Thank you. Please go ahead.

Teal Vivacqua Hoyos — Senior Director, Marketing and Communications

Thank you. Welcome to the 2022 third quarter update call.

This call will include forward-looking statements. These forward-looking statements contain projections of our future results of operations or of our financial position or other forward-looking information. We intend these forward-looking statements to be covered by the Safe Harbor provision for forward-looking statements contained in Section 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 in our Annual Report on Form 10-K for the fiscal year ending December 31st, 2021, as well as other reports we file from time-to-time with the SEC. These forward-looking statements speak only as of the day in which the statements are made, and we do not undertake or intend to update any forward-looking statements after this call or as a result of new information.

At this point, I would like to turn the call over to Plug’s CEO, Andy Marsh.

Andy Marsh — President and Chief Executive Officer

Well, thank you, Teal. So, we have published an Investor Letter today that provides details about the quarter, status of our projects and a summary of our mid-term ambitions. I noticed some our company is tough to financially understand in the near-term. It really comes down to two areas, the cost of hydrogen and selling more equipment. The equation for success really it comes down to building out our green hydrogen platform, which will transform a negative margin hydrogen business to a growing positive margin business just by turning on the plants.

We’ve already demonstrated this in Tennessee, we can generate hydrogen at one-third the cost we’re paying from the industrial gas companies today. We won’t be discussing this issue within a year. They will be in the rearview mirror, and the issue will be how to accelerate the plants. Equipment sales, even for our new electrolyzer businesses gross margins are already over 15% and we’re just starting to scale. We’ve made fuel cells profitable in material handling and now doing this again electrolyzers in stationaries.

You put these two items together with the real improvements in-service, the 2023 targets of $1.4 billion in revenue and exiting the year at breakeven operating margins is achievable. The long-term business prospects are even more attractive. And all starts with Plug doing real things. I know many of you were at the Symposium and you saw a real gigafactory, real electrolyzer systems, real vehicles, real liquid hydrogen trailers, real fueling stations, we were able to touch and feel the hydrogen ecosystem not in some distant future, but today.

Now for the future, Plus is a leader and will continue to be a leader in the energy transition. We have first-mover advantage in the fuel cell and hydrogen industry, that we do not intend to cede. We will have the first green hydrogen network across United States by 2025. And when we look out to 2030, we will have the most commercial vehicles on the road through our Renault JV Hyvia. We’ll have the largest deployments of PEM electrolyzers. We’ll be selling fuel cell peaker plants at-scale using our hydrogen, and many, many more activities we’ll be engaged with.

Finally, there are short-term challenges, but we have a clear, well-defined plan that has been demonstrated. And long-term, we are building out our hydrogen ecosystem by ourselves and partners that quite honestly is unmatched in the industry.

Paul and I are now ready to take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] The first question is coming from Colin Rusch of Oppenheimer. Please go ahead.

Kristen Owen — Oppenheimer — Analyst

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

Andy Marsh — President and Chief Executive Officer

Hi Kristen.

Kristen Owen — Oppenheimer — Analyst

Hi, Andy. So, the first question, just with a substantial pipeline of opportunities, can you discuss how you are down selecting opportunities to pursue and to commit to, particularly for electrolyzer sales and potential hydrogen offtake agreements?

Andy Marsh — President and Chief Executive Officer

Sure. I’m going to take the electrolyzer sales, and Sanjay is sitting here with me, and he works the hydrogen offtake agreements every day. So, with electrolyzers, there were a few questions we ask right upfront, where are these huge opportunities in? Does the customer really have access to renewable electricity or electricity at the scale that’s required to generate hydrogen. It may seem like a simple question, but it actually is an important one. The second one is, do they have real projects? And do they have fundamentally land to be able to build an electrolyzer plant with? We really make sure we understand what is the application, what are they doing with the hydrogen. And the third one is, in an industry like this you have to always be asking the question, how is the customer going to quite honestly pay you, and how are they funded? And you know that’s kind of the first three items we look at when we think about doing a deal and working with the customer. And there are no hunch, Sanjay, how do you, think about hydrogen itself selling?

Sanjay Shrestha — Chief Strategy Officer

Sure. Hey Kristen, how are you? We’ve got a couple of things on that, right. So, as we mentioned in our shareholder letter, the plant that we’re about to build in Europe we got 6x demand for that and we’re just about to break ground, right. So, I think the inbound on offtake for the hydrogen is actually pretty substantial, but this is how we think about it, right. We’ve told you in the past that we do not want to commit more than 80% of the capacity because we want to leave 20% of that capacity to meet sort of your peak demand, all the plant outages that we’ve seen in the industry to be able to support our customer as well as the broader hydrogen economy, number one. Number two, we have a lot of activity going on here. We are looking at some very, very sizable offtake agreements that are 5 to 7 years in term, that are focused on mobility market application. And we look forward to actually really updating you all here in not-too-distant future on some of those activity we’ve got going on.

Second, we’re also working with some of the industrial gas companies where it could actually be either like a swap-type agreement or those that are not as heavy on the hydrogen side of the business. We’re doing some of that work with them as well. And then, another thing we’re really prioritizing is as Andy touched on the activity in our stationary business, that’s a huge demand driver for our green hydrogen as well. We want to make sure that the capacity that we’re building is going to be available to support those apps and many of our customers as well, and as you guys know, we also have deals already with some of our pedestal customer as well. So, the way we are looking at it right now out of that 500 tons probably about 200 tons of that is going to be for supporting internal activity, internal customer and another 200 tons of that is likely going to be the third-party, broadly speaking, largely in the mobility as well as in some of the industrial gas-type customers as well.

Andy Marsh — President and Chief Executive Officer

Kristen, did that answer your question?

Kristen Owen — Oppenheimer — Analyst

That’s incredibly helpful. And I appreciate that detail. So then if we think about just the incremental scale-up needed for the supply-chain for fuel cells, are you seeing suppliers scaling to support the additional platforms beyond Plug or are they really focusing on just you, so any color on the supply chain scale-up? Thank you.

Andy Marsh — President and Chief Executive Officer

That’s another good question. I think many folks on the call we’re to our gigafactory and you can see how Plug is thinking about scaling our own manufacturing operations. I think when you take a step and look at our Vista plant, which is 400,000 square feet, which we were able to build in less than a year to support our business activity. So, from our own internal capability we feel very comfortable with. As you know, we’ve hired people who scaled the Tesla business to run both our operation and he has reporting into him folks who work in the Tesla’s supply chain. We are very focused on some critical items, some of those items are I’ll say critical to the performance of the products, things you may not think a lot about, things like humidifiers, hydrogen tanks and we have efforts, not only to support strongly our present suppliers, but we really had a focus on diversifying our supplier base. And like many people, we’re very focused on semiconductors to make sure we have the appropriate semiconductors to meet our needs. I think there’s lots of excitement about this industry, lots of folks are looking and trying to understand how they can enter, and look, we have volume today and that makes us attractive.

Kristen Owen — Oppenheimer — Analyst

That’s really helpful. Thanks so much Andy. I’ll pass it on.

Andy Marsh — President and Chief Executive Officer

Thanks Kristen.

Operator

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

Bill Peterson — JP Morgan — Analyst

Yeah, hi. Good afternoon. How’s it going Andy and team?

Andy Marsh — President and Chief Executive Officer

Hey Bill, how are you today?

Bill Peterson — JP Morgan — Analyst

Yeah, good, good. Wanted to talk about the, I guess, the electrolyzer business, it doesn’t seem the backlog has grown and I’m wondering if this is a function of maybe more your side or if customers are delaying FIDs, perhaps trying to get a better understanding of policy support benefits to the IRA, maybe renegotiated PPAs. I recognize it’s probably transit, but just kind of curious on what’s happening with the backlog? And, I guess maybe, looking ahead to where do you see more of the interest coming from as you discuss with your sales folks, ammonia refining, smaller projects, large scale, just kind of get a feel for how we should think about it into the next year?

Andy Marsh — President and Chief Executive Officer

So, Bill I think that, first, I think that the funnel has changed. We’re probably modest in the investor letter. I think that when you take a look at it, the key areas we’re seeing activity in is more in the industrial applications where you are looking specifically at opportunities with things like fertilizer, e-methanol are really areas we see lots of activities. As far as scale, I’m going to separate scale into what projects will be the big projects to ship next year? I can tell you, and you saw at the Symposium build the 5-megawatt platform. We’re seeing in many ways it’s kind of almost a starter kit, but we see a lot of interest also in things like bottle manufacturing. We think next year, just to give you a gauge, we’ll probably ship about 400-megawatts of that platform. On-top of that, there’ll be a lot of work done on the development of more larger scale plants. But that’s kind of how we see it rolling out. So, the big numbers for backlogs will roll well more in the ’24, ’25 timeframe, though there’ll be some upfront charges that you’ll see. But it will really so much of it’s in these industrial markets, where which we’ve shown in our investor letters, things like ammonia, methanol, steel even mixing natural gas pipeline. There’s a lot of activity going on there at the moment. Is that helpful, Bill?

Bill Peterson — JP Morgan — Analyst

Yeah, yeah. I was just trying to see if there’s very near-term delays, but it feels in any case you’re pretty feel good about ’23.

Andy Marsh — President and Chief Executive Officer

Yeah.

Bill Peterson — JP Morgan — Analyst

So, just a bit, the second question I have is about stationary power. Thanks for giving us the color around how you see ’23 and ’24 evolving. Can you give us a broad feel for how we should think about sort of pricing per megawatt and how should we think about maybe the margin structure? I presume at most scale the margins are not going to be coming in directly at corporate average, but how should this evolve over the next few years?

Andy Marsh — President and Chief Executive Officer

Yeah, I’ll make some comments, and I’ll let Paul — Paul’s in London at the moment, I’ll let him add to my comments. I think that those projects will primarily next year be more geared towards really two applications. One is, where grid is not available in charging EV’s, where I think half of what we ship next year will fall into that category. I think the second category that is really more with our traditional customers at their distribution centers, where we’ll be deploying stationary products, and I think, Jose, our VP of Sales in that area is projecting between 20 megawatts and 30 megawatts. We have the capacity and we’re driving the supply chain to make sure we could support 60 megawatts, just to give you a gauge. We think that business overall because there’s more to that business than just the stationary products, you have to build the hydrogen infrastructure, we see that business next year when you include everything that needs to be included, probably somewhere between $125 million to $150 million in revenue. Paul, I know, would you like to add to what I said.

Paul Middleton — Chief Financial Officer

Yeah, I just would comment on the margin side. The real big benefit for Plug is that there’s a lot of commonality and components in these products and leverage and what we’ve already established as the base for supply chain manufacturing. So that is a great platform to kick-off from, and two, because the sales opportunities and the funnel is growing so fast it will scale faster than other businesses from early-on. So, all of those factors help mitigate some of the — maybe some of the start-up effect you have of ramping newer products, so we absolutely expect that product will — we’re targeting north of 30% on that product line as we are on any equipment product line. And I think it will absolutely scale fast in that direction. So, we expect it to be accretive next year, and we expect it to grow quickly thereafter.

Andy Marsh — President and Chief Executive Officer

Hey, Bill, I would add one other item is that I think if that our ProGen module, a lot like a solar panel. So that ProGen module which we’re selling to Hyvia is essentially the same ProGen module from an architecture point-of-view especially that we’re going to be using in stationary, so there’s a lot of, if you think about there’s a lot of economies that come in the fact that those product lines are complementary. And just like the solar industry, our solar panels dramatically reduced in costs, because you’re building the same thing over and over again. In reality, what we’re doing in mobility and what we’re doing in stationary for the fundamental platform is exactly the same, which should really help our cost position next year, but especially long-term.

Bill Peterson — JP Morgan — Analyst

Yeah, that makes sense. Thanks for the color.

Operator

Thank you. The next question is coming from PJ Juvekar of Citi. Please go ahead.

Eric Petrie — Citi — Analyst

Hi, good afternoon. This is Eric Petrie on for PJ.

Andy Marsh — President and Chief Executive Officer

Hi, Eric.

Eric Petrie — Citi — Analyst

How are Andy?

Andy Marsh — President and Chief Executive Officer

Okay.

Eric Petrie — Citi — Analyst

Could you just give us a little bit of essence as to Amazon’s $2.1 billion portfolio deal going from forklifts and kind of what’s next for them looking at either, fuel cell trucks, fuel cell power generation, electrolyzers, what’s the next thing that they are looking at?

Andy Marsh — President and Chief Executive Officer

Yes, yes, yes. What we saw with green hydrogen Sanjay?

Sanjay Shrestha — Chief Strategy Officer

So, as you saw in the shareholder letter right, we did do 30 tons per day green hydrogen offtake agreement with Amazon, so again, that’s just the beginning of many portfolio sales opportunity we can have, that’s the value of what we talked about our vertically integrated model and all the effort that we’ve put into position the company to where we are. So, with that, why don’t I turn it to you Andy?

Andy Marsh — President and Chief Executive Officer

Yeah, so if you look at what Amazon said at Symposium, they really highlighted the need for hydrogen across a wide variety of applications, everywhere from stationary products to on-road vehicles, to electrolyzers, and obviously, we are engaged in all those areas with Amazon. Obviously, I can’t say too much more, because of nondisclosure agreements, but I can tell you from, if you listen to what Dean Fullerton says who runs over 30,000 people in the logistics group at Amazon, they are committed to green hydrogen, they’re committed to Plug. We’ve been their partner now for a long-time and they’re really looking to scale this business with us. And obviously, the size of what we’re looking at with them. I think you can, we kind of note that $2.1 billion gives you a feel for the scale.

Eric Petrie — Citi — Analyst

Thank you. And then just turning to light commercial vehicles, Hyvia, what should we expect kind of going from pilot to commercial orders, and we’ve seen some delays on the truck side as well, so just any thoughts there?

Andy Marsh — President and Chief Executive Officer

So, first I I’d like to say Renault had their investor today. And Hyvia was presented as a model of how they would like to think about their future. But we have built a facility within that can support deployment of 800 vans next year. We have already identified nine customers which we’ve named and others who are looking to start using these vehicles. I can tell you we expect that facility, Hyvia expect that facility to be sold-out next year and to scale from there.

Eric Petrie — Citi — Analyst

Thank you.

Operator

Thank you. The next question is coming from Joe Spak of RBC Capital Markets. Please go-ahead.

Joseph Spak — RBC Capital Markets — Analyst

Thanks.

Andy Marsh — President and Chief Executive Officer

Hi, Joe.

Joseph Spak — RBC Capital Markets — Analyst

Hey good morning or good afternoon.

Andy Marsh — President and Chief Executive Officer

Good afternoon.

Joseph Spak — RBC Capital Markets — Analyst

So, look I know you sort of led off here talking about some of the modeling difficulties and the issues impacting the near-term and how you don’t think that persist into the future, and I can appreciate all that. And in the letter again you talked about a step-change in fuel margins for instance, and I know at the Symposium you guided at minus 35% I think for the year, which obviously would be a big step-change from where you’re at now. But with all due respect, I mean we’re going on over a year about hearing about step-changes and the margins continued to to drag. So, I guess. I really want to understand your level of confidence there, you also sort of talked about or I think earlier today in response to another question some of charges for industrial application, I’m not sure if you meant that was for you or for your customers, and if that was contemplated. So, I guess what I’m really giving you an opportunity to do maybe is maybe add a range or some sort of sensitivity around how you feel about the gross margins at the field-level and the overall company for next year?

Andy Marsh — President and Chief Executive Officer

So, Joe, I think you’ve misunderstood us on two-levels here, and so, I’ll let Sanjay address the hydrogen margins because he is a little perplexed, so let me let him explain, and then after he gets done, I’ll ask you more about the industrial covenant.

Sanjay Shrestha — Chief Strategy Officer

Yes so, Joe, I think, look I appreciate the question, right, and as Andy mentioned in his prepared remarks, there’s really two factors that drive this margin, hydrogen and equipment, right. So let me take the hydrogen one first. So, so far other than our plant in Tennessee, we have been buying hydrogen from the third parties as you very well know, and that hydrogen price has been a function of the price of natural gas, and we know what has happened to the price of natural gas price, right, price of natural gas went up almost 61% in Q2 of this year, and there is a lag in terms of what the hydrogen fuel cost for us in Q3, which is why you’re seeing the margin deteriorate from Q2 to Q3 as it relates to what happened to that natural gas prices. But now fast-forward right, now we are commissioning our plant in Georgia before the year is over, we will start our commissioning of our plant in same gate Louisiana before the year is over, we’re expanding in Tennessee, we have multiple other plants that we’re starting to break ground on, we’re starting to make progress on, where we will have that about 200 tons of plant being commissioned by the end of 2023.

So as these plants start to produce hydrogen, the plants come online, as Andy said the cost is going to be one-third of what we’re paying for that third-party hydrogen cost, and even blending some of the legacy contracts that we have all whom taper off by 2025 with a blend of what we’re going to be producing and servicing our customer third-party sale that we’re going to have, we absolutely feel very confident that as you go to the end of 2023 we will exit the year with operating breakeven performance with our fuel business. That will create a step-change in our margin profile, and with that, Andy, why don’t I turn it over to you on how that complements with the equipment margin and expansion with the sales and how that plays out.

Andy Marsh — President and Chief Executive Officer

Yeah, when Sanjay, as I mentioned in start, Joe, it’s really pretty simple, simple is hard-to-do, but you look at Tennessee, which is about one-fifth our capacity, we already are producing hydrogen at one-third the cost that we have to buy it for today. We’re going to have a lot more hydrogen which is our own. I think we’re looking at 60 tons of our own next year just for our own customers. That’s going to be a very healthy profitable business for us. It also with the production tax credit, some of that we’ll keep, some that we’ll give the customers. And that combination will actually drive a lot more equipment sales, so, I guess, you know when I take a look at the hydrogen portion of this is really easy to see if you live it every day. But. I know that’s — I can understand your thought process, Joe. And your other question Joe, I really didn’t understand, I didn’t really think I’ve said anything, or I must have must really missed it. I must have really misspoken or said something that you know.

Joseph Spak — RBC Capital Markets — Analyst

Yeah, and also let me, I guess first of all, I totally get what you’re talking about on the cost of hydrate coming down. I guess the point of my question is that, underneath that or embedded in that assumption is clearly some glidepath on the ramp of plants right to sort of be able to produce your own hydrogen and I wanted to — that’s what I wanted to I guess to better understand because clearly if that doesn’t occur, then the margins will continue to suffer. So, I guess I wanted to, sort of a point estimate seems just very defined, and I wanted to understand maybe like a little bit more of a range of outcomes as you see it? On the industrial, I thought you had mentioned, Andy that you when you’re talking about in response to another question some of the industrial applications for hydrogen, I thought you had mentioned there might be some upfront charges, I didn’t know if you meant for your customers or for you on his chart?

Andy Marsh — President and Chief Executive Officer

I have no idea what I said Joe.

Joseph Spak — RBC Capital Markets — Analyst

Okay.

Andy Marsh — President and Chief Executive Officer

But I did — if I said that, there are no upfront charges, I think — I don’t know I must have not been clear, there is no upfront charges.

Joseph Spak — RBC Capital Markets — Analyst

Okay.

Andy Marsh — President and Chief Executive Officer

And on the plants, Joe, Georgia, if you go look at our investor letter, it’s pretty clear where we are in Georgia. We’ll have that plant commissioned by the end-of-the year; the equipment is there. We’re already producing hydrogen there, and low volume with our first electrolyzers that have been deployed. That’ll be scaling up and putting out hydrogen for production at-scale within 3 months. If I look at what we’re doing with Olin, that plant is an exact copy of what we’re doing in Tennessee, the equipment is there. I think we scaled additional capacity at Tennessee in 3 months, so I guess we don’t see maybe the risk that I understand you may see. So, I guess, we don’t see that. I guess, the challenge levels we see Joe for less than you may think.

Joseph Spak — RBC Capital Markets — Analyst

Okay. Fair enough. If I can squeeze one more in here, it looked like there was a little bit of another inventory build, I’m wondering how much of that is because of some of the project delays you mentioned or how much is maybe some buffer to be able to meet demand because of supply chain and like how should we think about the right level of inventory for what the business is today?

Andy Marsh — President and Chief Executive Officer

I’m going to let Paul take that one, Joe. Paul?

Paul Middleton — Chief Financial Officer

Yeah, well, one thing to keep in context when you look at the timing of the volume and sales and context of our guidance, the volume in Q4 could be on the upper ends of double Q3, so, and maybe even more in the range of possibilities. We’re working every day to deliver to all of those programs and so there’s a lot of buildup for that and that’s really the drive. What I would also say is that when you look at the mix of things that we’re doing, there’s a lot of new platforms between on-road, ELX or electrolyzers, stationary, new programs in Europe, I mean there’s just a broad — all of the companies that we’ve acquired, all of them have different mix and supply chain and scaling opportunities that we’re working through to quickly — we have the fortunate problem of a big growing backlog and opportunities scale to meet all those.

So, we’re focused mainly on delivering and growing that, and then you optimize. We’re currently turned on the factory up in Rochester where we’ve literally just last weekend turned on production in the new Vista facility and that scale-up in that facility was another record time kind of scale-up, so short answer to your question is, I’m a big believer in no inventory. I think just in times the best answer but you will see it come down and you will see it optimized in the near-term as we work-through the scaling each of those individual businesses and volume helps a lot, so third quarter should be a big — will put a big dent in it over the fourth quarter.

Joseph Spak — RBC Capital Markets — Analyst

Yeah. Thanks for that color.

Operator

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

Andy Marsh — President and Chief Executive Officer

Hi Alex.

Alex Kania — Wolfe Research — Analyst

Hi there, how are you?

Andy Marsh — President and Chief Executive Officer

Okay.

Alex Kania — Wolfe Research — Analyst

Good. Maybe just one simple kind of clarification question, just on the shareholder letter. It’s just thinking about interpreting the kind of average fuel molecule cost chart. Is that based on, I guess, it assumes what your expected level of hydrogen sales or production is going to be over the course of the next year, but does that also assume something roughly close to natural gas forward curve, so we’re kind of looking at kind of peak let’s say margin tightness next quarter and then it ends up falling even just based on looking for gas prices on top of the swap to green?

Andy Marsh — President and Chief Executive Officer

I’m going to let Sanjay answer that, Alex.

Sanjay Shrestha — Chief Strategy Officer

Yeah Alex, short answer is, yes, we have looked at the futures of the natural gas prices to blend what we buy from the third-party in that, right, so obviously that’s why you see the peak here, hopefully this is a peak here in Q3 from the third-party purchase perspective and it takes into consideration what we expect our production cost to be from all of these different green hydrogen plant. And again, we do have the incremental benefits benefit of the production tax credit as well, so that’s why with the PTC, with our production, despite this third-party existing contract in place is what gives us the confidence why we believe that exiting next year we’ll be able to get to that operating breakeven from that business.

Alex Kania — Wolfe Research — Analyst

Okay. Great. Thanks. And then this was, you talked about maybe a little bit in the prepared remarks, but just could you elaborate maybe a little bit more on discussions with some of these other industrial gas companies, am I assuming that that would be beyond Olin? And then maybe just really with respect to Olin, if you could maybe talk about there’s also discussion in the investor letter about exploring other sites and things like that, but just kind of given Olin’s kind of inherent hydrogen kind of production from the chemical processes kind of how big could you see that partnership ultimately getting into?

Sanjay Shrestha — Chief Strategy Officer

So, Alex we’re just getting the partnership started, right, but obviously we’ve been working with Olin for a long-time, right, Tennessee is the plant that is also a feed gas coming from Olin, so it’s been successful in Tennessee. We expect that success to continue also in Louisiana, and as you rightfully pointed out, they certainly do have a lot of feed gas available in the market, there’s a lot of discussion going on, give us some time, we’ll be happy to share with you a lot more incremental updates and we’re in a discussion and dialog with a partner right now, but I do want to have some time here before we can get into more specifics on that, but I think you’re thinking and logic is the right one year because they certainly to have a lot of feed gas available and we’re in discussions with them in terms of how can we rapidly expand this partnership into something much bigger than just the Tennessee and Louisiana as well, that’s on Olin side, right. And when we were referring about some of the industrial gas opportunity, look, I mean over-time this hydrogen should enter into some sort of a swap agreement, if you’re looking for green hydrogen, if you don’t have it, if Plug has it, we’re happy to provide that green hydrogen to industrial gas companies as well, because it’s a big market, we all have to work together, number-one. Number two, there are some of the smaller industrial gas companies that actually don’t have a lot of hydrogen capacity, probably would like to have that as a part of their portfolio offering as well, and that’s why we have some of those discussions going on at a pretty advanced stage as a matter of fact and that’s really what we’re referring to.

Alex Kania — Wolfe Research — Analyst

Great. Thanks.

Andy Marsh — President and Chief Executive Officer

Thanks, Alex.

Operator

[Operator Instructions] The next question is coming from Eric Stine of Craig-Hallum. Please go ahead.

Eric Stine — Craig-Hallum Capital Group, LLC — Analyst

Hi everyone.

Andy Marsh — President and Chief Executive Officer

Hi, Eric.

Eric Stine — Craig-Hallum Capital Group, LLC — Analyst

Hey. So, I have been jumping between calls, so I apologize if probably already been asked. But just curious, I mean I know when you provided the updated guidance back, I mean it was a couple of weeks before for the Symposium, you certainly contemplated a third quarter, fourth quarter split that was going to be magnified. I’m just curious how the split actually played out, is that, I mean, was that in-line with your expectations? And as we think about, I think Paul just referred to potentially fourth quarter being 2x the third quarter, I’m just wondering, are there what are the things that kind of dictate that, I mean, are there large projects, what are the things that could either will be upside or potentially slip to ’23?

Andy Marsh — President and Chief Executive Officer

Paul, I’m going to let you take that one.

Paul Middleton — Chief Financial Officer

Yeah. Well, the first thing is, we’ve been pretty transparent about scaling electrolyzer plant in Rochester, and the volume is dramatically increasing every month, and so it’s despite the nature of that scaling activity a lot of that volume happens in Q4. The second thing is a lot of these new programs and new products that we’ve been winning and developing and launching, a lot of them stem from I’m going to call it big lumpy-sum, lumpy contracts and those were certainly within our expectation until the timing of the close and it’s playing out as we thought and we’re closing those now and have outflows, and we’re working on delivering, and so those are in-line. And then the third thing is just material handling, every year it tends to flip, sometimes Q3 is bigger in terms of timing and sometimes Q4 is bigger in terms of timing, and so, there’s big pedestal customers they kind of it varies with them, but we’ve actually been as we announced back in the Symposium, we’ve launched and completed a number of new pedestal customer programs which we knew would be kind of the Q4-ish timeframe for those to close, things like the range of programs we’ve talked about, those are all underway as we speak, that’s first time we’ve done thing for them at-scale. It’s exciting. And things like the Lidl program that we won and other new pedestal customers, so those are in-line, so I’d say by and large it’s consistent with what we thought in context to the updated guidance we gave.

Eric Stine — Craig-Hallum Capital Group, LLC — Analyst

Okay. That’s helpful. I will jump back in the queue. Thanks.

Andy Marsh — President and Chief Executive Officer

Thanks Eric.

Operator

Thank you. The next question is coming from George Gianarikas of Canaccord. Please go ahead.

George Gianarikas — Canaccord Genuity — Analyst

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

Andy Marsh — President and Chief Executive Officer

Hi, George.

George Gianarikas — Canaccord Genuity — Analyst

Hey. So, just first when you talk about back leveraging plans to recycle capital, to build your hydrogen network, are you assuming you’ll be doing that all on your own or are you looking for more partners or do you need more partners to help finance that built? Thank you.

Andy Marsh — President and Chief Executive Officer

Go ahead, Sanjay.

Sanjay Shrestha — Chief Strategy Officer

Thank you, Andy. Hey George, how are you? So, look, I mean I think two things, right, on that, so obviously we always explore and see what is our right structure of partnership can look like, right, whether it’s a partnership with the likes of infrastructure fund our partnership with the likes of strategic funds, that’s always an option, but given where we are, there two things that will happen, right, one is, as these plants come online, we’ll be able to demonstrate what is the cash-flow from this plants first thing, right, so there’ll be a track-record of that, let’s say for 12 months, number-one. Number two, now with the production tax credit, you do have a view on a 10-year forward cash generation with that PTC as well, depending on what the split of that is between our sources, the customer, that parties really getting refined here at this point in time.

But can we do the back leveraging on these plants on our own? Answer is, yes, we can, is that the path we go down, frankly we’re having a lot of discussion at this point in time, it depends on what is the optimal solution for us, but this is no different though, right, then what really happened in the solar and the wind space when it first kind of got started, call it about 10 years ago, right, so first you have the DOE loan guarantee program for three mega-solar project which then led to the back leveraging of those projects, you basically had ITC in the solar space that begin 30% of the capital stack ITC, we got production tax credit in the wind industry, which then became 50% to 60% of the capital stack in the wind industry.

So, there should be no change or no difference in terms of how the capital stack will unfold in the green hydrogen industry as well, but once we actually start to really generate cash from these plants and with the PTC now as a part of this Inflation Reduction Act, we absolutely believe that we will be able to back leverage, there will probably be some sort of a tax equity at some point, fast-forward several years out, and we will be really able to not have to do this green hydrogen plant with 100% equity balance sheet financing, but we should be able to do that out-of-the gate probably it’s 40% equity, there is a scenario where you could envision that eventually goes down to 20% and that’s what we mean when we say we should be able to get 4 to 5 times multiplier available capital to really execute on the green hydrogen generation network that we’re looking to build.

George Gianarikas — Canaccord Genuity — Analyst

Thank you. And if I could just ask one follow-up, I’d love to get your thoughts on recent traditional energy activity in renewable, natural gas, and I’m curious as to how you see that potentially extending more into hydrogen over time and how you see that potentially playing out? Thank you very much.

Andy Marsh — President and Chief Executive Officer

You want to give your view Sanjay?

Sanjay Shrestha — Chief Strategy Officer

You can start as well, it’s an interesting question.

Andy Marsh — President and Chief Executive Officer

It’s interesting. You know I think ultimately as renewable electricity comes to scale I think the local carbon footprint of using green energy coupled with electrolyzers is the long-term solution. I think RNG is a interesting niche market which supports the transition, but it’s not going be ultimately the winner. And I would put it in analogous to blue hydrogen, I was talking to one of the large funds in the Middle East, one of the sovereign funds, and I asked them, why are you talking to me when you could be generating blue hydrogen all day long? And their answer to me, once green hydrogen is shown to be competitive with blue hydrogen, no one’s going to use blue hydrogen. And I think the same holds for RNG versus hydrogen.

Sanjay Shrestha — Chief Strategy Officer

Absolutely. Andy great, and again just to add to what Andrew just said George, I think it’s really a question of scale, we believe that the green hydrogen has scaled much, much bigger going forward leveraging off of the renewable assets, yes.

Andy Marsh — President and Chief Executive Officer

Not that I’m against, I’m not against anything that helps it accelerate the transition, and I think RNG helps accelerate the transition.

George Gianarikas — Canaccord Genuity — Analyst

Thank you.

Operator

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

Sam Burwell — Jefferies — Analyst

Hey, good afternoon, Andy.

Andy Marsh — President and Chief Executive Officer

Hey, Sam.

Sam Burwell — Jefferies — Analyst

I wanted to dig in on kind of the gross margin trajectory a little bit. So, I guess, first-off for 4Q and Paul already touched on it a lot like the equipment sales should be up a lot, maybe almost double in 4Q, so that should probably drag the company-wide gross margin up, but I’m curious how high should it or can it go in 4Q assuming like roughly 20% equipment gross margins, there are any other material uplift we should expect whether it’s fuel, or service or PPA?

Andy Marsh — President and Chief Executive Officer

I will let Mr. Middleton take that one, Sam.

Paul Middleton — Chief Financial Officer

Yeah. I think so the short answer is you hit the nail on the head. It’s a significant delta in equipment sales in the quarter, right. I mean the recurring revenue, think about it like a layer, that if you the layer-in, it comes overtime, but in short stents like this one, where there is a significant step-function change in the volume, in the sales volume, largely driven by equipment, so that will certainly have a very significant positive impact. There are other things like the scaling, I mentioned a minute ago on electrolyzers, so if you, think about volume out of that facility driving up substantially in the quarter from previous quarters that means substantial leverage on those investments that we weren’t getting those run-rates earlier in the year. So, those are very positive.

We expect — we’re seeing big improvements, we see continued improvements in our service offering, which affects our service revenues and our PPA. We have a number of programs we’ve launched this year, and you’re just starting to see the benefits of those part terms in some cases, some of the sites where we launched the upgrades, we’re seeing 72% to 80% percent reduction in part costs. Those benefits are just starting to really manifest and play through our numbers. We think the service costs on a unit basis will be down in the fourth quarter about 10% to 15% percent compared to where we were in Q1 as an example, and then there’s a bigger step-function almost as you saw by the chart is forecasted to be cut almost in half in the course of next year as those programs continue to bear benefits and new units rollout with that better mix offering.

So, there’s a whole host of things that are playing in our favor that we’ll start to see some of those benefits certainly in Q4 and then you see it really starting to magnify on into next year. There are headwinds, I mean like fuel and as Andrew alluded to natural gas prices and other things, but those positive events truly help put more of a positive tailwind to that margin trend.

Sam Burwell — Jefferies — Analyst

Okay. That’s certainly helpful. And then maybe shifting to look at 2023, and recall from the update that you guys gave on the guidance back in October you said there’s some projects were pushed out to next year, so is it right to think that there might be less of a quarter-on-quarter decline in revenues in 1Q versus 4Q than like typically you see because of seasonality? I’m just trying to get a sense of what we should expect for the trajectory of sales on the equipment side through 2023? And then also how should we think about the margin trajectory for that segment in 2023, is there any fixed-cost absorption that should really improve through the year or should it be fairly consistent around that 20% mark in all four quarters?

Andy Marsh — President and Chief Executive Officer

All that sounds like question for you.

Paul Middleton — Chief Financial Officer

Yeah, I would say, in general, I would expect still a one-third, two-third kind of phenomenon in our sales next year for the terms of the first-half, second-half. We have a number of the material handling dynamics still is still the same where there’s still a heavy push for new facilities and even renewals to happen starting kind of the June-ish timeframe and leading into the busy period, so that dynamic hasn’t changed. Yes, some programs may slide and that certainly helps to one, overall volumes are up so that helps. So, you will certainly see year-over-year growth in Q1 of next year to Q1 of ’22. But I don’t know that — I guess the best math I would use is just you know using a similar split, if you will, of this year as a proxy for kind of how the quarters may play on a percentage basis into next year. I think having said that, Q4 is going to be a big quarter for us. I mean, it’s just the timing of the way the programs have flown and how this particular year has flown with material handling timing and that certainly makes Q4 big, so it’s nothing surprising to us. And as we move into next year and work towards hopefully over-delivery, we certainly — that will compound second-half activities with all the things that we’re chasing to try and as I said overdeliver on the volume. So, for all those reasons, I expect that it will certainly be lower, most likely than in Q4 but substantially higher than last year’s Q1 and compounding thereafter.

Andy Marsh — President and Chief Executive Officer

Yeah, I’m trying to ship everything I can this year.

Sam Burwell — Jefferies — Analyst

Sorry, just quickly what about the margin trajectory in equipment, should that be fairly consistent or are there a lot of fixed costs that get absorbed just as you ramp-up electrolyzers and improve through the year?

Paul Middleton — Chief Financial Officer

Yeah. I think we gave 10% as a whole holistic number for next year, and because it goes consistent with volume, you will see much stronger margin profile in the second-half, both from fuel activities and from the equipment sales. But again, I expect Q1 to be a better margin profile than Q1 of this year, and I expect it every quarter to be better next year given the build of equipment activities and moved on, so, I think, directionally that’s probably — well, that’s certainly how it will play.

Sam Burwell — Jefferies — Analyst

Okay. Great. Thanks guys.

Andy Marsh — President and Chief Executive Officer

Thanks, Sam.

Operator

Thank you. The next question is coming from Greg Lewis of BTIG. Please go ahead.

Gregory Lewis — BTIG — Analyst

Hey, thank you, and good evening, everybody. And thanks for taking my call. Just one question from me. Sanjay, I guess congrats on bringing on FreezPak, met those guys at the Symposium, super-nice guys, and they’re super-pumped about using Plug solutions. One of the questions I had, and I know you’ve talked to in the past is about the ability to kind of go in the mid-end of the market. I guess I’m wondering any update there on the penetration on the mid and small ends of the market and really as you look ahead to 2023, how are you thinking about that opportunity? Thanks.

Andy Marsh — President and Chief Executive Officer

So, Greg this is, Andy. I’ve spend a lifetime with Jose who runs that business. I think probably the interesting mix in the fourth quarter is customers which are smaller probably represents 35% of the shipments this quarter, I think that’s a dramatic change and some of that will continue to improve and I think the. I’ve made reference to, can you share a bit of the production tax credit to make the value proposition more attractive and let us sell more equipment, and I think you’ll see more-and-more of that. So, the answer is we’re doing much better in smaller applications, and I can tell you, so we are also looking at and there’s work going on for much smaller hydrogen infrastructure, and I can tell you that I have it, we do have solutions that we’ve developed for Europe and that we’re looking to bring them to the United States, it’s one of the reasons Jose has been able to be successful to start bringing more pedestal customers in Europe.

Gregory Lewis — BTIG — Analyst

Okay. And then I guess I’ll just follow-up on that Andy, thanks. Is there any way to think about the margins on the smaller end versus the larger, I mean, I would imagine they have to be at least a little better, is that kind of a fair way to think about that?

Andy Marsh — President and Chief Executive Officer

So, they’re listening Greg.

Gregory Lewis — BTIG — Analyst

Well, they need to buy more then.

Andy Marsh — President and Chief Executive Officer

Yeah, I would just say you know, I’ll let Paul comment if he has any changes. Yes, obviously if you buy more, the price is lower than if you buy less across-the-board for all three elements, hydrogen, fuel and service. And I would think, we kind of look like, any of the companies you follow that have had that experience.

Gregory Lewis — BTIG — Analyst

Super-helpful. Thank you.

Andy Marsh — President and Chief Executive Officer

Okay.

Operator

Thank you. The next question is coming from Ameet Thakkar of BMO Capital. Please go ahead.

Andy Marsh — President and Chief Executive Officer

Hi, Ameet.

Operator

Ameet, please make sure your line is not muted. The next question is coming from Craig Shere of Tuohy Brothers. Please go ahead.

Craig Shere — Tuohy Brothers — Analyst

Hey, good afternoon.

Andy Marsh — President and Chief Executive Officer

Hi, Craig.

Craig Shere — Tuohy Brothers — Analyst

Hi. So first I just wanted to make sure I understand the rough next year revenue trajectory we’re talking about. It sounds like maybe in the ballpark of 450 to 500 in the first half with every quarter improving sequentially from first to second to third and then as usual third and fourth quarter being in kind of a toss-up as to what’s the top for the year?

Andy Marsh — President and Chief Executive Officer

Paul, do you want to take that.

Paul Middleton — Chief Financial Officer

Yeah. I think that’s right. I think, because we’re chasing programs as I said, our goal is to overdeliver, and we’re focused on beating our numbers every year and certainly this year will be the strong pressure to push that, so we expect a lot of programs to come in in the second half as they always do, and between the material handling dynamic and landing those big programs working through the timing of one with the volume, we’ll probably make Q3 before a little bit toss up, but most likely Q4 will be little bit heavier.

Craig Shere — Tuohy Brothers — Analyst

Got you. Okay and then one for Sanjay. I think Sanjay that coming out of Symposium there’s a little confusion, I mean there has been a little horse-trading to optimize some of your hydrogen plants, and the most scalability, the best returns. And it sounds like you’re still targeting, yeah like a nameplate commissioning capacity at your end about the same, but it’s possible that the production that was previously anticipated, actual H2 production through 2023 might be a little less than was thought a couple of quarters ago? And that may restrain the ability to raise guidance, but the margins beyond ’23 should then proportionately benefit with the combination of the scale fuel and the IRA PTC?

Sanjay Shrestha — Chief Strategy Officer

Yeah, so let me maybe take a step-back right, so Craig as you know when we, I think you know this pretty well, right, when we talk about commissioning the plant to full production there’s about a 3 to 4 month lag and it depends a bit on whether it’s essentially our electrolyzer plus liquefier or it’s just the feed gas and the liquefaction technology, right. And if it’s just the feed available, sort of like this Olin JV in Louisiana and what we do in Tennessee, the commissioning of that actually could even be faster than that.

So, I don’t know if I would say that word necessarily tweaking or adjusting the view, we’ve always said that we wanted to be 200 tons of commissioning by the end of 2023. And look, and you know that we’re looking at 70 tons of commissioning this year, where we’ve gone through a lot of detail on why we are going to be at that 45 to 50 tons of commissioning by the end of 2022, but by the end of 2023 our goal always was to get to that 200 tons of commissioning and that was a mix of project in New York, project in Texas, right, expansion in Georgia, expansion in Tennessee, an ongoing work that we’re doing in Louisiana so.

And from a cadence standpoint, right, the way you should think about is as you go into Q2 of next year, you should start to see the contribution of that low-cost hydrogen from Georgia. And again, in Q2 you should also start to see the contribution of that low-cost hydrogen coming from Louisiana, some gaseous hydrogen coming out of Tennessee. Then as you go into the Q4 of 2023, you should start to see some contribution coming from New York and Texas, some incremental contribution again coming from Georgia, because we have told you that we’re really looking to get that plant to be 30 tons by the end-of-the year, there is an existing infrastructure that will be actually a faster moving.

And by the way, Craig, we also have some other projects in the hopper that we’re working, because it’s a development business and we want to make sure that we’re thinking about optimizing and balancing if one project is a month or two behind, then we have something else that we can actually backfill that with a few more, so that’s how I would, think about it in terms of the cadence of that and how things will play-out in 2023.

Craig Shere — Tuohy Brothers — Analyst

Thank you.

Operator

Thank you. The next question is coming from Greg Wasikowski of Webber Research. Please go ahead.

Greg Wasikowski — Webber Research — Analyst

Hey, good afternoon. Andy, how you doing?

Andy Marsh — President and Chief Executive Officer

Okay Greg, how about yourself?

Greg Wasikowski — Webber Research — Analyst

Yeah, doing well. Thanks. A couple of quick ones on the pedestal customers, and apologies, I’ve also been hopping back-and-forth, so.

Andy Marsh — President and Chief Executive Officer

I understand.

Greg Wasikowski — Webber Research — Analyst

Apologies, if already asked here. So, it’s I noticed.

Andy Marsh — President and Chief Executive Officer

You’re not that fast today that you spend the whole hour with us.

Greg Wasikowski — Webber Research — Analyst

I wish you were the only ones I covered. On the pedestal customers I just noticed since the Symposium, Lidl is now officially named pedestal, so just curious, any color on what has developed since the Symposiums and now if it’s just as simple as executing an agreement or if there is anything interesting to know there? And then also if you could comment on just the relative size of where that stands versus the rest of the stationary power customer — sorry the pedestal customers, without giving numbers, but kind of where relatively speaking it may rank amongst the others, that would be great? Thanks.

Andy Marsh — President and Chief Executive Officer

Sure. So, Greg yes, we signed contracts after Symposium. So, that was pretty exciting, so it happened about two days after the Symposium, and Lidl has about 150 distribution centers in Europe, so you can kind of start thinking about them as the size of Home Depot.

Greg Wasikowski — Webber Research — Analyst

Okay. Great. Very helpful. And then one more just on pedestal customers, one that we haven’t heard about as much over the last year and a half since the original announcement was GM, so was just wondering if there’s any broad-based updates there, any appetite for expansion or different types of applications whether it be stationary power or etc. any update would be great.

Andy Marsh — President and Chief Executive Officer

So, we are doing deployments for GM this quarter. We’ve been continuing to work with GM. You know, certainly not as many opportunities there as Home Depot and Walmart and Amazon or Lidl, but I’m pretty pleased with the progress.

Greg Wasikowski — Webber Research — Analyst

Okay. Great. Thanks, Andy.

Andy Marsh — President and Chief Executive Officer

Okay.

Operator

Thank you. The next question is coming from Ameet Thakkar of BMO Capital. Please go ahead.

Ameet Thakkar — BMO Capital — Analyst

Let’s try this again, sorry about that. I’ll make it quick because I know it’s been evening, but just more of a housekeeping question, that I noticed in the investor letter you guys reaffirmed your kind of 2026 and 2030 revenue and margin targets, and did the same for 2023 revenues, should we still be thinking about the 10% gross margins for 2023 revenue explicitly?

Andy Marsh — President and Chief Executive Officer

Yeah, Paul, I’ll let you answer, but I think we’re standing up the chart that you presented on margins and performance for, ’23, 2030, ’26. There’s, no changes to that.

Ameet Thakkar — BMO Capital — Analyst

Great. And then is it — yeah, go ahead, Paul.

Paul Middleton — Chief Financial Officer

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

Ameet Thakkar — BMO Capital — Analyst

And just real quick, and then thinking about like a lot of the electrolyzer contracts, and the equipment you’re selling in Europe, is there going to be like a service revenue part of that as well that’s going to grow as you deploy more capacity out there?

Andy Marsh — President and Chief Executive Officer

Yeah, that’s actually good question, and no what we say is the answer is yes, but what we really haven’t talked a lot about is the opportunity for service with electrolyzers, which when I view with the team, maybe much more attractive than material handling. So, we are, a lot of the work we’re doing in Europe as you know will be associated with electrolyzers and the service business. When we look at it, we think it could be very, very attractive.

Ameet Thakkar — BMO Capital — Analyst

Thank you, guys.

Andy Marsh — President and Chief Executive Officer

All right. Well, thanks everyone. I appreciate everyone’s who is on the call today. Looking-forward in January to provide you the annual update, which happen probably at the end of January, we’ll schedule. And thank you again. Bye now.

Operator

[Operator Closing Remarks]