燃料電池能源 (FCEL) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the FuelCell Energy reports first-quarter 2012 results. At this time, all participants are in a listen-only mode. Later we will conduct a question answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to your host, Mr. Kurt Goddard, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to first-quarter 2012 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 as well as an accompanying slide presentation is posted on our website at www.FuelCellEnergy.com, and a replay of this call will be posted two hours after its conclusion. The telephone numbers for the replay are listed in the press release.

Once again, for those of you listening to this call via the dial-in phone number rather than via the Internet, management will be referencing a first-quarter 2012 slide presentation that is available on the Investor Relations section of our website.

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 US Securities and Exchange Commission.

Now I'd like to turn the call over to Chip Bottone. Chip.

Thank you, Kurt. Good morning, everyone, and welcome. I'd ask you to please turn to slide 4. We continued to execute on our global growth strategy, including a series of significant strategic initiatives in Asia with our partner, POSCO Energy that we announced this morning, combined with actions in Europe with two new partners. Our partnership with POSCO Energy includes a 120-megawatt multi-year order commitment; acceleration of deliveries under the existing 70-megawatt order; a commitment by POSCO Energy to purchase 20 million shares of FuelCell Energy common stock with proceeds of $30 million; and a license commitment for manufacture of direct fuel cell components in South Korea.

We continue laying a foundation for our future growth in Europe and Latin America by establishing a joint venture with Fraunhofer IKTS based in Germany and a partnership with Abengoa, based in Spain. We now have two broad and complementary channels for our products and services in these large and growing markets for clean baseload distributed generation.

While our partnership with Abengoa will leverage their market presence and sales resources, our joint venture with Fraunhofer IKTS will be different. A preeminent global applied research organization, Fraunhofer will apply their extensive research capabilities and we will be able to leverage their government and industrial relationships as we focus on building a direct sales model through the joint venture.

As these new relationships demonstrate, our flexible proven business model is being replicated successfully on a global scale. We are executing on our strategic plan to drive growth through global expansion and penetration of key markets.

Our margins continued to expand during the quarter, and we achieved our third consecutive quarterly gross profit. We have lowered year-over-year operating costs and refined our operating profile. We recently executed new service agreements, including another with the California utility, contributing to the growth of our services business. These results are consistent with our growth plans as we continue moving towards Company profitability.

I will discuss our strategy and results in more detail after Mike Bishop, our Chief Financial Officer, reviews our financial results for the quarter. Mike.

Thank you, Chip. Good morning and thank you for joining our call today.

Please turn to slide 5, titled Financial Highlights. FuelCell Energy reported total revenues for the first quarter of 2012 of $31.3 million compared to $28.1 million in the same period last year. Product sales and revenues for the first quarter increased to $29.6 million compared to $25.8 million reported in the prior year. Research and development contract revenue was $1.7 million for the first quarter of 2012 compared to $2.3 million.

We generated gross profit from product sales and research and development contracts in the first quarter of $2.1 million. This is our third consecutive quarterly gross profit resulting from increased production volume and lower product costs. Gross profit for product sales and revenues improved by $4.2 million compared to the first quarter of 2011.

The product gross margin was 6.6% for the first quarter of 2012 compared to a negative 8.9% in the prior-year period. Improvements in margins are primarily attributable to increased production volume, lower product costs achieved from manufacturing and supply chain efficiencies, and improved service margins.

Total operating expenses were $7.5 million for the first quarter of 2012 compared to $8.3 million in the prior year. Our focus on cost control drove this expense reduction of approximately 10% while we grew revenues year over year by approximately 11%.

Net loss to common shareholders for the first quarter decreased to $6.7 million, or $0.05 per basic and diluted share compared to $11.7 million or $0.10 per basic and diluted share in the first quarter of 2011. This improvement is due to increased revenues, improved product margins, and lower operating expenses.

Finally on this slide, I would like to comment on the steady improvement in EBITDA, which is earnings before interest, taxes, depreciation and amortization. Compared to Q1 2011, EBITDA improved by $5.5 million as a result of improved margins and lower operating expenses.

Now I will transition to slide 6, titled Cash & Investments. We ended Q1 with cash and investments in US treasuries of $41.5 million and revolver availability of $1 million. During the quarter we had preferred stock payments of $4.3 million, of which $3.2 million represented the final payment to Enbridge, the holder of the Series 1 preferred shares, which is nonrecurring. Going forward, total preferred stock payments will be reduced to approximately $1.1 million per quarter.

Looking at inventory, we maintained our annualized production run rate at 56 megawatts in the first quarter. In advance of firm contracts, we built two 1.4 megawatt DFC 1500 power plants totaling approximately $7.2 million. Selectively maintaining inventories to manage leadtimes is strategically important as illustrated by the example on the right side of the slide. In this case, we had a power plant in inventory in Q4, and, as a result, we were able to accept an order with a very tight customer timeline. The project investor that owns the plant, needed it to be producing power in a four-month window which we were able to execute on. We are comfortable that the two power plants, which are substantially complete in inventory, will be allocated to new contracts and be converted to cash.

As mentioned in the release, subsequent to quarter end, we reached agreement with our partner, POSCO Energy, whereby they will purchase 20 million shares of common stock, resulting in proceeds to the Company of $30 million. This transaction is expected to close in April 2012 and would increase POSCO's ownership percentage to approximately 19% of our common shares outstanding. In addition, we will be receiving an up-front license fee and running royalty upon execution of the cell license agreement.

We had previously provided operating cash guidance in the range of $17 million to $22 million for the fiscal year. This guidance remains unchanged as we expect working capital benefits later in the fiscal year from order activity and inventory reductions.

Cash used in financing activities in fiscal 2012 is expected to follow our prior forecast of approximately $7 million to $8 million of scheduled payments to preferred stockholders, of which $4.3 million was paid during the first quarter. Capital expenditures, primarily to enable capacity expansion, are estimated to be in the range of $3 million to $5 million for the fiscal year, consistent with prior guidance.

I would like to conclude on slide 7, titled Backlog & Near Term Activities. The Company's product sales and service backlog increased to $184 million as of January 31, 2012 compared to the $157 million at the end of Q1 2011. The components of this backlog include product orders of $108 million and service agreements of $76 million. Measured and megawatts, backlog totaled 62 megawatts as of January 31, 2012, compared to 26.5 megawatts in Q1 2011. We shipped 11.2 megawatts during the quarter. The POSCO Energy commitment will add 120 megawatts to backlog when closed.

The Company's research and development backlog increased to $14 million as of January 31, 2012 compared to $8 million for the prior-year period, reflecting awards of a number of contracts. We expect revenue acceleration in the second half of the year from our domestic and European pipeline, as well as the new order commitment from POSCO Energy. Our services activity also continues to increase, reflecting the growing installed base. We are focused on accelerating revenue, converting working capital to cash, and executing on our business initiatives to achieve Company profitability. Chip.

Thank you, Mike. Can I ask everybody please to turn to slide number 8.

This morning we announced a series of exciting initiatives with a South Korean partner, POSCO Energy. Three different forces are driving near-term demand in Asia for our ultra- clean and efficient power plants. The primary driver at present is the renewable portfolio standard that took effect on January 1, 2012. Early indications suggest compliance with the 2012 goals may be challenging for the impacted utilities independent power producers, but good for us in the sense that they may resort to bidding for renewable energy credits if they're not able to add renewable power generation by year end. Active bidding for RECs supports renewable power generation by project investors, such as the owner of the 11.4-megawatt fuel cell park we highlighted last fall.

In addition to the RPS market, POSCO Energy is developing export markets in Asia for DFC plants with our support.

Finally, the previously-announced 100-kilowatt demonstration plans for the commercial building application market are now operational.

There are a number of aspects to today's announcement. The 120-megawatt order is the largest order the Company will have ever received and provides a consistent level of production for our Connecticut production facility for many years. This certainty of demand facilitates manufacturing efficiencies and is valued by our supply chain. In addition, the existing 70-megawatt order will be accelerated to meet forecasted demand. The equity investment will further bolster our balance sheet.

Our goal is to produce locally with a global supply chain. Production in South Korea is consistent with this goal as we will closely coordinate global purchasing for both facilities. Local production improves responsiveness and decreases shipping costs and is worth noting that POSCO will be funding this capacity expansion.

POSCO Energy will pay a one-time licensing fee for the manufacturing rights. FCE will also receive ongoing royalties for each completed power plant sold by POSCO Energy. We continue to broaden and deepen our partnership with joint development agreements, including the potential for larger size power plants.

Please go to slide number 9. The economics and attributes of our power plants are well suited for solving the many power generation challenges facing Europe. These include the need for clean base load distributed generation, reduced carbon footprint, and like countries everywhere, the ability to contribute local content and create local jobs.

Our relationship with German-based Fraunhofer IKTS and Spanish-based Abengoa are important components in our overall strategy to develop the large, growing, and under-served market for clean distributed base load generation in Europe.

Our business model utilizes a complementary multi-channel approach. First, we sell fuel cell power plants direct to customers as we do in the US and we'll do in Europe through the joint venture with Fraunhofer. And second, we will sell via partners, which we will do with Abengoa. Fraunhofer IKTS is a global leader with advanced ceramics for high-tech applications. Our relationship with Fraunhofer will help us penetrate the European market in two distinct and complementary ways.

First, Fraunhofer brings a vast network of relationships including government, industry, and potential suppliers. Secondly, Fraunhofer will apply its considerable material science and fuel cell expertise to our direct fuel-cell technology. We will retain the rights to intellectual property developed by the joint venture.

FuelCell Energy has established a legal entity in Germany for the joint venture and we will retain majority ownership. The joint venture has been structured to allow for partners and investors and requires minimal cash expenditures as Fraunhofer is contributing to our existing R&D resources. We will add resources as demand warrants. Recognizing the value of clean distributed generation, a number of European governments have incentives for stationary fuel-cell power plants operating on either clean natural gas or renewable biogas as well as combined heat and power applications.

To illustrate the potential of the European market, in just the past year with a very minimum local presence, we built an active sales pipeline of approximately 45 megawatts in projects. Developing European market will help us diversify our revenues as our goal is to have a diversified revenue base with equal thirds coming from North America, Europe, and Asia.

Please go to slide number 10. Our focus on customer service supports our revenue growth with comprehensive portfolio of services for fuel cell power plants, including installation services and long-term service agreements up to 20 years in duration. We continuously monitor, operate, and maintain virtually every one of our installed base of DFC power plants. We recently executed a service agreement with Southern California Edison and have other service agreements closing during the second quarter of 2012. Our customer value proposition is to operate and maintain the power plants so the customer benefits from the attributes of the fuel cell power generation but does not need to be involved in the day-to-day operation. This is a model that is certainly difficult for others to replicate.

There are a variety of ownership models for our power plants, including electric utilities that place the plants on a rate base, and users that purchase the power plants directly, and project investors that own the plant and sell electricity and heat under long-term power purchase agreements. Project finance is an enabler of demand, so it's worth highlighting a recent financing transaction by a project investor that owns 4.2 megawatts of plants. This project investor and plant owner used equity to finance the purchase of plants. The investor then raised approximately $23 million from the issuance of California Municipal Finance Authority revenue bonds a few months ago. This is the second project investor to raise capital from municipal bonds.

We announced an 11.4-megawatt fuel cell park that became fully operational this past fall. Subsequently, a 10.4-megawatt fuel cell park became operational in South Korea. These types of installations are ideal solutions for electric utilities that need to add capacity throughout their network. Fuel cell parks can be added as power demand warrants and where the power is needed, minimizing investment in transmission and distribution while enhancing power reliability and energy security from the distributed generation aspect of these fuel cell parks.

We met our commitments under our 100-kilowatt joint development program with POSCO Energy, and both demonstration plants are operating. This development will support the compliance-oriented building application market segment. The photo on the bottom of the slide shows one of the units located adjacent to a hospital. The team at FuelCell Energy is proud that our power plants have generated more than 1 billion kilowatt hours of ultra-clean and renewable electricity since 2003, far exceeding the output of any other fuel cell company in the world.

Please go to slide 11. Our vision is to provide ultra-clean, efficient distributed generation base load power for less than the cost of the pre-delivered electricity without incentives. The global market is very elastic, meaning as you approach this point the market grows well beyond the current $12 billion estimate for power plants and services.

We can attain profitability at 80 to 90 megawatts of production. This is our first objective, and we are on a path to accomplish this with increasing volume. The work we are doing in opening new markets will drive our growth above our current capacity levels while delivering reduced costs and operating leverage.

Our focus on operational excellence is producing continuous improvements in our business and getting us closer to profitability. Our annual production rate was 4 megawatts in 2003 when we began commercializing our fuel cell power plants. Since then, in response to increasing order flow, the rate increased to 22 megawatts in 2010 and is now 56 megawatts, more than double what it was only two years ago.

We have been asked, how much volume will be necessary for us to achieve our vision of below-grid electricity pricing without incentives. We estimate that at an annual production rate of only 210 megawatts and we'll drive fuel cell power plant generation cost down to about $0.09 to $0.11 per kilowatt hour. This is a very achievable production volume, particularly relative to the POSCO Energy announcement this morning.

Our growing services business is contributing to revenues. Growing the installed base drives production volume for stack replacements at existing installations. We have service agreements with terms up to 20 years. With a growing installed base and longer-term service agreements, more production will be allocated to re-stacks over time, providing recurring service production.

Just to be clear, we are planning for rapid and extensive growth, though I feel it is useful for investors to understand the recurring business aspects of the business model from re-stacks and annuity-like recurring revenue. Our growing installed base and product backlog exceeds 300 megawatts if I include the 120-megawatt announcement today and this expanding installed base will drive future service revenue.

Our attractive and dynamic business model features diverse revenue streams, including sales of products and adjacent services across multiple vertical and geographic markets. We sell directly to customers and via partnerships.

Our Company is creating permanent jobs in the United States and abroad that are tied to local demand. This strategy attracts the support of governments that are seeking the benefits of ultra-clean distributed base load power generation while simultaneously creating sustainable jobs.

Please go to slide number 12.

We are leveraging our flexible business model and executing on our global expansion strategy. We are moving towards a vision of grid parity pricing which we estimate we can achieve at an annual production rate of only 210 megawatts. We have delivered improved margins and cost reductions leading to improved EBITDA results. Our initiatives with POSCO Energy will bolster our balance sheet, provide multiple years of committed production for our US manufacturing facility, and leverage our partnership to grow stationary fuel cell adoption in Asia.

Our exciting new relationships with world-renowned Fraunhofer IKTS will open many doors for us in Europe that will contribute to product enhancements. Our new partnership with Abengoa will help us to penetrate the market for stationary fuel cell power generation in both Europe and Latin America. Service is becoming a profitable portion of our growth and adding diversity to our revenue.

In conclusion, I want to thank our talented associates for making excellent progress and our investors for their confidence in us. Thank you for your support.

Operator, we'll be happy to take questions at this time.

(Operator Instructions). Sanjay Shrestha, Lazard Capital.

Congratulations on the POSCO announcement. So first up, just one point of clarification. You guys mentioned that your cash burn for the year is going to be between $17 million to $21 million, right? So given the burn in Q1 here, so you're basically going to be cash neutral, but you've been generating some cash for the other three quarters. Is that the right way to think about it?

Certainly for the fiscal year, Sanjay, that's how we're thinking about it. When you look we used the inventory example on the call. We certainly expect to turn that inventory into cash during the fiscal year.

Okay, okay, got it. Now in terms of -- okay -- so then timing is probably the only variability there whether it's Q2 versus Q3 versus Q4, but net-net, there should be a quarter where -- even a distributor -- there should be a quarter where you guys are starting to actually add to the cash rather than use the cash, right?

That's right.

Okay, great. Now in terms of the POSCO relationship here, right, how should we think about -- how much of the POSCO backlog is going to get used in fiscal 2012? And given this 120-megawatt order and shipments starting in 2013, I mean is it too much to sort of think that there was a good chance you guys could actually even be profitable for the fiscal year of 2013? Can you help us understand that? How should we think about sort of service component of your installed base and how much of the POSCO backlog from that 70 megawatt is going to get burned this year? How much is left as you go into 2013 and how much of that 120 megawatts do you expect to ship in 2013?

Sanjay, this is Chip. Good morning and thanks for joining the call, and great question.

Just to keep it simple, we're producing right now in, for POSCO, about two kits a month, okay? What this ultimately means with the acceleration means that we're going to be doing about three kits a month, call it the second half of the year. And that kind of continues to next year.

But I think the other piece of this is that I think if you did the math, what you would see is, and to Mike's earlier point about using the inventory that we have built -- or it's not inventory, it's actually almost finished plants -- we will have other announcements of other orders beyond the POSCO to fill up that production plant.

We're executing just like we said. So I think the EBITDA number as you saw, is down, which is good. We'll turn that operating and (technical difficulty) work and then we'll win with POSCO and some other (technical difficulty).

Okay. Do you guys have a sense, though, out of that 120 megawatts, how much of that might get shipped in 2013? Because it goes from 2013 all the way to 2016, right?

Yes, we actually have a detailed plan for that, Sanjay, all the way through 2016 actually is actually how that kind of times out.

Sanjay, this is Mike. A way to think about it is right now we have a 70-megawatt backlog from POSCO. That -- you divide it between two fiscal years, it's about 35 megawatts a fiscal year. They are accelerating what we had in 2013 to increase that to about 40 megawatts this fiscal year. And next fiscal year it will be in that same range, 40-megawatt range, for the next couple of years, and then go down from there.

Got it. One final question for me then, guys -- so as we look at some of the other European partnerships, right, especially given the aspiration in Germany for the base load requirement and all that, because solar and wind is just not going to meet that demand. So one, I just want to get some granularity as to what exactly do you guys expect and what's the timing on that?

And two, what's now all this visibility that you guys have? Should we start to expect some of this Connecticut project to come back in life again?

That is kind of a two-part question. Let me go to the Germany one first, Sanjay. Yes, you'll start seeing some visibility of not just Germany but Europe business here in the second half of 2012 for us. There's a few more details to work out. and obviously resources to be bolstered in place there. But it's pretty interesting discussions we're having with multiple type of customers, with being introduced from Fraunhofer and Abengoa.

I think the second part of your question was back to the US and specifically Connecticut. There is -- I'm pretty positive on activity in Connecticut here in the second half of the year as well, our fiscal year. So I think it would be safe to say that we will see some closure out of that activity.

Okay, that's very helpful. Thank you so much, guys, and congratulations again.

Thanks.

Thanks, Sanjay.

John Quealy, Canaccord Genuity.

Just a couple questions -- again, on the POSCO, this MOU, is this going to be finalized soon? And obviously, we're talking about orders being accelerated. Is this finalized now or when should we look for it to be finalized?

Hi, John, this is Mike. So there's really three components to the MOU. The first piece is the investment in FuelCell Energy common stock. That will close first; we expect that to close within 30 days.

The next piece is the order. We expect that to close in about 45 days.

And then on top of that is the cell license agreement, and that will be about 60 days.

Okay. And then your narrative about the royalty moving forward, the potential one-time royalty for POSCO once some production would move potentially to South Korea in 2014 -- can you talk about the magnitude for that? Would that set up a different licensing model, or if you could just give us the more context there.

Sure. Certainly there will be an up-front royalty payment. We are going through a review and evaluation and a negotiation process right now on that. From there we would look at having an ongoing royalty arrangement, just like we do right now with POSCO. That will be effective when manufacturing begins in Korea in 2015, but between now and then we'll still have the ongoing royalty from the existing licenses, which is BOP manufacturing, as well as stacking and conditioning in Korea.

Okay. And I'm sorry, could you just remind us, how much cumulatively that POSCO has invested in the Company over the last several years, including this $30 million tranche?

With this, this brings POSCO's ownership percentage to about 19% of the Company. It's just over 30 million shares.

Okay. And then just a couple follow-ups -- so on the European channel, can you talk a little bit more about Abengoa? I think you were putting one of the demonstration units on one of their campuses; but in terms of go forward, are you guys going to co-market things? Or are they going to own units? How is that relationship slated to evolve?

John, this is Chip. I'll answer that question. We have those guys actually here, I think it is next week, or this week actually, frankly.

But we're having discussions with them about how to actually do that. So it's a little bit premature to talk about how we would do that. But I suspect -- I mean, they are going to be putting together some of their own technology and then we're basically providing the modules similar to what we do with POSCO in the early days. So we are going to try to work out the branding aspects and some of those channel marketing challenges -- or not challenges, but how do we do that with those guys here shortly. More to follow on that.

Okay. And then in terms of domestically, with the movement towards cheap gas and the buildout of the infrastructure, can you comment a little bit about any initiatives or plans you have domestically to try to increase penetration of fuel cell product on the gas side of things, as obviously we're all going crazy for shale gas here?

Yes, it's interesting. You know, obviously, we play in the natural gas side in the biogas side, right? So frankly, what happens is the -- everything is on a return on investment basis, the base we build the bigger and bigger plants, right?

And so when the cost of gas is down, okay, the paybacks get pretty attractive, but equally we get a lot of interest when it goes up, because the efficiency levels we can -- able to produce.

So what we're seeing is a little different rotation in maybe some customers that we typically see, but I think, particularly in Europe, not just the shale gas in the US, but it's become pretty obvious that gas is going to be a solution in a lot of different continents. So we're seeing people now go, okay, we expect that the price for gas will be maintained at a very reasonable price for a reasonable period of time. And so we're seeing people from an investor perspective look at that as a positive sign and going, hey, that's a lot less risk than I thought I had before.

So I'd say what's -- the market interest -- we get a lot of these calls and stuff and doing interviews, but what has really happened is the customer base, and particularly the investors, are warming up to this idea. So we're going to see some traction from that. We haven't quite seen it thus far, but I suspect you'll see that soon.

And then lastly, I just want to make sure I understand the cash position. So $42 million at quarter end -- excuse me. It looks like you're going to be net flat or neutral with cash burns at the end of the next three quarters. And so then we're going to have another $30 million from POSCO, excluding the CapEx. Is that sort of how the math works, so about $70 million minus CapEx? Is that what we should look at, at the end of the year?

That is how the math works, John, yes. And the other thing I would point out is as we discussed the up front (multiple speakers) royalty, as well.

And then the preferred I would say like about $1 million a quarter, something like that?

The preferred is about $1.1 million a quarter, yes.

Okay. Thank you, guys.

Thanks, John.

Walter Nasdeo, Ardour Capital.

If I could, I'd like to jump over kind of to the design manufacturing side with some of these new initiatives that you're working on. Now, do you foresee any alterations that you need to make due to design of this product going into Europe as far as any EU regulations or things like that?

Walter, the only thing we need to do is the product has to be CE-compliant. And we currently source components out of Europe anyway -- I think it's a significant number. But we actually are in the process of shipping our first CE unit over to London right as we speak. So basically we just have to finish the CE mark work on the megawatt and the multi-megawatt units, but that is actually done by the folks here. So that's -- it just takes some time and a little bit of money. But it doesn't alter the technology, if you will. It's more of the external to plant -- components and mechanical balance, the plant electrical balance of plant.

Got you. Okay, good.

Now as far as like the manufacturing process and you're driving to automate that, how close are you getting or how many people actually touch components as opposed to automated as the stack is being assembled?

We'll try to answer that. I mean a great deal of it is automated. I can't just off the top of my head tell you the exact percentage here. But our labor aspect isn't a very large piece of what we do. We're getting some significant leverage from the overhead, but the labor itself is less than 10%, Walter.

We're always updating through our improved processes and things what more we can automate, but labor isn't the biggest challenge we have. It's really just about throughput and leverage -- that's really what it is -- and leveraging the supply chain on volume.

Okay. So what is your current capability as far as units per month?

What we can do out of the current facility, Torrington, if we -- we've got like $1 million of capital to spend and some time to get there -- but we can do about 80 -- depending on the mix -- about 80 to 90 megawatts a year in volume. So you just do that on a monthly basis.

Okay. Well what happens if you get shoved in, like you say and if somebody has a need, a rapid need for a handful of units? Is there any kind of plan in place for you to be able to meet those needs?

Yes, well, first of all, if you remember, last year -- and we ramped up, flawlessly would be probably the best way to describe it -- very, very quickly, okay?

We have a certain amount of -- Tony Rauseo looks at the supply chain very carefully and we look at what the critical parts are. So we have com bonds and things like that at critical points.

But earlier, Mike talked about we built basically the two power plants, the modules, if you will, for two projects. We do have some of those figured in our forecast -- that's why we do them. And that is kind of a strategic decision. In the short term, we put some cash into those, but we have been able to basically show how we get that cash back and we get it back -- it happens pretty quickly.

The other thing, it makes some of these projects go because it really shortens the construction period time of these power plants, which time is money in the financing industry, as you know. So it's a strategy that we have used, I think, effectively, and we continue to do it.

Great. Okay, and then just one last thing from me -- how is POSCO's marketing of your products throughout Asia going? Are they getting any ramp up in that yet?

Well, we've got the first -- the answer is, they are putting resources and money to it, Walter, is the short answer. We've got, of course, the one project in southeast Asia. We are having discussions; they're having discussions. We're supporting those discussions in Japan, given the opportunities there. Those are the major ones at this time. But I mean there's just a lot going on in Korea, itself. But we're doing double duty here on the import -- the export side as well as making sure we capture the volume, which is pretty substantial in the domestic market.

All right. Well, listen, I appreciate you taking time to answer my questions.

Thanks.

Jeff Osborne, Stifel Nicolaus.

Mike, I was just wondering if you could touch on the expense run rate -- what we should be thinking about over the next couple of quarters. Should it be at current levels or do you need to step up for this acceleration?

Jeff, right now where we're at with R&D and SG&A, we expect it to be in this range for the rest of the fiscal year. No significant changes, higher or lower.

Got you. And then, have you decided or POSCO decided what the size of the plant will be that they intend to build for 2015 production? Is that known yet?

That's a great question. No, we're -- we -- and part of this discussion that Mike alluded to, Jeff, this 60-day period or give or take, is we're having those discussions with them. There's a lot of details that have to be worked out. But whether they build a 70 megawatt or above, that's still to be determined.

Got you. And --

There are other facilities over there. Stacking others are above 70-megawatt capacity right now.

That is 100 megawatts, correct?

Correct, yes.

Right. And then two other quick ones here -- around POSCO, can you touch on the two units on the 100-kilowatt side that you've jointly developed in terms of A, what the expected profitability of those are? I assume you're not going to be making those in Torrington and this test will go on for some period of time and then eventually those would be made in Korea? Or maybe I'm reading it wrong.

Jeff, let me -- so that is a market that started out unique to Korea from a compliance perspective. Basically, new buildings, government in nature and it will expand, starting in Seoul, had to basically have a certain percentage of on-site generation, okay? It's just part of their overall energy strategy. And so frankly, POSCO was the first to enter into that, and thus, the project for the 200-kilowatt products.

For those products, we delivered two aspects of those; you can see in the picture. We basically -- inside there is a module. I think it is a 100-cell module or something, rather, than our 400-cell module. And basically that module that we make here goes into that, and then we supplied some engineering expertise as well. So POSCO basically created the balance of plant, if you will, and all the aesthetics and the enclosure for that project.

So we're working on it. Those are kind of like alpha units. And now based on the fact that they are running and everything else, we're going back now and looking at what really would be the future cost and margin and other opportunities around the world.

Got you. And then the last one is, should we still think about 80 megawatts as the run rate for profitability for the Company? Or has that changed?

Our profitability target is 80 to 90 megawatts of annual run rate, depending on product mix. And we're comfortable with that range.

Perfect. Thanks much.

Thank you.

I would now like to turn the conference back over to Mr. Chip Bottone for any closing remarks.

Well, thank you very much, everybody, for joining the call today. We certainly appreciate your questions. They were great questions. A lot of news today we're very proud of and we look forward to seeing everybody on the call next quarter. Have a great day. Thank you very much.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.