Jordan Levy: That’s really helpful. Appreciate that. And then maybe just as a quick follow up. Not to belabor the timing on the DOE here, and I know there’s only so much you guys can say, but I’m just trying to get a sense of kind of at this point in the cycle with the term sheet and all of that, is the ball sort of in the DOE’s court at this point, or are you still at a point where you’re in constant communication back and forth with them? I’m just curious to get where we are in the process.
Andy Marsh: So, as I mentioned in my comments, we do expect — this is March, and we do expect conditional approval by the end of this month. There’ll be negotiations then. And I think our view is that by the end of the third quarter, those negotiation — it should be written and it should be finalized.
Jordan Levy: Thanks for all the details.
Andy Marsh: Okay, Jordan.
Operator: Thank you. Next question today is coming from Sherif Elmaghrabi from BTIG. Your line is out live.
Sherif Elmaghrabi: Hey, thanks for squeezing me in.
Andy Marsh: Good morning, Sherif.
Sherif Elmaghrabi: Good morning, Andy. So, I guess a bit of a nuanced question, but I noticed the average price for a fuel cell was significantly higher in Q4. So, my question is, are we already seeing an impact from pricing efforts, or is that still more of a ’24 story and this quarter may have just been a mixed shift to bigger fuel cells?
Paul Middleton: Yeah. In Q4, it was probably more mixed. We tend to sell a lot more class 1s in Q4 often, so that helps in terms of the overall pricing structure. But I think as you look at ’24 is when you’ll see more of that impact and probably more so in Q2, as Andy alluded to.
Sherif Elmaghrabi: Okay. Got it. That’s helpful color. Thank you.
Operator: Thank you. Next question is coming in from Amit Dayal from H.C. Wainwright. Your line is now live.
Amit Dayal: Thank you. Good morning, everyone.
Andy Marsh: Good morning, Amit.
Amit Dayal: Hi, Andy. Just one quick one from me on the DOE loan, right? So, given the focus on the operational and margin improvements versus aggressive sales growth for 2024, and based on just your comments a little bit earlier, should we assume that the 2024 execution plan is not really dependent on this coming through for you in 2024, this facility? Just — that would help basically give us a sense of what the cash needs just overall for the business that you can support with the available resources.
Andy Marsh: Yeah. So, Amit, operationally, we’re not dependent upon the DOE loan for ’24. We will, once the DOE loan is finalized, move ahead more aggressively, especially in our Texas activity, and that — because we’ve already made significant investments in Texas, we see opportunities to even have some capital come in from the DOE to support that activity. So, we look at it, a lot of the — when you think about 80-20, we feel a good deal. For example, in Texas, we’ve already made the capital investments.
Amit Dayal: Understood, Andy. That’s all I have. Thank you.
Andy Marsh: Okay. Thanks, Amit.
Operator: Thank you. Next question is coming from Ameet Thakkar from BMO Capital Markets. Your line is now live.
Ameet Thakkar: Hi, good morning. Thanks for taking my question.
Andy Marsh: Good morning, Ameet.
Ameet Thakkar: Good morning. And thank you for all the detail on the cash burn. I guess just from a starting point, what sort of kind of revenue in ’24 and gross margin on — in ’24 is that premised on?
Andy Marsh: Go ahead, Paul.
Paul Middleton: We’re not — we haven’t really given specific numbers, I guess, to be candid with you. I think what we’ve alluded to is that we definitely expect growth off of 2023. You’ll definitely see growth off the revenue numbers and you’re obviously — we’re anticipating pretty significant improvement on the margin front. So, that’s where we stand.
Ameet Thakkar: Okay. And then, since like we’re kind of waiting on the DOE to move forward with Texas and New York, I guess, is there any kind of impact to your fuel margins in ’24 from any off-takers that won’t be getting fuel from those plants?
Andy Marsh: No. I’ll let Sajay take that, but no, that’s not in the plan.
Sanjay Shrestha: No. Ameet, we don’t have any of that impact whatsoever in ’24.
Ameet Thakkar: But there are off-takers here for both those plants?
Sanjay Shrestha: Yeah. Again, I think the way we’ve been focused on, right, is like, for example, I think this was a question we used to get a lot, how many off-takers do you guys have in Georgia? And we’ve always said, for the reason to build Georgia was for us to really help the North American network. Second, really lower the cost more than really trying to optimize the price, right? So that’s always been our focus. But when you think about our plant in Texas and New York, there’s a lot of discussion in the plant in Texas. There was some off take, right, but that doesn’t kick-in in 2024, which is why you should actually see no impact whatsoever from that.
Ameet Thakkar: Thank you.
Andy Marsh: Thank you, Ameet.
Operator: Thank you. Next question is coming from Dushyant Ailani from Jefferies. Your line is now live.
Dushyant Ailani: Thanks for squeezing me in. I just had one quick question on the electrolysis stacks, the cost cutting that you guys mentioned. Could you talk a little bit about where you’re seeing those cost cuts and maybe just walk us through that a little bit?
Andy Marsh: Yeah. So, we mentioned cost cuts. It’s really manufacturing process changes to allow the stack to be produced in a much simpler fashion. So, I think if you’ve done a tour of a facility, it actually helps increase the time for manufacturing the stack. And it’s really not dependent upon suppliers, and it’s dependent upon process improvements that we’ve made, which really simplifies the stack and has some really dramatic cost reductions on the level of materials we require and the assembly technique.
Dushyant Ailani: Thank you.
Andy Marsh: You’re welcome.
Operator: Thank you. Next question is coming from Andrew Percoco from Morgan Stanley. Your line is now live.
Andrew Percoco: Great. Thanks so much for taking the question and squeezing me in.
Andy Marsh: Good morning, Andrew.
Andrew Percoco: Good morning, Andy. How are you?
Andy Marsh: Okay.
Andrew Percoco: Great. Well, just maybe start off with a housekeeping item. Product gross margins in the fourth quarter came down quite a bit. Was there any non-cash impact embedded in that number in the fourth quarter? And then, I have a follow-up after that.
Andy Marsh: Go ahead, Paul.
Paul Middleton: Yeah, there was probably, I’m going to estimate, roughly $60 million or so non-cash evaluation adjustments. That’s a GAAP basis. Obviously, we still have those assets, and our intentions are to leverage them into cash in 2024. So, that was part of it. And then, the other part was lower absorption. When you have — on the equipment side, when you have that dynamic, that affects equipment margins. And as we’ve announced, a lot of those restructuring activities actually were specifically targeted towards labor and overhead in the production activities. And so that should yield benefits as we move into ’24. So that was — I guess those are some of the key things in relation to your question on equipment margins.
Andrew Percoco: Got it. Okay, that’s helpful. And then, as my follow-up, and I think most of my other questions related to kind of cash flow and balance sheet dynamics have been answered. So, I’ll just maybe shift to a longer-term question on the PPA environment. I think, as others have already noted on the call, there’s a lot of demand for clean electricity, AI data centers, other electrification efforts. And I think what you’re seeing across the developer landscape is that returns are actually increasing in some cases, PPA prices are increasing as a result. What does that mean for your unit economics of your business beyond 2024 and 2025? I know you secure a lot of your PPAs for the plants that you’re working on today, but does the unit economics of green hydrogen in the U.S. work if PPA prices don’t fall from here?
Sanjay Shrestha: Andrew — maybe, Andy, I can take that one.
Andy Marsh: Yeah, go ahead, Sanjay.
Sanjay Shrestha: So, Andrew, I think we’re glad that we’ve secured the PPA pricing in Texas, as you know, right? And I think even in Georgia, given I think how we have that deal with sort of the overall natural gas price market dynamics that actually PPA — that power pricing is playing out pretty well in our favor as well. So, we have some other discussion where power prices are going to actually remain pretty attractive in some of the even other development effort we still have going on. Obviously, the focus here is, we’ve already talked about what we’re trying to do in ’24, how we’re prioritizing two key projects here, and then you really think about all this in the second half of 2025. Having said that, we’ve always said, right, as long as the power prices stay between that $30 to $40 a megawatt hour level, all in fully-loaded, green hydrogen economics work.
And look, and I think, Andrew, we’ve all been through this cyclicality of the power market, right, where the rates impacts have had impact from the levelized cost of electricity. But directionally, we believe that the power prices, in any given year, it could go up, any given year, it could go down. But directionally, our view still remains that the power prices probably will continue to go down. But does it have to go down dramatically from those levels here for the green hydrogen economics to make sense in the U.S.? Probably not. That’s number one. And number two, we also have been very thoughtful about really being in the right location, right opportunity set as we think about some of this green hydrogen opportunity, also in Europe as well, where we can leverage low-cost hydro, complementing that with low-cost renewable electricity.
So, look, and if there is any relief from the inflationary environment, if anything, you will probably start to see the cost for the wind turbine also go down at some point, that should have a benefit. And that hopefully is enough to offset the rise in the interest rate environment and the return hurdle that some of these developers are looking for, right? So, we really don’t need the price to go down a lot. But again, our sort of working view at this point in time is when you really think another five years out directionally levelized cost of renewable electricity should still continue to go down. But certainly not at the rate that we’ve seen in the last 10 years.
Andy Marsh: And Andrew, I would just add that a bigger picture. I’ve mentioned work we’ve done with the leading consulting firm for hydrogen. And they’ll tell you they expect in the U.S. at least 50% of hydrogen will be green in 2030. And as you know in Europe, they have very, very stringent goals where I think the number is 43% by 2030 has to be green. So, there are other dynamics that come into play.
Andrew Percoco: Great. Thanks so much.
Andy Marsh: Okay. Thanks, Andrew.
Operator: Thank you. Next question is coming from Kashy Harrison from Piper Sandler. Your line is now live.
Kashy Harrison: Good morning, everyone, and appreciate you getting me on the call here.
Andy Marsh: Good morning, Kashy.
Kashy Harrison: Yeah, good morning, Andy. So, I guess my first one, you’re highlighting $75 million of expected savings in 2024. And I fully appreciate that reductions are extremely difficult for the people involved. So, not trying to be — basically what I’m asking is why aren’t you cutting something more aggressive? Why aren’t you targeting something more aggressive? Because your OpEx at this point is 42% of revenues, and that’s up from 22% in 2019. And so, why aren’t you trying to cut OpEx in half this year?
Andy Marsh: I think, Kashy, because it may look good for some folks in 2024, but it will be a huge mistake in 2028. Those same folks are critical for us to achieving the gross margin targets. Those same folks are critical for improving our customer experience. Those same folks are important to building out plants like Texas. We modeled this so that the company can become operationally cash flow positive in ’25. But chainsaw — what was that [indiscernible], I don’t think he built great businesses. And business is much more than the Excel spreadsheet that you put in front of yourself.
Kashy Harrison: Yeah, fair enough. And then, my follow-up question, maybe a bit more mechanical in nature. Can you walk us through how the change from sale leasebacks to direct purchase works with the customers within material handling? I think there was a comment in the K that now the customers are dealing directly with the banks. And so, I was wondering if you could just help us think through exactly how the sales process works today versus how it did prior. Thank you.
Paul Middleton: Yeah. So, I guess as a preface, that industry, a lot of customers like to lease their asset solutions. And so, they lease their tractor trailers. They lease their forklifts. They lease their racking equipment. It’s just the way they like to access that market. Historically, we’ve offered both options. We’ve offered customers the ability to buy the equipment, and some do that. And then, we’ve offered options where we lease it to them. Because it’s eligible for investment tax credits, it becomes — it has been a bit more challenging to monetize those benefits when we offer that leasing solution. And it’s limited in terms of the banks and participants you can go to. So, historically, for those customers, we would — they would subscribe to it and we would deploy it and then we would take that — package that up and sell it to a bank and then monetize the benefits.
