FuelCell Energy, Inc. (NASDAQ:FCEL) Q2 2023 Earnings Call Transcript

FuelCell Energy, Inc. (NASDAQ:FCEL) Q2 2023 Earnings Call Transcript June 8, 2023

FuelCell Energy, Inc. misses on earnings expectations. Reported EPS is $-0.09 EPS, expectations were $-0.07.

Operator: Good morning and welcome to the FuelCell Energy’s Second Quarter of 2023 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. [Operator Instructions]. Thank you, Tom Gelston, Senior Vice President of Finance and Investor Relations, you may begin your conference.

Tom Gelston: Thank you and good morning, everyone and thank you for joining us on today’s call. As a reminder, this call is being recorded. This morning FuelCell Energy released our financial results for the second quarter of 2023, and our earnings press release and our Annual Report on Form 10-K are available in the Investors section of our website at www.FuelCellenergy.com. Consistent with our practice, in addition to this call and our earnings press release, we have posted a slide presentation on our website. This webcast is being recorded and will be available for replay on our website approximately two hours after we conclude the call. Before we begin, please note that some of the information that you will hear or be provided with today will consist of forward-looking statements within the meaning of the Securities and Exchange Act of 1934.

Such statements express our expectations, beliefs, and intentions regarding the future and include without limitation; statements with respect to our anticipated financial results, our plans and expectations regarding the continuing development, commercialization, and financing of our FuelCell technology and our business plans and strategies. Our actual future results could differ materially from those described in or implied by such forward-looking statements because of a number of risks and uncertainties. More information regarding such risks and uncertainties is available in the Safe Harbor statement in the slide presentation and in our filings with the Securities and Exchange Commission, particularly with Risk Factors section of our most recently filed Annual Report on Form 10-K and any subsequently filed quarterly reports on Form 10-Q.

During the course of this call, we will be discussing certain non-GAAP financial measures and we refer you to our website and to our earnings press release and the appendix of the slide presentation for the reconciliation of those measures to GAAP financial measures. Our earnings press release and a copy of today’s webcast presentation are available on our website at www.FuelCellenergy.com under Investors. For our call today I am joined by Jason Few, FuelCell Energy’s President and Chief Executive Officer; and Mike Bishop, FuelCell Energy’s Executive Vice President and Chief Financial Officer. Following our prepared remarks, we will be available to take your questions and be joined by other members of the senior leadership team. I will now hand the call over to Jason for opening remarks.

Jason?

Jason Few: Thank you Tom and good morning everyone. Thank you for joining us on our call today. Today we are pleased to announce another quarter of strong revenue growth. We also want to highlight our consistent operational progress on key projects and strategic objectives, including our Tri-generation distributed hydrogen platform at the Port of Long Beach, California, which has entered the commissioning phase. Continued development of our solid oxide power generation and our electrolysis platforms, carbon separation and carbon capture technologies, and our continued focus on extending advanced applications for our platforms. For anyone who may be new to the FuelCell Energy story, we have included a company overview on Slide 3.

Our purpose is to enable a world empowered by clean energy. We are proud to be a global leader in clean energy technology. In simple terms, our proprietary FuelCell technology platforms do two things, decarbonize power and produce hydrogen. We operate in North America, Asia, and Europe and we are focused on entering additional markets around the world. We have 95 platform installations in commercial operation and have generated more than 13 million megawatt hours to date. The technology behind these high temperature electrochemical energy platforms underpins both our Tri-generation and carbon capture platforms, which we believe enables FuelCell Energy to leverage 20 years of operating history and sets the stage for us to meet the evolving needs of our current and future customers.

Next, please turn to key messages for this quarter shown on Slide 4. First, we are very pleased to announce consistent operational progress on key projects. During the quarter, we completed new module exchanges at the plant owned by Korea Southern Power Company in Korea which achieved commercial operations in fiscal year 2018. The new module exchanges were an important driver of our service agreements revenue in the quarter. At our Toyota Port of Long Beach, California project, the FuelCell platform has advanced to the commissioning phase of project deployment and we anticipate that the remaining commissioning activity will be completed and commercial operations will be achieved in our third fiscal quarter. Under our hydrogen power purchase agreement with Toyota, this project has a 20-year firm off take commitment for hydrogen and power and we have entered into a contract with Anaergia to supply renewable natural gas.

We will continue to leg into gas supply over time, the renewable natural gas is produced from local food waste and municipal wastewater which we expect will allow our Tri-generation system to produce three emission free value streams, hydrogen, electricity, and water for our customer Toyota. In Derby, Connecticut onsite construction of the 14 megawatt project continues to advance and 4 of the 10 modules required for the project have been delivered for installation. Onsite civil construction of the 2.8 megawatt project is also advancing. We expect to achieve commercial operation on both of these projects in the fourth quarter of calendar year 2023. Secondly, we are progressing on the development of advanced applications of our platforms. We received an order from an affiliate of ExxonMobil Technology and Engineering Company or MTEC and ExxonMobil for long lead FuelCell equipment and tooling to be acquired from third party vendors as well as engineering support from the company that would be required in connection with the implementation of a potential carbon capture demonstration.

We continue to advance our testing work under our joint development agreement with MTEC, which we believe validates our confidence in our carbon capture technology. In addition, we believe that this demonstration project would provide an outstanding opportunity to demonstrate our technology’s ability to address one of the largest environmental challenges of today, efficiently and cheaply capturing carbon at the direct point of emissions and destroying Nox. Government incentives such as 45Q in the United States and the carbon border adjustment mechanism in the European Union are just two examples of the global support for reducing carbon emissions. In addition, we recently announced that we have executed a Memorandum of Understanding with Chart Industries to partner in exploring opportunities in carbon capture for user sequestration as well as generation and storage of gaseous or liquefied hydrogen.

I will discuss this in more detail later in the presentation. Thirdly, we are continuing to focus on expanding our solid oxide manufacturing capacity. Our plan to expand manufacturing capacity in our Calgary facility from 4 megawatt to 40 megawatt is progressing. We have more than doubled our manufacturing square footage and we have hired and trained additional team members for a third shift production operation. During calendar year 2023 our Calgary manufacturing operation is expected to build and deliver four units, two units that will run internally for advanced testing and two first article production units for delivery externally. We have started manufacturing the 250 kilowatt electrolysis platform for delivery to Idaho National Laboratories.

Copyright: 1971yes / 123RF Stock Photo

In addition, we continue to opportunistically evaluate options to benefit from global policy tailwinds. In addition to the Inflation Reduction Act and the Infrastructure Investment and Jobs Act in the United States, global support for green energy includes the European Union’s proposed approximately $270 billion program, also known as the European Green Deal and Korea’s Clean Hydrogen Energy Portfolio standard, also known as Korea’s Hydrogen Economy Roadmap. We believe that these policies will support and drive increasing demand for clean energy technologies to decarbonize power, produce hydrogen, and deliver resiliency, reliability, redundancy, energy security, energy independence, and affordability. Lastly, we continue to focus on maintaining liquidity and exercising a disciplined approach to capital allocation.

Subsequent to the end of the quarter, we closed on an $87 million non-recourse project financing facility. The facility, which was oversubscribed due to strong lender interest, further improves our balance sheet strength and flexibility. Now I will turn the call over to Mike to discuss the financial results for the second quarter, as well as our new financing arrangements in more detail. Mike.

Michael Bishop: Thank you, Jason and good morning to everyone on the call today. Let’s begin by reviewing the financial highlights for the quarter shown on Slide 6. For the second quarter of fiscal year 2023 we reported total revenues of 38.3 million compared to 16.4 million in the second quarter of fiscal year 2022, an increase of 134%. Net loss was 33.9 million in the second quarter of fiscal year 2023, compared to net loss of 30.1 million in the second quarter of fiscal year 2022. The resulting net loss per share attributable to common stockholders in the second quarter of fiscal year 2023 was negative $0.09, compared to negative $0.08 in the second quarter of fiscal year 2022. Adjusted EBITDA totaled negative 26 million in the second quarter of fiscal year 2023 compared to adjusted EBITDA of negative 21.2 million in the second quarter of fiscal year 2022.

Please see the discussion of non-GAAP financial measures, including adjusted EBITDA in the appendix at the end of our earnings release. Finally, the company held total cash, cash equivalents, and short term investments of over $350 million as of April 30, 2023. Next, please turn to Slide 7 for additional details on our financial performance and backlog. The chart on the left hand side graphically shows our revenue composition by line item. Looking at revenue drivers by category; service agreement revenues increased to 26.2 million from 2.6 million. Service agreement revenues recognized during the second quarter of fiscal year 2023 were primarily driven by new module exchanges at the plant owned by Korea Southern Power Company in Korea while there were no new module exchanges during the comparable prior year quarter.

The company expects a lower level of module exchanges during the balance of the fiscal year. Generation revenues decreased to 8.4 million from 9.1 million, which is primarily the result of the timing of revenue recognition for the sale of renewable energy credits compared to the comparable prior year period. Advanced technology contract revenues decreased to 3.7 million from 4.7 million. Compared to the second quarter of fiscal year 2022 Advanced Technologies contract revenues recognized under our joint development agreement with ExxonMobil Technology and Engineering Company were approximately $0.3 million higher, and revenue recognized under government and other contracts were approximately $1.3 million lower as a result of the allocation of engineering resources during the quarter.

Looking at the top right hand side of the slide, I will walk through the changes in gross loss and operating expenses. Gross loss for the second quarter of fiscal year 2023 totaled 6.1 million compared to a gross loss of 7.3 million in the comparable prior year quarter. The decrease in gross loss is primarily due to favorable service agreement in gross margins partially offset by the decrease in generation revenue of gross margin resulting from a project asset impairment and a decrease in gross profit for advanced technologies. Operating expenses for the second quarter of fiscal year 2023 increased to 29.8 million from 20.9 million in the second quarter of fiscal year 2022. Administrative and selling expenses were higher during the second quarter of fiscal year 2023, primarily due to an increase in headcount.

Research and development expenses increased to 14.7 million during the second quarter of fiscal year 2023, primarily due to an increase in spending on the company’s ongoing commercial development efforts related to our solid oxide power generation and electrolysis platforms in carbon separation and carbon capture solutions compared to the prior year period. On the bottom right of the slide, you will see that we finished the quarter with backlog of approximately $1 billion, a decrease of 23% compared to backlog as of April 30, 2022. Reduction in backlog is due in part to the decision in the fourth quarter of fiscal year 2022, not to move forward with certain generation projects given their economic profiles at the time, as well as revenue recognition under product, generation, and service agreements since April 30, 2022.

On Slide 8 is an update on our liquidity and ongoing investment in project assets. As of April 30, 2023, we had total cash, cash equivalents, and short-term investments of $353.5 million. This total includes 246.8 million of unrestricted cash and cash equivalents represented by the darker blue bar on the chart in the center of the slide, 30.2 million of restricted cash and cash equivalents represented by the purple bar and 76.4 million of short-term investments represented by the lighter blue bar. The short-term investments represent the amortized cost of U.S. Treasury Securities purchased by the company during the first and second quarters of fiscal year 2023 as part of the company’s cash management optimization effort, all of which are expected to be held to maturity.

Looking at the right hand side of the slide, there is a chart illustrating our total project assets which make up our company owned generation portfolio. As of April 30, 2023, our gross project assets totaled $273.2 million, which excludes accumulated depreciation. As detailed on Slide 19 in the appendix of this presentation, our generation portfolio totaled 63.1 megawatts of assets as of April 30, 2023. This includes 43.7 megawatts of operating assets and 19.4 megawatts of projects in process. As projects in process begin commercial operation, they are expected to contribute to higher generation revenue. Now please turn to Slide 9, which is a great example of how the company has been able to recycle cash from our generation portfolio. We were very pleased to close on a new project financing agreement subsequent to the end of our second quarter.

In spite of the current challenges in the fixed income markets, we were able to diversify our sources of capital and increase the efficiency of our financing structure by entering into an $87 million non-recourse project financing facility. After a portion of the proceeds were used to repay some of the company’s existing indebtedness and certain restricted and unrestricted reserve accounts and cash reserves were released at closing, this financing transaction yielded net cash proceeds to FuelCell Energy of 60.6 million, of which 46.1 million is unrestricted and may be used to accelerate commercialization of our hydrogen FuelCell technologies for strategic initiatives and for general corporate purposes. 14.5 million of the net cash proceeds is restricted and has been used to fund performance reserves.

We partnered with a diverse bank group consisting of Investec Bank, Bank of Montreal, Liberty Bank, Amalgamated Bank, and Connecticut Green Bank. This facility provides a seven-year term loan at competitive interest rates secured by six of our long-term contracted operating assets which are contracted with investment grade counterparties. Finally, please turn to Slide 10. I would like to confirm that our projected investments that we introduced at the beginning of the fiscal year are on track. The three primary targeted areas for investments are capital commitments for property, plant and equipment, research and development, and continued buildout of our generation portfolio. Capital commitments for property, plant and equipment are expected to range between 60 million to 90 million for fiscal year 2023.

We expect cash for these commitments will be expended over fiscal years 2023 and 2024. CAPEX includes expected investments in our manufacturing facilities for both carbonate, including carbon capture and solid oxide production capacity expansion. The addition of test facilities for new products and components, the expansion of our laboratories and upgrades to and expansion of our business systems. The solid oxide production capacity expansion is well underway in our Calgary, Canada facility. In addition, we are evaluating the potential for additional manufacturing facilities in the United States to complement Calgary and support the growth that we anticipate. Looking at research and development, our R&D efforts continue to be focused on commercialization of our hydrogen technologies, including long duration energy storage and carbon capture.

We estimate that full year R&D expenses for fiscal year 2023 will be in the range of $50 million to $70 million. We estimate that full year expenditures for project assets will be in the range of $45 million to $65 million. This includes the amounts being expensed for the Toyota project. As projects in our generation portfolio begin operation under long-term power purchase agreements and hydrogen power purchase agreements, we expect this investment to translate into growth in recurring revenues and provide continued opportunities for tax equity and back leveraged debt financing. All of the investments that I have described on this slide are expected to drive future growth. In closing, I am pleased with the progress made this past quarter. From a financial perspective, we believe that we remain well positioned to execute on our near, medium, and long-term powerhouse business strategy.

I will now turn the call back over to Jason.

A – Jason Few: Thanks Mike. As we have stated in previous quarters, our powerhouse business strategy serves as our framework for achieving long-term growth. I will summarize our approach on Slide 12. The first tenet is growth. We are working to optimize our business for achieving growth in markets where we see significant opportunities for our platform technologies. We have created geographic market segment and application specific playbooks that are focused on building a robust sales pipeline. Our business development team is focused on moving the pipeline from prospects to executed agreements. The second is scale. We plan to scale our existing platforms by investing in, extending and deepening our leadership and total human capital across the organization.

Across our operations, we are focused on optimizing manufacturing capacity for our carbonate platform with the goal of achieving 100 megawatts of annualized integrated onsite manufacturing and conditioning capacity. We are also working to expand our solid oxide manufacturing capabilities with a goal of adding an additional 400 megawatts of manufacturing capacity in the United States. We believe that the legislation enacted and being contemplated around the world will over time, serve as a catalyst to support the acceleration of adoption of products like ours and to ultimately drive down cost. And third, innovate. Over our 50-year history, we have never stopped innovating. As shown on the earlier slide, we have hundreds of patents granted or pending in jurisdictions around the world.

We believe our technologies and our culture provide the opportunity for our participation in the growth of the hydrogen economy and carbon capture market and will enable us to deliver on our purpose to enable a world empowered by clean energy. We are working to develop diversified revenue streams by delivering a range of solutions and services anchored by our multi feature platforms that support the global energy transition. Please turn to Slide 13. Our collaboration with Chart Industries announced after the end of the second quarter is a great example of how we plan to innovate and work with partners to deliver complete solutions to our customers. We are excited to collaborate with Chart Industries with the goal of delivering innovative, sustainable solutions for our customers.

As you may know, Chart Industries is a leading technology company that provides equipment and services for a range of applications, including CO2 and hydrogen, liquefaction and compression. We at FuelCell Energy plan to bring our expertise in manufacturing high temperature electrochemical FuelCell energy platforms to the collaboration. Our intent is to apply our two companies complementary strengths to deliver reliable and efficient carbon dioxide capture for use or sequestration, as well as generation and storage of gaseous or liquefied hydrogen. As an example, in the food and beverage industry, beverage grade CO2 is a critical input but is often in short supply, lacks clear price signals, and generally does not offer long-term price or supply hedging.

We believe our combined capabilities can help provide this sector with consistent pricing, surety of supply availability, and quality. We look forward to providing updates as this relationship further develops. Before moving to Q&A, I will conclude with takeaways on Slide 14. I’m excited about how over the last four years, our company has navigated our transformational journey. Our technologies under development are progressing toward commercialization, and we believe that these technologies will have a positive impact on our world in the future. We are making consistent operational progress. We are executing on large, complex projects for our customers, improving the capabilities of our multifunction technologies, with two projects expected to begin commercial operation in the next six months.

We are making progress on developing advanced applications of our platforms and are continuing to collaborate with MTEC and working to develop new collaborative relationships with companies like Chart Industries. We are working to expand our solid oxide manufacturing capacity. We believe that our investment in such expansion will support our future ability to capture market opportunities for sub-megawatt power generation and high efficiency electrolysis products. Globally, policies to support the energy transition are gaining momentum with the Inflation Reduction Act in the United States, as well as efforts we are seeing internationally. And we believe we are well positioned to benefit from these tailwinds. We have worked to maintain our liquidity, have remained focused on disciplined capital allocation, and have expanded our banking relationships.

We believe we are positioned for future growth. We believe FuelCell Energy is well positioned to capture market opportunities over the coming years and deliver enhanced shareholder returns over the long run. I will now turn it over to the operator to begin Q&A.

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Q&A Session

Operator: [Operator Instructions]. Your first question comes from the line of George Gianarikas from Canaccord. Your line is open.

George Gianarikas: Hey, everyone. Good morning and thanks for taking my questions and congrats on the financing. Maybe just to start, you’re very close to commercial launch of your Toyota Tri-Gen project. And I’m curious if you can kind of help us understand what the bottlenecks that are left are and making sure that you get that up and running shortly and whether or not you have seen any additional interest from others as you approach commercial launch with Toyota?

Jason Few: George, good morning and thank you for being on the call. This is Jason. I’ll ask Mike Lisowski to give you a little bit more detail on where we are on the commissioning phase of our project at the Port of Long Beach with Toyota. But the first thing maybe I’ll just say, and then I’ll pass it over to Mike, is that we really are not seeing bottlenecks relative to getting to COD. It’s just a normal part of our commissioning process that we go through on a platform like our Tri-gen platform. But Mike, maybe you can give some more insight on where we are on commissioning and our timing for Q3 COD.

Michael Lisowski: Yes, thank you Jason and thank you George for the question. So the Toyota project is advancing steadily forward and Toyota is pleased with the progress and the status. As we’ve reported, the construction work is now complete and we’re in the final phase of the work, which is the commissioning phase. Overall, the system process and controls testing has been successfully completed and we’re focused on the process of finalizing the subsystem optimization. This is the work that we’ll do prior to preparing the plan to ramp up to commercial operation, which, as we’ve reported is expected and will be achieved this summer.

George Gianarikas: Great, thank you. And just as a follow up, I’d like to switch gears a little bit and ask about things related to Washington and the Inflation Reduction Act. There are a few issues outstanding in terms of additionality, deliverability, and matching. I’m curious as to whether what your view is on where you think Washington ends up and how that could impact your business? Thanks.

Jason Few: That’s a great question. And, we clearly don’t have a crystal ball in terms of where Washington is definitely going to land, but we expect that we’ll get more clarity this month is kind of our view of where things stand today. We think that the IRA in general was a real positive for us as a company. We think that what the IRA is trying to deal with is both kind of driving demand and then also helping on the supply side. When you look at the ITC and the ability to get somewhere up between 50% to 70% cost recovery on these projects that’s really helpful to drive momentum from an adoption standpoint, really helpful to help drive scale to bring down costs, and we saw this play out with wind and solar. We think, ultimately decisions around additionality when the DOE and the Treasury Department really looks at that or the administration, I think that they’re going to land probably in the right place and really look at the practicalities of implementation around IRA, how they’re going to get the biggest momentum around this.

And then phasing in maybe more aggressive things over time but I think additionally, I think they’re going to be really constructive on supporting projects that we’re engaged in.

George Gianarikas: Thanks so much.

Jason Few: Thank you, George.

Operator: And your next question comes from a line of Manav Gupta from UBS. Your line is open.