Sartorius Aktiengesellschaft Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
September 11, 2023

There are 9 speakers on the call.

Operator

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fucel Energy Third Quarter 2023 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. Tom Gelston, Senior Vice President, Finance and Investor Relations, You may begin your conference.

Speaker 1

Thank you. Good morning, everyone, and thank you for joining us on today's call. As a reminder, this call is being recorded. This morning, FuelCell Energy released our financial results for the Q3 of 2023, and our earnings press release and our SEC filing are available on the Investors section of our website at www.fuelcellenergy.com. Consistent with our practice, in addition to this call and our earnings press release, We have posted a slide presentation on our website.

Speaker 1

This webcast is being recorded and will be available for replay on our website approximately 2 hours after we conclude the call. Before we begin, please note that some of the information that you will hear or be provided with today will consist A forward looking statement within the meaning of the Securities Exchange Act of 1934. Such statements express our expectations, beliefs and intentions regarding the future and included 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 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 Sains Commission, particularly the Risk Factors section of the most recently filed Annual Report on Form 10 ks and any subsequent filed quarterly report on Form 10 Q.

Speaker 1

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. Again, it's www.fuelcellenergy.com under Investors. For our call today, I am joined by Jason Feuch, FuelCell Energy's President and Chief Executive Officer and Mike Bishop, 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.

Speaker 1

I would like to now hand the call over to Jason for opening remarks. Jason?

Speaker 2

Thank you, Tom, and good morning, everyone. Thank you for joining us on our call today. Today, we are pleased to announce another quarter of strong operational execution. We will highlight our consistent progress on key projects and strategic objectives, including the commissioning of our 5 generation and Distributed Hydrogen Platform at the Port of Long Beach, California. The extension of our term of our joint development agreement with ExxonMobil Technology and Engineering Company, or Emtek, as well as our success in reentering the Korean market.

Speaker 2

For anyone who may be new to the FuelCell Energy story, we have included a company overview on Slide 3. Our purpose is to enable a world empowered by clean energy. We are proud to be a global leader in clean energy technology. In simple terms, our proprietary fuel cell technology platforms do 2 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.

Speaker 2

We have 95 platform license in commercial operation and have generated more than 13,000,000 megawatt hour to date. The technology behind these high temperature electrochemical energy platforms Underpins both our 5 generation and carbon capture platform, which we believe enables FuelCell Energy to leverage 20 years of operating history and sets the stage for us to meet the evolving needs of our current and future customers. Next, Please turn the key messages for this quarter shown on Slide 4. First, we were thrilled to announce that the Toyota project located at the Port of Long Beach for Toyota's mobility application. At this time, we are only waiting on the receipt, final fire department and related building permits required to fully declare achievement of commercial operations.

Speaker 2

This marks a tremendous accomplishment in our technology development in partnership with Toyota and evidence of the power of collaborating on innovation as we did with the Department of Energy on the initial Trident development. Our innovative TriGen system will help Toyota achieve its decarbonization goals by producing emission free hydrogen Electricity and help meet United Nations Clean Water and Sanitation Goal number 6 by producing water every day to support their port operations. Secondly, we are making progress in growing our business in Korea, most recently through new service opportunities. During the quarter, we signed a long term service agreement with Noel Green Energy and executed a memorandum of understanding that outlines a potential business arrangement that could see us take over the long term servicing of the world's largest fuel cell park. Thirdly, the development of our carbon capture technology in partnership with Emtek is advancing well.

Speaker 2

In August, We were very pleased to announce the extension of the term of our joint development agreement through March 2024. 4th, in Derby, Connecticut, on-site construction of our 14 megawatt project continues to advance with installation largely complete. On-site civil construction of our 2.8 Megawatt project is also advancing. We expect to achieve commercial operations on both of these projects in the Q4 of calendar year 2023 and upon declaring commercial operations. This will increase the size of our generation portfolio by 38%.

Speaker 2

In addition, we are advancing our plan to expand manufacturing capacity for our high efficiency solid oxide power generation and electrolysis platform. Lastly, We continue to focus on maintaining liquidity and exercising a disciplined approach to capital allocation. Our liquidity position remains strong with a cash and short term investment position of approximately $414,000,000 which we were able to increase through both project financing and Equity offerings during the quarter. Now, I will turn the call over to Mike to discuss the financial results for the Q3. Mike?

Speaker 3

Thank you, Jason, and good morning to everyone on the call today. Let's begin by reviewing the financial highlights for the quarter as shown on Slide 6. For the Q3 of fiscal year 2023, We reported total revenues of $25,500,000 compared to $43,100,000 in the Q3 of fiscal year 2022, a decrease of 41%. Excluding the revenues generated by the sale of modules in the prior year quarter, Overall revenues in the Q3 were up slightly compared to the prior year quarter. Net loss was $23,600,000 in the Q3 of fiscal year 20 $23,000,000 compared to a net loss of $29,000,000 in the Q3 of fiscal year 2022.

Speaker 3

The resulting net loss per share attributable to common stockholders in the Q3 of fiscal year 2023 was negative $0.06 compared to negative $0.08 in the Q3 of fiscal year 2022. Adjusted EBITDA totaled negative $31,600,000 in the Q3 of fiscal year 2023 compared to adjusted EBITDA of negative $20,800,000 in the Q3 of fiscal year 2022. Please see the discussion of non GAAP financial measures, including adjusted EBITDA in the appendix at the end of our earnings release. Finally, the company held total cash, tax equivalent and short term investments of over $410,000,000 as of July 31, 2023. Next, please turn to Slide 7 for additional details on our financial performance and backlog.

Speaker 3

The chart at the left hand side of the slide graphically shows our revenue composition by line item. Looking at revenue drivers by category, service agreement revenues increased to $9,800,000 from 9,000,000 The increase in service agreement revenues for the Q3 of fiscal year 2023 was primarily driven by 2 new module exchanges at the plant owned by Korea Southern Power Company in Korea and a module exchange at the plant at Trinity College. Generation revenues were consistent period over period, increasing to $11,000,000 from $10,900,000 in the comparable prior year period. Advanced Technology contract revenues decreased to $4,700,000 from $5,200,000 Compared to the Q3 of fiscal year 2022, Advanced Technology contract revenues recognized under our joint development agreement with ExxonMobil Technology and Engineering Company We're approximately $300,000 higher and revenue recognized under government and other contracts were approximately $800,000 lower as a result of the allocation of engineering resources during the quarter. Looking at the top right hand side of the slide, I will walk through the changes in gross loss and Operating Expenses.

Speaker 3

Gross loss for the Q3 of fiscal year 2023 totaled $8,200,000 compared to a gross loss of $4,200,000 in the comparable prior year quarter. The gross loss increased for the Q3 of fiscal year 2023 compared to the Q3 of fiscal year 2022, primarily due to the fact there were no new module sales during the Q3 of fiscal year 2023. The prior year period included favorable product margins as a result of module sales to Korea Fuel Cell Company. Operating expenses for the Q3 of fiscal year 2023 increase to $33,200,000 from $23,800,000 in the Q3 of fiscal year 2022. Administrative and selling expenses were hired during the Q3 of fiscal year 2023, primarily due to an increase in compensation expense from an increase in headcount in support of sales and business expansion.

Speaker 3

Research and development expenses increase to $15,600,000 during the Q3 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 platform and carbon separation and carbon capture solutions compared to the prior year period. On the bottom right of the slide, you'll see that we finished the quarter with backlog of approximately $1,000,000,000 A decrease of 17% compared to backlog as of July 31, 2022. The reduction in backlog is a result of a reduction in generation backlog due to the decision not to move forward with certain generation projects during the Q4 of fiscal year 2022, given their economic profiles and also due in part to the timing of revenue recognition under product generation and service agreements since July 31, 2022. This decline was partially offset by an increase in service backlog related to a new service agreement with NOEL Green Energy entered into during the Q3 of fiscal year 2023, which has a contract value of approximately $73,000,000 On Slide 8 is an update on our liquidity and our ongoing investment in project assets. As of July 31, 2023, we had total cash, cash equivalents and short term investments of $413,900,000 This total includes $303,700,000 of unrestricted cash and cash equivalents represented by the darker blue bar on the chart in the center of the slide, dollars 32,700,000 of restricted cash and cash equivalents represented by the purple bar and $77,400,000 of short term investments represented by the lighter blue bar.

Speaker 3

The short term investments represent the amortized cost of U. S. Treasury Securities outstanding as of July 31, 2023, which were purchased by the company during fiscal year 2023 as part of the company's cash management optimization efforts and all of which are expected to be held to maturity. Looking at the right hand side of the slide, there is a chart illustrating our total project assets, which make up our company owned generation portfolio. As of July 31, 2023, our growth project assets totaled $289,400,000 which excludes accumulated depreciation.

Speaker 3

As detailed on Slide 20 in the appendix of this presentation, our generation portfolio totaled 63.1 megawatts of assets as of July 31, 2023. This includes 43.7 Megawatts of operating assets and 19.4 Megawatts of projects in process. As projects in process begin commercial operations, they are expected to contribute to higher generation revenue. In closing, I am pleased with our continued progress this past quarter. From a financial perspective, we believe that we remain well positioned on our near, medium and long term PowerHouse business strategy.

Speaker 3

I will now turn the call back over to David.

Speaker 2

Thanks, Mike. I will now cover our business and operational updates in more detail, beginning with Slide 10. 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 grow.

Speaker 2

We continue to focus on optimizing our business for achieving growth in markets where we see significant opportunities for our platform technologies, create a geographic market segment and application specific playbook that are focused on building a robust sales pipeline. Business Development team is focused on moving the pipeline from prospects who executed agreement. 2nd is scale. Plan to scale our existing platforms by investing in, extending and deepening our leadership and total human capital across the organization. From our operations, we are focused on optimizing manufacturing capacity for our Carbonite platform with the goal of achieving 100 megawatts of annualized integrated on-site manufacturing and conditioning capacity.

Speaker 2

Also working to expand our solid oxide manufacturing capabilities with a goal of adding an additional 400 megawatts of manufacturing capacity in the United States. We believe that 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. 3rd, innovation. Before our 50 year history, we have never stopped innovating. At Stone, on an earlier slide, we have hundreds of patents Granted or pending in jurisdictions around the world.

Speaker 2

We believe our technology and our culture provide the opportunity for our participation and the growth of the hydrogen economy and carbon capture market and will enable us to deliver on our purpose to enable the world empowered by clean energy. The multi featured capabilities of our platforms as exhibited by Trident and support our 4 strategic focuses intended to advance Global Energy Transition. Those strategic focuses are distributed power generation, distributed hydrogen, Electrolysis and Hydrogen Storage and Carbon Recovery and Capture Solutions. 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 11.

Speaker 2

We had a very exciting announcement during the quarter as we are growing and strengthening our presence in Korea by developing relationships with 2 domestic clean energy electric utilities. The first is the long term service agreement with Knoll Green Energy, This plant has a total output of 20 megawatts using 8 Stewart Thor 3000 Gil Cell platform. Under the terms of the agreement, FuelCell Energy will oversee the operation and maintenance of these aged DuraStor's 3,000 fuel cells Over the next 14 years, this project is expected to have a total contract value of approximately 73,000,000 Which is added to our total backlog. In addition, we signed a memorandum of understanding with John G. Green Energy or GGE.

Speaker 2

GGE has the largest fuel cell power platform operating anywhere in the world. DGE plant has a total output of 58.8 Megawatts using 21 SureSource 3,000 fuel cell platform. The MoU provides a framework for negotiating the proposed business relationship between GGE and FTE, including future module replacement and service as well as developing new opportunities in Korea. We are currently negotiating the detailed terms of that proposed agreement with GGE. In addition, We see future opportunity for operations and maintenance agreements with a large potential market of over 100 Megawatts in Korea.

Speaker 2

We are focused on winning these opportunities and look forward to providing updates on our progress in Korea in future quarters. Please turn to Slide 12. We continue to advance our decarbonizing power solutions. At the end of the quarter, we announced an exciting development in our partnership with Emtek, which is part of our innovation strategy. We have extended the term of our joint development agreement for Carbon Capture Technology through March 2024.

Speaker 2

This extension is intended to provide the opportunity to continue derisking the generation New Technology FuelCell Module demonstration program and the joint marketing and sales efforts to inform development of a new business framework between the parties beyond the current joint development agreement structure. We are continuing to finalize the engineering and cost element of a potential demonstration of the technology with Emtek. We are extremely pleased that our jointly developed Carbon Capture Technology has been found to be feasible for the commercial use applications we are targeting. We are excited about the promising potential of this technology to capture CO2 emissions from industrial and commercial exhaust streams with the goal of helping to solve one of the world's biggest environmental challenges. A final investment decision on the demonstration project is expected later this year.

Speaker 2

Next, our 2 projects in Derby, Connecticut continue to progress on schedule and are expected to soon contribute meaningful growth to our generation portfolio. On-site construction of the 14 Megawatt project is continuing to advance. We have largely completed the installation of the majority of the balance of plant components as well as the ten modules required

Speaker 3

for the project.

Speaker 2

On-site construction of the 2.8 Megawatt project is also advancing well and we expect to achieve commercial operation of both these projects in the 4th calendar quarter of 2023. Moving to our focus on producing hydrogen. We continue to invest and Product Development and Manufacturing Scale up for our 2 solid oxide platform, power generation and electrolysis. To enable our growth, We're expanding our Calgary manufacturing operations with the goal of increasing the capacity of the facility from 4 megawatts to 40 Megawatts Per Year of Solid Oxide Electrolysis cell production. In addition, we see the potential to further increase our annual production capacity to up to 80 megawatts by leasing additional space and investing in various process optimizations intended to increase throughput on yield.

Speaker 2

We have hired and trained additional staff for a 3 ship production operation to support the initial planned expansion to 40 megawatts, And we need to add additional staff as required in the future to realize the potential 80 megawatts of annualized solid oxide electrolysis production capacity. Please turn to Slide 13. In terms of delivering hydrogen to our customers, we offer 2 solutions. Our TriGen platform, which has just been completed for Toyota at the Port of Long Beach in California, as well as our solid oxide based electrolysis platform. 1st, with regard to our TriGen solution, we deploy our innovative net 2.3 Megawatt trigeneration platform to Produce emission free hydrogen, electricity and water every day.

Speaker 2

In the Toyota example, the hydrogen produced will be used to Fueled Toyota vehicles, while the electricity produced will be sufficient to power the Toyota Logistics Service Center with additional electricity being sold into the grid and the water that is generated will be used for car washing. Given the use of carbon negative renewable natural gas for this project, This installation demonstrates our ability to generate renewable hydrogen at the point of consumption, avoiding the cost and emissions associated with delivery of hydrogen to remote users. We see tremendous potential to apply our cryogen technology and other locations utilizing a space that is the equivalent of 3 NBA basketball courts providing energy that is distributed at the point of consumption and avoiding most, if not all, of the permissions and permitting required for centralized production and distribution infrastructure, and we look forward to pursuing those future opportunities. Turning to our solid oxide electrolysis platform. We believe solid oxide presents one of the best opportunities to minimize overall cost while maximizing efficiency and that our platform will give more organizations the option to implement a flexible energy strategy.

Speaker 2

We will touch more on our design attributes and differences in a moment. While our TriGen platform benefits from reducing the cost of hydrogen through the cell of electricity, solid oxide is an ideal solution for geographies that have low to no cost power and hydro, strong wind and or sun coverage. Because most of the cost of hydrogen produced by electrolysis is related to the cost of input power. Efficiency is one of the most effective ways to lower hydrogen costs, and we believe FuelCell Energy's solid oxide platform is among the most efficient electrolysis technology available. Our platform can generate 600 kilograms a day of hydrogen without any incremental heat stores only using a 1.1 Megawatt power input.

Speaker 2

Adding a heat source just increases the benefits of our platform's high efficiency. As an example, processed heat from a nuclear power plant further increases platform efficiency, Lowering the required power to produce the 600 kilograms a day of hydrogen to 1 megawatt. A low temperature electrolyzer would require about 35% more power to produce the same amount of hydrogen. Turning to Slide 14. I would like to emphasize how FuelCell Energy solutions are highly differentiated versus other solid oxide technologies.

Speaker 2

Our first generation high efficiency solid oxide product comes in 2 different configurations. 1 is our 250 kilowatt power generation platform and the second is our electrolysis platform capable of producing 600 kilograms of hydrogen per day FuelCell Energy Solutions for a number of key performance advantages. Our platform is compact and lightweight. Our designs keep cost low and avoid supply issues with minimal need for rare earth minerals and no use of platinum group metals. Our integrated, active product provides complete solutions for our customers.

Speaker 2

Our electrolysis platform is fed with water, not steam. Steam is generated on board using internal heat and electric power. Our power generation platform is capable of combining heat and power operations at up to 80% efficiency. And our power generation platform is flexible in its ability to operate on various fuels, hydrogen, biogas, fuel blend or natural gas. All of these different data give us confidence in our ability to grow in the solid oxide market.

Speaker 2

Our thin cell architecture leads to a very low stack weight per kilowatt, Our rating, which translates directly to lower material costs and which also provides benefits in faster heat up and winter time. As we increase our solid oxide production capacity, we see significant market opportunities in Stethicone hydrogen generation application, Particularly given the cost advantage of distributed production. We also see market opportunities in power generation As low carbon solutions increasingly displaced gas and diesel generator. In addition, renewable energy and nuclear power represent The end market where solid oxide electrolyzer cells can be operated in tandem with power generation, yielding high efficiency hydrogen and increasing overall efficiency and flexibility. Before moving to Q and A, conclude with takeaways on Slide 15.

Speaker 2

I'm excited about how over the last 4 years, our company has navigated our journey. We are commercializing technologies and advancing new technology for commercialization. We believe that our technologies will have a positive impact on our world. We are demonstrating the commercial value of our technology with our TriGen platform operating for Toyota and Long Beach. We are delivering commercial results for our customers and for the planet.

Speaker 2

We are succeeding in our international growth Most notably in Korea during the Q3. We are making progress in developing advanced applications for our platforms, specifically to our collaboration with Intech on Carbon Capture Technology. We are making progress on large projects, Including the Derby, Connecticut project, which we expect to achieve commercial operation during calendar year 2023. In addition, we're making progress in increasing manufacturing capacity for our high efficiency solid oxide power generation and electrolysis platform, which we believe will give us a differentiated position in the market. We have remained focused on disciplined capital allocation and have increased our liquidity through both debt and equity financing.

Speaker 2

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

Operator

And your first question comes from the line of George Giannakoulis from Canaccord Genuity Group. Your line is open.

Speaker 4

Hey, everyone. Good morning and thank you for taking my questions. Maybe just to start, first question, You mentioned in the press release that you're examining additional facilities for The build of your solid oxide platform. Could you just help illuminate a little bit of additional interest that you've seen? And what gives you the confidence to continue to build up the capacity there.

Speaker 4

Thank you.

Speaker 2

George, good morning and thank you for joining the call and thank you for your question. Yes. We continue to use the interest that we're seeing from customers and the pipeline that we're building as how we think about the need to expand capacity for our solid oxide manufacturing. In addition to that, We continue to look for ways in which we increase our capacity and our existing footprint to our existing footprint even in Calgary. So we're today we believe that we can get 80 megawatts of capacity from originally where we thought we were at 40 just based on additional process optimizations and things that we're doing at that facility.

Speaker 2

So our decisions will be driven by demand in the pipeline that our business development team is building. But we're seeing really strong support for solid oxide for Powergen and for electrolysis.

Speaker 4

And do you still expect a reversibility to come into the platform in 2027?

Speaker 2

We do. We believe that that's going to be a significant opportunity for us in the longer term as energy storage Continues to be a more important part of the energy transition as we continue to add more and more intermittent technologies To the grid, our view is that hydrogen works as an excellent energy store and that it's far more I go for long duration energy storage versus mineral based solutions. And so our ability to leverage reversibility of our platform, so the same stack that's going to make hydrogen is the same stack. We can reverse and feed that hydrogen to produce power. We think it's going to be a real opportunity for us.

Speaker 4

Maybe just a last question. Wondering if you could share your thoughts on the upcoming decision by Treasury to Give us more detail around additionality, excuse me, deliverability and matching and your thoughts as to how that decision will turn out. Thank you.

Speaker 2

Yes. So just I think it was on 7th, the Deputy Secretary of Treasury said that they plan Clarify more of the rules by the end of this calendar year. So one, I would say we're excited that there's We're going to get to real clarity around the rules. As a company, we've continued to be in a position to leverage the ITC and we've demonstrated our ability to attract tax equity as part of the way in which we recycle cash in our business. We think that the Treasury Department and overall, the administration is really trying to listen to the voice of the market In terms of how it's making these decisions.

Speaker 2

And so when you think about things like additionality or matchability, They're really trying to get this right, we believe, and we think that they'll ultimately get to the right decision and Put together more of a transition path than kind of a clear hard determination one way or another in terms of how they're going to account for Whether it's additionality or matching.

Speaker 1

Thank you.

Operator

Your next question comes from the line of Manav Gupta from UBS. Your line is open.

Speaker 5

Good morning, guys. I actually quickly wanted to focus on this SRA study from California that came out on Friday that's calling for like 90% emission reductions for 2,045. It lists a number of fuels including hydrogen, so it's pretty bullish on hydrogen. And I'm basically trying to understand now that California, it seems, would be very supportive of alternate fuels, does that change your plans? And also In the report, it's basically saying a book and claim would apply to even green hydrogen, which is they are encouraging the sale of green hydrogen within the state of California, that's when you can get the credit.

Speaker 5

So if you could talk around your plans of California based on what we are seeing with SRI, which basically would support alternate fuels in a big way in the state of California.

Speaker 2

Good morning and thank you For your question and also you wrote a pretty nice report on this yourself just that just came out. So appreciate that. Look, We are strong supporters of using biofuels not only for power production, which we've done on a number of different relations in California. We support the methodology in terms of how you think about using alternate fuels to produce green hydrogen, Which is exactly what we're doing with our tri generation platform at the Port of Long Beach. So we're really supportive of this move that they're making.

Speaker 2

And as you know, As a company from a carb standpoint who's driving this movement in California, We've been carb certified for a long time. We're the 1st FuelCell provider to get there. And so as we think as air quality issues and The real focus around things like SOX and NOX and other particulates coming back into focus, We think strong support of alternate fuels, our platform that doesn't combust those fuels, so we don't produce SOX and NOX and other particular It shows stronger support for what California is trying to do. So we're really excited about it and we think it's a real positive and We think that opens the door for us from a distributed power generation. It opens the door for more opportunities around tri generation To actually produce carbon neutral power, green hydrogen and water like we're doing in California.

Speaker 2

So We think it's a very positive thing.

Speaker 5

Thank you for a very detailed response and congrats on getting the TriGen platform up and running. We hope it's First of many because those things really help to decarbonize at a faster pace. So I'll turn it over. Thanks again.

Speaker 2

Thank you.

Operator

Your next question comes from the line of Ryan Finks from B. Riley Securities. Your line is open.

Speaker 6

Hey, good morning guys. On product sales, can you provide any color around demand and Any progress you might be making with new customers potentially outside of Korea?

Speaker 2

Ryan, good morning and thank you for the question. Yes, as we've indicated as a company, We've begun to really focus on creating a better balance between our power purchase agreement opportunities that we drive and product sales. So we're building a pipeline that enables us to Do both of those things because we think continue to offer multiple ways for our customers to purchase from us is a benefit to us as a company. But we see strong pipeline builds not only in our traditional markets, but as we expand into new markets outside of kind of our core. We're seeing strong product demand and those generally tend to be more product sale focused markets as opposed to PPAs.

Speaker 2

And so we think that over the coming quarters, you'll see More from us on product sales as an overall opportunity.

Speaker 6

That's helpful. And then Turning to the generation segment, can you talk a little bit about the economics of the Derby projects or maybe at a higher level, How they might help the profitability of the generation segment as a whole?

Speaker 2

Yes, sure. I think maybe Mike could give you a sense of how we think about margin and on our generation business and what we've seen Happened over the last several quarters and certainly this quarter, but Mike can walk you through that.

Speaker 3

Sure. Good morning, Ryan, and thanks for joining the call. So Yes. As we think about the 2 Derby projects that will add meaningful generation revenue. Right now, today, we're producing about $44,000,000 on an annualized rate.

Speaker 3

We did about $11,000,000 of generation revenue this quarter. So $44,000,000 today, but adding obviously the large dairy project, another 14 megawatts will Make a meaningful increase there. When we think about profitability of the generation portfolio, we target EBITDA margins in our generation portfolio of between 40% to 50%. When you if you look at just last quarter's results, when you back out the Toyota One time charges as well as depreciation were in the 46% range right now. So we would expect that to continue as we add additional operating assets in the portfolio.

Speaker 7

Great. Thank you guys for the color.

Speaker 3

Thank you. Thank you.

Operator

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

Speaker 8

open. Good morning, everyone.

Speaker 2

Good morning, Eric. How are you?

Speaker 8

Hey, doing well. Thanks. So maybe I'll just stick with generation. Curious, so now with Derby coming on, I think you'll be at, what, 63 You'll be around 60 megawatts, and I know and this goes back a while, so, not this isn't necessarily a target you've given, but At one time, you had kind of a 50 to 60 megawatt area where you thought you'd breakeven. Obviously, you've got a lot of irons in the fire.

Speaker 8

You see you've taken on more expenses. Do you kind of have a high level megawatts in generation portfolio breakeven number?

Speaker 3

Good morning, Eric. This is Mike. I'll take that one. So yes, historically, if you go back 4 plus years ago, we were really centering the business around the generation portfolio with a meaningful backlog of projects that we had. So to your point, we've been working really hard at getting those projects up online.

Speaker 3

We'll be north of 60 Megawatts after Derby comes online. And back at that time, we were focusing the business on getting to EBITDA positive around the generation portfolio. Fast forward a couple of years with the Energy transition now being here in a big way with global support around what we're doing. We've accelerated investments around our different technologies and Jason talked about both solid oxide but also carbon capture that has increased both our operating expenses and CapEx, which has pushed out our profitability into the future, but we made that trade off in order to get these technologies to market. When we look at the external targets we've put out there, we're targeting getting over 300,000,000 of revenue in 2025 and over $1,000,000,000 by 2,030.

Speaker 3

We're still confident in those targets and with the increased revenue, we would expect Profitability to come as well.

Speaker 8

Got it. And I mean, is it something where we should think about, I mean, is there a time in the future, say, when carbon capture, when maybe that has progressed, You've gotten through the pilot project program, where that spending maybe tails off a little bit. I mean, I know this is all dependent on what your spend looks like. So maybe how do you think about those things? Or do you think that you're going to have kind of this elevated spend for the, well, foreseeable future or longer term than that?

Speaker 3

So when we look at the R and D spend, we ramped that up here over the last couple of years. We have not put out guidance of when that would come back down. But clearly, as we've talked about, we're investing in first article products that we're building here in our Connecticut facilities. And as those become commercial, that will shift up to cost of sales, which would likely drive down research and development expenses in the future. But we haven't put out specific guidance around that.

Speaker 3

And then Just going back to the question around megawatt guidance. As we look at the revenue potential for different products that we have out there Now it's different math than just dollars per megawatt. We can potentially see Higher revenues, particularly around a project like Trigen that has multiple attributes coming out, not just power generation, but for hydrogen and water and then obviously with government incentives out there around like the PTC credit that was not there A couple of years ago, potentially higher revenue opportunities for those projects than just $1 per megawatt.

Speaker 1

Okay. Thank you.

Operator

And our final question today comes from the line of Noel Parks from Tuohy Brothers.

Speaker 7

Just had a couple. Talking about the generation business and more recent investments in new technologies. Can you just talk about sort of the state of your business momentum with generation, New customers, anything that's shifted in terms of how you characterize the sorts of customers that Are being more aggressive, whether they're moving any faster or as with so many things waiting for sort of more of The IRA and Infrastructure guidance.

Speaker 2

Thank you for your question. So as we think about what we're seeing with customers And you think about what we've just done with Toyota, many of the things that we're doing are new applications in the way in which we're using our platform. What's important to note about that is that it's our same existing platform. We're just extending the capabilities of that platform to deliver additional value. So the same carbonate platform that we commercialized in 2,003 is the same platform we deployed at the Port of Long Beach in port of the Toyota opportunity, yet we're delivering hydrogen and water from that platform in addition to power.

Speaker 2

We see that as a great example of where customers will now be able to see A real commercial implementation of that platform and we think that will help us drive additional opportunities around the TriGen platform as an example. We are seeing customer interest in the way in which we're building our pipeline growing Even without the clarity around IRA and especially when you think about globally because we're not just focused in the U. S, But you've got programs in the EU, you've got programs in Korea, all of which drive strong tailwinds that really support the business that we're in. And when you think about what's really happened, net 0 in countries around the world have been legislated in. And so Companies are going to find ways to get there and we think that you'll see even more states in the U.

Speaker 2

S. Take more progressive attitudes like what you're seeing in California, like what we just talked about, and the expansion of and support for renewable fuels. We think that all serves us really well to help drive our business, especially some of the advantages we have, for example, When you think about renewable fuels, the fact that we can use renewable fuels directly coming out of an anaerobic digester as opposed to needing those to get the pipeline quality gas as an example, which we think gives us an advantage, lowers the cost of the fuel and puts us in a position to deliver carbon neutral to carbon negative power. So we're really excited about that. And as we look at our pipeline, We're seeing growth happening despite of the IRA, but there's no question that customers really want to understand in the U.

Speaker 2

S. How to really fully maximize the IRA, but we'll continue to take advantage of the investment tax credit. We think we're in a really strong position around project like Toyota to take advantage of the production tax credit. When you think about the incremental benefits, We are a U. S.

Speaker 2

Manufacturer. We largely use U. S. Based content in our platform and we use labor that are at prevailing wages. So all of those things continue to ladder up as just incremental benefits to bring down the cost for the customer and to create a different set of economics for us.

Speaker 2

Getting there are instances where you can get almost up to 50% through the IRA based on the way in which we're configured as a company. So we're pretty excited about that.

Speaker 7

Great. Thanks. And I just wanted to turn to the ExxonMobil JV. And I was just curious about a couple of things, I guess just sort of the working relationship, they're a huge company and sort of their internal process and maybe how it affects progress in the JV. You've had a number of extensions of the agreement.

Speaker 7

And I guess just even more on a practical level, do you have any thoughts about the process that's left before in the pipeline before there'll be more info about, for example, the timing of plans at Rotterdam for a capture installation there.

Speaker 2

Thank you. I don't want to speak on behalf of Exxon, but I think it's clear from their public pronouncements that they are committed to their low carbon business. Our technology is directly supportive of what Darren has talked about and Dan Ammon has talked about in terms of their low carbon business and so we feel really good about that. They have been clear that they expect to get to decision later this year on a demonstration project. So we think that will happen.

Speaker 2

So I think you're seeing Exxon operate very differently with their low carbon business and they've and we think that That will be benefit for us as well. And so, they've got a strong commitment there and we're excited about it.

Speaker 7

Great. Thanks a lot.

Speaker 3

Thank you.

Operator

And this ends our question and answer session. I will now turn the call back over to to Jason Fue for some final closing remarks.

Speaker 2

Rob, thank you. We want to take a moment to acknowledge and honor the victims, families and communities impacted by September 11. As a Connecticut based company, Today, our thoughts are with those impacted in our community. As a company, we will continue to execute on our PowerHouse business strategy with the goal of delivering growth and optimizing returns. Thank you all for joining the call today and for your interest in FuelCell Energy.

Speaker 2

We look forward to updating you again next quarter and have a great day.

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Earnings Conference Call
Sartorius Aktiengesellschaft Q3 2023
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