FuelCell Energy, Inc.
Q3 2011 Earnings Call Transcript

Published: 7 Sep 2011

[Operator:]

Good day, ladies and gentlemen, and welcome to the FuelCell Energy Reports Third Quarter 2011 Results. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Kurt Goddard, Vice President of Investor Relations.

[Kurt Goddard:]

Good morning, and welcome to the Third Quarter 2011 Earnings Call for FuelCell Energy. Delivering remarks today will be Chip Bottone, President and Chief Executive Officer; and Mike Bishop, Senior Vice President and Chief Financial Officer. The earnings release is posted on our web site at www.fuelcellenergy.com, and a replay of this call will be posted 2 hours after its conclusion. The telephone numbers for the replay are listed in the press release. Before proceeding with the call, I would like to remind everyone that this call is being recorded and that the discussion today will contain forward-looking statements, including the company's plans and expectations for the continuing development and commercialization of our fuel cell technology. I would like to direct listeners to read the company's cautionary statement on forward-looking information and other risk factors in our filings with the U.S. Securities and Exchange Commission. Now I'd like to turn the call over to Chip Bottone. Chip?

[Arthur Bottone:]

Thank you, Kurt. Good morning, everyone, and welcome. As global energy demand and the need for the new sources of power grows, our intense focus on driving growth has generated increased order flow and produced the highest backlog of products and services in our history. Our team is executing on the production of this record backlog extremely well, and we are delivering strong financial results. For the first time since commercializing our fuel cell power plants, we achieved a gross profit from the third quarter of 2011. This is a great achievement for the entire FuelCell Energy team, and brings us closer to our goal of company profitability. As announced previously, during the third quarter, POSCO Power, our South Korean partner, placed a 2-year order for 70 megawatts of fuel cell kits, equipment and services valued at $129 million. This is POSCO's largest order to-date, and represents initial demand under South Korea's renewable portfolio standard. We're also pleased to announce further expansion into the Asia region by POSCO. Before discussing any results further, I want to introduce Michael Bishop, FuelCell Energy's Chief Financial Officer, who will present our financial results. Mike is a CPA and has an extensive experience with high-growth public companies, technology development and services deployment. I know his experience in financial leadership will serve us well. During his 8 years with us, Mike has built a solid team, ensuring that the finance, legal and information systems are well positioned to support and continue the growth of the company. Mike?

[Michael Bishop:]

Thank you, Chip. Good morning, and thank you for joining our call today. FuelCell Energy reported total revenues for the third quarter of 2011 of $31.2 million, compared to $18.9 million in the same period last year. This 65% growth in quarterly revenue from one year ago is reflective of the increasing demand for our products and our current production rate, which now exceeds 50 megawatts on an annual basis. Product sales and revenues for the third quarter were $29.4 million, compared to $16.2 million in the prior year. The company's product sales and service backlog totaled $231 million as of July 31, 2011, compared to $80 million as of July 31, 2010. For the third quarter of 2011, product order backlog totaled $153 million, and backlog for service agreements totaled $78 million. Backlog is the highest in the company's history as a result of the $129 million order for 70 megawatts of fuel cell kits and other equipment and services received from our South Korean partner, POSCO Power. We generated gross profit in the third quarter of 2011. This is a significant milestone and the first growth profit since the company began commercializing our FuelCell product. Margins for product sales and revenues improved by $4.1 million compared to the third quarter of 2010, and the product cost-to-revenue ratio improved 0.99

[Arthur Bottone:]

Thank you, Mike. FuelCell Energy's vision is to provide ultra-clean, efficient, distribute generation baseload power for less than the cost of grid-delivered electricity without incentives. We have positioned the company to participate in a very attractive and growing market space. The nexus of 3 closely related markets encompassing clean renewable energy, the smart grid and energy efficiency. To achieve our vision, we have established 3 strategic priorities

[Operator:]

[Operator Instructions] And first in line, we have John Quealy with Canaccord Genuity.

[Mark Sigal:]

It's Mark Sigal for John. Recognizing that South Korea has the strong renewable portfolio standard in place, have any of your conversations with POSCO divulged any sense of a digestion period after the next 70 megawatts are delivered? Or can you just talk about how they're thinking about that?

[Arthur Bottone:]

This is Chip. Yes, in fact, we just had a kind of a strategic review meeting, which I alluded to in my script. I would say they've installed about 70 megawatts, and that really was the showcase and digestion period. The RPS program really starts to take effect in 2012. They've got a lot of activities, some of which the customers have actually visited us here, we visited them. And I think the demand is going to be so large that they easily consume that 70 megawatts certainly over that 2-year period. They've got expectations significantly beyond that. So I don't see a kind of a stop and go effect here. I think it's kind of crossed over that, now it's in the go phase, Mark.

[Mark Sigal:]

Okay. And then just moving on to Indonesia. Can you talk a bit about some of the similarities and differences you might see between Korea and Indonesia? And how do you see sales cycles shaping up in Indonesia? Any color there?

[Arthur Bottone:]

Yes. First of all, there's kind of 2 drivers there. #1, POSCO wants to export, if you will, to some of the other opportunities, specifically in Asia. They've targeted Southeast Asia. Indonesia have to be the first place in Southeast Asia they went to. But they have strong ties, obviously, to the construction business, and they have strong export bank financing support. So that's the motivation there. As far as the markets itself, the reason that Southeast Asia is interesting it's twofold, one, there's demand, given the GDP growth over there, but secondly, particularly Indonesia, has some very high population density issues, coupled with the demand for capacity and obviously, they're a significant producer of oil and gas supplies. So they have some pretty good economic dynamics of which that we can help them with. So that's -- I think it's kind of 2-phased. POSCO is motivated, and I think the economics from their side would work very well with our products.

[Mark Sigal:]

Okay, great. And then just lastly, given the strong showing that fuel cell technology had in Connecticut 150, is there any reason to believe that fuel cells wouldn't enjoy a similar showing under the new long-term renewable energy credit? Any early indications there, just from a technology standpoint and a relative market share?

[Arthur Bottone:]

No, I actually feel we're going to get some of the other ones in the 150 project done, as I mentioned. But going forward, the programs a little bit different. And actually, I think it actually works better. It's more of a predictable rec value. There were some not fluid [ph] recs on the previous programs. So it depends on how you look at it, but I'm quite confident on the program going forward, Mark.

[Operator:]

Our next question comes from Sanjay Shrestha with Lazard.

[Sanjay Shrestha:]

Two questions, please. How should we think about the gross margin embedded in the current backlog? And what does that mean in terms of sort of cost reduction potential over the next 12 months?

[Michael Bishop:]

It's Mike Bishop. Our profitability is tied to our current production levels, Sanjay. Our backlog is profitable. We expect to generate profitability in the fourth quarter, as I've described in my script. As long as our production remains at our current run rates and increasing over time, we'll continue to generate gross profit.

[Sanjay Shrestha:]

Just one quick follow-up here. In terms of the European markets, how should we think about -- can you provide us any update on the distribution offers already in that market?

[Arthur Bottone:]

Sanjay, your question, this is Chip, was somewhat garbled. Could you repeat that, please?

[Sanjay Shrestha:]

Could you provide us an update on the distribution offers already within the European market?

[Arthur Bottone:]

This is Chip. I can answer that, Sanjay. I alluded to in my comments, we've been in discussion with several players, and we've been very cautious to obviously pick the right partners. I mean, POSCO was a great partner. We understand what the right partner looks like. So Europe, I can't comment on the specifics of who they are other than to say we've done on lot of due diligence. We're in pretty advanced discussions with multiple parties, and I'm pleased that we're going to finally be able to do something in Europe because it's an underserved market just based on some of the things that were done before. So I'll just have to defer a little bit to the further news flow before I can comment any further on that.

[Operator:]

Our next question comes from Walter Nasdeo with Ardour Capital.

[Walter Nasdeo:]

I'd like to touch on the 100 kilowatt product that you're developing with POSCO now for commercial use over there. Can you kind of give us a little idea on what, if any technological challenges, you're facing on scaling back down again as far as efficiencies go, and any designs issues that you're dealing with? And then off of that, what sort of kind of overall cost per kilowatt are we looking at now in the completed units?

[Arthur Bottone:]

Okay. Wish that I could remember all that, Walter. Let me first start with what the program is because I don't think it will help kind of frame what the opportunity is. The government, obviously, imports a majority of their fuel from outside the country, so they're very keen to put in place long-term strategies of efficiency, et cetera, et cetera. And this is really a compulsory program, starting first with all federal buildings. They need to have a -- 5% of their power demand has to come from renewable or new sources, and that's a fuel cell effectively because that's really all that fits in there. You can't do solar or anything like that. So we're developing this product based on our current design. Basically, Walter, if you will, it's just 1/3 the stack size. POSCOs developing the balance of plant based on the balance of plant that they've developed, they've localized, if you will, on their own. So I mean, I think there's very low technical risk, and they think this is going to be a very, very large market. And in fact, they think it's going to then be applied to commercial buildings. In fact, we're having some discussions that any buildings over x size in Seoul would basically have to have the same kind of thing, and they might even increase the percentage. And if the building's bigger, therefore, then the baseload will be different. So they're really keen on this program. As far as per dollars per kilowatt, we're not at the point that we can comment on that right now. I mean, we're literally in the development phase of this. But I think it's less sensitive to pricing, given the compulsory nature of the opportunity.

[Walter Nasdeo:]

What's the expected footprint, then, of this unit?

[Arthur Bottone:]

Walter, I don't have that. I can get that to you on e-mail. We have some layouts for it, but I don't know it off the top of my head. It's probably similar in size to our original 300 kilowatt, maybe a little bit smaller.

[Walter Nasdeo:]

Okay. So this would be -- but this will be installed outside the building then, correct? Like in the parking lot or...

[Arthur Bottone:]

Outside or inside, Walter. Probably inside. And it's both a power electricity as well. They're going to use the heat as well for hot water.

[Operator:]

Our next question comes from Matthew Crews with Noble Financial.

[Matthew Crews:]

A question, to kind of stay on that topic real quick, on the JV development. Is that program -- the announcement back in November was $5.8 million. You said you did about $5.5 million in the quarter. What are expectations from a revenue perspective on this program moving forward?

[Michael Bishop:]

I'll take that one, Matthew. This is Mike. Yes, the total program about $5.5 million, that has come through during the fiscal year. In this quarter, we probably had about $2 million of revenue related to that. The other revenue coming through was related to other components and construction activities and installation activities for other projects. We expect that, that program will wrap up here in fourth quarter and first quarter of 2012.

[Arthur Bottone:]

And just to add to what Mike said, Matthew, as far as production -- because don't forget, these are the first 2 units they're putting in. They're going to test these out. Like I said, there's pretty low technical risk here, Real production demand will probably come in the form of kits, similar to our bigger unit kits probably hitting some time in 2013, based on the market demand that POSCO then foresees.

[Matthew Crews:]

Okay. What's the competitive -- I mean, a lot of the literature out there has shown that the solid oxide fuel cell technology has been promoted both by POSCO, I believe, as well as South Korea. Is POSCO looking at the molten carbonate fuel cell as obviously, an alternative, attractive technology based on what you just said, the low technology risk?

[Arthur Bottone:]

Yes, I mean, that's the -- I mean, there's a couple of things. One, it's ready now and it's low technology risk as compared to others. I think that's the 2 main driver because this program takes effect now, I would say 2012. But they're looking at putting the molten carbonate fuel cell in lots of different applications. I mean, we've talked about power plants and now we're talking about building applications. There's discussions going on about different types of buildings. There's discussions going on about onboard ships and things like that. So technology itself is pretty versatile. And finding the right opportunities, when you put them all together, can create a pretty substantial market opportunity.

[Matthew Crews:]

And if my understanding is correct, that technology or a stack size that you can use in the U.S. as well?

[Arthur Bottone:]

You could use in the U.S. Again, some of our cities are a little bit different laid out, and some of the grid requirements are a little different that we have here and some of the economics are a little different. But in their case, it's a compulsory program, which really drives it. Which means it's almost like a fire alarm system; you've got to have one, right?

[Matthew Crews:]

Okay. And just on the -- could you explain again just the general idea of what you're looking for, for the partnership in Europe? Obviously, you said you need to find someone there local, if you're looking at a country like Germany. But is this one of those ones where you're looking for a POSCO-type, someone to actually do a bulk of the manufacturing? Could you just kind of -- what's an ideal layout? Is it identical to POSCO or any differences?

[Arthur Bottone:]

It's a little different. Let me just explain my comment about partners first. What we found is a couple of things are attractive in a partner. One, that they understand the power generation business. I mean, even though POSCO Power is in the fuel business, they had a POSCO Power business that understood how to run a power generation business. They didn't have any other things competing with. They're all in on fuel cells or power plants, so they didn't own any core technology. Second is they have the ability to create market opportunities, both in their brand recognition and ability to set some policies. Those are 2 main drivers that we look at in trying to find a partner. We have several different options on the table where we may pick up somebody else's assets, but the plan here is to partner with somebody, in this case, sizable names that can give us both the access and the reputation that we're talking about. And probably, in Europe, it was a little more fragmented than Korea was, actually, in terms of its efforts. We'll probably do something whereby we're involved in some sort of a joint venture type of arrangement. Whereas with POSCO, it's not a joint venture per se.

[Matthew Crews:]

Okay. And then just lastly and I'll hop back in the queue. It looks like legislation in the SUIP program is progressing. It looks like they're getting financing squared away for, hopefully, '12. Any update there? Because it seems like you've been a little quiet on the front for California orders?

[Arthur Bottone:]

Yes, it's a great question. Yes, in fact, the proposed decision just came out yesterday, and they're going to vote on that, I think, tomorrow, actually, the Public Utility Commission. Yes, what's happened on that was even though we have people that have reservations that could still use those, the whole discussion centered around almost stopping because people were concerned at, "Well, maybe I can get a better deal," or something like that. So you're right. I mean, we did see activity other than stuff that we had going on not close. But we have 2 types of customers going forward. We have the ones that have reservations that are teed up and ready to go, and then we have ones that would apply for a new application as soon as the rules, in fact, are done and get those ready to go. So over the next quarter or so, you'll see some activity in California pick back up again. But it really came to somewhat of a standstill while the administration was coming and putting their changes in place. I would also say, though, that also, what's coming is some other tools, which we didn't have before, we're kind of the final phases of the CHP feed-in tariff, which is, in fact, an add-on aspect of SGIP. If you looked at it closely, you can now apply for 25% export, which will help economics. And then the other one that's also in the works is the renewable feed-in tariff. And then, of course, the IPC federal grant is still out there as well. So there's other tools, but some of this was a little bit emotional for some people. But it'll start to get going again now.

[Operator:]

At this time, I'm showing no further questions, and I'd like to turn it over to our speakers for any closing remarks.

[Arthur Bottone:]

Okay. Well, if there's no further questions. I would just to thank everybody for calling in, and we look forward to speaking with you on the next call. Have a great day. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone, have a great day.