FuelCell Energy broke even at the
gross profit level in Q2, even though it had lower revenue. This
makes the company confident it will eventually be profitable.
FuelCell Energy is working to diversify revenue streams, lower
internal costs, reduce capital intensity of the business, and expand
globally.
Asian strategy.
FuelCell is able to develop markets,
such as those in Asia, with minimal capital investment. Its power
plants are competitively priced and it has a strong track record in
terms of servicing the plants for its customers.
In South Korea, POSCO is developing the 60 megawatt park, which consists of a series of DFC3000 power plants. FuelCell Energy's two plants in South Korea operate in excess of 10 megawatts and it expects considerable interest from electric utilities in the U.S. and Europe once construction begins on the 60 megawatt park. So far, POSCO has ordered a total of 140 megawatts from FuelCell Energy, and the 120 megawatts under the memoradum of agreement (the largest order in FuelCell Energy's history) will bring the total ordered from POSCO to 260 megawatts. The size of the POSCO order will keep production at FuelCell Energy's Connecticut plant level for a number of years and the certainty of the demand helps with manufacturing and supply chain efficiencies.
FuelCell Energy has expanded its partnership with POSCO to include fuel cell component manufacturing and it will establish a second manufacturing site. POSCO will pay a one-time licensing fee for the manufacturing rights and will receive royalties for each of the fuel cell plants that POSCO sells.
In Asia, there are a number of items driving demand: (1) the Renewable Portfolio Standard, which took effect on January 1, 2012, is supporting demand for items such as the 60-megawatt FuelCell park being developed by POSCO; (2) there is a significant opportunity to augment or replace nearly 23,000 megawatts of nuclear power in Japan: (3) Seoul City recently announced a plan to install 230 megawatts of fuel cell power plants.
Under the Seoul City project, utilities or project investors will probably own the plants. The Seoul Metropolitan Rapid Transport and Korea South-East Power recently signed a memorandum of understanding to locate 134.4 megawatts of power in 6 subway rail yards, which is far more than the 70 megawatts of power under the Seoul City project. At this point, POSCO does not have any orders for this project, but the project is an indication of possible future demand.
European and Latin American
strategy.
Germany is a good possible market for fuel cell generation. It has an extensive natural gas network, wants to reduce its reliance on nuclear power, and wind and solar is not suitable in many parts of the country.
FuelCell Energy has partnered with Fraunhofer, an applied research organization, to focus on building a direct sales model throughout the European Union. Fraunholfer will become a minority partner in FuelCell Energy Solutions (FCES), the German subsidiary of FuelCell Energy, by the end of June 2012. FuelCell Energy will make a one-time cash infusion into FCES. FCES will be able to have other potential partners in the future. Fuel cells will initially be sent from the United States to meet European demand.
FuelCell Energy has also partnered with Abengoa to develop the market in Latin America.
United States strategy.
FuelCell Energy is using a direct sales model in the United States and is selling to multiple growing markets. It has an active pipelines, with a lot of projects in California and New Jersey FuelCell Energy is also submitting mutiple bids under Connecticut's low emission Renewable Energy Credits (LREC) program, which includes fuel cells. Bid selection will take place in July 2012.
Early in the second quarter. FuelCell Energy signed a multi-year contract with Southern California Edison.
Future profitability
FuelCell Energy expects revenue to increase in the second half from its United States and European pipeline and by meeting growing demand in South Korea.
FuelCell Energy believes that as it gets more volume of orders, margins will expand. It currently has positive gross margin delivering 50 megawatts of power. It is currently delivering 56 megwatts of power annually and will be at that rate through the end of the third quarter. Due to the POSCO order and scheduled restacking, it will be able to deliver 50 megawatts of power per year through 2016. It will achieve positive EBITDA at 80 megawatts of power and positive net income at 80 to 90 megawatts of power. An annual production of 210 megawatts would reduce the cost of power generation to $.09 to $.11 per kilowatt.
FuelCell Energy expects to see future activity from the United States soon, more activity from Asia later in the quarter, and activity from Europe in the second half of the year. It believes it will be able turn that activity into revenues fairly quickly.
Financials.
Total revenues in Q2 were $24.2 million, a decline of $4.4 million. Product sales and revenues were $22.1 in Q2, a decline of $4.6 million. Revenue from research and development contracts was $2 million, a decline of $100,000. FuelCell Energy is forecasting higher revenue in Q3 than it received in Q2, but the timing will depend on the timing of orders closing.
Gross profit margin from product sales and research and development contracts was $.2 million. The improvement in margin was the result of lower product costs resulting from manufacturing and supply chain efficiencies and improved service margins.
Total operating expenses were $8 million, an 11 percent decrease. EBITDA improved by 28 percent.
Net loss was $.06 per diluted share, compared to a net loss of $.10 per diluted share in Q2/2011. The reduction in net loss was due to lower product costs and lower operating expenses.
For the first 6 months of the year, EBITDA improved by 44 percent. The company believes it will have positive quarterly cash flow under an EBITDA measurement by late 2013 or early 2014.
At the end of Q2, FuelCell Energy had cash and cash equivalents of $60.3 million and a $1 million revolver. In addition to this case, on May 2, 2012, FuelCell Energy received $30 million from its South Korean partner, POSCO Energy. FuelCell Energy expects to make $7 to $8 million in scheduled payments to preferred shareholders in fiscal year 2012, and $5.3 of that amount has already been paid. It expects capital expenditures of $3 to $5 million.
FuelCell Energy builds its inventory in anticipation of projects in which it is in negotiations that are financed with tax equity because those projects have to be executed on a predictable time table. The inventory can be modified for other projects if the company is not awarded the project. FuelCell Energy's backlog as of April 30, 2012 was $168 million, compared to $135 million in Q2/2011. In terms of megawatts, the backlog is 52.4 megawatts versus 18.1 megawatts in Q2/2012. FuelCell Energy shipped 9.6 megawatts during the quarter. The backlog consists of the POSCO kits and service inventory. It expects to be reducing inventory in the second half of the year.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
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