燃料電池能源 (FCEL) 2019 Q1 法說會逐字稿

Good morning.

My name is Jason, and I will be your conference operator today.

At this time, I would like to welcome everyone to the FuelCell First Quarter 2019 Earnings Call.

(Operator Instructions) Tom Gelston, Vice President of Investor Relations, you may begin your conference.

Thank you, and good morning, and welcome to the first quarter of 2019 earnings call for FuelCell Energy.

This morning, FuelCell Energy released financial results for the first fiscal quarter of 2019.

The earnings release, as well as a presentation that will be referenced during this earnings call are available on the Investor Relations section of the company website at www.fuelcellenergy.com.

A replay of this call will be available approximately 2 hours after its conclusion on the company 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, without limitation, statements with respect to the company's anticipated financial results and statements regarding the company's plans and expectations regarding the continuing development, commercialization and financing of its fuel cell technology and its business plans.

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, President and Chief Executive Officer.

Chip?

Thank you, Tom.

Good morning, everyone, and welcome.

Please turn to Slide 4, Highlights.

Today, we announced our first quarter fiscal 2019 results, a quarter that was highlighted by a number of key financing activities and milestones.

We continue to execute on our core business and to work on the prerequisites needed to finalize the remaining 2 LIPA PPAs.

We expect these PPAs will be executed over the coming months.

We are working hard to accelerate the development and deployment cycle where possible, particularly with respect to Derby, Connecticut project awarded last June, which we now expect to complete 6 months ahead of the original projected commercial operation date.

The construction of the 2.8-megawatt plant in Tulare, California is expected to be completed in the third quarter of this fiscal year, and the 5-megawatt plant for Bolthouse Farms is expected to be completed in the fourth quarter of this fiscal year.

And we've begun construction of the 7.4-megawatt plant located on the U.S. Navy Submarine Base in Groton, Connecticut.

In addition, during the quarter, we completed the construction of our SureSource 4000 fuel cell, which is our high-efficiency utility scale solution located at Triangle Street in Danbury, Connecticut.

This product features an enhanced electrical efficiency profile by configuring the fuel cell modules in a series to utilize the fuel to the greatest degree possible.

Key to our business model is project financing.

During the quarter, we entered into $100 million project finance facility with Generate Lending, a subsidiary of Generate Capital, which we expect to use to fund the construction, installation and commissioning of certain of our projects.

Also, subsequent to the quarter end, we announced that we have entered into a construction facility -- financing facility with Fifth Third Bank, proceeds of which are to be used to finance the construction, installation and commissioning of the fuel cell plant being built at the U.S. Navy Submarine Base in Groton, Connecticut.

In conjunction with this financing, we obtained commitments for the long-term project financing of the Groton project to be funded upon completion of construction, subject to the negotiation of definitive agreements and other closing conditions.

Our 4-point long-term strategy, which is to execute on our backlog and project awards, grow our generation portfolio, win new business and develop and commercialize our Advanced Technology solutions, remains intact and has been validated by our recent announcements and customer response.

We are not without our challenges.

This past quarter was difficult in regards our stock trading dynamics as well as the impact to the financial statements related to the outstanding Series C and Series D preferred securities.

Also, new order cycle continues to be hard to predict.

We are actively working on a number of projects and are encouraged by the growing appreciation for the energy solution our fuel cells provide.

I will discuss more of our business execution and some status updates after Mike Bishop, our Chief Financial Officer, reviews our financials.

Mike?

Thank you, Chip.

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

Please turn to Slide 5 titled Financial Update.

FuelCell Energy reported total revenues for the first quarter of fiscal 2019 of $17.8 million, compared to total revenues of $38.6 million for the first quarter of fiscal 2018.

Service and license revenues increased over the prior year period to $11.8 million, primarily due to higher number of scheduled module replacements under the company's service agreements in the first quarter of fiscal 2019.

Advanced Technology contract revenues totaled $4.5 million compared to $3.1 million in the first quarter of fiscal 2018, primarily due to activity under existing contracts.

Generation revenues decreased to $1.5 million, primarily due to timing of plant maintenance.

And finally, product revenues decreased $29.5 million, primarily as a result of the completion of deliveries in fiscal 2018 under the 20-megawatt order for the utility project in South Korea owned by KOSPO.

The gross loss generated in the first quarter of fiscal 2019 totaled $2.2 million compared to a gross profit of $4.6 million generated in the first quarter of fiscal 2018.

This decrease is primarily a result of the completion of deliveries in fiscal 2018 under the 20-megawatt order for KOSPO.

Both periods were impacted by underabsorption of fixed overhead costs due to low production volumes.

Manufacturing variances primarily related to low production volumes totaled $3.2 million for the 3 months ended January 31, 2019, compared to $2.3 million in the 3 months ended January 31, 2018.

Finally, the adoption of the new revenue recognition standard Topic 606 resulted in a reduction of service and license margins of $1.3 million.

Operating expenses for the first quarter of fiscal 2019 totaled $13 million compared to $10.2 million for the first quarter of fiscal 2018.

This increase was primarily related to spending to complete the development and construction of the SureSource 4000 plant located in Danbury, Connecticut as well as higher professional-related expenditures and sales and marketing costs due to business activities in the first quarter of fiscal 2019.

Net loss attributable to common stockholders for the first quarter of fiscal 2019 totaled $33 million or $0.33 per basic and diluted share compared to $8.4 million or $0.12 per basic and diluted share for the first quarter of fiscal 2018.

Net loss attributable to common stockholders in the first quarter of fiscal 2019 includes noncash deemed dividends, redemption value adjustments and redemption accretion related to the company's Series C and D convertible preferred stock of $14.7 million or roughly $0.15 per share.

Adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA, which is a non-GAAP measure, in the first quarter of fiscal 2019 totaled negative $12.1 million compared to negative $2.8 million in the first quarter of fiscal 2018.

Please see our earnings release for a reconciliation of adjusted EBITDA to the most comparable GAAP measure.

Cash, cash equivalents and restricted cash totaled $68.2 million as of January 31, 2019.

This includes $27.7 million of unrestricted cash and cash equivalents and $40.5 million of restricted cash and cash equivalents.

We also have $90 million of borrowing availability under the new project financing loan facility with Generate Lending, a subsidiary of Generate Capital.

Backlog reached a record level of approximately $1.3 billion at the end of fiscal 29 -- at the end of first quarter fiscal 2019.

Generation backlog totaled $982 million as of January 31, 2019, more than double the total at January 31, 2018, as we executed the first of 3 power purchase agreements or PPAs with the Long Island Power Authority in the first quarter.

As described in our earnings release, backlog does not yet include the 2 -- the other 2 LIPA projects that are categorized as project awards.

These project awards represent approximately $636 million of future revenue potential over the life of such projects, assuming the company retains ownership of these projects.

Overall, our backlog and project awards, together, total approximately $2 billion.

As the chart on the bottom right side of the slide shows, the company has invested and will continue to invest in project assets and the buildout of our generation portfolio.

Project assets consist of projects developed by the company that are structured with power purchase agreements as well as projects the company is developing and expects to retain and operate.

This portfolio of projects is supported by a diverse group of counterparties, which include investment-grade utilities.

Growing our generation portfolio is a cornerstone of our plan for building a sustainably profitable business.

Project assets increased to 100 point -- $109.8 million as of January 31, 2019, with such project assets consisting of $27.2 million of completed installations, which are currently operating and $82.6 million of projects in development.

The chart on the bottom left of the slide shows the anticipated timing for the build-out of these projects in development.

With regard to our project-level debt activity, the company reached a significant milestone in the first quarter as we entered into a new construction facility that provides us with up to $100 million of construction-level debt for our 2 fuel cell projects, which may be expandable subject to lender approval to up to $300 million over time.

Generate Capital may also participate in the long-term capital stack of these projects.

We expect to use this facility to fund the construction of the 3 LIPA projects, totaling $39.8 million and the 2 projects awarded pursuant to the Connecticut DEED RFP totaling 22.2 megawatts as well as potential future project awards.

I would now like to turn the call back to Chip, who will talk more about the company's execution and market opportunities.

Chip?

Thank you, Mike.

Please turn to Slide 6, Market Update.

I wanted to take a minute to provide context of our product as a utility scale solution.

South Korea remains one of the most productive supportive markets in the world for stationary fuel cell technology.

We believe that our technology is the preferred solution for utility scale power, especially for combined heat and power utility scale projects.

With significant installed base of carbonate fuel cell plants currently operating, customers have expressed a strong preference for our technology and its ability to deliver solutions that meet their exacting needs.

Our 20-megawatt KOSPO project continues to perform exceptionally well and regularly helps visitors.

The market opportunity is supported by a robust Renewable Portfolio Standard that the South Korean government has put in place, quickly ramping from 2% in 2012 to 10% in 2023, and most recent declaration of 30% by 2030.

As a result, South Korea looks to remain a leader in deploying clean utility scale fuel cells for years to come.

Turning to Connecticut.

We've seen both utility companies in the state AVANGRID and Eversource recognize the benefits of our projects, resulting in the leading installed base of projects, not only for their attributes our distributed power but also for the ability to answer such critically growing need for microgrid applications, as demonstrated last year with our solution for the town of Woodbridge with Eversource.

With the completion of the design of our SureSource 4000 behind us, we're in better position to provide cost-effective utility scale solutions in state.

Lastly, as it relates to New York, the same dynamics that took shape in South Korea and then in Connecticut are now playing out in New York.

The LIPA projects totaling nearly 40 megawatts provide a very prescriptive solution to Long Island's electrical needs, putting in plants right where the power is needed and, again, giving us a leadership position.

Our solution is unique, scalable, avoids expensive non-value-added investment and transmission infrastructure and advances the sustainability goals of power generation.

Please turn to Slide 7, Carbon Capture Update.

Designed around our core carbonate technology platform, we have continued to make forward strides with our global carbon capture solution.

We continue to see increasing interest in our decarbonization solution and have adapted our near-term plans and longer-term vision to the expanding energy market transition.

ExxonMobil remains a key collaborator.

We thought it would be helpful to provide an illustrative path of product and market development of carbon capture solutions, with timing and specifications ultimately based on continued product evolution and market demand.

As previously disclosed, we completed design and engineering work for our Generation-1 solution, which is a megawatt-class carbon capture fuel cell plant in 2018.

This design is based on our existing product configuration with adjustments to balance the plant.

Recent work has included various validation tests across various conditions prior to deployment, focusing on 90% CO2 and 70% NOx reduction, respectively.

We are now transitioning to the development phase of our Generation-1 solution, expanding to industrial applications and larger systems.

You can now start to think about using this solution for reducing CO2 from any exit gas stream.

This expanded industrial market, which historically had limited solutions for decarbonization, accounts for roughly 1/3 in the global CO2 emissions.

Additionally, we have developed the expertise and sound and objective experience to execute project and plant FEED studies.

FEED studies determine the specific application parameters and expected results.

FEED studies are used for project development and execution of all-sized projects.

We are working on scaling this technology and making them ideal for large-scale carbon capture.

As an example, the slide contains an image of a multimegawatt fuel cell REC system, customizable to fit any number of sizing applications.

We believe that the scale would create a strong value proposition.

Additionally, if we take this solution to its full potential, we can reduce CO2 and NOx, reduce power and hydrogen, which further increases the affordability of this offering.

Sources of CO2 are not going away anytime soon, and we believe that solutions like ours will play an important role in reducing emissions and creating new energy sources globally.

Please turn to Slide 8, Summary.

Over the past few months, we've made significant progress in a range of new sources and financing, both construction and permanent project-level debt.

These transactions are major enablers of a fundamental shift for being primarily a product-driven company to being a solutions company.

We appreciate the support of Generate Capital, Fifth Third Bank, the Connecticut Green Bank and the growing number of institutions that recognize the value and attributes of our projects.

Additive to our projects under construction are projects under development, which, together, are expected to result in approximately 94 megawatts in our generation portfolio.

Carbon capture, as discussed, is a major opportunity for us.

It has potential to scale and answer some of the most pressing needs to reduce emissions and reinforce energy security.

Our Advanced Technology team continues to push hard on all fronts, not only carbon capture, but our distributed hydrogen and long-duration storage solutions as well.

Plenty of reasons to be excited about our future.

Great folks doing great things.

Thank you.

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

(Operator Instructions) Your first question comes from the line of Eric Stine from Craig-Hallum.

It's Aaron Spychalla on for Eric.

First, you talked about it a little bit.

Can you just maybe give us a little broader update on the pipeline in South Korea and in the U.S.?

Any thoughts on kind of size relative to kind of recent quarters?

Any thoughts on timing?

And maybe in the U.S., I know you had mentioned previously the ITC reinstatement being kind of one of the catalysts you had maybe expected some traction in 2019?

Yes, Eric -- or Aaron rather, this is Chip.

I'll take that one first.

Yes, the primary markets are obviously in U.S. here.

And as Mike and I commented on, our focus was -- we've got a big backlog and are executing on our backlog.

But beyond that, yes, we have a very active pipeline.

And look, I won't talk specifically about it, but it's as big as it's ever done -- ever been, sorry, both in terms of future PPAs and some sale of equipment project.

That would include all areas, power generation, carbon capture, hydrogen, et cetera.

In South Korea, specifically, we kind of laid out kind of an update, but there's kind of like -- there's roughly 4 things we're doing there.

Number one is, we do have a large installed base that does require replacement of modules over time to keep those plants running.

And we will make sure working with POSC so those customers are taken care of.

Number two, as we've laid out, we have our own direct customers there in KOSPO and we continue to service that.

Third, we do have a license agreement with KOSPO on a kind of a limited range of the products we offer, and we'll continue to work with them on that.

And then finally, there's other range of products, some of which I mentioned, that we plan to introduce to the marketplace.

So I would say when you take that both on the service side and new product side, it's quite active over there, as I mentioned in my remarks.

All right, sounds good.

Maybe on tri-generation, I know that's kind of one area that you've been excited about with the Toyota project.

Can you just kind of go through some of the next milestones we should be looking for there, how that global pipeline is shaping up?

And I did see that it seemed like that was pushed back a couple of quarters on timing.

Maybe just some color there, please.

Sure.

On the hydrogen -- sorry, the tri-generation, which is one way to produce hydrogen, yes, we started off with the Toyota project, just due to some timing of things, permits and other things, were -- that was moved back a little bit.

But beyond that, we've continued to focus on renewable hydrogen supply in -- specifically, in California.

And what that means is you go to landfills and wastewater plants and we've got a number of projects we're working on.

We did talk about some grants we've gotten, some leases that we have exclusively on and things like that.

So that we'll continue to build up beyond the project we have with Toyota on that.

We're also looking at some other applications.

There's certainly a need in Korea for that, and we've met with some folks to talk about how to deploy that.

Obviously, that's -- Hyundai makes hydrogen vehicles.

So I won't get in too many details, but yes, we've got a lot more activity going on beyond that Toyota project that we'll execute on here.

All right.

And then maybe last for me, can you just kind of talk about that -- the service line and outlook for kind of stack replacements here over the next few quarters?

And then you kind of touched on the ASC 606, but how -- I mean, is that something we should be looking for, going forward?

How are you kind of thinking about gross margins on that line, given that now?

Sure, Aaron, I'll take that one.

So in the first quarter of 2019, we did have scheduled module replacements that came through.

The -- and as you mentioned, 606 created an accounting impact essentially with reserves.

We expect that to moderate in the future.

We've always said, we target gross margins in the service business north of 20%.

That's typically what we bid out at.

At these low levels, low production rates, there has been a drag on service, but we expect margins to grow over time.

(Operator Instructions) Your next question comes from the line of Colin Rusch from Oppenheimer.

As you're watching the green market evolve, how much work is it going to take you to adjust the power portfolio?

And how much of the existing inventory can you use to meet those needs?

Colin, this is Chip.

I'll take that.

Mike might have something to add as well.

So if you kind of look at the market there, Colin, they've made some changes recently to some of the specifics relative to the RPFs (sic) [RFPs].

But what I would say is that from a new solutions perspective, I mentioned that we had finished construction of the 4000, which is really aimed at electric-only with some thermal need.

And there's kind of like 2 different applications over there.

One is ones that need steam and power, and we're uniquely positioned to do that.

We have some of those projects.

But then the other one is looking at less emphasis on thermal load and more emphasis on electrical load.

And that, really, is what the 4000 is for.

And so we have that project under construction as well at the U.S. Navy base and some other projects we'll get that.

But it will be our intent to introduce that, which would have a very compelling value proposition for those specific applications.

As I mentioned earlier, there's further interest in things like hydrogen.

It's kind of uniquely positioned, given the population density and topography, if you will, to support a strategy like that, and we have had that conversation with people over there about hydrogen.

And then finally, carbon capture, which is a little bit out, but they clearly have something to do, if you've been over there, they have a real fine dust problem on good days.

And they just have to find a way to deal with the CO2 and the NOx reduction.

So that's kind of our approach as to kind of make sure we're taking care of the installed base because those are obviously customers for new business, repeat business.

But increasingly, there's demand for the other products that we have, that we currently don't have under license with KOSPO.

Okay.

That's incredibly helpful.

And then just on the balance sheet, you've got a reasonable amount of short-term debt.

You've been able to close a couple of substantial financing facilities.

Could you talk to us about what your plans are for the debt on the balance sheet and how you're approaching that as you go through the balance of this year?

Sure, Colin, this is Mike.

I'll take that one.

So yes, what's in short-term debt on the balance sheet is the corporate debt facility that we have with Hercules.

We had a 1-year interest-only period on it, which has essentially come off.

That instrument, starts amortizing here in the next quarter.

So essentially, all of that -- and that's a $25 million facility, so most of that is short term at this point.

The company's strategy is obviously to maintain long-term debt at competitive pricing.

We would certainly look to continue that strategy here going forward.

There are no further questions at this time.

I now turn the call over back over to Chip Bottone, President and CEO, for closing remarks.

Okay.

Again, good morning, everybody.

Thank you for the comments here.

I guess, if you kind of looked at this quarter, the main emphasis for us was on execution and, perhaps, you saw a lot of that in here.

We would say that's pretty exciting, but when you're grinding things out, as we've done, there's a lot of things that went into delivering those results that will pay dividends for us in the future.

So our focus continues to be on just, overall, to deal with energy security and decarbonization.

And I think you saw some of the developments we have clearly demonstrate that we have some of these leading products, going forward.

So next quarter, we'll update you on further progress on our generation portfolio deployment and other development efforts that we have going on around the world.

So thank you very much for your time, and have a great day.

That concludes today's conference call.

You may now disconnect.