Q1 2022 Fuelcell Energy Inc Earnings Call
Okay.
Good morning, My name is Shawn until and there'll be a conference operator today at this time I would like to welcome everyone to the fuel cell energy 2022 earnings conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session. If you'd like to ask a question. During this time will be press star followed by the number one on your telephone keypad, if you'd like to withdraw your question. Please press star one again thank you.
Tom Gelston you may begin your conference.
Thank you operator, good morning, everyone and thank you for joining us on the call today as a reminder, this call is being recorded.
This morning fuel cell energy released our financial results for the first quarter of fiscal year 2022, and our earnings press release and our quarterly report on Form 10-Q are available in the investors section of our website at www fuel cell energy Dot 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 with 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 are.
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 the 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 a 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 dot fuel cell energy dot com under investors.
For our call today I'm joined by Jason few fuel cell 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 our leadership team I.
I will now hand, the call over to Jason for opening remarks, Jason.
Thank you Tom and good morning, everyone. Thanks for joining us on our call today I want to start by offering prayers and support to the people of Ukraine, we're suffering while we do not have operations in Ukraine. We are hoping for the restoration of peace in the face of the humanitarian crisis. We also launched a matching gift.
Program in support of the overwhelming interest of the fuel cell energy team members to support the citizens of Ukraine.
And our first quarter, we made continued progress in executing our powerhouse business strategy, including the publication of our first sustainability report, making clear our short term net zero targets for scope, one and two emissions to be achieved by 2030 and our longer term 2050 scope three commitment Ria.
<unk>, our global brand to better reinforce our agenda to Decarbonize power and produce hydrogen expanding our carbon capture product development in Canada, working with candidates clean resource innovation network, which includes Chevron, Canada Shell, Canada, Suncor energy and Canadian natural resources.
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Growing revenue by over 100% year over year and working to define our company as a global leader in Decarbonising power and producing hydrogen.
Mike and I look forward to providing some insight around these activities and the other first quarter results in the coming slides, but as I always do on these calls I'd first like to provide a brief overview of the company as shown on slide three fuel cell energy achieved annual revenues for fiscal year 2021.
<unk> of almost $70 million, which came from three revenue categories service and license advanced technologies and generation all of which represent diversified sources of recurring revenue under multiyear contracts.
Over the past two fiscal years, we have had no revenue from product sales. However, in the first quarter product sales returned to our revenue mix as we delivered six replacement modules to service Posco Energy's existing installations in South Korea under our recent settlement agreement with Posco energy.
With the market once again open to us as a result of the agreement.
We are optimistic that we will see revenue from new product sales in South Korea. In addition to sales of replacement modules on a going forward basis.
We're also looking forward to building, our sales pipeline and other Asian markets as well as select countries in Europe , The Middle East Africa, and North America, where we have made it a priority to target product sales.
Turning to slide four.
As a company we are committed to our purpose of enabling the world empowered by clean energy, we believe that our technology is well positioned as every industry and every company will be impacted by the transition to net zero in.
In parallel organizations much Saul for energy security and energy independence, which represents important macro themes for our company.
The World will always need reliable 24 by seven power, creating in an environmentally responsible manner.
Therefore, when it comes to what we do we believe fuel cell energy is uniquely positioned to assist customers on a safe secure and practical path to carbon zero.
And how we do this is by Decarbonising power and producing hydrogen.
We believe we have the only technology that can capture cotwo, while producing power and hydrogen.
Produce hydrogen power and water simultaneously.
Produce hydrogen in multiple ways for example, using electricity and water or biogas.
He also energy's technology provides localized solutions for clean energy that deliver real time benefits to the communities in which our platforms operate and reduce scope one and two emissions. We do this in a manner, which supports high standards of living and economic growth, while protecting the environment minimizing land use when compared to wind and solar.
Projects, avoiding costly transmission build outs and adapting to new resource challenges.
This purpose drives our strategic focus and the work we are passionate about doing.
Next I would like to turn the discussion to business results and corporate development during the quarter summarized on slide five.
Our quarter was defined by execution against our backlog, including achieving commercial operations of the Libra <unk> project recognition of product revenue through the sale of six modules to a subsidiary of Posco energy in South Korea success.
<unk> successfully demonstrating the advancement of our carbon capture capabilities by achieving a technical milestone under our joint development agreement with Exxonmobil Research and Engineering company.
And receiving a carbon capture project award from Canada's clean resource innovation network.
Overall I am very pleased with the progress our team has made in advancing our long term goals, including executing on our existing backlog.
Commercial operation commenced in early January on the seven four megawatt utility scale like but yeah paint project. The project has been added to our generation portfolio, bringing the total megawatts driving recurrent generation revenue to 41 four megawatts.
This is an important step forward to continue to enhance the recurring revenue profile of fuel cell energy.
With respect to the seven four megawatt project at the U S. Navy submarine base in Groton, Connecticut, we're in the process of repairing and upgrading our mechanical component that was not performing according to engineering specifications.
<unk> completion of the repair and upgrade work and Reinstallation of the mechanical components at the project site, we will restart the process of commissioning the project letting.
Let me be clear.
This did not meet our expectations for delivery and I appreciate the efforts and focus of the fuel cell energy team as they work to put us on a path to achieving commercial operations.
Once fully operational incorporation of this platform into a micro grid is expected to demonstrate the ability of <unk> platform to increase grid stability and resilience, while supporting the U S. Military efforts to fortify based energy security and demonstrate the Navy's commitment to clean reliable power with micro grid capabilities.
<unk>.
Yes.
The Toyota project at the Port of long Beach, a two three megawatt Tri generation platform will produce electricity hydrogen and water offering a unique set of capabilities from a single platform.
Fuel cells platform equipment has been built and delivered to the site and civil construction work is underway.
When it achieves commercial operation this power plant will deliver carbon neutral electricity green hydrogen and water, enabling Toyota to avoid water consumption in a region experiencing extreme drought conditions enhances operations through a more reliable power and advance both passenger vehicles and class eight heavy duty.
<unk> truck hydrogen transportation.
Hydrogen has the opportunity to fully repower the transportation sector.
Second having executed a favorable settlement agreement with Posco energy and its subsidiary Korean fuel cell, we sold and delivered via X works. The first six of the initial 12 models ordered under the settlement agreement to Korea fuel cell, resulting in $18 million in realized product revenue in the first fiscal quarter.
Of 2022.
We have planned production of the additional eight modules required to be purchased by Korea fuel cell under the settlement agreement across the balance of the calendar year.
This settlement agreement not only provides fuel cell energy with the opportunity to sell modules to Korea fuel cell for Posco energy's existing customers, but importantly confirms our access to the South Korea and broader Asian markets.
My third key message is that we have successfully achieved a significant technical milestone in the development of our carbon capture application under our joint development agreement with Exxonmobil Research and Engineering company if.
We also entered <unk> unique value proposition for carbon capture is that we believe we are the only carbon capture technology that can capture carbon while producing power and hydrogen at the same time.
Other carbon capture technologies, our parasitic load on the power source.
In other words, they require a significant amount of power to operate.
One of the key focus areas of the JV with Exxon has been to increase the power the sales can produce while concentrating in capturing carbon dioxide. This is important because the more power we can produce while capturing carbon the more revenue can be generated through either the sale of.
Christie or avoiding the cost of purchasing electricity from other sources, thus lowering the cost of capture.
We believe that achievement of the milestone is an indication that the JV has yielded sell improvements that may enhance the economics of carbon capture with our carbon at platform.
Fourth we are a clean technology energy company, but we're also a responsible corporate citizen wholly committed to protecting the environment.
Painting, net zero goals being a diverse equitable and inclusive company and exercising good governance, we have shared our commitment to environmental social and governance issues due to the issuance of our first sustainability report in early February .
Although much of the work is it new we are proud to establish a solid ESG reporting baseline and we will work to improve both our performance and disclosure in the coming years.
And lastly, I am keeping the strategic comments on this call fairly short as we look forward to hosting our 2022 Investor Day next week on Wednesday March 16th at 10, a M eastern.
We are excited about our prospects and future and anticipate sharing more about our vision capabilities and team with everyone on the webcast and now I would turn the call over to Mike to discuss this quarter's financial results in more detail.
Mike.
Thank you, Jason and thanks to those that joined our call today, you have heard from Jason about a number of significant developments that took place during our first quarter and now I would like to spend a few minutes, providing some details regarding our financial results for the first fiscal quarter of 2022, Please turn to financial highlights shown on slide <unk>.
Seven.
In the first quarter of fiscal year 2022, we reported revenues of $31 8 million compared to $14 9 million in the first quarter of fiscal year 2021, an increase of approximately 114% looking.
Looking at revenue drivers by category product revenues returned this quarter totaling $18 million, reflecting the ex works delivery of six fuel cell modules to a subsidiary of Posco energy under the recent settlement agreement.
Service agreement revenues decreased 56% to $2 2 million from $4 9 million revenue recognized in the first quarter of fiscal 2021 related to module exchanges at several plants and routine maintenance activities. The decrease in revenues for the first quarter of fiscal 2022 is primarily due to the fact there.
There were no new module exchanges during the quarter compared to the prior year period.
Revenue from service agreements is variable on a quarterly basis, depending on the number of module exchanges in the period Gen.
Generation revenues increased 53% to $7 5 million from $4 $9 million in part due to the inclusion of the seven four megawatt <unk> project in January 2022, and the one four megawatt San Bernardino renewable Biofuels project in July of 2021. In addition.
Generation revenues increased due to the higher operating output of the generation fleet portfolio as a result of investments and maintenance activities made in the prior year.
Advanced technologies contract revenues decreased 19% to $4 1 million from $5 1 million compared to the first fiscal quarter of 2021 advanced technology contract revenues recognized under the joint development agreement or <unk> with Exxonmobil research and engineering company or Emory.
We're approximately $1 $4 million lower offset by an increase in revenue recognized under government contracts of <unk> 3 million as Jason mentioned during the three months ended January 31, 2022. The company achieved the first technical milestone under the <unk> as a result, the company will risk.
We've a payment of $5 million. The company has not recognize revenue in connection with this milestone achievement as a result of our prior agreement with respect to a future potential demonstration project with Emory Exxon Mobil's Rotterdam refinery in the Netherlands under this agreement we agreed to either make.
<unk> investment in the amount of $5 million in the Rotterdam project or discount and <unk> purchase of the Companys fuel cell module and detailed engineering design for the Rotterdam project by the same amount. The company will continue to evaluate revenue recognition of this milestone achievement as project negotiations with Exxonmobil or a subsidiary there.
<unk> evolve.
Gross loss for the first fiscal quarter of 2022 totaled $2 9 million compared to a gross loss of $3 $6 million in the comparable prior year quarter. The decrease in gross loss is in part a result of revenue recognized in connection with sales of modules during the quarter.
To a subsidiary of Posco energy in the quarter the company realized lower service margin due to no new module replacements occurring in the quarter $3 million of non recoverable costs related to the construction of the Toyota project and a $1 million asset impairment charge related to a legacy conditioning facility at our Danbury, Connecticut hedged.
Quarters.
Operating expenses for the first fiscal quarter of 2022 increased to $41 9 million from $10 8 million in the first quarter of 2021 administrative and selling expenses in the first quarter included $24 million of nonrecurring legal fees associated with the settlement of the Posco energy proceedings.
Excluding these fees the increase in administrative and selling expenses related to higher sales and marketing and consulting costs as the company is investing in rebranding and accelerating its sales and commercialization efforts and an increase in compensation expense, resulting from an increase in head count research and development expenses.
A $5 million during the quarter reflect increased spending on the companys hydrogen commercialization initiatives compared to the prior year period.
The loss from operations totaled $44 8 million in the first quarter of 2022 compared to $14 $4 million in the comparable prior period net loss was $46 1 million in the first quarter of 2022 compared to $46 million in the prior year period, both periods were impacted.
Acted by nonrecurring expenses, the first fiscal quarter of 2022 was impacted by the previously mentioned nonrecurring legal expense of $24 million associated with the settlement of the Posco energy proceedings. The first quarter of 2021 was impacted by charges associated with a change in the fair value.
Of a warrant liability issued to our legacy lender under a now extinguished credit agreement totaling $16 million. Additionally, the first quarter of 2021 included a loss on extinguishment of debt and a loss on extinguishment of our preferred stock obligation of subsidiary totaling $12 1 million interest expense.
<unk> was also lower in the first fiscal quarter of 2022 compared to the first fiscal quarter of 2021.
The net loss per share attributable to common stockholders in the first fiscal quarter of 2022 was <unk> 11.
Compared to <unk> and.
In the comparable prior year quarter, the lower net loss per common share reflects a lower net loss attributable to common stockholders, despite the $24 million or approximately seven cents per share of nonrecurring legal expense associated with the settlement of the Posco energy proceedings.
The lower net loss attributable to common stockholders was partially offset by a net loss allocated to noncontrolling interest totaling $5 5 million for the lightweight yacht tank project tax equity financing transaction or approximately <unk> <unk> per share.
There was no comparable net loss for the prior year as the likely yacht Peng project tax equity transaction closed and the project began operating in the first quarter of fiscal 2020 to the lower net loss per share was also a result of higher weighted average shares outstanding due to share issuances since.
January 31 2021.
Adjusted EBITDA totaled negative $13 6 million in the first fiscal quarter of 2022 compared to adjusted EBITDA of negative $7 4 million in the first fiscal quarter of 2021. Please see the discussion of non-GAAP financial measures, including adjusted EBITDA in the appendix of the slide presentation or in the <unk>.
<unk> at the end of our earnings release.
Next please turn to slide eight for additional details on our financial performance and backlog.
At the left hand side of the slide graphically shows the numbers. We just reviewed for the first quarters of fiscal years, 'twenty, one and 'twenty two.
Looking at the right hand side of the slide we finished the quarter with a backlog that was approximately 3% higher year over year at approximately $1 $31 billion.
<unk> continued project build execution and adjustments to our generation backlog and the addition of product sales backlog from the module order from a posco energy subsidiary <unk>.
Module exchanges with higher future output and expected revenues and the inclusion of the two eight megawatt project in Derby, Connecticut, which was awarded in fiscal year 2021.
Advanced technologies backlog reflects new contracts from the U S Department of energy, partially offset by work performed under our joint development agreement with Emory.
Turning to slide nine I would like to bring some perspective to the company's enhanced liquidity and continued investments in our project assets in the first fiscal quarter of 2022, we closed a tax equity financing transaction with a subsidiary of Franklin Park for a likely Jaap Hank project, which delivered $12 four.
And gross proceeds to fuel cell energy.
As of January 31, 2022, we had total cash and cash equivalents of approximately $405 4 million.
This includes approximately 377 million of unrestricted cash and cash equivalents represented by the darker Blue bar on the chart in the center of the slide and $28 5 million of restricted cash and cash equivalents represented by the lighter Blue bar.
On the right hand side of the slide is a chart illustrating our total project assets, which make up our company owned generation portfolio. We continue to develop construct and grow our portfolio of project assets investments to date reflect capital spent uncompleted operating projects as well as capital spent on <unk>.
<unk> currently in development and construction.
At the end of the first quarter of fiscal year 2022, our gross project assets totaled approximately $256 1 million, which excludes accumulated depreciation.
As detailed on slide 18 in the appendix of this presentation. Our generation portfolio totaled 75, three megawatts of assets as of January 31, 2022. This.
This includes 41 four megawatts of operating assets and $33 nine megawatts of projects in process.
As projects in process begin commercial operation they are expected to contribute higher revenue. Additionally, as these projects in process reached mechanical completion and or achieve commercial operation. We expect to see long term tax equity financing such as the example, I previously discussed as well as back leverage debt transactions.
To further recycle capital back into the business.
We are pleased with the continued progress being made and from a financial perspective, we believe we are well positioned to invest in capabilities to support the future growth and product commercialization opportunities I will now turn the call back over to Jason to further discuss these initiatives.
Thanks, Mike.
On slide 11, I wanted to share some highlights of our recently updated powerhouse business strategy to take us to the next phase of the company's journey towards long term growth.
Grow we want to pursue growth in markets and customer segments, where we see significant opportunities.
Scale to achieve growth, we plan to scale, our existing platforms by investing in extending and deepening our leadership in total human capital across the organization.
And innovate over our 50 year history, we have never stopped innovating we plan to continue to innovate for the future to enable our participation in the growth of the hydrogen economy and carbon capture and to deliver on our purpose.
Our powerhouse business strategy has evolved to focus on growth the energy transition is happening at an accelerated pace and we believe our platform technologies will play a significant role in helping the global society achieve our collective sustainability goals. Thus we are moving forward with <unk>.
Making investments in capacity capability and global talent, which we believe will enhance our ability to capture more of the market opportunity over the coming years and deliver enhanced shareholder returns over the long run.
Looking at Slide 12, I am proud of the progress we are making as an organization, including the recent launch of our new brand identity.
Evolving the fuel cell energy brand is intended to be a signal to our customers communities team members and you our stockholders of our absolute commitment to enabling a safe secure and practical approach to realizing the goals set forth in our inaugural sustainability report.
Our brand encompasses our purpose, what we do and how we do it we are focused on enabling a safe secure and practical path to carbon zero and we hope to Decarbonize power and design and build fuel cells that produce hydrogen.
Three design points define the new identity.
First it represents the journey, we are helping our customers take the carbon zero.
The designs use of gradients signals the journey, our customers are taking to carbon zero. Additionally, the reductive footprint of the broader design system reinforces how frictionless adoption of clean energy can be.
Second it takes inspiration from our DNA.
Fuel cells don't combustor fuel, but our fuel flexible isn't that they can run on biogas renewable natural gas hydrogen and natural gas blends natural gas or a mixture of those fuels and hydrogen in all cases the <unk>.
Wholesale produces a chemical reaction which results in electricity.
The design of the logo was inspired by the bonds between the molecules that are broken informed in the chemical reaction in our fuel cells.
It's letters form incorporates F C E L. Our stock ticker symbol.
And if you look closely the logo also forms a zero representing our customers' journey.
And ours towards net zero. It is also an integral part of our commitment to global net zero goals.
On slide 13, we highlighted the successful launch of operation of our seven four megawatt lifer, Yeah paying project. This project can power approximately 7500 homes situated on a landfill that has been transitioned to a clean energy park the fuel cell delivers.
Long island, the benefits of our distributed power solution, namely clean and resilient Baseload power and improved air quality versus conventional power generation sources.
And reduces long island's dependency on transmission and the incremental investment required to build new long distance high voltage transmission lines.
This project has been added to our generation portfolio and we are working to complete the capital structure that will allow us to return significant capital back to fuel. So energy, while also providing increased recurring revenue and margin going forward.
Turning to slide 14, I encourage you to download and review our sustainability report that I mentioned earlier. This inaugural sustainability report is meant to outline how we fulfill our corporate purpose by actively managing environmental social and governance risks are.
Our active focus on diversity equity and inclusion and opportunities material to our business and stakeholders in fulfilling our corporate purpose, we find ourselves in the enviable position of helping customers achieve their own sustainability goals by reducing their scope, one and two emissions and enhance the community.
<unk> in which they operate through improved air quality more efficient land use than intermittent resources and generating local tax revenues. Additionally, we are committed to a net zero target for our scope, one and two emissions by the year 2030 and to net zero by 2054, our scope three emissions.
And before I open the call to questions I wanted to remind everyone. One last time that on Wednesday March 16th at 10, a M. Eastern time, we will host a virtual investor day to give a deeper explanation of our strategy and our plans to bring new technologies to market.
We are excited to share our thoughts on topics such as the Companys long term growth opportunities and strategy business execution capital allocation priorities global team and plans to drive long term shareholder value.
You can register for and view the Investor day presentation by accessing the link on the events calendar on the Investor page of our corporate website.
We welcome your participation with that I will now turn it over to the operator to begin Q&A.
At this time I would like to remind everyone in order to ask a question press star one well pause for just a moment to compile the Q&A roster.
Our first question comes from Jed <unk> with Canaccord Genuity. Your line is open.
Jed Joshua your line is open.
Sorry, I had it on mute hey.
Thanks for taking my question.
Just around Exxonmobil.
That seems to be I was wondering if you could provide more details.
In substance to the breakthrough is that clearly sounds like.
Could be game changing between blue.
Blue versus gray and green hydrogen. So that's my first and then I have a follow up.
So Jade Hey, good morning, Thanks for joining the call. This is Jason with respect to Exxon. The work that we're doing with them is really focused on carbon capture and our platform has the ability to capture carbon from an external source and also produce and deliver high.
Origin. So the work that we're doing and our focus is on ensuring that we maintain.
Optimal performance from our power output standpoint, as well as optimal performance in terms of our ability to concentrate.
Carbon and capture that carbon for whatever they use may be whether that be sequestration and or utilization. So as we've laid out the work plan with Exxonmobil research and engineering, we set a number of milestones that are really you can think about them as mile markers and those biomarkers give.
Clear indication that we're progressing along the things that we think are most technically important to demonstrate that the technology will perform at a level that will do a few things one that we will efficiently concentrate capture and separate carbon.
Two that we will maintain.
Power density or power production and three that we can do that efficiently across a number of different blue streams, which gives us the ability we believe to ultimately deliver a much lower cost of carbon capture as a result of being able to sell power <unk> replace power that's being used at.
That particular facility and so.
Achieving the milestone is just another biomarker along the way to demonstrate that our technology actually has the ability to be effective in carbon capture.
Got it and then I guess as my follow up and perhaps a bit of an extension here.
So far in the U S.
It's been the commercialization has been.
<unk>.
Slower I guess would probably be the right adjective.
And you are now looking at kind of a pivot or expansion I guess into the Korean market.
One of the.
Issues in the U S has been.
You sort of an adoption of <unk>.
Green hydrogen or the use of electrolysis.
Maybe you correct correct me, if I'm wrong in that assumption.
And I guess, that's why I was asking with respect to.
The Exxonmobil and as you look at Korea, there seems to be sort of a.
Broader understanding of the use of gray in blue.
Is there something else that's going on in terms of that expansion into Korea that seems to be is that do you see that as a more.
Favorable nation, if you will or region for your technology and or do you see with what's coming out of the Exxonmobil a rethink in the U S that may shift some things around.
So Jed no great question. So we believe that both Asia and Korea, specifically as well as Europe is ahead of where they.
The U S. Today is today with respect to announcements on projects around hydrogen however that being said, we do think that the current infrastructure package and the $8 billion that have been announced in support of these hydrogen hub projects are a good indication of the U S intent to.
Try to catch up if you will but in Korea. We are excited about the opportunity because as you know over the last six years, we've effectively been out of the largest fuel cell market in the world now with the settlement and our ability to be back in that market and are in a way in which we can actively.
Pursue opportunities, we think that our platform our existing carbonate platform is well positioned because those projects in Korea tend to be large scale utility projects that actually also have a need the need for the high grade heat that our platform provides which is also a differentiation between us and them.
Their fuel cell players and so if you look at our one of our projects in Korea that exist today. It's a 20 megawatt project Thats grid connected and then also connected to the district heating system, where we provide high grade heat for that and so on our core business platform. We're excited about the opportunity and we think we're well positioned.
Aftermarket.
Utility scale projects in that market with respect to hydrogen.
The government has announced a very robust.
Set of objectives around hydrogen and we think that gives us an opportunity not only on our tri Gen platform, but also the work that we're doing to commercialize our solid oxide technology, because we think hydrogen is going to be an important part of the energy economy on a go forward basis in Korea, and so we are very optimistic about that.
And then when you think about one of the early adoption opportunities around hydrogen utilization being mobility applications.
Like Toyota.
In the United States and in Japan Hard day in Korea is also very committed to fuel cell electric vehicles. So we think that there's a demand that's being created for hydrogen and that market beyond just the government programs. There that we think are going to play well for our overall market opportunity.
<unk> in Korea, and then if you just kind of ladder up and broadly look at it if you think about what the hydrogen council.
Has put out there between.
If you look at hydrogen production.
Investment needed for transmission and distribution, although we think our distributed capabilities can help mitigate some of that in the end use applications I mean, youre talking about the hydrogen council suggests over $700 billion in investment by 2030 against those three categories and so and we think Asia and Europe are going to lead.
In that regard and so we're excited about the opportunity to that to remove the cloud that we had across the Asian markets.
That's helpful I'll jump back in queue and look forward to the analyst day.
Okay, great. Thank you thank.
Thanks Jed.
Our next question comes from Colin Rusch with Oppenheimer. Your line is open.
So much does can you quantify the exposure you have on natural gas prices relative to your Ppas and how we should think about generation gross margins on a go forward basis.
Okay.
Good morning Collyn. This is this is Mike so on our on our power purchase agreements as far as natural gas goes the way we the way we think about that is kind of twofold one.
Or as you look at our portfolio today.
Large part of that portfolio.
The off takers actually procuring.
Natural gas.
As we look at some of our larger projects and for instance, the likely Jaap prank project that came online this quarter. The company were and there is a fuel price exposure there, but what the company does in those examples is put long term contracts in place. So we actually have a seven year.
Seven year fixed price agreement.
That and we'll follow natural gas prices and.
And continue to extend that.
When it makes sense in the future. So that's really our strategy around.
Mitigating increase in natural gas prices Com, yes, Colin just to add maybe a little bit to that as a as.
The company, where we do have gas exposure right. We don't take a fundamental view on gas prices and so we work to hedge those risk off.
We will continue to do that way and do that and we will leg in as years pass will lag and more to limit that exposure as you know it's challenging to go get a 20 year long term commitment on a nat gas and may not even be a good decision to do that anyway, but we do have an active program.
Around how we hedge and manage those risks.
Okay, great I'll applicable there nuance questions I'll take offline or of that so.
Moving moving forward towards the product backlog.
The existing finished goods inventory that you have.
Much of that backlog can really be met with the.
Existing configuration that you have in that sense goods back or inventory or are there. Some developments that you guys need to going forward on the technology to meet that backlog.
So covenant is.
You were asking about our current backlog of projects, which equates to almost 34 megawatts in backlog is that you're referring to.
No.
The product backlog that you guys have announced a $60 million.
And versus.
First is the existing inventory.
All of the inventory that you have on hand.
We sold against that product backlog or if there's product development that needs to happen.
To hit the spec for the.
Those orders that are in that backlog.
Colin This is Mike I'll take that one so as as you saw come through this.
This quarter as a result of the settlement agreement that we put in place with Posco energy as part of that settlement agreement Posco energy placed an order for 20 modules, we shipped X works in the first quarter six modules that came out of finished goods inventory and recognize $18 million of.
Revenue.
So as and and that's our current can to answer question around configuration, that's our current configuration.
One four megawatt modules.
We will continue over the course of this year to build inventory to two.
To satisfy the balance of that commitment. So no we don't need to do any technology changes no configuration changes its our standard one four megawatt modules.
To satisfy service needs of Posco as existing fleet in Korea.
That's super helpful. Thanks, So much guys.
Yes.
Our next question comes from Mark Strouse with Jpmorgan. Your line is open.
Yes, good morning, thanks for taking our questions.
Just a follow up to Collyns question, there and I'm, sorry, if I'm missing this but.
Can you help me reconcile the six modules that you've delivered a pasco already in the eights that youre expecting over the balance of the year, how do I tie that with the 20 modules that youre expecting from Posco.
Yes.
Sure Mark Good morning. This is Mike again, so the way the way the agreement with Posco was structured was theres essentially two orders that the posco committed to a firm order, which was placed in in January .
For the initial modules and then they committed to placing a second order for the balance of the 20 <unk>.
By the end of June of of 2022, So we would expect to see that second order by the end of June of 2022 per the settlement agreement and we will deliver against both of those this year.
So mark the initial order was 12 right and we've shipped via X works are delivered via X worked six of those.
So the remaining eight will be ordered in June but the expectation is in calendar year 2022, we will deliver all 20 of those modules to Posco energy Slash Korean fuel cell company, which is their subsidiary that's actually taken delivery of our.
<unk> the other thing I would just point out about that as you think about the market for us in Korea with the settlement and you think about the installed base in Korea that we have with our technology through that settlement we are.
Only <unk>.
Source of providing those replacement modules on a go forward basis, and so we we expect that that will create additional opportunity for us over time just on that.
Book of business, if you will alone.
Okay. That's helpful and actually Jason you started to answer my follow up question there.
Your ability to open up the rest of the Korean market outside of Costco I know, it's still early but just qualitatively speaking can you talk about any kind of inbound request that youre getting from customers outside of Costco in that region.
Yes, so if you think about our existing business in Korea.
And the business that Posco had done in Korea.
The customer and those markets are the gin kos, so not really pasco itself. They were you can think about them as formerly a channel partner for US. If you will in that market that had rights to sell and offer our solution across Asia. So those customers. The genco as we are.
Seen interest from those <unk> and in fact are we have a we've been building out a sales team there now, which we didn't have to have before because posco was our channel partner and so we are actively engaged in in real conversations about opportunity there and because they tend to be larger projects.
They are projects that take a little bit of time to develop.
But youre talking the largest fuel cell platform in the world exists today, leveraging our technology in Korea, and it's 59 megawatts right. So these are large scale projects and so we feel pretty good about our technology to serve the genco has given megawatt scale and the attractiveness of.
Hi, great heat that we can deliver.
Off of our existing platform.
Right, Okay that makes sense. Thank you very much.
Thank you.
Our next question comes from Laurence Alexander with Jefferies. Your line is open good.
Good morning, I may have missed this.
Can you frame just how many megawatts of capacity are installed in southeast Asia, where replacement modules could be needed in the next three five years.
Yes, so in.
Yes.
<unk>.
Customers that were originally.
Served if you will by Posco energy through our.
Channel partnership for lack of a better expression, there's about 140 megawatts installed that fall into that category.
That ultimately.
Beyond what module replacement Posco energy may have overdone beyond the module replacement that the <unk> modules that we are providing to posco energy, our Korean fuel cell company for replacement.
Ultimately there will be most likely additional opportunity for module replacements for the rest of the installed base.
And is the module replacement economics stable that is can we use the posco.
Agreement as a proxy for the future economics or is that or how might that evolve over time.
I would think that over time, you could probably use that as a watermark.
Because we would we would suspect that.
As time moves you might see pricing move up or but I would I would not suspect.
Downward movement on pricing, but time will time and market conditions will tell but I would I would suggest maybe using that as a watermark today.
Thank you.
Thank you.
Our next question comes from.
Neil Mariani with Keybanc capital markets. Your line is open.
Hey, guys I was hoping you could provide a little bit more information about the nature of the delays at the Toyota plant here.
And then kind of what's your best guess as to when you might be able to get this up and running.
I guess do you also have like a.
Our annualized revenue number what you might see when that plant comes online.
Yes.
Good morning, and thank you for your question.
With respect to the Toyota project in long Beach, California that project as we indicated a little bit earlier is in construction today as we speak.
That project, we suspect that we will be in.
Delivery of that project is targeted in 2023.
For delivery of that project, but we will see substantial work completed around the construction of that project in this calendar year.
And so we feel good about where we are on product development for that project, we have not put out.
Long term revenue numbers, yet on what our expectations are around that Toyota project, but it is.
Under a long term power purchase agreement both for the hydrogen.
For that project as well as we are under a.
Tariff in California for the power.
Okay No that's helpful for sure.
And I guess just wanted to jump over to your 14 megawatt Derby, Connecticut project that seems obviously very sizable in the portfolio do.
Do you guys have a better sense of what roughly the in service plan is there in terms of date when that may come online.
Yes, Leo Thank you for the question. This is Michael Lisowski, Chief operating officer with fuel cell energy, we have mobilized and launched the construction phase and site civil construction as well as mechanical assembly of our Derby project.
And we have made significant progress in equipment deliveries and mechanical assembly. This year in parallel with that work, we're continuing to advance the electrical interconnection process. That's required for this facility to come online. So so both of those I'll call. It key milestone activities are continuing to advance.
<unk>, well and we're moving that project forward and advancing it towards commercial operation I would say you can expect to see continued advancement of the project through the balance of the calendar year and looking ahead to commercial operation in 2023.
Okay. So sometime 2023 startup okay. That's helpful. And then just on your Exxon JV correct me, if I'm wrong, but.
I think that was maybe scheduled to expire some time in April obviously, you hit a milestone recently is that in process of like being extended or re upped here, we can tell us about that.
Yes, so the current J D. A to as we call. It is set to expire at the end of April . However, we are in discussions with Exxon.
Exxon about.
The next phase of what we do from both the development work that we're doing in addition to the prospects around the demonstration project in Rotterdam, which Exxon has.
<unk> publicly talked about so the way that the way that you could think about it is.
The milestone that we hit like I indicated earlier is a mile marker that indicates that the technology can do the things that we need to be able to demonstrate that we can be effective in capturing carbon.
As well as producing power at the same time as a result of hitting that milestone that gives us more confidence around the extended nature or opportunity that exists between us and Exxon and as you know.
I can't speak for Exxon, but Exxon has created through their reorganization.
A separate business unit, that's called their low carbon business unit.
And one of the aspects of that business unit is delivering carbon capture.
As a solution for their company and so we will work very collaboratively with excellent as we have done over the last I believe 10 years, we've worked together and so we're in the process of negotiating with the next phase of our development relationship looks like.
Okay. That's helpful color and then just lastly, Neil did talk about <unk>.
Expectations for other revenues outside of Posco in South Korea would you expect those to be significant here in fiscal year 'twenty two or do you think that's more of a fiscal year 'twenty three.
Just in terms of the time it takes on these projects and even if you get.
And order 60 days from now right to be able to put that order into our production schedule.
A project do all the permitting and all the things that you need to do the construction around that project.
You should probably think about that more as a 23, then 22 in terms of actually being able to realize revenues around that.
Okay. Thank you guys.
Okay.
Okay.
Again, if you would like to ask a question. Please press star one to allow time for everyone to ask a question. Please limit yourself to one question and one follow up. Our next question comes from the line of Chris <unk> with B Riley. Your line is open.
Hey, guys. Thanks for taking my question here can we maybe talk a little bit about the Scarborough project in Canada.
Maybe just.
Three joint owners, who are working with <unk>.
Who are you working with most of the development there I wanted to get a sense you could.
Could develop a more future opportunities to collaborate with.
Any or all of Canadian natural resources, Chevron or shell that'd be great.
Chris Good morning, and thank you for your question I'll ask Tony Leo Our Chief Technology Officer to speak about the project and the work that we're doing with all of the partners that are engaged on this opportunity.
Right. It is a consortium of different oil sands companies, including some support from some Canadian government entities.
The lead for the project is Canadian Natural's <unk>.
And so there are our principal contact there it is a shell upgrader.
That is jointly owned between <unk> <unk> and a few others, but it is operated by shell.
But our prime the leader of that consortium in CNR rail.
And maybe Tony you can just very quickly describe the carbon capture that will actually demonstrate from the upgrade facility itself. Yeah. So one way to think about that is that as we work on optimizing the performance of our of ourselves and our stacks for carbon capture with Exxonmobil and just improving the technology in general we do have a technology of units that we.
We make today in our Torrington factory are capable of doing carbon capture.
And those units can be suitable to do certain projects that have a very hard to value or power value or demonstration projects and this is a demonstration of capture from some of the process heaters and that upgrade facility.
Which will be capturing cotwo from these process heaters as opposed to say a power plant or something like that.
Good demonstration opportunity there are a variety of different options that they are looking at what to do with the captured Cotwo also there'll be more to come on that but it just happens to be.
Prime focus decarbonising the oil sands.
Industry in general.
They view this as a really attractive way to do that.
Okay.
Okay, that's great to hear well open the Q&A expense.
Thank you.
Our next question comes from <unk> <unk> with Wells Fargo. Your line is open.
Thanks. Good morning, just wondering if you can give us an update on your gross margin expectations for the year I guess, how much of the gross margin in Q1 was kind of weighed down by the inflationary pressures that we're seeing and I guess when do you expect gross margin to turn positive just any commentary around margins would be helpful.
Sure. This is Mike Thank you and.
Good morning, and thanks for joining the call. So I'll provide a couple of comments around gross margin and really in the in the first quarter. It really wasn't weighed down by.
Supply chain issues or cost pressures.
We generally have long term contracts in place for our materials, but a couple of things coming through gross margin that I would highlight on the product side of the business. We did have a $1 million impairment charge.
As well as about $2 million of.
Ah variances in absorption costs, when you back that out of product and these are disclosed in our 10-Q, when you back that out of product.
You would see around a 16% margin on on the sales of those modules.
Also on generation.
We have a non recoverable costs coming through related to the Toyota projects of about $3 million and there is as we disclosed there's also depreciation expense that comes through the generation portfolio. So so we like to look at the generation portfolio on an EBITDA basis, and when you take those two numbers out you are looking at about a 45%.
EBITDA margin on the generation portfolio, and we've said historically that we target 45% to 50% EBITDA margins. There. So those are the comments that I'd make around our Q1 margins.
And we do not put out.
Annual targets around margins our guidance.
Got it.
And then just my second question here is just if you could give us an update on your solid oxide commercialization progress I guess, where does that stand today and then.
Where do you expect that to be most.
Meaningful in terms of industries applications. I mean, you mentioned in South Korea, it's more going to be your carbonate.
Platform. So so where do you expect the most success on the solid oxide side.
Hi, This is Jason and then I'll also ask Tony maybe to comment on this as well.
We've now demonstrated a couple of different things with our solid oxide technology. We've demonstrated the ability to have an efficiency electrical efficiency of 92 plus percent. So in other words converting electricity and water into hydrogen we are working on a project and we will do another.
<unk>, where we will show this year.
Working with Idaho National Labs from our nuclear application standpoint to show leveraging nuclear power and waste heat to be at 100% electrical efficiency and so we are we are very actively advancing the commercialization of that platform and as we've indicated even on our last quarter.
All we know.
Given the strengthening of our balance sheet, we are making more investments in that commercialization effort than we have historically, we think that the efficiency that we have given that we're a high temperature fuel cell.
The architecture that we've chosen to leverage in our design gives us some advantages.
As it relates to efficiency. So as we think that as you look to long duration energy storage applications. The efficiency of our platform will play quite well in that type of an application given the size and distributed nature of the platform, we believe rather you're talking about.
Producing hydrogen that gray blue or green the ability to deploy our platform with high efficiency can be used at a number of different industrial applications, including things like <unk>.
Factoring of steel or cement.
Provide the heat values that you need so we believe overall that hydrogen has the ability to be either a replacement or additive to all of the work that's going on around clean fuels and particularly around the hard to electrify heavy industrial type.
Opportunities and we think that will play quite favorably there given the efficiency of our platform and Tony I don't know if you would add anything else, but the one thing I would add is that our focus has been developing our solid oxide platform.
That is versatile and that can address power generation applications, where Charles this applications.
Storage and we demonstrated the power generation application a couple of years ago actually and a field trial that we did in Pittsburgh.
<unk> demonstrated electrolysis as Jason mentioned in our labs in Danbury and later this year and I don't know and if you think about this high efficiency electrolysis the high efficiency power generation combine those together with the stored hydrogen and then you've got a really effective energy storage system. So we're pretty happy with where we are in the technology for us.
Outside right now and then printed I'd like to just go back to one thing that you that you also said as it relates to Korea.
Beyond our carbonate platform, which we see as a more immediate opportunity right. We also believe that our solid oxide technology.
Has an opportunity to compete.
Compete very effectively in that market as well as we commercialize that technology. So.
Today, if we look at things that are on the shelf, that's our carbon at platform, but we absolutely see opportunity for our solid oxide business in Korea as well. The government has a very strong commitment publically stated commitment to making hydrogen a big part of the energy economy there.
Yeah.
Got it thank you.
Okay.
Our next question comes from Eric Stine with Craig Hallum. Your line is open.
Hey, good morning, I'll, just sneak one in here at the end.
I might have missed it but just curious if you maybe this is something you wait for the Investor Day next week, but just curious if you would update to the targeted breakeven megawatt level for the generation portfolio.
Yes.
Good morning, Eric This is Mike so a little bit of color on the generation portfolio this quarter we.
Finished commercial or we finished construction and entered commercial operation for the LIFO tank project that.
That brings the operating portfolio to 41 four megawatts. If you look at what we have in backlog for the balance of the portfolio.
$33 nine megawatts, all up and running when they when these projects.
Projects are bill over the medium term that will bring the total portfolio to 75 megawatts as.
As far as revenues last year, we had.
We had about approximately $24 million of revenues come through the financial statements related to the generation portfolio that will obviously grow with with the life of project coming online and other assets as well.
Come online, we haven't really put out a a breakeven target, but what we've what we said as I said in one of my earlier responses as we do target EBITDA margins for the portfolio and the.
45% to 50% range is really what the company targets.
Got it and I think in the past you had given a.
A 50 megawatt kind of level, I mean, and I know that there was some.
Some dependence on what your level of product sales would be as well, but I guess it seems like that's a.
That's a number that probably is fairly appropriate.
All things considered.
So, yes, so I can see where you're going with the question. Sir question. There. So so one of the reasons why the company strategically went down the path of building out. This portfolio was to have a portfolio of long term contracts and if you look at the average life of these contracts it's over 15 years.
Ears right with.
With tier one customers that will be producing recurring revenues and cash flows for a long period of time.
Which obviously helps the EBITDA profile of the company now with with with.
With product sales online coming back online as well that that improves the profile, obviously, because we will get.
We will get gross margin from those sales so we really haven't.
Put out a target that says okay. If we do 50 megawatts a year of production. The company is either gross margin or EBITDA EBITDA positive.
But as as we continue to.
Grow mature have a have a larger backlog, we will look at putting out.
Some of those some of those guideposts again in the future.
Okay. Thank you.
Yes.
We have run out of time for Q&A on today's call I'll turn the call back over to Jason <unk> for closing remarks.
Chantelle. Thank you. Thank you again for joining US today, we will continue to execute on our powerhouse business strategy working to deliver growth and optimize returns the fuel cell energy team is excited about our work to deliver on our purpose of enabling a world empowered by clean energy and we are excited to deepen the understanding of.
The company's platforms opportunities and priorities next week during our Investor day.
Finally, I again want to offer our prayers and support to the people of Ukraine and all of those impacted.
Thank you for joining and have a great day.
This concludes today's conference call you may now disconnect.
[music].
Yes.
Sure.