FuelCell Energy CEO Discusses Q4 2011 Results > Fuel Cell Dispatch

FuelCell Energy CEO Discusses Q4 2011 Results

Good morning, and welcome to the Fourth Quarter 2011 Earnings Call for FuelCell Energy. Delivering our remarks today will be Chip Bottone, President and Chief Executive Officer; and Mike Bishop, Senior Vice President and Chief Financial Officer.

The earnings release is posted on our website at www.fuelcellenergy.com, and a replay of this call will be posted 2 hours after its conclusion. The telephone numbers for the replay are listed in our press release.

Arthur A. Chip Bottone

Thank you, Kurt. Good morning, everyone, and welcome. Fiscal year 2011 was a year of growth for our company.

We had record revenues and generated gross profits during the third and fourth quarters, the first since commercializing our products. We successfully managed a significant production increase and are executing on our backlog. Credit for these achievements goes to our talented team of associates and their dedication to our vision, which is to provide ultra-clean, efficient distributed generation baseload power for less than the cost of grid-delivered electricity.

I'll review our business and update you on our execution of our strategic initiatives in greater detail after Mike Bishop, our Chief Financial Officer, reviews our financial results for the quarter. Mike?

Michael Bishop

Thank you, Chip. Good morning, and thank you for joining our call today. FuelCell Energy recorded total revenues for the fourth quarter of 2011 of $34.7 million compared to $19.7 million in the same period last year. Product sales and revenues for the fourth quarter were $33.3 million compared to $17.2 million reported in the prior year. This is a 94% increase in quarterly product revenue and a record for the company. The company's product sales and service backlog totaled $210 million as of October 31, 2011, compared to $154 million at the end of the prior year. The components of this backlog include product orders of $132 million, service agreement backlog of $78 million. We plan to deliver product backlog through October 2013.

We generated gross profit from product sales in the fourth quarter of 2011. This is our second consecutive quarterly gross profit resulting from increased production volume and lower product costs. Margins for product sales and revenues improved by $4.3 million compared to the fourth quarter of 2010, and the product cost-to-revenue ratio improved to 0.98:1. Research and development contract revenue was $1.4 million for the fourth quarter of 2011 compared to $2.5 million in the prior year. The company's research and development backlog totaled $15.8 million as of October 31, 2011 and increased compared to the $9.7 million reported in the prior year.

Net loss to common shareholders for the fourth quarter decreased to $7.9 million or $0.06 per basic and diluted share compared to $12.9 million or $0.11 per basic and diluted share in the fourth quarter of 2010. This improvement is due to increased revenues and improved product margins.

Turning to the full year, my discussion of results will exclude the charges related to the repair and upgrade program, and the reevaluation of the Series I preferred shares recorded during fiscal 2011. Please note there is a non-GAAP reconciliation included at the end of the earnings release, which illustrates financial results, excluding these items.

For the fiscal year, the company reported total revenue of $122.6 million, up 76% compared to total revenue of $69.8 million in 2010. Product sales and revenues were $115.1 million compared to $59.2 million in the prior year, and R&D contract revenue was $7.5 million compared to $10.6 million in fiscal '10. Margins for product sales and revenues improved by $14.9 million compared to the prior-year period, and the product cost of revenue ratio improved to 1.03:1 on cost reductions including better labor efficiency and improved overhead absorption from higher production rates.

Net loss to common shareholders for the fiscal year was $40.6 million or $0.33 per basic and diluted share, compared to $58.9 million or $0.63 per basic and diluted share for fiscal 2010. Total liquidity was $64.4 million at October 31, 2011, including cash and investments in U.S. Treasuries of $63.4 million and revolver availability of $1 million. Net cash, cash equivalents and investments generated in the fourth quarter of 2011 was $13.9 million. Cash flows from operations totaled $9.5 million, reflecting strong milestone payments from contracts and backlogs. We used $2.2 million of cash on capital expenditures in the quarter and generated $6.6 million through financing activities.

Total net cash used for fiscal 2011 were $21.6 million and compared very favorably to total cash used of $42.4 million in fiscal 2010. These totals exclude net proceeds from underwritten common stock offerings and revolver borrowings. We have previously forecasted total cash use of $24 million to $32 million for fiscal '11. Improved operating leverage from higher volume drove the favorable variance to our prior forecast.

Our earnings release contains forward-looking 2012 financial guidance. Based on a projected annual run rate of 56 megawatts, we forecast product sales and revenues in the range of $31 million to $34 million per quarter. Fiscal 2012 operating cash use based on the current production run rate and projected order flow is forecasted to be approximately $17 million to $22 million. Cash used in financing activities include approximately $7 million to $8 million of scheduled cash payments to preferred stockholders, the majority of which will incur in the first half of 2012. Capital expenditures are estimated to be $3 million to $5 million for the fiscal year.

As a company, we are executing on our strategic initiative. Our financial statements reflect very favorable trends over the prior year, as we grew revenues and reduced product and operating cost. We are focused on top line revenue growth, driving down costs and expanding margins and reaching profitability. Chip?

Arthur A. Chip Bottone

Thank you, Mike. Our business strategy is to expand in 11 distinct vertical markets we have identified and penetrate key geographic markets, while we continue to reduce our product costs. We estimate the near-term global potential for our products at more than $6 billion, plus an additional $6 billion potential for services. Our installed base and backlog receives 180 megawatts illustrating our momentum. Top line revenue growth remains our focus.

We have an attractive business model that we can replicate globally. Our business model features multiple revenue streams and a growing installed base, that is driving future service revenue. We are creating permanent jobs both in the U.S. and abroad that are tied to local demand attracting the interest of governments seeking to realize the benefits of distributed baseload power generation, while simultaneously creating sustainable jobs.

Our Direct FuelCell power plants are ultra-clean, efficient and reliable distributed generation solutions. Our high-electrical efficiency results in more output for a given unit of fuel, reducing operating cost and emissions. The emissions profile virtually eliminates pollutants and helps customers reach their sustainability goals. Our power plants generate electricity at the point of use, avoiding additional investments in transmission and distribution. Our worldwide global business is growing because our Direct FuelCell solutions excel in solving energy, environmental and business problems.

Our 3 strategic priorities to achieve our vision are driving growth, operational excellence and customer satisfaction. Let's review our progress on these initiatives. Sustained focus on driving growth is generating new business and building momentum in South Korea and the U.S., and is propelling us into new markets in Southeast Asia, Europe and Latin America. Global expansion in select market is an essential component of our strategy to generate volume. Our growing volume reduces costs, generates cash and accelerates our progress towards company profitability. Sufficient volume will allow us to achieve our vision of pricing below the cost of grid-delivered electricity. Our pipeline of qualified projects is approximately 345 megawatts, including 170 megawatts in the U.S., 130 megawatts from South Korea and Southeast Asia, and 45 megawatts from Europe.

We are focused on operational excellence, which we define as making continuous improvements to every aspect of our business. This focus is enabling us to solidly execute on the production of our product sales and service backlog, while continuing to reduce product cost and improve margins. Our team of associates has worked hard to more than double our production to 46 megawatts produced, compared to 22 megawatts produced in fiscal year 2010, demonstrating that we can respond to increasing order flow and effectively manage our supply chain. We remain on track to achieve company profitably of 80 or 90 megawatts of annual production.

As we ramp production levels, we're adding direct labor with about 60 associates hired in 2011 for the production line. Other than direct labor, there are minimal fixed cost as we ramp production towards our existing capacity level. Our focus on customer service supports our revenue growth through long-term service agreements and we execute with our customers and through additional adjacent services, such as installation services. During the last several months, we have installed DFC power plants in 8 locations in the U.S., and they are now either operating or undergoing commissioning. During this time, POSCO Power installed DFC power plants at 2 locations in South Korea, totaling more than 11 megawatts.

In total, our installed base has grown by 17% with these recent installations. And over the past 5 years, the combination of installed base and backlog has grown at a compound annual growth rate of 48%. With our growing installed base, the advantages of fuel cell solutions are becoming more widely recognized, contributed to a growing momentum in key markets. Now let's turn to those markets.

In Connecticut, Greenwood Energy, a renewable energy investor, placed an order for a 1.4-megawatt DFC1500 power plant on a turnkey basis at Central Connecticut State University. Greenwood is a North American renewable energy division of Libra Group, a global conglomerate. Greenwood will sell the ultra-clean electricity and steam generated by the power plants at the university under a long-term power purchase agreement. We will maintain the plant under a multiyear service agreement. This turnkey project is our first with Greenwood Energy. Like many investors, Greenwood is seeking renewable energy investment opportunities and was impressed with the economics of our power plant. Projects like this are coming to fruition because our power plant projects offer attractive economics, and we have built a track record as a solid and reliable partner that delivers on our commitments.

This order was closed in September, and we are on track for the power plant to be producing power by the end of 2011. This project required rapid engineering and installation completion to meet the year-end deadlines. And based on our years of installation experience, we're able to deliver to meet our customers' requirements. Investors are attracted to the credit profile of universities and their consistent need for baseload power. Fuel cell power plants help universities reduce operating expenses, meet their sustainability goals, as well as provide secure and reliable on-site power with little, if any, of their own investment capital. Our power plants modest footprint and quiet operation make them practical to site on the campus. Central Connecticut is our eighth university project domestically.

The high efficiency of our DFC power plants helps universities and customers in other vertical markets to reduce their energy costs. When configure with combined heat and power or CHP operation, the high-quality heat generator by our fuel cell power plants can be used for heating and cooling purposes. This lessens dependence on combustion-based boilers, reduces CO2 emissions and virtually eliminates pollutants like NOx and SOx. Use of our product in CHP can yield system efficiencies up to 90%.

The economics of this whole high-profile fuel cell installation is good for that state of Connecticut. This project is appropriately sized in financial property and capital. Officials have expressed interest in signing FuelCell power plants in other campuses within the Connecticut State University system. This type of investor-owned project sited at the university is a model that's replicable in other states and countries.

We currently announced a new partnership with Abengoa, a multinational company based in Spain, that is focused on applied energy and environmental technologies. Abengoa possesses both fuel cell experience and marketing resources in Europe and Latin America. Our partnership is targeted at developing renewable biogas and liquid biofuel opportunities in these markets, and we see strong progress -- prospects for expansion. Under the terms of our agreement, Abengoa will develop, manufacture and market stationary fuel cell power plants using proprietary fuel cell modules provided by us for the sale in Europe and Latin America. The pilot DFC power plant will be installed at Abengoa's headquarters in Spain, and will incorporate a 300-kilowatt Direct FuelCell module supplied by us in the balance of the plant produced by Abengoa.

Our partner will use its biofuels experience to develop a fuel processing system that will allow fuel cell power plants to operate using liquid biofuels. Markets in Spain, Brazil and Mexico are particularly attractive. Our partnership is part of an overarching expansion strategy and includes key elements of our localization strategy, under which our partners assemble completed power plants for proprietary components supplied by us using balance of plant they manufacture. We control our electrical property by leveraging our manufacturing capacity and reducing shipping cost.

This flexible business model can be replicated with multiple partners in many regions. This partnership is a significant step forward as we execute our European strategy. Europe is a collection of economies with different needs, assets and drivers of value that we feel is presently underserved relative to clean and renewable baseload distributed generation. Our strategy involves more than one partner to develop and grow the fuel cell market in Europe, and we continue to pursue other opportunities in the marketplace for clean baseload distributed generation. We are in advanced discussions with other prospective partners in Europe, and expect to announce more progress.

Our partnership with POSCO Power in South Korea is an excellent example of the strength of our business model. Under the licensing agreement with us, POSCO assembles complete power plants using fuel cell components produced by us in our proprietary balance of plant design. Since 2007, POSCO has ordered 140 megawatts of our products and has begun to expand in Asia, as they work to develop an export market from South Korea.

Last month, we announced the commissioning of the world's largest fuel cell park in Daegu City, South Korea. The 11.2 megawatt project includes 4 scalable 2.8 megawatt DFC3000 power plants. POSCO sold these to Cobalt Sky, an investment and energy consulting firm and sold them in urban location. Under long-term power purchase agreements, electricity will be sold to Korea Electric Power Company, and the heat will be sold to the local municipality for their wastewater treatment facility. This showcase project demonstrates utility scale, grid support in an urban location. We are seeing a trend towards larger power plants and larger installations, because the economics of these projects improve with scale.

In September, we announced expansion into Indonesia with POSCO's purchase of the sub-megawatt DFC module for installation in Jakarta. POSCO will combine the fuel cell module with manufactured balance of plant and will install the complete power plant. POSCO has opened a sales and service facility in Indonesia to support further growth in Indonesia and other Southeast Asian markets, such as Thailand, Malaysia and Singapore. Working with POSCO, we developed a 100-kilowatt fuel cell power plant for the commercial buildings market, a large and attractive market driven by South Korean energy policy. Two demonstration units have been built for installation at Seoul City, the first is undergoing commissioning and the second is being installed.

We continue to increase our penetration in California markets, particularly in utility, municipal wastewater treatment and government segments. The number of dedication ceremonies marked the commissioning of our power plants. In 2010, Pacific Gas & Electric, one of the largest utility companies in the U.S., ordered 2 DFC1500 power plants for installation at 2 California university. Both of these power plants are now operational. Three power plants that comprise our first directed biogas project, one DFC3000, one DFC1500 and one DFC300 are undergoing commissioning in the San Diego area. Finally, 2 DFC300s began operating for a repeat customer at Eastern Municipal Water District, and one DFC300 began operating at U.S. Army's Camp Parks.

Public policy to accelerate fuel cell deployment saw a great deal of progress in the recent months. The California Public Utilities Commission updated the SGIP program and implemented a combined heat and power feed-in tariff program. The SGIP provides incentives for both clean, natural gas and renewable biogas applications, and has been shifted to performance-based incentive, which we support. The California Public Utilities Commission also recently enacted a long-awaited feed-in tariff for CHP applications, providing on-site power for up to 20 megawatts in size. Under the feed-in tariff, excess electricity not used on site can be sold to the grid at a price set by the CPUC, called the market price referent or MPR, as long as the heat is used on site. The feed-in tariff will improve the economics of fuel cell projects.

Our advanced technology programs are focused on 3 strategic areas that have strong prospects for commercialization within a reasonable time frame: Carbon capture, hydrogen and solid oxide fuel cell technology. These programs, funded in part by the R&D contracts, allow us to leverage our core technology by identifying future markets for existing products and designing cost-effective solutions.

During the fourth quarter, we received 2 new contract awards from the Department of Energy totaling $4 million. One contract involves use of our Direct FuelCell technology to separate CO2 from coal-fired power plants' emissions, which we refer to as carbon capture. The other involves the development of solid-state electromechanical hydrogen separation and compression technology, which helps to enable hydrogen infrastructure for vehicle fueling or industrial gases.

Our progress has positioned us well as we continue to aggressively expand and globalize our business. We are executing on our strategy. We improved our balance sheet, generated record revenues for the quarter, as well as gross profit for the second consecutive quarter and announced global expansion into South East Asia and Europe with strong partners. With profitable products and growing margins, additional order volume is propelling us to company profitability. I want to thank our talented associates for making excellent progress and our investors for the confidence in us. Thank you for your support.

Source: Seeking Alpha