Earnings Call Transcript - FCEL Q2 2023

Operator, Operator

Good morning and welcome to FuelCell Energy’s Second Quarter of 2023 Financial Results Conference Call. All lines have been muted to minimize background noise. Following the speakers' remarks, there will be a question-and-answer session. Thank you, Tom Gelston, Senior Vice President of Finance and Investor Relations, you may start your conference.

Tom Gelston, Senior Vice President of Finance and Investor Relations

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 Few, President and CEO

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, 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 four 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, and 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 reuse or 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 megawatts to 40 megawatts 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. 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.

Michael Bishop, Executive Vice President and CFO

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 a 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 gross margins partially offset by the decrease in generation revenue 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.

Jason Few, President and CEO

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 costs. 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 reuse 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 multi-functional 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.

Operator, Operator

Your first question comes from George Gianarikas from Canaccord. Your line is open.

George Gianarikas, Analyst

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, President and CEO

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, Senior Vice President of Operations

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, Analyst

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, President and CEO

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 as 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, Analyst

Thanks so much.

Operator, Operator

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

Manav Gupta, Analyst

Good morning, everyone. I would like to revisit the announcement made by ExxonMobil on May 1. It appears you are making significant progress in commercializing your carbon capture technology. Could you clarify the potential next steps in your outlook, the growth prospects for this business, and what additional indicators we should monitor for customer engagement and progress regarding the May 1 announcement?

Jason Few, President and CEO

Manav, thank you very much for your question. This is Jason, again. You know, look, we are really excited about the progress that we're making on our carbon capture technology as a company, right. We believe very strongly that carbon capture is one of the essential elements to achieving decarbonization. I think if you look at the IRA and legislations, like we talked about the EU carbon border tax, you see clear policy driving the need for solutions around carbon capture technology. If you look at just recently, in May the EPA ruling around power generation and decarbonization and what needs to happen there, you've got really strong support globally to address what the EIA forecasts to be roughly 38 gigatons of CO2 that we need to deal with. With our technology and Exxon and the May announcement, what that is driving toward is long lead items in support for the possibility of doing a demonstration project. That is driven largely by our demonstration of technical milestones that we continue to demonstrate with our carbon capture technology and the enhancements that we're making really around two things, we refer to as carbon transfer and power density, and we feel really good about that. So we think over time, as we outlined previously in an Analyst Day a little over maybe a year ago, we see carbon capture. And our technology really being able to participate in about a $1 trillion market between now and 2030. So the things that you should look for are additional demonstration announcements, not only with Exxon, but with other customers where we have the ability to showcase the technology which is differentiated from the aspect of the only technology we're aware of that can capture carbon from an external source, produce power, and hydrogen simultaneously. And the extra benefit of doing something that is really also unique to our platform, and that's the destruction of NOx. So we feel really good about where we are, we think it's a big market opportunity, and we look forward to pursuing it.

Manav Gupta, Analyst

Perfect. My quick follow-up is if you could also help us get some more details around the commercialization of your solid oxide fuel cells and electrolyzers, and a decade down the line do you actually think that solid oxide could be a more prevailing technology and you would be bigger in solid oxide than other technologies, so how does it shake out, would you be like a 50:50 company in terms of solid oxide or would that become the dominating technology even for FuelCell?

Jason Few, President and CEO

That's a really good question. I think if I go a decade out and I tried to use a crystal ball of what I see, I think that we will see strong growth in our solid oxide platform for kind of two primary reasons. One, we see time to power as a really significant issue, when you look across not only the U.S., but around the world and just interconnection and other issues and transmission and things that are creating significant delays to implementing power infrastructure. And we see that our ability to now have a sub-megawatt platform will give us a chance to participate in more opportunities than we've traditionally participated in as a company, so we see growth there. We also see really strong growth around one of the second things that we consider to be really important to the decarbonization effort, and that is hydrogen. And so electrolysis and with the growth of hydrogen, both as a replacement fuel or an additive fuel to traditional hydrocarbons, as well as transportation, we see strong growth there. We think our differentiation on solid oxide electrolysis, both from an efficiency standpoint, reversibility, and the ability to use the same stack for hydrogen production and power generation, we think will give us some advantages in the market. So I think, looking 10 years out, we certainly see strong growth on solid oxide. We think it will be a significant part of our portfolio. Where we see growth in carbon, though, as you think about the platform today, but ask you to maybe think about it slightly differently, 10 years from now, because our carbon platform is the driver for carbon capture. And we think that is a big market, like I talked about, that's a $1 trillion TAM in the way we see it between now and 2030. So I think what you'll see is strong growth in solid oxide, and perhaps some power generation, pure power generation applications. Maybe solid oxide becomes a bigger part of our portfolio. I think when you think about hydrogen generation, we certainly see that solid oxide and electrolysis takes on a bigger piece of the opportunity for us. But we still see opportunity for carbonate like for our Tri-Gen platform, like we're building in California, because there are going to be markets where water is going to be a constraint. There's going to be markets where there's strong power markets where a platform like Tri-Gen actually is the better solution for that particular application. So we see strong opportunity for carbonate there as well over time. So I think you're going to see application makes a difference. But you'll definitely see strong growth in solid oxide for sub-megawatt and electrolysis.

Manav Gupta, Analyst

Thank you so much for the detailed response.

Operator, Operator

Your next question comes from the line of Eric Stine from Craig-Hallum. Your line is open.

Eric Stine, Analyst

Hi everyone.

Jason Few, President and CEO

Hey, Eric. Good morning.

Eric Stine, Analyst

Hey, good morning. So maybe just on the product side, I know with the POSCO settlement you are kind of freed up in Asia and you've been making a number of investments in this area and over the last couple of quarters more optimism of traction there. So just maybe if you can give an update, I don't know if it's by geography but just looking for any details on a potential pickup on the product side?

Jason Few, President and CEO

Yeah, so I assume you are maybe referring to product sales, is that what you mean by pickup on the product side?

Eric Stine, Analyst

I mean, product side. Yeah, product sales adding a backlog and obviously traction there, something you've been targeting?

Jason Few, President and CEO

Sure. When we assess our pipeline today, we notice strong geographic diversification. Asia and North America are the largest components of our pipeline, followed by Oceania and Europe, with other global markets making up the remainder. We see promising opportunities across various regions. In terms of applications, there's substantial potential in both hydrogen and electric power generation, as well as traditional combined heat and power. Hydrogen, in particular, is becoming a more important opportunity in our pipeline, although many of these projects are longer-term. Additionally, we are observing significant growth in CO2 utilization, driven by regional constraints and varying prices across different markets. Regarding our technologies, we are seeing substantial interest in electrolysis and steady activity around our carbonate platform. In the short term, much of the growth in carbonate is linked to strong opportunities in the Korean market. After a nearly six-year absence, we re-entered the Korean market just over a year ago. As of January this year, we can now offer long-term service agreements to the customer base previously sold to by POSCO, positioning us uniquely to provide module replacements. We expect a strong demand in Korea, although we are still navigating some issues with customers who have been under long-term agreements with POSCO for the past few years. Nevertheless, we are optimistic about the potential there. Additionally, initiatives like the clean hydrogen portfolio standard in Korea present new opportunities, with plans to deploy 200 megawatts annually. We intend to compete vigorously for these opportunities.

Eric Stine, Analyst

That's great information. I could have asked another question as well. Looking ahead two to four quarters, do you think there's some product backlog to accompany the over $1 billion in the rest of your business?

Jason Few, President and CEO

Yeah, we certainly don't give kind of outlooks that way. But what I would say is, yes, that's clearly an expectation that we will build product backlog. And we've invested money in our sales organization. We brought in a new sales leader about a year ago, Mark Feasel, that we brought in from Schneider who is a very experienced sales leader. And the playbooks that we've developed from a sales opportunity standpoint we feel good about. We feel good about the pipeline, the quality of the pipeline, our move of deals into contract and negotiation phases. So we should expect that you'll start to see backlog product sales as well.

Operator, Operator

And your next question comes from the line of Chris Souther from B. Riley, your line is open.

Christopher Souther, Analyst

Hey guys, thanks for taking my questions here. Maybe just a little bit more on the timing of the solid oxide deployment in Idaho and any update as far as what customer engagement looks like for that segment specifically, as you're building up the pipeline, do you think potential customers are waiting to see that project up and running as it can have more clarity on kind of IRA, like what our customers looking for and where are we in the education project?

Jason Few, President and CEO

To start with I&L, we expect to deliver I&L this year. As we've discussed, we aim to build and deliver four solid oxide platforms through our manufacturing capacity in Calgary. We believe the demonstration of the I&L project will highlight the strong differentiation of our product compared to others on the market or in development. This application of I&L will exemplify the integration of our platform with nuclear, demonstrating not only the efficiency of our product but also the added value of being a high-temperature fuel cell that utilizes waste heat from nuclear to achieve up to 100% electrical efficiency. We see this as a significant catalyst. Regarding the IRA, the Investment Tax Credit has been available for some time, and the Production Tax Credit is becoming clearer. As these elements are finalized, they will further open up opportunities as customers become more comfortable with how to take advantage of the tax benefits.

Christopher Souther, Analyst

Okay, and then maybe a separate one on that generation gross margin, you call that an impairment can you maybe talk about that a little bit? And then can you talk about how overall generation gross margins should evolve with Toyota, Derby, Trinity College coming online this year? Thanks.

Michael Bishop, Executive Vice President and CFO

Sure. Good morning, Chris. This is Mike. And I'll take those questions. So as we look at generation, yes, we did have one impairment which came through generation related to an old development asset that the company chose not to move forward with. As we think about generation margins going forward, one thing that has been coming through the P&L which has been a drag on generation margins has been expensing capital costs related to the Toyota project; I believe there's about $4.5 million coming through this quarter. Certainly, as Toyota comes online those costs will mitigate. What we target for our generation portfolio is EBITDA in the 40% to 50% range. So when you do the math and you essentially back out the charges for Toyota impairments as well as depreciation, we're in that range this quarter and for the fiscal year. So that's how we think about the EBITDA margins in that portfolio going forward.

Christopher Souther, Analyst

Yeah, okay. That's helpful.

Operator, Operator

Your next question comes from Noel Parks from Touhy Brothers. Your line is open.

Noel Parks, Analyst

Hi, good morning.

Jason Few, President and CEO

Good morning.

Noel Parks, Analyst

I was wondering, could you talk a bit about, I'm thinking in particular about the partnership with Chart. It seems that we are seeing more lately partnerships between standalone public companies rather than what maybe what we've been seeing in the past, sort of like public companies taking a smaller private under their wing with a potential for vertical integration and some functions. And so I just wonder if you see these sort of partnerships as sort of a one-off for you, or something that's more inevitable or a harbinger heading towards consolidation across some related clean tech sectors?

Jason Few, President and CEO

Yeah, this is Jason. I won't comment on M&A or consolidation, but I want to discuss partnerships in general. We view our partnership with Chart as a strong illustration of our commitment to providing fully integrated solutions to our customers. Customers want to purchase energy as a service rather than act as integrators of energy technologies. Our platform, similar to an enterprise software platform, offers various capabilities that can be added or removed. For example, in the food and beverage sector, there are elements of carbon utilization that we don't manufacture ourselves, nor do we plan to, since there are other companies that specialize in that. Chart is one such company that enables us to present a customer with onsite generation, thermal energy solutions to reduce or replace boilers, and beverage-grade CO2 for food and beverage processes. By collaborating with Chart, we can provide a comprehensive solution that encompasses not just our platform but also necessary components like CO2 storage and purification, which we don't handle. This partnership allows us to offer integrated solutions to customers, which helps expedite transaction closures. You can see this approach reflected in our work with Toyota, where our platform delivers power, hydrogen, and water, while another provider supplies the fueling station infrastructure needed to fuel the jointly developed Class A heavy-duty truck with Packard. Such partnerships are crucial to our overall strategy, similar to our collaboration with MMAG on large-scale solid oxide electrolysis projects. We will continue to pursue these types of partnerships where they align with our objectives.

Noel Parks, Analyst

Great, thanks a lot. It's really illuminating. And you talked a little bit about margins you are looking for with the generation portfolio. I just wondered if you could talk a little more broadly about sort of what's next for the portfolio, if we look ahead to the next few quarters, are you seeing more interest or urgency around utility projects or more like the municipal or industrial water project?

Jason Few, President and CEO

Yes, we are observing several key trends. In North America, the government has emphasized the importance of infrastructure, the Inflation Reduction Act, and semiconductor manufacturing. We are involved in two of these areas: infrastructure and the Inflation Reduction Act. Our solutions enhance grid resilience, reliability, redundancy, and affordability, which we believe are crucial. We are noticing an increase in power projects and growing interest in distributed power generation in demand centers. This is partly due to the lengthy process of permitting interconnections and constructing new high-voltage transmission lines, which presents significant challenges. Additionally, we see several promising opportunities in CO2 utilization and a strong pipeline for carbon capture, including our collaboration with Exxon. Our technologies are generating real market interest, and we are also seeing demand for our solid oxide platform, having recently closed a sale in that area. We are eager to advance with our platforms and target specific applications where we believe we can succeed.

Noel Parks, Analyst

Great, thanks a lot.

Jason Few, President and CEO

Rob, thank you. We will continue to execute on our powerhouse business strategy with the goal of delivering growth and optimizing returns. Thank you all for joining the call today and for your interest in FuelCell Energy. We look forward to updating you again next quarter. Hope everyone has a great day. Thank you very much.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.