Earnings Call Transcript - FCEL Q4 2023

Operator, Operator

Hello, and welcome to FuelCell Energy Incorporated Conference Call. Please note that this call is being recorded. I'd now like to hand over the call to Tom Gelston. Please go ahead.

Tom Gelston, Moderator

Thank you. Good morning, everyone, and thank you for joining us on the call today. As a reminder, this call is being recorded. This morning, FuelCell Energy released our financial results for the fourth quarter and full fiscal year of 2023, and our earnings release and our SEC filings are available in the Investor 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 will be provided with today will consist of forward-looking statements within the meaning of the Securities 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 fuel cell technology, and our business plans and strategies. Our actual future results may 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 the risk factor section of our most recently filed annual report on Form 10-K. 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, our Executive Vice President, Chief Financial Officer, and Treasurer. Following our prepared remarks, we will be available to take your questions and be joined by other members of the leadership team. I'd like to now hand the call over to Jason for opening remarks. Jason?

Jason Few, CEO

Thank you, Tom, and good morning, everyone. Thank you for joining us on our call today. We are proud of the continued progress we are making toward advancing our purpose of enabling the world to be empowered by clean energy. This morning, we were proud to announce our fourth quarter and full year results marked by our important progress on large projects, continued advancement of our solid oxide power generation and electrolysis hydrogen platforms, successful reentry into the Korean market, and announcing the next steps toward the commercialization of our direct flue source carbon capture platform as you will have seen from our joint announcement with ExxonMobil regarding our carbon capture demonstration project, but more on that later. As a reminder, for those who are not familiar with FuelCell Energy, we have included a company overview on Slide 3. We are proud to be a global leader in electrochemical technology. In simple terms, our proprietary fuel cell 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 188 modules in commercial operation and have generated more than 15 million megawatt hours to date. Our carbonate technology has met our customers' needs for over 20 years. And our newly commercialized solid oxide platform extends the value we offer customers, including electrolysis and power generation using zero-emission hydrogen fuel as the only feedstock. We believe that our two differentiated fuel cell electrochemical platforms enable us to leverage our operating history and position us to meet the evolving needs of our current and future customers across distributed power generation, distributed hydrogen, electrolysis, and hydrogen energy storage and direct flue source carbon capture. FuelCell Energy provides technological solutions for and collaborates with some of the world's largest global companies, including our work with ExxonMobil to develop carbon capture solutions, our work with Toyota for distributed hydrogen through the completion of our Trigen facility at the Port of Long Beach, building a microgrid for Pfizer, exploring the viability of using our electrolyzer paired with nuclear energy to decarbonize asphalt production in the UK with EDF Energy, and our collaboration with IBM to use AI to research new ways to extend the life of our fuel cells. Next, please turn to key messages for this quarter shown on Slide 4. First, we are maintaining the strength of our balance sheet and taking a disciplined approach to managing our capital investment, paced by visibility into the milestones we established as investment triggers. We will continue to work to increase revenues and investable cash flow and take proactive steps to raise capital while also preserving the liquidity required to operate our business. Secondly, we were thrilled to jointly announce yesterday that ExxonMobil's affiliate, Esso Nederland BV, plans to build a pilot plant at its Rotterdam manufacturing complex to test the carbonate fuel cell technology for carbon capture jointly developed by FuelCell Energy and ExxonMobil Technology and the Engineering Company, or EMTEC. This announcement follows completion of all required technology tests regarding the efficacy and longevity of our carbonate fuel cells to capture at least 90% of CO2 emissions from an external emission source with a concentration of 8% or higher CO2. Although not a required test for this pilot project, our lab testing has demonstrated the ability to capture 90% of CO2 emissions from lower concentration flue streams as well. Next, we have continued to execute on large scale projects and our solid oxide manufacturing capacity expansion. Our tri-generation platform in Long Beach, California, began commercial operations and is producing emissions-free hydrogen, electricity, and water for our customer, Toyota. This capability is unique to FuelCell Energy. Subsequent to the end of the quarter, we opened our newest fuel cell park in Derby, Connecticut, generating competitively priced renewable energy for many thousands of area residents and helping the state close its power generation gap. We also made progress on the capacity expansion of our solid oxide manufacturing facility in Calgary and advanced the planning for our potential US capacity expansion. Fourth, we are making progress in expanding our reach into markets such as Korea, where we signed a long-term service agreement for fuel cell operations with a domestic clean energy electric utility and an MOU which outlines certain anticipated terms of the proposed business relationships with Gyeonggi Green Energy, or GGE, the utility hosting the largest fuel cell park in the world with a total output of 58.8 megawatts. We see tremendous additional opportunity for long-term service agreements in Korea. Additionally, applications like electrolysis, time to power, and CO2 as a delivered product are gaining momentum among a broader set of customers and geographies. Lastly, as we look ahead to fiscal 2024 and 2025, we remain focused on delivering our growth plans. We are focusing on advancing our technologies, including advancing toward the commercialization of carbon capture and other advanced applications and expanding our commercial relationships. We believe that 2024 will be an important year for our company, and we believe that we have the technology and flexibility across our products and services to allow us to participate in the global energy transition in a number of different ways. Now I will turn the call over to Mike to discuss the financial results for the fourth quarter. Mike?

Mike Bishop, 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 fourth quarter of fiscal year 2023, we reported total revenues of $22.5 million compared to $39.2 million in the fourth quarter of fiscal year 2022, a decrease of 43%. This was driven primarily by the lack of replacement module sales in the fourth quarter of fiscal year 2023. Net loss was $29.5 million in the fourth quarter of fiscal year 2023 compared to a net loss of $42 million in the fourth quarter of fiscal year 2022. The resulting net loss per share attributable to common stockholders in the fourth quarter of fiscal year 2023 was negative $0.07 compared to negative $0.11 in the fourth quarter of fiscal year 2022. Adjusted EBITDA totaled negative $30.8 million in the fourth quarter of fiscal year 2023 compared to adjusted EBITDA of negative $36.1 million in the fourth 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 unrestricted cash, restricted cash, cash equivalents, and short-term investments of $403.3 million as of October 31, 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 fourth quarter revenue composition by line item other than service revenues of negative $0.8 million. Looking at revenue drivers by category, product revenues for the prior year quarter included module sales to Korea Fuel Cell Company Limited or KFC under the company's settlement agreement with KFC and POSCO Energy Company Limited or POSCO Energy, for which the company recognized $24 million. This compares to $10.5 million of product sales in the fourth quarter of fiscal 2023, reflecting revenue recognition related to a performance guarantee, which was part of the settlement agreement with POSCO Energy and its subsidiary, KFC. This revenue was constrained until certain of the modules previously sold by the company to KFC were installed at the Noeul Green Energy site, and the company entered into a long-term service agreement to service those installed modules. Generation revenues were generally consistent quarter-over-quarter, decreasing to $8.5 million from $8.8 million in the comparable prior year period. Advanced technology contract revenues decreased to $4.3 million from $7.5 million. Compared to the fourth quarter of fiscal year 2022, advanced technology contract revenues recognized under our joint development agreement with ExxonMobil Technology and Engineering Company or MTEC were approximately $0.3 million higher. This increase was more than offset by lower revenues recognized under government and other contracts as a result of the allocation of engineering resources to MTEC and other internal engineering and product development efforts during the quarter. Service agreement revenues for the fourth quarter were negative $0.8 million compared to negative $1.07 million in the prior year period. Revenues in both quarters were impacted by higher future cost estimates related to future module exchanges compared to the company's prior estimates, which more than offset revenue recognized in each quarter. There were no module exchanges during the fourth quarters of fiscal years 2023 and 2022. Looking at the top right-hand side of the slide, I will walk through the changes in gross loss and operating expenses during the fourth quarter of fiscal year 2023. Gross loss for the fourth quarter fiscal year 2023 totaled $1.5 million compared to a gross loss of $15.2 million in the comparable prior year quarter. The gross loss decreased for the fourth quarter of fiscal year 2023 primarily due to three items. One, product recognized in the fourth quarter of fiscal year 2023 that did not have any associated cost of goods sold in the quarter. Two, generation cost of sales was lower in the fourth quarter of fiscal year 2023 as the company recorded a derivative gain of $4.1 million. And three, generation cost of sales were lower in the fourth quarter of fiscal year 2023 as a result of lower impairment charges compared to the comparable prior year quarter. These benefits were partially offset by the lack of module sales in the fourth quarter of fiscal year 2023. Operating expenses for the fourth quarter of fiscal year 2023 increased to $35 million from $27.5 million in the fourth quarter of fiscal year 2022. Administrative and selling expenses were higher during the fourth quarter of fiscal year 2023, primarily due to an increase in compensation expense resulting from an increase in headcount in support of sales, marketing, and business expansion. Research and development expenses increased to $18 million during the fourth 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 and carbon recovery and carbon capture solutions compared to the comparable prior year period. On the bottom right of the slide, you'll see that we finished the quarter with backlog of approximately $1 billion, a decrease of approximately 5.7% compared to backlog as of October 31, 2022. The reduction in backlog is primarily a result of revenue recognition under product, generation, and service agreements since October 31, 2022, partially offset by an increase in service backlog from the new service agreement with Noeul Green Energy entered into during the year ended October 31, 2023. On Slide 8 is an update on our liquidity position and our ongoing investment in project assets. As of October 31, 2023, we had total cash, cash equivalents, and short-term investments of $403.3 million. This includes $250 million of unrestricted cash and cash equivalents represented by the darker blue bar on the chart in the center of the slide, $103.8 million of short-term investments represented by the lighter blue bar, and $49.6 million of restricted cash and cash equivalents represented by the purple bar. The short-term investments represent the amortized cost of US Treasury Securities outstanding as of October 31, 2023, all of which are expected to be held to maturity. Throughout fiscal year 2023, we took a proactive approach to capital raising by entering into project financing with total gross proceeds of $100.5 million during fiscal year 2023 and net proceeds of $97.4 million from sales of common stock during the fiscal year. In the fourth quarter, we closed on tax equity transactions that yielded net proceeds of $7.3 million. We expect to receive an additional $20.6 million of unrestricted cash in the first quarter of 2024 after the Derby projects are placed in service. Finally, we generated $15.8 million in interest income during fiscal year 2023 from money market investments and US Treasury Securities, an increase of $12.4 million from the amount of interest income generated in fiscal year 2022. 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 October 31, 2023, our gross project assets totaled $304.3 million, which excludes accumulated depreciation. As detailed on Slide 22 in the appendix of the presentation, our generation portfolio totaled 63.1 megawatts of assets as of October 31, 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. Please turn to Slide 9. Here we are showing greater detail on the targeted investments we plan to make during fiscal year 2024, which will support our growth plans, allowing us to compete and meet market needs over the medium and long term. First, we are planning $60 to $75 million of capital expenditures in fiscal year 2024. These amounts are a continuation of the capital expenditures and commitments made by the company in fiscal year 2023 to upgrade our manufacturing facilities, including the expansion of solid oxide manufacturing capacity at our Calgary facility to 40 megawatts a year of solid oxide electrolysis cell production. This expansion is expected to be completed in fiscal year 2024. We also expect to invest in our manufacturing facilities for molten carbonate, including importantly for carbon capture. During fiscal year 2023, the company also began investments to add engineered carbon recovery capability to the on-site SureSource 1500 in Torrington, Connecticut, which is expected to be completed in fiscal 2024. This product enhancement will allow potential customers to observe the operating plant and given the target market of food and beverage companies, will allow for the sampling and testing of recovered CO2 to verify quantity, quality, and purity requirements. Internally funded research and development expenditures for fiscal year 2024 are projected to be $60 to $70 million, which is consistent with our R&D expenditures of $61 million in fiscal year 2023. Priorities for R&D are to continue to accelerate the commercialization of our advanced technology solutions for distributed hydrogen, hydrogen-based long-duration energy storage, and hydrogen power generation. Lastly, in fiscal year 2024, we plan to invest $15 million to $25 million in the project assets in our generation portfolio backlog with the expected monetization of tax incentives helping to offset a significant amount of the planned investment. This expected investment level is lower than it has been in prior years as our Toyota and 14 megawatt Derby projects are now complete. In closing, I am pleased with our continued progress this past quarter and during the fiscal year. We have taken and will continue to take proactive steps to ensure that we have the balance sheet strength required to support our growth objectives, and we will continue to take a highly disciplined approach to managing cash and allocating capital. 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.

Jason Few, CEO

Thanks, Mike. I will now cover our business and operational updates in more detail beginning with Slide 11. 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. The first tenet is growth. We're working to optimize our business to achieve growth in markets where we see significant opportunities for our platform technologies. We have geographic markets, segment, and application-specific playbooks that are focused on building a robust sales pipeline and converting that pipeline into revenue. To that end, our business development team is focused on moving the pipeline from prospects to executed agreements, and I will discuss our pipeline in more detail today. The second is scale. We are scaling our existing platforms by investing in, extending, and deepening our leadership and total human capital across the organization. Across our operations, as previously mentioned, we are focused on optimizing manufacturing capacity for our carbonate platform with the goal of achieving 100 megawatts of annualized integrated on-site manufacturing and conditioning capacity. We're also working with ExxonMobil on the development of a new business framework between the parties beyond the current joint development agreement structure. We are also evaluating additional US locations with the goal of producing up to an additional 400 megawatts per year of solid oxide electrolysis cells, which would be implemented in phases as the market develops. 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 in our 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 the carbon capture market, and will enable us to deliver on our purpose to enable a world empowered by clean energy. We're working to turn our innovations into diversified revenue streams by delivering a range of solutions and services anchored by our multi-feature platforms providing the opportunity for FuelCell Energy to pursue the energy transition across the following four applications: distributed hydrogen, direct flue carbon capture, electrolysis, and long-duration energy storage and distributed power generation. We are making good progress in the execution of our strategy, and I will discuss specific highlights in more detail on the following slides. Please turn to Slide 12. First, on Korea. We were very pleased to announce earlier in the year that we are growing and strengthening our presence in Korea. We executed a long-term service agreement with Noeul Green Energy and quickly assumed full responsibility for fuel cell operations and maintenance services at their 20 megawatt fuel cell park. Through this agreement, FuelCell Energy is overseeing the operation and maintenance of eight SureSource 3000 fuel cells over the 14-year terms of the agreement. This agreement has added significant expected long-term recurring revenue to our reported backlog with a contract value of approximately $75 million. We see further opportunities for operations and maintenance agreements in Korea with a large potential market of over 100 megawatts. Next, we have two new project awards to highlight. The first is a 1 megawatt solid oxide power generation project awarded by a university in the Northeast United States. The second is a 2.8 megawatt carbonate power generation project for a municipality in California using biofuels as the feedstock, taking advantage of our ability to use direct biofuels versus needing to spend additional capital upgrading that fuel to pipeline quality gas, which other power generation technologies require. I should note that these project awards are in negotiation. Consistent with our practice, these awards are not included in the company's backlogs and will only be added upon execution of final agreements. We are also working with nuclear power providers EDF Energy in the United Kingdom and Canadian Nuclear Laboratory or CNL in Canada. We believe that our previously announced work with Idaho National Laboratory and our work with EDF Energy and CNL demonstrates the differentiated value of our solid oxide electrolysis technology in nuclear applications. Please turn to Slide 13. We are focused on building our sales pipeline. On the left-hand side of the slide, we are illustrating the breakdown of our pipeline by type and geography. Consistent with our overall growth strategy and the capability of our platforms to deliver multiple values to our customers, we believe we will be well-diversified across different applications as well as geographies. We offer a range of solutions enabled by our two electrochemical platforms, and we believe that this will allow us to compete and win on differentiated value. By type, our pipeline as of October 31, 2023, consisted of almost 50% electrolysis and hydrogen, with 33% carbon capture and carbon recovery, and the remaining 18% in pure distributed power generation. Geographically, approximately 51% was in North America, 34% is in the Asia Pacific region, and the remaining 15% is in the EU, UK, Middle East, and Africa. When we refer to our sales pipeline, we're referring to ongoing commercial discussions with new leads and potential customers. We believe that interest is being driven by demand in the market, particularly interest in carbon recovery plus, zero and low carbon hydrogen from electrolysis, and time-to-power applications. We also believe that the recently announced US hydrogen hubs are driving interest in technologies like ours. We are continuing to qualify and develop new leads and potential customers. Please turn to Slide 14. We believe that the hydrogen delivery market represents a large and growing opportunity. We are already participating in this market with our Trigen facility at Toyota's port operations in Long Beach, California, producing hydrogen, electricity, and water. We believe that our Trigen technology has broad market application, and we are pursuing additional deployments. Next, we will consider the future development of the hydrogen delivery market. In October, the Department of Energy selected seven regional hydrogen hubs, which will be supported by $7 billion of funding through the Infrastructure Investment and Job Act. We believe these hubs will act as a catalyst for accelerating the clean energy transition. The first round of funding awards are currently in negotiations. We were honored to have our technology named in two of the hydrogen hubs, and we are in discussions with all of the hubs as they prepare to make technology decisions. We expect that future clarification around the production tax credit should help to further broaden the hydrogen market. We expect the US hydrogen hubs will drive meaningful incremental demand for clean energy technology like those provided by FuelCell Energy. Our Tri-generation technology, which is being utilized by Toyota in Long Beach, California, provides a low-risk solution that we believe is an ideal fit for hydrogen hub applications. In addition, we believe that our first commercial solid oxide unit, which is expected to be delivered to the Idaho National Laboratories in 2024, would demonstrate superior performance and efficiency compared to competitors. Please turn to Slide 15. We are advancing our succeeded priorities across two areas of focus: decarbonizing power and producing hydrogen. As previously mentioned, we recently opened our newest fuel cell park in Derby, Connecticut. The 14 megawatt project was placed in service in December, subsequent to the quarter end. This project is generating competitively priced renewable energy for many thousands of area residents, and is helping the state of Connecticut close its power generation gap. We believe that this project further demonstrates our ability to execute large complex projects on time and will make a meaningful contribution to our generation operating portfolio and contribute to EBITDA for years to come. Also, we expect that the smaller 2.8 megawatt project from Derby, Connecticut will be placed in service later this month. Moving to solid oxide. We continue to invest in product development and manufacturing scale-up for our two solid oxide platforms, power generation and electrolysis. To enable our growth, we are expanding our Calgary manufacturing operations with the goal of delivering up to 40 megawatts of annualized solid oxide electrolysis cells production per year, compared to our existing capacity of 4 megawatts per year. In addition, we have design and flexibility that would allow us to further increase cell stack manufacturing capacity at our Calgary facility to facilitate the potential annualized production of up to an additional 40 megawatts of solid oxide electrolysis cells per year by leasing additional space and investing in various process optimizations intended to increase throughput and yield. This approach would allow for the potential to increase our total annualized solid oxide electrolysis cell manufacturing capacity to up to 80 megawatts per year. We have hired and trained additional staff for a three-shift production operation to support the initial planned expansion to 40 megawatts and would add additional staff as required in the future to realize the potential 80 megawatts of annualized solid oxide electrolysis cell production. Our solid oxide manufacturing operation is in the process of building four units, two units that will run internally for advanced testing and two production units for delivery externally. Of these commercial units for external delivery, one will be our electrolysis platform for delivery to Idaho National Laboratory, and the other will be our distributed power platform for delivery to Trinity College in Hartford, Connecticut, for use under a long-term power purchase agreement. We expect that the INL unit will be operational at our Danbury location this month, and then delivered to INL in early 2024, where the unit will operate and undergo extensive validation testing. So turning to Slide 16, we wanted to highlight some very recent developments regarding our carbon capture work with ExxonMobil. ExxonMobil announced yesterday that its affiliate, Esso Nederland BV, plans to build a pilot plant at its Rotterdam manufacturing complex to test the carbonate fuel cell technology for carbon capture jointly developed by FuelCell Energy and EMTEC. Esso Rotterdam’s integrated manufacturing site will be the first place in the world to pilot this technology. ExxonMobil has stated that the captured CO2 will be transported and stored via the Porthos project for permanent storage under the North Sea. Additionally, the release indicated that pending a successful demonstration, ExxonMobil could deploy this technology at its manufacturing sites around the world. And when the carbonate fuel cell technology is technically ready for broad-scale implementation, it could potentially offer economical decarbonization solutions for customers from a wide range of industries. We believe that our technology could significantly reduce direct at-the-source CO2 emissions from industrial emitters, and we are very excited as we move into the next phase of activities and action. Before moving to Q&A, I will conclude with takeaways on Slide 17. I am excited about how our consistent efforts to advance new technologies toward commercialization are progressing. We believe that our technologies will have a positive impact on our world. We have remained focused on disciplined capital allocation, and we have maintained the strength of our balance sheet through both debt and equity financing. We are making critical investments to position FuelCell Energy for future growth while taking a highly disciplined approach to maintaining cash and liquidity. We are excited about Esso Nederland BV’s recently announced plans to build a pilot plant at its Rotterdam manufacturing complex to test the carbonate fuel cell technology for carbon capture jointly developed by FuelCell Energy and EMTEC. As mentioned earlier, this announcement follows completion of all required technology tests regarding the efficacy and longevity of our carbonate fuel cells to capture at least 90% of CO2 emissions from an external emission source with a concentration of 8% or higher CO2. We believe that capturing carbon at the emission source and sequestering it could be an efficient way to decarbonize heavy industry. In addition, we have shown that our technology can capture carbon and produce electricity and hydrogen simultaneously, which differentiates it from other forms of carbon capture technology which consume energy. We believe our carbon capture technology could be an important solution for helping decarbonize the hard-to-evade carbon-intensive industrial sector. We are demonstrating our ability to execute large projects, most recently with our Trigen platform operating for Toyota in Long Beach and the commercial operations of our Derby generation facility. We have had success in our growth efforts in Korea where we see tremendous additional opportunity for the future. Lastly, we believe we are positioned for growth and we remain focused on advancing both our technologies and commercial relationships in 2024. 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

Thank you. We are now opening the floor for questions. We have our first question from George Gianarikas from Canaccord Genuity. Your line is now open.