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Operator
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. If anyone should require operator assistance during this conference, please press star zero on your telephone keypad. 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.
Teal Hoyos
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 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 31, 2021, as well as other reports we file from time to time in the SEC. These forward-looking statements speak as 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.
Item 1A
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 fertilizing 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 always 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 percent of the world's CO2 footprint. But 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, Hy-Vee Avans, and, of course, powering material handling equipment becomes 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'll move up our path to profitability by six months. Finally, before Q&A, I'd like to highlight PLUG's priorities beyond our revenue goals of $900 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% plus gross margins in 2024. The math is quite simple via a combination of vertical integration and the PTC. Obviously, we're 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 break even 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 sell more electrolyzers, sell more green hydrogen, sell more fuel cells, especially for our stationary products, Hy-Vee, and of course our material handling business. And four, full deployment of our highly optimized and automated Gigafactory and Vista site that will drive down our costs of our 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, Hy-Vee, Axiona, and Foreskew. 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.
Operator
Thank you. And ladies and gentlemen, at this time, we will conduct our question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation code will indicate that your line is in the question queue. You may press the star key followed by the number 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Andy
One moment, please, while we pull for questions. And our first question comes from Colin Rush with Oppenheimer.
Operator
Please state your question.
Colin
Thanks so much, guys. I guess this may be 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 you know, looks like could get pretty competitive fairly quickly.
Sanjay
Yeah. So, hey, Colin, how are you? 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, you know, one of our biggest focus is sourcing 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 you guys, as Andy mentioned in his prepared remarks, we're actually looking to build more plants faster, not the other way around, number one. Number two, what we're really looking to do is, and we've taken this approach, right, where, you know, when the 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 location for that? How do you get the complement 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. And one of the things we're really doing is that how do you not only look at the land, but how can you expand that? How can you think about larger solar plants? 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 a gray hydrogen being used in industrial applications today, that really creates a very, 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 goes with on-site electrolyzer, you're talking about 10-plus gigawatt of electrolyzer opportunity in this industrial opportunity for us as well. Would you like to add anything?
Colin
No. Perfect.
Sanjay
Anything else, Colin?
Colin
Yeah, yeah. Now, 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 guys have kind of stretched 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. I'm sure that you've kind of bounced those ideas around, and those conversations are going to get more concrete here. But I'm just curious what you can say about that at this point.
Item 1A
Yeah, Cowan, I would kind of first take a step back and say there's actually three ingredients to that supply chain. One actually has to do with design. And when I think about our PEM electrolyzer design, we envision that sooner rather than later, a stack today will actually have about double the power, which actually simplifies really our supply chain. So, a lot of that happens with You know, can you design the product simpler? And that's continuing to go through our business. Probably the more important one is, you know, are we adding the right people? And I think the reasons that we do not foresee supply issues this year is because the leadership we've put in place. As you know, I've hired Dave Midrick from Tesla who drove their Reno facility to make sure Tesla vehicles could be delivered. that same sort of mentality about how to develop those strategic relationships with suppliers, we've been working on for a long time. And third, look, a lot about this whole integrated supply chain is your own manufacturing capability. And the facility we've built in Rochester, the facility we've built in Vista, which now we can occupy, you know, I think dramatically changes everything. So we have sophisticated people who've been driving our supply chain for the past years. We have designs which we're looking to reduce the number of parts which help us with cost and supply chain. And third, we have the facilities. And look, our goal is to continue to have that leadership position. I don't want to downplay that, and I'm not trying on this call, the downplay that we don't fight supply chain issues every day. We do. But that is, you know, the first item I get in the morning is what's going on and do they need me to make a call? So it is an everyday effort. It is more complicated. But I would say that it's less intense than it was.
Operator
Perfect. Thanks so much, Andy. Thanks, Colin. Our next question comes from James West with Evercore ISI. Please go ahead.
Andy
Hey, good afternoon, guys. Good afternoon, James.
James
Andy, clearly a lot of game-changing action here recently. One of the things I wanted to hone in on, 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 you get to that, I think you put out a $40 billion market opportunity number.
Item 1A
And, Colin, I'm sorry, James, you know, first, it was a big step. I mean, you know, that activity with Microsoft to design that product was a combined two-and-a-half-year effort. And already we have developed the next generation product, which will be rolling out to Microsoft and others in the fourth quarter here. And I think in our letter we really outlined numbers for this market. I think the numbers were in the next 12 months, Sanjay, you know, I think over the next 18 months about 200 megawatts of activity. So, the numbers are, you know, just starting, James. But, you know, with that application, and we're talking, you know, we're engaged with all the data center operators. But it also is very applicable, you know, and I was down in the city of Albany talking about this today, about the challenges many people are having with powering EVs. And I think our first big deployments, believe it or not, will be powering electric vehicles, where Hydrogen will be generated outside of town and brought in to power stationary products, believe it or not. That's one that's not as obvious, but it's actually probably will be the first biggest market for that opportunity. And third, this same product scaled as we scale it, and there will be different continuous generation is what we plan for SK. And for SK, by the end of 2024, we'll be deploying 200 megawatts worth of product. So this is a huge opportunity for us and really just beginning. But it's not only a huge opportunity. And, you know, when you think about it, these are really the beginning of the future peaker plants that, combined with the work Sanjay is doing with pipelines as well as green hydrogen generation, that's really the bigger vision. The $40 billion really only represents what's going on at data centers.
James
Right. 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 putting a large-scale facility there. That seems like another big deal, but also probably the first in maybe a series of port applications that you might look to implement. you know, exercise on. Is that fair?
Item 1A
Yeah, I would say absolutely. And I think, James, if you look at that port, it is the second largest chemical port in the world. We're looking to add, you know, they're looking to add a green hydrogen pipeline at that port to feed all the chemical plants. And we certainly are looking to scale it. And what was it, 300 miles? There's like 60% of the population of Europe is close enough to that port, boy, what ideal situation for plug to really be building our Hyvea business, material handling business in stationary. So that is, and here in the States, James, I actually believe the best opportunities for these hydrogen hubs, you know, I was meeting with Senator Ossoff in Georgia, and we talked a lot about the hydrogen hub possibilities in Georgia. And one of the biggest focuses is the Port of Savannah. You know, you think about the Port of Savannah, I guess the Port of New York, New Jersey. Even I know in West Virginia when we met with Senator Manchin, you know, there's an opportunity to bring hydrogen from West Virginia into the Great Lakes. So ports and moving hydrogen is really, really a huge opportunity.
James
Great. Thanks, Andy.
Operator
Thanks, James. Our next question comes from Alex Kanya with Wolf Research. Please state your question.
James
Good afternoon, Alex. Hi there. How's it going?
Alex
Okay.
James
Great. Maybe like a philosophical question about how to think about the PTC with respect to pricing. I guess in the near term, if you've got fixed price contracts, maybe the PTC is something that you're able to kind of pocket, but then maybe over time, and obviously that would help out with the near-term kind of margin headwinds, but then over time, is it fair to assume, or I'm just curious about how you're thinking about what the PTC means for how you negotiate green hydrogen deals moving forward?
Item 1A
Yeah, I think, you know, 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, I think 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.
James
Great. Thanks for that. And then maybe a follow-up just on thinking about it.
Item 1A
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.
James
That makes sense. Thanks. And maybe just thinking about, you know, now the fact that the U.S. has a, you know, is looking to have a pretty supportive policy environment, and it looks like, you know, Europe is aiming for something with RepowerEU. I mean, how do you think about kind of balancing your focus? Do you think you can kind of scale, you know, kind of both of those continents in kind of the way that you hope? Or, you know, now does this kind of maybe divert a little bit more attention towards the U.S.?
Item 1A
That's actually a real one. Interesting question, Alex, and you must have heard my testimony in front of the Energy Committee, because I mentioned without policy, our focus would move more rapidly to Europe. You know, at the moment, we believe, you know, for plug, the two best market opportunities are the U.S. and Europe. And, you know, I think we will be leveraging our partnerships more in Europe. Well, most of what we'll do here in the States, we'll do it by ourselves. You know, in Spain, you know, when you think about how to leverage solar, you couldn't have a better partner than Axiona. You know, our activity in the wind belt up in Denmark with H2 Energy and with other activities we're looking at, I think that's where we'll be focused. Obviously, with Renault JV, We're focusing on leveraging their capabilities. So in Europe, I think it'll be much more partnership oriented and people who can, uh, help, help lead us in Europe here in the States, we will take a leadership position, but quite honestly, without this bill, more and more of our focus would have turned to Europe. But now, um, now I think it'll be a much more balanced approach, but, uh, I always like to remind people of the pure play hydrogen players. No one in the past two years have invested more in Europe than Plug. Plug is both an American company and a European company.
James
Great. Thanks. Good to hear. Take care.
Operator
Thanks, Alex. Our next question comes from Bill Peterson with J.P. Morgan. Please go ahead.
Alex
Hi, Bill. it's good to see the uh the uh inflation reduction act uh pass after a couple uh a couple head stakes um but i wanted to actually follow up on that last question um on europe you know we saw the ipci high tech to tech come 5.4 billion euros in funding we see a lot of you know logos on there but not plugged directly we see a lot of your partners i guess is there a path for plug to directly benefit and if so does it entail you know local manufacturing and just kind of dovetail with that last question like How does Pug benefit from that, and what does Pug need to do to benefit more?
Item 1A
No, I think that, first, our focus was our partnerships. And if you look at Hy-Vee, and I know the numbers haven't been announced, but the level of support Hy-Vee has received is significant. And, you know, that has been – that was our focus. major initiative for on-road vehicles. We obviously have activities as Plug Alone going on in Belgium with support from the Belgium government. You know, I think as we get viewed as more and more European, and, you know, I take a look at the fact that, you know, I was invited to France. I was at a dinner with Macron. you know, plug, you know, plug is beginning to be recognized more and more throughout Europe. And I think as our presence becomes clearer, we'll be able to participate more directly. But the moment we felt that to maximize the amount of cash to support our activities in line with our business goal, that Hy-Vee certainly was the best vehicle. And I can just tell you, um, Bill, that has really paid off.
Alex
Terrific. And the other side of the coin, you did kind of mention earlier about electric cars and stationeries being the first big market. I believe you're actually seeing some of that later this year as part of the sort of back half weighted. I hope you can size that opportunity, I guess, as a run rate actually this year, but more importantly, how does that business look over the next few years, given that it looks like it's one of the, it's not the biggest stationary opportunity in the near term, certainly one of the bigger ones.
Item 1A
If I was going to talk about, from a plug perspective, the stationary market will, you know, beyond electrolyzers, we see the stationary market as really going to grow more rapidly than on-road vehicles in the next two to three years. And it's really because, you know, there's two big applications. One is a as I mentioned earlier in the call, powering electric vehicles. The second one is this data center market, which when you have people like Microsoft, you know, and obviously if anyone's read the blog, we've developed a very, very close relationship that, and really demonstrated a, I think, what do they call it, a moon? It was equivalent to man's walking on the moon. Yeah. You know, they're looking to eliminate all diesel by 2025 or 2030. We think, you know, that's going to be an incredible opportunity for Plug. You know, if you think about 2024, for example, you know, I think this business will be – that portion of our business could be, you know, more than 20%, 25% of our business. And then when I think about on-road, you know, Hy-Vee is looking to have, you know, 100,000 vehicles on the road by 2030. So there's a real good roadmap for us with IVEA. And the fact that we have 20 customers who are going to be piloting our products over the next six months, I think, which is double the number that we expected when we talked to you at the beginning of the year, I think that's a real sure, clear sign that those business opportunities are large.
Alex
Thanks, Seth. Lots of good activities to track.
Andy
Yes, thanks, Bill. Thank you.
Operator
Our next question comes from PJ Juvicar with Citi. Please go ahead.
spk12
Hi, PJ. Yes, good afternoon. Good afternoon. Great news with PTC. And just a question on sort of levelized cost of hydrogen. What 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 gauge how quickly will the heavy-duty industry, like refining and steel, would start converting to green hydrogen.
Item 1A
I'm going to turn that over to Sanjay here, PJ.
Sanjay
Hey, PJ, how are you? So, PJ, as you know it very well, right, when we talk about gray hydrogen, we've got to kind of put that in context with – on-site, you know, gaseous gray hydrogen versus liquid hydrogen as well. So, you know, I mean, despite the, you know, sort of commodity price volatility and all that, if you're just talking about on-site gray hydrogen supporting things like refining industry or the, you know, ammonia and things like that, the number would be probably around $1.50 a kilogram, give or take. Okay, so if you're looking at that $1.25 to $1.50 kind of a number, now take a step back, right? Think about on-site electrolyzer four cents a kilowatt hour electricity, right, connected to that electrolyzer, you know, then you take into consideration 55 kilowatt hour of electricity, then you got some capital cost there, then you layer on PTC. So all of a sudden, right, there is not a single application where the green hydrogen is not economical anymore. Obviously, it will take some time for the industry to evolve and grow as we move ahead, but that's what happens. Now, take that into the liquid hydrogen market and think about long, you know, sort of transportation application, mobility application. When you start to think about the diesel parity, our view always had been it's not about thinking about can we charge, you know, more than diesel because it's our, you know, system is more efficient. We want it to be a diesel parity, right? When you look at those numbers, you know, all of a sudden, even from a liquid hydrogen perspective, so market can comfortably be in that $4 to $5 range delivered. And with PTC, that path becomes even that much more clear. And for folks like us, it actually allows us to provide that kind of a pricing, make return on our plant. And PJ, I hope that folks do appreciate one point, which is we've been at it now for some time. And the fact that we've been building this green hydrogen plant, the work we have done, the learnings we have had, I think, really, really stands out as a big force mover and a competitive advantage for Plug.
spk12
Great. Thank you. 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, you know, with this PTC, if demand for green hydrogen takes off, which it will, you know, your electrolyzer orders could also go up, just like what you've seen with hydrogen energy and new fortress energy. You know, do you have enough capacity at Rochester? Was Rochester built with PTC in mind, or do you need to expand more, you know, even more?
Item 1A
I think that's a real good question, PJ, and I hope the answer is I have to expand more. But let me kind of give a picture where I think, you know, I mentioned earlier that that we do think there's possibilities that we'll be at a rate of about one megawatt a month in 100 megawatts a month by October in Rochester. I think there's a way to optimize that facility and push that probably up to 150, 160 megawatts I think there's an opportunity to make design improvements. But I do think, especially in Europe, we'll be looking at opportunities to expand our manufacturing footprint to support that market. So, you know, we've already had, I'll say, some initial discussion. So I think that's an opportunity. And one of the items I think we did really well was that – we designed that plant that we can take that design and duplicate it, duplicate it, duplicate it, so that the footprint and design we put together, you know, it probably would take us 15 months to build another plant. You know, I think, you know, I think when you look at that, you know, I think that we will be probably giving that a lot more serious thought, especially for Europe, so that, you know, we're in a great position to capitalize on this opportunity. But, you know, having built a plant and then just having to duplicate it is a lot simpler than doing it for the first time. And I used to have a full head of hair, PJ, before we started building a plant.
spk12
All right. Well, thank you. I appreciate it.
Operator
Okay. Thanks. And our next question comes from Eric Stein with Craig Hallam. Please go ahead. Hi, everyone.
Eric Stein
Hello, Eric. How are you today? Hello. Doing well. So all the talk of the PTC and cost of hydrogen coming down, I know something that you've talked about for years is potentially expanding to smaller locations for materials handling. Just wondering what your thoughts are. Is that still an objective, or how would that impact expand the market opportunity.
Item 1A
You know, and I don't talk about this much, Eric, but the acquisition of ACT and the trailers, having controllers of our trailers actually makes smaller hydrogen facilities simpler. It reduces the cost of infrastructure. And we have done smaller sites. and we're beginning to do more. And we do see that the combination of lower hydrogen costs, simpler on-site hydrogen infrastructure where it becomes much easier just to do swap-outs of trailers, and you then think about a regional activity. Jose and his team actually have quietly implemented a few of those. So we do think that's a great opportunity And the fact that the fuel, which has dominated the cost, now will be significantly lower is a real, real benefit.
Eric Stein
And any thoughts on how that expands the market opportunity? It might be a tough question.
Item 1A
So, you know, I think at the plug symposium, you know, Jose pointed out, you know, the path to – you know, how that business could be a, you know, $3 to $4 billion business opportunity with smaller scale. And, you know, we really had that beginning to ramp in the 25, 26 timeframe. We haven't done any new projections, but obviously when you can think about what Jose was pointing at and with the lower costs of hydrogen, you could see that being pulled in. That's a real good question.
Eric Stein
Got it. That's helpful. And maybe just last one for me. In the release, you mentioned two pedestal customers in Europe that you are targeting. Just wondering if you can give any details there, whether it's, you know, potential timing size, et cetera.
Item 1A
Yeah, we're in the final, final stages. And I was hoping – I've actually been watching my phone to see if I could say anything. But we do have – You know, we've targeted three pedestal customers for this year. I would expect all those will be announced before we speak in the fourth quarter. Okay, thank you.
Andy
Two in Europe, one in the United States, Eric. Perfect.
Item 1A
Yeah. And I think that the comment I made about us really looking more European, the fact we have, you know, probably in Europe today, over 300 people, has really made a big difference in being able to convince customers we're serious.
Andy
Thank you. And our next question comes from Chris Souther with B. Riley.
Operator
Please state your question.
Chris
Hey, thanks for taking my question here. Can you maybe talk a little bit about the $15 billion electrolyzer sales funnel? I'm curious if you could frame the activity by geography and maybe the timelines customers are looking for potential deliveries. And I'm curious, does the PTC potentially change your strategy within the U.S. around electrolyzer sales versus owning the infrastructure yourself?
Item 1A
Yeah, really good question. So, you know, Chris, probably 70% 80% of that funnel today is Europe and the Middle East. And that is the heart of the funnel. There are, just to give you a feel, there is about, just for our smaller five 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, to steel manufacturing. There's a lot of smaller projects that, quite honestly, are easier to deploy rapidly because you don't have, essentially, they're self-contained systems. And most of our shipments, which will be about $140 million of electrolyzers, the second half, will be like five megawatt containers. I think at this time next year, when we report the third quarter, I suspect about 30 to 45 percent of our revenue will be coming from our electrolyzer business. And I think by
Andy
2025, it could be as much as half. Okay.
Chris
And then, you know, does the PPC potentially change the strategy within the U.S. maybe around, you know, selling versus, you know, building out the infrastructure yourselves? Or would you kind of just take the potential growth of a market as an opportunity to do both?
Item 1A
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. And 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, as we 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 one gigawatt electrolyzer plant here in Texas, and one of the discussions we had was, could we own a portion of that plant so we could use as part of our offtake? It would reduce, obviously, our capital costs and provide us an opportunity to really expand and grow more rapidly. So the answer to your question is we have been giving that a lot of thought.
Chris
Okay. Appreciate the call. I'll hop in the queue.
Operator
Thank you. Just a reminder to everyone, to ask a question, press star 1 on your telephone keypad. To remove yourself from the queue, press star 2. Our next question comes from Samir Joshi with HC Wainwright. Please state your question.
Samir Joshi
Hey, good afternoon, everyone. Thanks for taking my questions. The chart that you have in your letter on page three, does that take into account delivered cost of hydrogen, or does it assume localized production?
Item 1A
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.
Sanjay
Go ahead. That's right, Andy. But Samir, that is really on-site, right? So that does not take into consideration the delivery cost. That chart is up.
Samir Joshi
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?
Paul
Yeah, it's really anticipation for the second half. I mean, if you look at the sales, as we've seen historically, you know, we do about one-third in the first half, and we do, you know, two-thirds in the second half. It's going to be, you know, we're going to do more sales in the second half than we did almost all of last year. So, you know, it's a big push. We're ramping up new facilities and production to support that as well as what we anticipate happening in the first part of next year. So I don't see that build continuing on in the second half. I think it will temper. Well, I know it will temper, but it's really driven towards all that growth that we're building for to deliver in the second half.
Samir Joshi
Understood. And then last one also maybe for Paul on the SG&A question. A sequential increase has been almost $15, $16 million. Should we see this level over the next few quarters, or do you expect further increases in SG&A?
Paul
No, it's, you know, there was some, you know, I think I gave a number for the beginning of the year of 100 to 110, you know, per quarter. I think this quarter was a little heavier just because of the Microsoft and some other, you know, new product launches. But I think that 100 to 110 is a good proxy for this as we move forward.
Andy
Got it. Thanks. Thanks, Bob. Thanks for taking my question. Thanks, Sanir.
Operator
Our next question comes from Amit Fakhar with BMO. Please state your question.
Andy
Hi, Amit.
Operator
Hey.
Andy
Hi, Andy. Thanks for squeezing me in. Hey, just real quick on the production kind of outlook, you know, 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.
Item 1A
I'm going to let Sanjay take that one.
Sanjay
Thank you, Andy. So, I mean, as we mentioned this in the prior calls as well, that 500 ton is really the number in North America. And by 2028, we said we want to be 1,000 tons, and that actually includes Europe as well. But you do bring up a good point. Is there a opportunity for that 500 tons to be potentially higher than some of the activity we have going on in Europe? The answer to that is yes, but that 500-ton number is strictly referring to North American production by the end of 2025. Okay.
Andy
Okay, super. And then just, you know, now that you have, you know, a kind of line of sight on the PTC, I think you guys had talked about, you know, kind of looking for optakers for about 70% of your green hydrogen production. The PTC kind of helps to, I guess, seemingly kind of de-risk some of this as well. Are you guys still thinking about that 70% level, or would you be kind of willing to kind of keep more production for yourselves, or are you looking to maybe do kind of the opposite and actually ramp up the percentage draft takers?
Sanjay
Yeah, so isn't that a great question? I mean, so a couple of points to highlight on that, right? One, I think, you know, so I just thought it's an important point to note here, which is with PTC, one another thing that it also does is capital formation, right? So that's another big benefit that we will get from source of financing type of capital that comes in, structure of capital, right? Right now, most of our investment has been largely focused on all equity investment. That's another added benefit that you will see as you go forward. But look, and I think that's what we're going through right now, but I think our focus is really we want to make sure that first and foremost priority, it hasn't changed for us. We want to make sure that our customers are taken care of. Obviously, our pedestal customer, we want to make sure that they never run out of hydrogen. We want to make sure that we're adding more customers to that mix, but we're We really haven't changed the view on that 70% loading of the plant at this point in time. But as Andy touched on some of the opportunity that we're starting to see in the stationary market, That can really, really drive the demand for our hydrogen for some of our customers, and that could make that. Do we only load some of these plants for 50% instead of 70%? But that's TBD at this point in time. We really haven't changed that view, but that number certainly is not going to go from being 70% or trying to sell out the entire plant, given what we're seeing here.
Andy
Great. Thank you so much. Sure.
Operator
Next question comes from Kashi Harrison with Piper Sandler. Please state your question.
Item 1A
Hi, Kashi.
Andy
Good afternoon, and thank you for taking the questions. So I was hoping... Good afternoon. I was hoping if you'd maybe just walk us through your margin expectations for the rest of the year. Go ahead, Paul, please.
Paul
Yeah, well, the good news is it's going to be heavily concentrated with equipment if you look at the mix of sales and the growth that we're experiencing. So You know, I would say we're definitely going to see margin progression, and I think it'll, you know, even in the fourth quarter, it'll move into positive range and could even hit double digits, depending on final mix. There's a couple of big things happening. We're ramping, as Andy mentioned, we're moving quickly to ramp the electrolyzer sales, you know, going from kind of scaling the plant this first half to Max production, you know, in the short term, you know, that's a big step function change. The other two things, the fuel and the service, we continue to make big progress. But, you know, those, in fact, the service in particular, today I was working with the teams. It's really impressive some of the things we've been doing, including some of the enhancements to the field. We've seen, in some cases, 70% part reductions. So we're starting to see that benefits really pay off. We think that'll start paying off more in the second half, but you'll see even a bigger step function as we move into next year. And then the fuel, as we talked about, really kind of kicking in first part of next year as we start launching those facilities and we play out the PTC. So progression through the year, but big step function changes in 23 as some of those big events start to play out.
Andy
That's great, Keller. Thank you. And then it sounds like you have some new pedestal customers coming, which is great. But I was curious what you're hearing from your customers surrounding the slowdown in the global economy. Do you think that might temper demand on the material handling side, or are you still getting positive indication from your pedestal customers that you know, they're ready to, you know, continue to grow as you think about, you know, 2023?
Item 1A
Yeah, good question, Kashi. I would say this. You know, we have two advantages. One is that we are adding new customers that can help mitigate any slowdown that could occur. I think the second item, too, is that we haven't really seen – we may have seen slowdown at one customer and upticks at other customers. You know, sometimes during these times where it's difficult to acquire labor, it's difficult to find ways to reduce costs, you know, you actually have an advantage in the selling process. So I can tell you – One of our big customers who I've worked with for years, you know, is making the commitment to really dramatically change over their remnants of the older technology of batteries to move to fuel cells. So what I've seen is some sloshing around, but I have not seen a reduction. And I think that, you know, having lived through – these tough times before, I've always noticed that, you know, you're actually in a much better position if you're in a business that has a smaller market share of the overall opportunity, plus you're selling cost savings. That's a pretty powerful message when things are slowing down and labor's tough to acquire.
Andy
Thank you for that color. I appreciate it. If I could just sneak one 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 buildout. Wondering if you have any good rule of thumb for maybe thinking about CAPEX on a per-unit basis just for modeling purposes.
Paul
yeah well the bulk of our capex is in the green hydrogen platform so you know we do have as annie mentioned a number a couple different facilities we're building out for production capacity expansions as andy mentioned hopefully the ptc drives the need for even more uh we'll see how that plays but what we've talked about is kind of a billion a year is a good proxy um you know these these plants uh are large-scale, and to get to the 500 tons, you know, it's in that range of about a billion a year in terms of run rate.
Item 1A
I think, you know, Sanjay, you, Paul, and I had a great conversation about why the PTC is going to make it easier to get capital. Absolutely. You want to comment?
Sanjay
Happy to do that, Cash. All right, so I think, so Paul, just to add to what you just said here, right, I think... You know, with sort of the PTC, it will probably likely follow what happened to the capital formation in the solar and wind industry. In the beginning, it was all about, you know, folks were thinking about 10 megawatt solar project equity financing. But all of a sudden, with the ITC and solar and PTC and wind, capital structure changed in a way where equity was really only 20% of the capital stack, number one. Number two, return expectation on that equity went from mid-teens to single digits. thereby reducing the cost of renewable electricity, levelized cost of that electricity. We see exactly same pattern unfolding here with this PTC for green hydrogen as well. One source of capital, type of capital, availability of capital will dramatically go up and we wouldn't actually be in a position where we have to fund all this just with our equity capital. It can be back leverage, it can be tax equity, all forms of capital will really help us, one, accelerate our build-out, and two, keep driving the cost of green hydrogen down, very similar to what happened to the solar and wind industry in the last decade.
Andy
Thank you. Excellent. Thank you, Kashi.
Operator
Our next question comes from Sharif Amagrabi with BTIG. Please state your question.
Sharif
Hi, Sharif. Hi, how are you? Thank you for taking my question. I'm doing fine. 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?
Item 1A
You know, Sharif, there's a lot of work. And, you know, I would say this. One, the PTC will be able to capture the $3 a kilogram tax credit. PlugUp has a great deal of domestic content in our products today. And like most folks, not only to meet these kind of requirements, but also to shorten our supply chains, we're doing more and more domestically. So we continue to take steps to make sure. And look, this is not unique to the United States. We spent a lot of time with Hy-Vee looking at European content and substituting European content. So we are looking at ways to maximize our domestic content to make sure we can where it makes sense for our shareholders to take maximum advantage of what's most profitable to plug.
Sharif
Great. Thank you for taking my question. Great.
Operator
Thank you. Next question comes from Tom Curran with Seaport Research Partners. Please go ahead.
Andy
Good evening. Hi, Tom. Andy.
Tom
Andy, across the Atlantic, you know, 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 green hydrogen, you know, either with regards to which applications will prove economically viable and scalable or about how urgently, you know, they're doing enough to ensure announced projects actually make it to FIDs. You've just shared some encouraging updates on the Hy-Vee of JV and hydrogen mobility, the stationary power cam, progress on these two hoped-for incremental pedestal customers for MH. 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 and usage in Europe are reaching FIDs?
Item 1A
So, Tom, first and foremost, there are going to be projects that make it to the finish line and projects that don't, no doubt about it. I mean, that's just a reality. So, you know, I'll take a look at Denmark, where I've spent some time. with leadership there. They are serious about building 30 gigawatts of wind power, with the majority of that really headed towards generating of green hydrogen to support Europe. They are serious. And I met with the former head of parliament in Denmark, who's deeply involved in building the pipeline from northern Denmark into Germany. That's serious. There are projects which I sit there and think, that's not real. There's others which have a combination of government support, industry support, application support, like Hy-Vee. Not to be controversial, I also would suggest that maybe some which are part of the old energy world may not want this to move as rapidly.
Tom
Right. 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, you know, the territory that services needs to cover to reach break even by year end, what should be the key drivers from, you know, a negative 32% gross margin for 2Q to break even as we exit this year?
Paul
Yeah, labor leverage definitely will help. But to be honest with you, the biggest impact we're seeing is reducing the touch points, and that's with the reliability improvements. And so we've launched different equations from different components and stacks and other configurations, new software upgrades, a whole lot of different solutions that both are going out into the new units that are getting deployed. So we're already seeing out of the gate better performance. And more importantly, we're able to retrofit and apply to the installed fleet. And some of those improvements, as I mentioned earlier, you know, we're seeing dramatic reduction in parts. So I think it's the combination of, it's that and the labor leverage. I mean, we're, you know, next year it could be 150 sites. So, you know, it's, what's that? Plus more hardware. Yeah. And, you know, and so it's, we're going to see that continue to progress, but you're going to see some pretty good traction here very shortly as those start to play out.
Tom
As well as the accruing benefits of that ever-expanding newly installed base of the latest generation stacks, right?
Paul
Yes, absolutely, exactly. And leverage on supply chain to leverage on the labor across the board, absolutely.
Andy
Great. Thank you for taking my questions. Thanks, Tom.
Operator
Our next question comes from Joseph Spack with RBC Capital Markets. Please go ahead.
Joseph Spack
Hi, Joseph. Hey, thanks. Andy, you mentioned a couple times, you know, you think Plug will be able to hold on to the PTC. I just want to clarify, do you mean eventually or even initially? Because if you're not passing the PTC through, how do you get to sort of initial competitiveness on green hydrogens?
Item 1A
I think when you take a step back, there's different, good question, Joe. There's, you know, the electrolyzer business, obviously our customers take advantage of it. As I mentioned, I already have contracts with customers for hydrogen, Joe, that we can take full advantage of. And the third, I did mention in my comments that we would be in a position where we'd be sharing some of the PTC with other customers. And, you know, I think that's how the mix comes out. Okay.
Joseph Spack
I just wanted to clarify.
Item 1A
That's how. And I thought that's why I said, but, you know, it's been a long call.
Joseph Spack
Yeah, I know. It has. I guess maybe secondarily, and I know this is, very early days and preliminary, but, like, functionally, how, like, I get the math on this $500 million of incremental cash flow, right? But, like, how does it actually work? Because you're not a taxpayer right now, so I think you need to set up some sort of entity to actually get that cash and maybe do some tax equity financing.
Item 1A
I'll cut you off really quick. For the first five years, it's direct pay.
Joseph Spack
It is, okay. So then is that actually – so that $500 million would actually be revenue, not just sort of a cash inflow from selling credits or whatnot.
Item 1A
I actually think it's, correct me if I'm wrong, it's a reduction of cost.
Joseph Spack
It's a reduction of cost. Okay. And then lastly, I guess, you know, 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 and, you know, how you see that progressing.
Item 1A
I'll let the guy who deals with permitting every day answer that. Sanjay?
Sanjay
So, again, it's like any development business, Joe, right, as you can imagine. So, look, I mean, there are areas where we're able to do things faster than expected, right? There are situations 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, and I think we also try to think about if Plan A doesn't happen, how is our Plan B and potentially Plan C is going to get implemented here for us to get to that goal. So, needless to say, in light of this, 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 ton is obviously much larger than that.
Joseph Spack
Okay. Thank you very much, Arun.
Operator
Our next question comes from Praneeth Satish with Wells Fargo. Please state your question.
Praneeth Satish
Hi, Praneeth. Hi, Andy. Two quick questions for me. The PTC will certainly help with green hydrogen adoption and cost, but I guess the other key variable for pricing is electrolyzer costs. I'm just trying to understand the trajectory for electrolyzer prices. Do you think they'll fall as you improve manufacturing efficiencies, or do you think the PTC has created so much demand that electrolyzer prices could hold steady?
Item 1A
I can tell you with our plants today, 75% of it's the electrical feedstock. I mean, I think that tells it all. So will electrolyzer pricing cost come down? Absolutely. But it's so dominated by feedstock that the key item is, you know, the output, you know, the PTC itself will dominate.
Praneeth Satish
Got it. And you've talked about, you know, 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 With the PTC making hydrogen prices lower, the market's 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 pipe 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.
Item 1A
I'm going to give you a, you know, I'm an engineer, so you're going to get a yes and yes answer. I think that, you know, I'll give you an example. We're dealing with one bottle manufacturer who has 80 bottling plants throughout the world. A 5-megawatt electrolyzer on site is ideal for him to be able to produce green bottles to satisfy his end customers, which are, you know, the beverage makers. You know, in that case, and there's lots of applications like that, concrete manufacturing where you can see small scale. I'm a real believer in pipelines for hydrogen. I believe that the infrastructure bill for building out the hydrogen hubs, the best investments that can be made are building pipelines for hydrogen, which come off large-scale green hydrogen plants. The cost of that hydrogen will be lower just because the scale of running and operating a plant doesn't change that dramatically. All those costs are increased by going smaller. In those cases, pipelines are ideal. But I think today, if you take a look at what we're doing with H2 Energy in Denmark, perfect opportunity where Green hydrogen will be feeding a pipeline, which will be a public access pipeline for green hydrogen. No better way to do it. But I think it really depends upon the application, the location, and quite honestly, the timing. Thank you.
Andy
Real good question. I am a big, big believer in pipelines, though.
Operator
Thank you. Our next question comes from Greg Wafikowski with Weber Research. Please state your question.
Greg Wafikowski
Hey, Greg. Hey, guys. How you doing?
Operator
Okay.
Greg Wafikowski
I'll just keep it short. I'll keep it to one. Okay. And it's kind of a piggyback off of the last one here. So can you speak a little bit more on what you're seeing on the development of the hydrogen midstream as a whole? You just talked about pipelines, which We spoke about in the past being a little bit more of a future conversation, at least in scale. But does the PTC change your thoughts on that and or other means of transporting larger amounts of hydrogen over longer distances? Thanks.
Item 1A
I'm going to turn it over to Sanjay. But I'll just add the lowest cost way to move hydrogen is pipelines.
Sanjay
Absolutely, Andy. So again, Greg, so we have a lot of activity going on in that front. So let me just give you a scenario, right? Think about a optimal wind location where you can actually really build 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 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. So we are talking to some of the major midstream companies to think through what is that right volume of what makes the economics work, because you don't want to do a pipeline for a small amount of hydrogen, then the economics doesn't work. So the way this is probably going to unfold is no different than the existing energy infrastructure, right? Large-scale renewable facility, large-scale electrolyzer, gaseous hydrogen fed 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 plants to supplement that network. That's how it is going to unfold. We've got a lot of work going on there. We've been thinking through how do you do large-scale stories in cavern and things like that. So stay tuned. Hopefully we'll have more to talk about it going forward.
Operator
Thanks, Andre.
Andy
Thanks, Greg.
Operator
Thank you. There are no further questions at this time. I'll hand the floor back to Andrew Marsh for closing remarks.
Item 1A
So thank you, everyone, for hanging in there for an hour and 15 minutes. I look forward to seeing you at the Plug Power Symposium. Our fourth symposium will be October 18th and 19th 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.
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