燃料電池能源 (FCEL) 2007 Q2 法說會逐字稿

We are about to begin. Good morning everyone, and welcome to today's FuelCell Energy report's Q2 2007 results conference call. Today's call is being recorded.

At this time I would like to turn the call over to Ms. Lisa Lettieri. Please go ahead, ma'am.

Thank you, Operator. Good morning, everybody and welcome to FuelCell Energy's Second Quarter results conference call. Delivering remarks today will be R. Daniel Brdar, Chairman and CEO, and Joseph Mahler, our Senior Vice President and CFO.

Before proceeding with the call I would like to remind everyone this call is being recorded, and this presentation contains forward-looking statements, including the Company's plans and expectations for the continuing development and commercialization of our FuelCell technology. Listeners are directed to read the Company's cautionary statement on forward-looking information and other Risk Factors in its filings with the U.S. Securities and Exchange Commission.

I will now turn the call over to Dan Brdar. Dan?

Thanks, Lisa. Good morning, everyone and thank you for joining us on FuelCell Energy's Second Quarter conference call.

Looking back on the second quarter, I am happy to report that product revenue rose 37% with important margin improvement during the quarter, resulting in the lowest cost to revenue ratio since the Company began shipping commercial products. Largely a function of our continued drive to lower product costs through our cost out initiatives. We expect to continue to achieve cost reduction goals through both specific initiatives, as well as increased order volume. Current order flow for our FuelCell power plants is coming from those markets that support the growth of clean power initiatives.

The Clean Energy programs in California, Connecticut, and Asia are expected to serve as prototypes for other markets, that have enacted legislation to increase Clean Energy use. During the quarter, we saw 1.9 megawatts in orders from customers in California, and 2.4 megawatts through our distribution partner, POSCO Power South Korea. Yesterday morning we announced another 5.1 megawatts of orders from POSCO Power, for three of it's utility customers, that included our largest power plant, the 2.4 megawatt DFC3000.

South Korea is turning out to be a very robust market because of the need to meet its emission standards, and the fact the Korean government made FuelCell one of it's Top 10 economic drivers. POSCO has not even built its own balance of plant manufacturing facility, but it is already aggressively developing the market and capturing orders. We are very enthusiastic about the results so far, and we are looking forward to increased participation in such a rapidly growing market.

In response to near term orders in California and South Korea, and visibility to additional order flow in these markets and Connecticut, we have begun the process of ramping up our near term production at our manufacturing facility in Torrington, Connecticut, but more on that later.

Before I turn the call over to Joe, I want to make the listeners aware of the loss of one of FuelCell Energy's Directors. Warren Bagatelle passed away last week. Warren was one of the earliest supporters of the Company, and served on our Board of Directors since 1988. As a result, he had a deep understanding of the Company, our products, and the market. For those of you who did not have the privilege of knowing and working with Warren, he was a man of uncompromising integrity and tremendous business knowledge. We are very grateful for his long and dedicated service. The Board of Directors and the Management team will greatly miss his passion for the Company, his keen insights and his wise counsel.

Now, before I review our Corporate Developments and business climate, I will turn the call over to Joe Mahler to review the financial results.

Thank you, Dan. Total revenues for the second quarter of this fiscal 2007 were 11.4 million, compared to the 9.5 million reported in the second fiscal quarter of 2006. Product sales and revenues were 8.9 million, compared to 6.5 million, and Research and Development contract revenue was 2.5 million, compared to 3 million in the prior year quarter.

Product revenue backlog at April 30 including long term service agreements increased to 36.8 million, compared to 23.9 million reported at April 30, 2006. Backlog is increasing primarily due to orders for megawatt class products and service contracts for customers. The recent order from POSCO of the 5.1 megawatts will add close to 17 million to our backlog.

R&D backlog at April 30 was also strong at 26.4 million, up from 9 million a year ago. The net loss to common shareholders for the second quarter was 18.8 million, or $0.32 per basic and diluted share, compared to a net loss to common shareholders of 23.5 million, or $0.48 per basic and diluted share, in the same quarter last year. I should note that last year at this time, we took a one-time charge of 4.3 million, or $0.09 per basic and diluted share, for the conversion of Series B Redeemable preferred stock.

The product cost margin for the quarter is the best we have reported since shipping our first commercial product to Cameron Brewery in 2003. With the ratio of cost to product sales and revenue at 1.85, compared to 2.43 in the year ago period. We have gained important traction with our cost out initiatives. We have been able to achieve significant cost out with value engineering, and expect that continued work in this area will result in further cost savings as we go forward.

Increased volume will drive to more efficient manufacturing process, and allow us access to better supply chain economics. The current costs for the 2.4 megawatt DFC3000 power plant is $32.50 per kilowatt at a production volume of 1. Volume production should result in further cost reduction moving this product to profitability.

Total cost in cash and investments at April 30 was 178.7 million. As part of a comprehensive distribution and manufacturing relationship, POSCO Power invested 29 million in cash, and the Company issued 3.8 million unregistered common shares adding strength to our balance sheet. In addition, we sold a total of 9.4 million common shares at a public offering, which netted an additional 65 million.

Net cash and investment used in the quarter was on target at $14 million. Cash used on CapEx in the quarter was approximately 1.1, and depreciation expense in the quarter was approximately 2.3 million. With a strong capital position and declining product cost from our cost out initiatives, we are on solid footing to ramp up production to meet the demand for our DFC products in Asia, California, and Connecticut.

Dan?

Thank you, Joe. I would like to talk more about the actions we are taking to capitalize on the opportunities we see emerging in our order flow, in particular, multi-megawatt installations across a number of market segments. Last year, we increased our salesforce in California to take advantage of the large end-user opportunities we saw there. As it turns out, we did the right thing at the right time, and we are doing an increasingly robust business.

The business in regulatory environment is highly favorable for clean, economical and energy efficiency. Over 40% of our business is from California customers, because end-users want higher efficiency and lower cost combined with lower SOX, NOX, and CO2 emissions.

FuelCell's base load power plants are designed to run 24 hours a day, 7 days a week, so our customers such as Sierra Nevada Brewery and Cal State Northridge have ultra-clean, reliable cost effective power when the grid is interrupted. The Santa Rita Jail is using our FuelCell in conjunction with solar energy to use much less grid power, and also secure the safety of the community. And of course, many wastewater treatment facilities are using our Fuel Cells as their main source of power, saving hundreds of thousands of dollars over grid electricity by turning their waste gas into Clean Energy.

In February, we announced the ten year distribution and balance of plant manufacturing agreement with POSCO Power, Korea's largest independent power producer. POSCO Power is a subsidiary of POSCO, one of the largest steel makers in the world. That relationship is off to a very strong start. POSCO Power announced plans to invest 70 million in its FuelCell business, which includes building a FuelCell balance of plant manufacturing facility, with the capacity of 50 megawatts per year by 2008, and 100 megawatts a year by 2010 in Pohang City, and during the quarter, POSCO Power ordered two DFC1500MA units totaling 2.4 megawatts for a grid support application.

This installation will for the moment be the largest FuelCell power plant in the world, and will export enough electricity to the grid to support 2000 households. Additionally, just yesterday morning, we announced three more POSCO Power orders totaling 5.0 megawatts for utility customers. These orders will include a 2.4 megawatt DFC3000, as well as two DFC1500MA power plants, and one DFC300MA. All together, POSCO Power has placed 7.5 megawatts worth of orders in just three months, a great start to our relationship.

On last quarter's call, we discussed the recent selection by the Connecticut Clean Energy Fund of six energy Projects, incorporating 68 megawatts of our 2.4 megawatt DFC3000s. These projects are now being evaluated by Connecticut's two major utilities. Once the utilities complete their review, they will request approval of the states Department of Public Utility control or DPUC, to negotiate the power purchase agreements with our distribution partners. We expect the utilities to complete their analysis and request to negotiate power purchase agreements within the next two weeks.

We hope to be able to announce the DPUC request at that time, since the information will be publicly available from the DPUC. The last step is final contract approvals which are expected mid to late August. These recommendations highlight Connecticut's leadership in advancing superior, renewable ultra-clean energy solutions, and recognize the value of the multi-megawatt FuelCell projects we proposed.

These projects are very exciting for us, not only the scale of them ranging from 2.4 megawatts up to 20 megawatts, but also the applications. Two of the FuelCell Projects are located at hospitals that will feed electricity to the grid and provide heat to the hospitals. One is a 20 megawatt project to supply the grid in Danbury, while another is a 20 megawatt grid support project in Bridgeport. There is also a 14 megawatt grid support project in Bridgeport.

Our newest product, the DFC ERG was proposed a natural gas let down station in Milford that would use an 8 megawatt system. A wide variety of applications of all different sizes, but all using our core technology and our lowest cost product, the DFC3000.

In light of the increased order flow from California and South Korea, and the potential orders from Connecticut's Project 100, we are ramping up production. We are in the process of adding a third shift, and will significantly increase capacity over the next several weeks. As we see what orders go to contract from Connecticut's Project 100, we will look this summer to further increase overall production capacity.

As our plans finalize in the coming weeks, we will provide more information for you in future calls. We are also seeing strong support in both State and Federal legislative activities. The State of Connecticut continues to serve as a model for other states looking to develop a competitive, cost effective model, to meet the requirements for ultra-clean and renewable power.

Just this past week, the State legislature passed an important new energy Bill that was signed by the Governor yesterday. In the legislation, Project 100 was increased from 100 megawatts to not less than 150 megawatts by October 1, 2008, to essentially facilitate the next round of project bidding designed ultimately to fill the states objective of 400 megawatts of renewable power by 2010.

Also included in the Bill, the DPUC is now required to establish a grant program for distributed generation projects in businesses and State buildings that are powered by solar and fuel cells. The grants provide up to 25 million for FuelCell projects. A new $50 million grant program was also established for municipalities that purchase and operate renewable energy and efficient energy generation. Net metering was expanded to 2 megawatts, and the state's renewable portfolio standard was increased for the years 2011 to 2020.

Lastly, demand charges were waived for our FuelCell Operator during a loss of power, caused by problems with the utilities distribution infrastructure, or a scheduled or unscheduled shutdown of the FuelCell that occurs during off-peak hours. These legislative moves amount to further demonstration of Connecticut's continued leadership in Clean Energy policy, support of the FuelCell industry, and it's desire to further the installation of Clean Energy distribution within its borders.

On the Federal level, there are also a number of initiatives that we believe will trigger larger business opportunities, by overriding the patchwork of State regulations that are now in place. As evidenced by the various bills going through Congress and President Bush's statement last week, calling for a global standard for greenhouse gas reduction, there is a great deal of attention being focused on CO2 legislation, that would be of great benefit to us.

Our DFC's produce much less CO2 than traditional fossil fuel plants, representing the potential for a significant positive impact on greenhouse gas emissions if widely deployed. For example, when operating on natural gas, one of our high efficiency Fuel Cells with heat recovery, produces only 25% of the carbon dioxide of a typical coal-fired power plant. When operating on biofuels, the reduction in greenhouse gasses is even greater. We believe it is increasingly likely that some form of federal legislation will be passed to curb greenhouse gas production. As one of the most efficient ways to generate power, our products will be uniquely positioned to capitalize on this new opportunity.

The success of our strategy to become the world's leader in stationary Fuel Cells for commercial, industrial, municipal and utility customers is beginning to be realized with these latest developments, and we are very enthusiastic about what the future holds for FuelCell Energy.

Operator, I would like to turn it back to you to compile the list and begin taking questions.

Thank you, sir. Today's question and answer session will be conducted electronically. (OPERATOR INSTRUCTIONS) And we will pause for a moment to allow everyone a chance to signal. We will take our first question from Pearce Hammond of Simmons & Company.

Good morning.

Good morning, Pearce.

Great quarter. First question, you went through the timeline a little bit on the Connecticut orders, can you refresh that again, as far as when will you be able to consider these firm orders for FuelCell Energy, and do you think you are going to get the full amount of orders that has already been selected by the Project 100 group?

Well, let me start with the latter part of that first. We have heard nothing negative at all during this process, so we remain very optimistic that everything that has been selected is going to get through that approval process. What is going on right now is the utilities are doing their own review of the projects, where they basically have to independently calculate the net cost of these projects. From what we understand, they are very much on-track for completing that within the next two weeks.

At that point, they will request of the Public Utility Commission to begin entering negotiations for the power purchase agreement. Again, this is a power purchase agreement that they have previously reviewed that was part of the solicitation, so there is no real surprises that we expect there either. We expect that to take probably 30 to 45 days, so by the end of July we would expect to be through this DPUC process, and be able to enter contracts in the August timeframe.

Great, and then on the ratio, 1.85:1 for this quarter, are we kind of expecting that trend to continue for the remainder of this year?

Yes, it always depends, you know, a little bit on product mix, but as the product mix goes to megawatt and the 2 megawatt power plants, then yes, the ratio can actually get a little better. I mean the DFC300, the sub-megawatt still has, for example, a standard ratio a little bit over 2 at this point in time , but we are, we believe that we have those products are now coming through the financials, and it should be relatively consistent.

Great. Thank you. I will jump back in queue.

We'll take our next question from Sanjay Shrestha of Lazard.

Hi, guys. It is actually [Graham Madison] in for Sanjay. Just wanted to get a little bit more color on the market in Korea. How does your margin profile compare there with sales in the United States?

We actually are able to capture higher pricing in Korea because the incentive program they have got there is a little more robust. What works against us a little bit is fuel pricing is higher, but when you net those things out, we are able to capture better pricing there, then we would see for example, in California.

Okay, and then what is the outlook for growth outside in Asia, outside of the Korean market? Do you see some traction in other areas there?

We are actually starting to see interest in some countries outside of the core that we have been working in. In Japan, we are really waiting a little bit for the inverted sparks spread to return, but we have actually had a parade of visitors here in the last couple of months from other countries, that are looking at how they would introduce Fuel Cells, now that we have got a cost effective product, and we have got enough units in the marketplace that people are really comfortable with their operation, so I expect as we go forward we will be able to leverage our position in South Korea, and what we have already done in Japan, to broaden out to other countries.

Great. Just a housekeeping question. On the G&A outlook, how would we want to model that going forward now that you are adding additional shifts, in terms of ramping up? Any color on that in terms of an outlook there?

Yes. You mean general administrative costs?

Yes.

I don't think you see a lot of big impact at this point, so I think that G&A should be relatively stable. There will be some small increase, really more focused than increasing our sales efforts in the SG&A line is really where you will see a little bit of an increase, but I don't see anything dramatic happening in G&A at this point.

Most of what we are going to be adding is direct labor in the factory.

Okay, makes sense. Great. Thank you very much. Congratulations on a great quarter!

Thank you.

We will go next to Mark [Segal] of Canaccord Adams.

Hi. Good morning. Just on the POSCO front, you mentioned 7.5 megawatts worth of orders to date. I believe that I read you guys were looking for preliminary orders in the ballpark of 5 to 15 megawatts. Just wondering if the POSCO relationship is tracking in-line with your expectations thus far, and what are your expectations as they get their plant up and running in the 2008 to 2010 timeframe?

Actually, we have sort of a lot more detail in terms of what the business plan is. They are actually a little ahead of schedule, so we are very pleased to see that. We know they definitely aren't done with orders for the year , they have got a lot of things in the pipeline, but as they move towards getting their balance of plant facilities up and running, we will shift from selling the complete product, to selling them the conditioned module.

In fact we have already got identified in our production queue when the first of those happen, so we will start to see this this transition over towards the module being integrated in to the balance of the plant there making country.

Okay, and then following up on your comments on market dynamics out of California. Just wondering if you could give us any color on the competitive landscape you are seeing out there?

Yes. I mean, what we are really competing within most of of these locations is what the customers are paying to their local utilities. As we have discussions with the Public Service Commission out there and the utilities, what is becoming really clear is there has been a lot of effort to deploy solar. There has been a lot of work on wind, and what they are really looking for, is what is the clean, firm component that is going to go with that, and that is really what Fuel Cells do.

There is increasingly a growing recognition out there that they have got a great natural gas infrastructure that they are going to leverage, to get the maximum amount of clean power possible, and we are finding that we're being received really well, particularly at the Public Service Commission and the California Energy Commission, as a product that really fits nicely into that scenario.

Okay and then lastly, on the CO2 side, do you guys see any potential emerging opportunities in the like of any emission credit sharing agreements, or will things near term just be much more straight equipment sales?

Yes, we see some, for example, like Connecticut 100. We expect, as you know, the emission credit markets have been all over the place, but what we are seeing in the Connecticut market right now is as those contracts come forth, is that that should stabilize a trading range for emission credits, and the way the law works is that you are allowed to charge the utility half the standard offer plus a $0.055 add, plus you share the RECS, the Regional Emission Credits.

When we first put our estimates in the numbers were pretty low, but as the contract actually starts which is good news, while the contracts look like they will actually happen and stabilize, and actually there are 100 megawatts coming in, we are now expecting that that could be a value of $0.01 to $0.02 to $0.03, so we expect that that is the beginning. We think that as we look worldwide at carbon and carbon trading, and you look at the European market, the European market is pretty actively trading right now, we think all of that will stabilize and that will become a real market.

All right, great. Thanks, congratulations on a nice quarter!

Thank you.

We will go next to Jeff Osborne of CIBC World Markets.

Great. Thanks a lot and congratulations again! I was wondering just a quick one, megawatts shipped in the quarter? I think you mentioned orders of 1.9 from California, and 2.4 from POSCO, but can you talk about shipped by geography?

Shipped by geography in the quarter, we shipped shipped 2.15 in California actually.

Okay. Very good. And then just following up on the gross margin question, can you just detail what your direct labor is as a percentage of cost of goods, and how we should think about that with the third line?

As you guys know, most of the material costs of our products is really, most of the cost is immaterial. Certainly in the modules you are running probably at 70% material, probably 10% labor, and 20% overhead to capture the module.

On the balance of plant, it really is a function, like for example, we buy the inverter as a complete material. If you consider it material, then the balance of plan is somewhat similar, probably 60% material, and the rest labor and overhead.

Very good. And then just how should we think about gross margins with the kind of POSCO dynamics here, with the balance of plant facility not up and running, and that becoming a meaningful percentage of revenue moving forward versus your direct salesforce?

So the question is, do we see a difference in the Korean gross margin versus a domestic gross margin?

Exactly, and then how should we think about Korean gross margins in '08 once that balance of plant facility is up and running?

Yes, I think the bigger driver is the product mix, and whether it's Korea. Korea has a little better pricing but there is also a little extra cost dealing with an international marketplace.

I think your driver is really in the megawatt size, so what you are looking at is from a cost ratio standpoint, as I alluded to before, is that the sub-megawatts are still what we are pushing through our financials are in the 4,800 to 5,000 range, and looking at a 1:2 ratio a little bit higher, we are actively trying to limit the number of 300s that go in for exactly that reason.

Then you have got the megawatt plants around 4,000 to 4,300, so you are going to get closer to the 1.5 to 1.9 range, and as we push more of the 2-megawatt product into the marketplace, we are expecting to be under that closer to the 1:1 ratio, so it is really going to be, the driver here is really product mix as opposed to locale.

Understand and that gets into my last question, can you break out the backlog in terms of the mix in those three segments , the sub-megawatt, megawatt, and the 2-megawatt?

That is, how about we do that off line.

Understand.

Or maybe I will come back on, if I can get somebody to do that quickly.

Understand and just lastly on the Connecticut Project 100, there is nothing in the backlog currently, of the 68 megawatts that you were awarded?

There is nothing in the backlog for the 68.

And I want to make sure I understand Dan's comment that you expect all 168 megawatts that were the total, would be awarded despite the initial expectations?

There is actually 151 megawatts that were awarded. The scuttlebutt is that the 2 biomass projects are competing for the same fuel supply, and I think the Clean Energy Fund has publicly stated that both those projects will not go, so really what your doubts were, there was about 120 megawatts left on the list. As Dan said before, we have had nothing but glowing response to all of our proposals at this point in time so we are feeling pretty good.

Understand, thank you.

And we will go next to John Adams of Canaccord Adams.

Good morning and congratulations!

Thank you, John.

On your production ramp, where are you now, where does the third shift take you, and assuming you get Connecticut, what is the critical path to getting that increment of capacity online?

Good question. We are currently in the 10 to 12 megawatts a year. Ahead of Connecticut, we are going to ramp the business to the 30 to 40 megawatt range, and we will have that ramp completed here a little bit later this year.

As we get some visibility into Connecticut, we will take that next step, and go to 50 megawatts, or possibly a little bit higher than that, and to sort of revisit where we are at that point in time. For us it is really just a matter of hiring people for the factory, and bringing them on in an orderly fashion.

There is no particular piece of production equipment you need to order?

No. We have equipment in place for Torrington that can produce 50 megawatts of capacity. The only equipment that we really need to spend any money on and it's not going to be much, 5 to $10 million, is for expanding our conditioning facilities, because all the growth that we are seeing here is in the megawatt class, and our current megawatt conditioning capacity is about 25 megawatts a year, so we will bump that up to about 50 megawatts.

Okay. When will you know whether you can attain project financing on some of these Connecticut deals? Is that really, you need to get into the contract stage before you will know?

No. We are doing a lot of work, John, on project financing, but mostly what we are doing is we are assisting the developers at this point.

You have got Enbridge and Energy East on the DFC ERG in Milford, you have got Catamount Energy working on the the two larger projects, the 20-megawatt projects, and Emcore as distributors, and we are actually piecing that together, we are really supporting their efforts. I mean, the response so far with the combination of the investment tax credit and the accelerated depreciation, the financial models for these projects look very, very good.

We have gotten very, very good response, so we are feeling very good about the ability that the developers will have to finance us. I mean, our model right now is that we would like to sell products to these guys, and get cash flow, get kind of our standard payment terms on these projects, so we are feeling very positive about it.

Finally, Japan. That is one great big roaring disappointment. How, I mean, it is just a tremendous aberration in the market, or is there something structural with the way the Japanese Government subsidizes energy?

Well, you know, the subsidy programs that they have for new technologies are great. The drivers over there in terms of the desire to reduce CO2 emissions, to have low emission products are all there. There is a lot of support for it.

The problem they have right now is they still continue to have an inverted spark spread, because it's not a completely deregulated market, so what has been happening is in order to keep their customers, the utilities have been dropping their rates, while the gas companies have been trying to struggle to figure out how do they capture increasing gas prices.

It is one of those events that can't last for a long time, because ultimately you have got an imbalance in the marketplace, so either the government will step in and fully deregulate the market, or at some point, we will just see this thing correct itself. It is not unlike what happened in California about a year ago, where we had an inverted spark spread, but there it is a more open, more competitive marketplace, so it corrected itself more quickly.

Thank you, and good luck in ramping that volume!

Thanks, John.

We will go next to Rob Stone of Cowen and Company.

Hi, guys.

Good morning, Rob.

Assuming that the revenues for this next phase of the orders for the next phase of Connecticut 100 come through in the August timeframe, could you give us a sense of the timing to revenue for those projects, over what number of quarters you might expect delivery?

Yes. What we would, just to back up one second. If you get all 67 megawatts you are talking product revenue of something over $200 million. What I would expect and we account for everything on percentage of completion, though we would start to account for revenue.

I would say that you would look at the 67 megawatts, probably over a 15 to 24 month, probably an 18 to 24 month period, would be where the initial ramp would be reasonably slow, and then we will pick up in subsequent quarters. So I would think that you would see most of that really happening in the '08 year.

You would start to see some in '07, but your ramp here, the way the ramp timing would be we would increase our capacity, you would capture a little bit in the September/October timeframe, and for us we are on a fiscal year basis, so you are really capturing it in the first fiscal quarter, second fiscal quarter, third fiscal quarter, over that type of a time period.

Okay. And can you mention the amount of the expected orders that are in megawatt class and above? In other words, you have got much better cost reduction targets in view on the larger systems, so how do the potential orders break down, in terms of megawatt versus sub-megawatt?

Well certainly everything for Connecticut is megawatt class, out of Project 100. We see some other order activity on the East Coast, that is probably certainly much less in volume, but is a mix of sub-megawatt and megawatt class. Korea is going to be predominantly megawatt class also, because the nature of the program, you sell the power to the utility, so they want megawatt and multi-megawatt installations.

In California it is going to be largely a mix. Probably about half and half sub-megawatt and the other half megawatt, but you put those all together assuming we are successful in Connecticut with all of the projects, you are going to see an overwhelming megawatt class of what we are taking for orders here over the next year or so.

So in that scenario, how would you, and roughly when would you expect to bring down cost, or assuming that there are certain types of installations, say wastewater treatment or certain types of facilities where they don't need or can't support a megawatt class in one location, is there a future for your sub-megawatt designs, and how do we get there?

Oh, absolutely there is a future for it. Remember as we ramp up in volume, volume purchasing for the cell components everything else, benefits all the products. Higher utilization of capacity in Torrington benefits all of the projects. We will still continue cost reduction on all the products including the sub-megawatt, and we have another operate that is on test now which will benefit all of the products, so the sub-megawatt has every bit as clear a path to get to that market clearing price as the megawatt class products. It is just the megawatt class is going to do it first.

Does it need to independently reach some threshold volume, or do you see the volume benefits just riding along on the aggregate production?

It will really ride along on the benefits of the megawatt class volume.

Great. Thank you.

Sure thing.

We will go next to [Joanna Gratalli] of Ardour Capital Investment.

What should we expect your cost-out program for this year?

We have identified that we were targeting a 20% reduction on both our sub-megawatt products, and our 1-megawatt products, so we would be reducing the sub-megawatt product to $3,800 a kilowatt, and the 1-megawatt product to $3,400 a kilowatt.

So, what is the potential impact for your cost to revenue ratio? You cannot quantify at this time, or -- ?

Well the cost productions that we are doing this year will show up in future production, they will be for units we are making mid to late '08, so what's in production now, and what we are about to be taking in orders over the next quarter or two, is going to reflect cost reductions we have previously done, so the 1.85 we think is representative of where we are going to be near term, and as the 2-megawatt products start to flow through the P&L, we will see that get driven down by the DFC3000 volume.

Thank you.

You are welcome.

And we have no further questions. At this time, Mr. Brdar, I would like to turn the call back over to you for any additional or closing remarks.

Just one more thing, since we had some questions about the split in the backlog, I think Joe has some numbers.

Yes, we quickly pulled together the unit break down in the backlog, and I am going to calculate it back to a backlog that includes the recent Korean order, so we have 14.4 megawatts in backlog. There is one 2.4 megawatt, there are six 1.2 megawatts, which is 7.2 megawatts in total, and then there are 16 sub-megawatt power plants for 4.8 megawatts, that gets you back to to the 14.4.

With that, I would like to thank everyone for joining our call today, and we look forward to speaking with you again as we move forward. Thank you and good morning.

And that will conclude today's conference call. Thank you for your participation. You may disconnect at this time.