FuelCell Energy, Inc. (FCEL) Earnings Call Transcript & Summary

Good afternoon everyone. It is 1 p.m., and I am calling this meeting to order. I am Herb England, Chairman of the Board of Directors of FuelCell Energy Inc. I will be presiding as Chairman of this meeting. Along with my fellow Directors and executive officers of the company, I would like to welcome you to our Annual Meeting of Stockholders reconvened today after adjournment on April 9. We appreciate your attendance, your interest and most importantly, your support of FuelCell Energy. This Annual Meeting of Stockholders is held pursuant to the amended and restated bylaws of the company and written notice to all stockholders of record of our common stock as of February 14, 2020. You are participating in this meeting virtually. We are pleased to hold this Annual Stockholder Meeting virtually as we aim to increase access and participation. [Operator Instructions] Questions will be answered after the conclusion of the meeting and the brief business presentation. After introducing the Directors and officers in attendance and dealing with a few procedural matters, we will take up the items to be acted upon.

We would like to introduce the Directors of FuelCell Energy who are in attendance today. We welcome Mr. England, our Chairman, from whom you just heard, Mr. Matthew Hilzinger; Ms. Natica von Althann; Mr. Chris Groobey, and Mr. Jason Few, who is also our President, Chief Executive Officer and Chief Commercial Officer. The FuelCell Energy executives who are in attendance are Mr. Michael Bishop, our Executive Vice President and Chief Financial Officer; Mr. Michael Lisowski, our Executive Vice President and Chief Operating Officer; Mr. Anthony Leo, our Executive Vice President and Chief Technology Officer; and I am Jennifer Arasimowicz, the Executive Vice President, General Counsel, Chief Administrative Officer and Corporate Secretary. This meeting is not being recorded for later replay. Also attending this meeting are Renee Molnar, Walter Connelly and David Presutti of KPMG, our independent auditors. Although KPMG has indicated that it does not wish to make a statement, Ms. Molnar is available to respond to appropriate questions during the general question-and-answer period. In accordance with our amended and restated bylaws, Mr. England will act as Chairman of the meeting, and I will act as Secretary of the meeting.

In addition, the Board of Directors has appointed [ Mr. Edmund Wiener ] of AST Financial to serve as the independent Inspector of election for this meeting. [ Mr. Wiener ] has filed his oath of office with the Secretary of the meeting for inclusion in the minutes of this meeting. Will the Secretary please report on the proof of notice of meeting?

I have an affidavit of mailing from Broadridge Financial Solutions, certifying as to the giving of notice of this meeting and the sending to stockholders of record as of February 14, 2020, the notice of Internet availability of proxy materials, all of which Broadridge commenced distributing to stockholders on February 27, 2020. I also have a copy of the company's 2019 annual report, which includes financial statements certified by KPMG. A copy of this annual report was sent or made available to each stockholder entitled to vote at this meeting, and an electronic copy of the annual report is available on the website used to access this meeting. The notice of meeting and the affidavit of mailing together with the attachments thereto and the 2019 annual report will be filed with the minutes of this meeting.

The Secretary has the list of the holders of record of common stock of the company at the close of business on February 14, 2020. This list of stockholders has been open for examination at the company for any purpose relevant to this meeting during ordinary business hours for the past 10 days and for the 10 days preceding the originally scheduled annual meeting. This list is available for inspection during this meeting by any stockholder on the website used to access this meeting. The Secretary will please file a copy of the list of stockholders with the records of the company. Jennifer, will you please present your report of attendance at this meeting so that we can determine whether a quorum is present?

Mr. Chairman, on February 14, 2020, the record date for this annual meeting, there were outstanding and entitled to vote a total of 210,968,053 shares of common stock. I have been informed by the inspector of election that there are more than 105,484,027 shares of common stock represented by proxy, and thus, the shares represented exceed 50% of the total shares of common stock outstanding and entitled to vote at this meeting and that constitute a quorum.

Thank you, Jennifer. On the basis of the report of the Secretary and the Inspector of election, I find that proper notice has been given and that a quorum is present. Accordingly, this meeting has been properly convened. It is approximately 1:05 p.m. on May 8th, 2020, and the polls for voting on all matters are open. All FuelCell Energy stockholders entitled to vote at this meeting have the ability to do so online. If you are a stockholder entitled to vote and have not yet voted or if you want to change your previously cast vote, please do so via the website used to access this meeting. Please remember that if you have already voted by proxy, it is not necessary to vote again. After voting has been completed on all matters on the agenda, we will close the polls, and the Inspector of election will provide his preliminary report. We'll move now to a review of the proposals. The first proposal to come before the meeting is the election of Directors. At this meeting, we will be voting to elect each of the 5 Directors named in the proxy statement to serve until the 2021 Annual Meeting of the Stockholders or until their successors are duly elected and qualified. The nominees are James H. England, Jason few, Chris Groobey, Matthew F. Hilzinger and Natica von Althann. Information concerning their principal occupations, service as FuelCell Energy board members, skills and qualifications and other matters which may be of interest are contained in the proxy statement. No other nominations were received prior to the deadline established in the company's amended and restated bylaws. Therefore, no additional nominations may be made at this meeting, and I declare the nominations to be closed. The next matter to come before the meeting is the ratification of the selection of KPMG LLP as the company's independent registered public accounting firm for the fiscal year ending October 31, 2020. The Board of Directors recommends the ratification of the selection of KPMG to serve as the company's independent registered public accounting firm for the fiscal year ended October 31, 2020. Proposal 3 asks stockholders to approve on a nonbinding advisory basis, the compensation of the company's named executive officers as set forth in the executive compensation section of our proxy statement. This proposal is advisory. Although nonbinding, the vote will provide information to our Compensation Committee and our Board of Directors regarding stockholder sentiment about our executive compensation programs and policies, which our Compensation Committee and our Board of Directors will be able to consider when making future decisions regarding executive compensation. The next matter to come before the meeting is the approval of the amendment of the company's certification of incorporation as amended to increase the number of authorized shares of common stock of the company from 225 million shares to 337,500,000 shares. We refer to this proposal as the increased authorized shares proposal. The Board of Directors recommends the approval of the increased authorized shares proposal and the amendment of the company's certificate of incorporation, as amended, to increase the number of authorized shares of common stock of the company from 225 million shares to 337,500,000 shares. The final matter to come before the meeting is the approval of the amendment and restatement of the company's 2018 omnibus incentive plan. The approval of such amendment and restatement will increase the share reserve or the number of shares of common stock available under the plan by 4 million shares. Our compensation committee and Board approved the 2018 omnibus incentive plan as amended and restated on February 6, 2020, subject to the approval of our stockholders at this annual meeting. If this proposal is approved by our stockholders, the 2018 omnibus incentive plan, as amended and restated, will become effective as of the date of this reconvened annual meeting. In the event that our stockholders do not approve this proposal, the 2018 omnibus incentive plan, as amended and restated, will not become effective and the existing 2018 omnibus incentive plan will continue in its current form.

The polls are about to close. So if you have not yet voted, please do so. [Voting]

Since everyone has had the opportunity to vote, the polls are now closed. The inspector of election has delivered his preliminary report, and I will now announce the preliminary results. Mr. Chairman, based on the Inspector of election's preliminary report, each of the following Director nominees, James H. England, Jason Few, Chris Groobey, Matthew F. Hilzinger and Natica von Althann, has received affirmative votes in excess of the necessary majority of the shares of common stock casting votes in person or by proxy on such proposal at this meeting. The proposal to ratify the selection of KPMG LLP as the company's independent registered public accounting firm for the fiscal year ending October 31, 2020, has received affirmative votes in excess of the necessary majority of the shares of common stock casting votes in person or by proxy on such proposal at this meeting. The proposal to approve, on a nonbinding advisory basis, the compensation of the company's named Executive Officers has received affirmative votes in excess of the necessary majority of the shares of common stock casting votes in person or by proxy on such proposal at this meeting. The proposal to approve the amendment of the company's certificate of incorporation as amended to increase the number of authorized shares of common stock of the company from 225 million shares to 337,500,000 shares, has received the affirmative vote of the holders of majority of the shares of common stock outstanding as of the record date for this meeting. And the proposal to approve the amendment and restatement of the company's 2018 omnibus incentive plan has received affirmative votes in excess of the necessary majority of the shares of common stock casting votes in person or by proxy on such proposal at this meeting. We will file the final report of the Inspector of election with the records of this meeting. We expect to report the results of the voting on a Form 8-K to be filed with the SEC within 4 business days of this meeting.

Thank you, Jennifer. That concludes the business for the meeting. The meeting is now adjourned. I will now turn it over to Jason Few for a brief business presentation, after which we will answer some of the questions submitted regarding the company and its business. [Operator Instructions] Ladies and gentlemen, thank you for attending today's meeting.

Thank you, Herb. And thanks to the Board for your commitment and service to the company and our stockholders. To our stockholders, I want to thank you for your continued interest and support. Today, I will provide you a brief update on the company. At the end of my prepared remarks, we will spend a few minutes answering submitted questions. First, I will call your attention to our safe harbor statement. This presentation contains forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including, without limitation, statements with respect to the company's anticipated financial results and statements regarding the company's plans and expectations regarding the continuing development, commercialization and financing of its fuel cell technology and its business plans and strategies. Please read the statement in its entirety. On Page 3, I want to start with our purpose, to enable the world to live a life empowered by clean energy. This purpose is our why. We believe that baseload power will continue to be a requirement for the energy grid today and even more so in the future. And we believe fuel cell technology can ultimately become the clean power platform of choice to meet that need. We also think hydrogen, long duration hydrogen energy storage and hydrogen power generation can grow to be a significant aspect of tomorrow's grid to provide firm power support for intermittent technologies such as wind and solar and that hydrogen can also serve as a transportation fuel. FuelCell Energy's power platforms can deliver differentiated hydrogen energy solutions across the hydrogen value chain. This purpose drives our strategic thinking, how we deploy capital, and has become the fuel to power our team. Moving to Page 4. Over the last year, the company has executed on its business plan to build a recurring revenue business across 3 of our 4 revenue drivers: service and license, Advanced Technology and generation. In the last 9 months, we also relaunched our business in Europe, and we refocused on platform sales in addition to utility-scale power purchase agreements. We continue to have strong relationships with investment-grade customers that value and make long-term commitments. We believe that we have proven technology with more than 255 megawatts deployed globally, and our FuelCell platforms have generated more than 10 million megawatt-hours of clean energy to date. I also want to point out that FuelCell Energy's power platforms are multifaceted. Our platforms are capable of delivering multiple value streams to our customers. Our power platforms are capable of providing electricity, thermal energy and producing hydrogen, giving our customers the ability to deploy a single platform and capture multiple benefits. Moving to Page 5. FuelCell Energy is well positioned to benefit from 4 major long-term macro trends supporting the global move to cleaner energy. Forecast around the world suggests more electric power generated annually will come from clean energy sources. Natural disasters, aging infrastructure, and the mix of intermittent energy sources are expected to drive demand for grid resiliency and reliability, which our baseload platform is capable of delivering. Carbon Capture requires game-changing technologies as countries around the world race to limit global warming to 1.5 degrees Celsius. The world must think differently. Regulatory frameworks are expected to continue to provide the support needed to drive the adoption of clean energy technologies like fuel cells. Moving on to Page 6. FuelCell Energy's differentiated power platforms have the capability of addressing 4 significant energy opportunities. First, power will continue to become more locally driven, resulting in the deployment of distributed generation. FuelCell Energy platform support microgrid, combined heat and power, use of multiple fuels and resiliency applications. Also, our differentiated generation platform spans sub-megawatt to large megawatt scale, require a limited space and operate at a low decibel level allowing our plants to be placed in relatively small spaces in densely populated areas. Finally, our distributed generation platform avoid the need for costly long-distance, high-voltage distribution lines and transmission line losses. Second, distributed hydrogen. Our TriGen platform is capable of generating hydrogen where it is needed, reducing the cost of transporting hydrogen and avoiding transportation emissions. In addition to producing hydrogen, the same platform provides electricity and thermal energy. As the hydrogen economy develops and hydrogen power light-duty cars and trucks as well as heavy-duty trucks move to run on hydrogen, FuelCell Energy has an opportunity to play a significant role in developing the hydrogen distribution network. Third, Carbon Capture is arguably one of the most substantial energy challenges the world has come together to address. Delivering Carbon Capture technology at scale and producing clean, continuous energy is paramount to capitalize on this opportunity. FuelCell Energy is working with ExxonMobil Research and Engineering to do just that. We believe that FuelCell Energy's proprietary fuel cell stack technology does what no other known technology in the world can do, electrochemically concentrate the carbon dioxide from the exhaust of an external power plant or industrial operation. The CO2 molecules are transferred to the fuel electrodes where the concentration of CO2 allows for its easy removal and purification. Carbonate fuel cells are the only fuel cell technology that can be used in this way to capture CO2 and produce more power at the same time. FuelCell's technology can be game changing, both for cost and the ability to scale the FuelCell Carbon Capture solution to address this global challenge. And fourth, FuelCell Energy is developing advanced technology to address long-duration energy storage globally. FuelCell Energy's reversible solid oxide fuel cell stacks enable electrolysis to produce hydrogen for stored energy. Through electrolysis, long-duration hydrogen energy can be stored at virtually endless capacity. FuelCell Energy's closed-loop SureSource power platform can flow that stored hydrogen back through the fuel cell stack and generate electricity that is 0 carbon, 0 NOx, 0 SOx and no particulars with differentiating round-trip efficiency. Long-duration hydrogen energy storage and hydrogen power generation provides the potential to firm up intermittent technologies and provide clean energy around the world. Clean energy grid reliability and continuous power are what FuelCell Energy's technology is designed to enable at large scale. FuelCell Energy is working hard to drive innovation. As a leader in power platform innovation, FuelCell Energy is positioning itself to address 4 of the most sustainable energy opportunities holistically. As you can see on the graph on the left side of the slide, distributed power generation, distributed hydrogen, Carbon Capture and energy storage represent significant opportunities for the company across both equipment and services. Moving to Page 7. FuelCell Energy is focused on delivering solutions aimed at opportunities where our technology provides multiple value streams to our customers, such as our 20-megawatt power platform sold to KOSPO, which also offers heat to the district heating system. At Pfizer, our power platform enhances reliability and is capable of delivering steam. In Bridgeport, Connecticut, our 15-megawatt power platform provides reliable power to the grid and facilitate a brownfield revitalization and economic benefits to the city. And in the bottom right, we are integrated with a solar solution. I want to highlight 2 key facts about this project. First, the FuelCell Energy 2.8 megawatt fuel cells sits on only 1/4 acre versus approximately 9 acres for 2.2 megawatts of solar. Perhaps more impressive, the FuelCell platform is capable of delivering 23,000 megawatt hours annually versus about 3,000 megawatt hours for the solar array. This installation highlights the space advantage, efficiency advantage and enhanced resiliency of the FuelCell Energy's solution. On Page 8. Through the back half of 2019 and through 2020 to date, our team has been focused on execution. We evaluated our cost structure and delivered approximately $15 million in annualized reduced operating expenses in fiscal 2019. We improved our capital structure by paying off short-term debt, closing on a long-term $200 million credit facility with Orion Energy Partners and recently closed on a tax equity sale-leaseback transaction with Crestmark Equipment Finance on our Tulare BioMAT project. We entered into a second straight joint-development agreement with ExxonMobil Research and Engineering to continue the development of our Carbon Capture technology. We work to execute on our project backlog, and brought our Tulare 2.8 megawatt biofuel plant to commercial operations and restarted construction on our 7.4 megawatt project on the Navy submarine base in Groton, Connecticut. The California PUC reaffirmed the permissibility of use of directed biogas in support of our Toyota Port of Long beach TriGen hydrogen project, we announced the commercial operation of our Triangle Street 3.7 megawatt power plant in the heart of Danbury, Connecticut. And just this week, we announced that site construction has begun on our 1.4-megawatt biofuel project in San Bernardino, California. At the end of our first quarter fiscal year 2020, we delivered gross margin of 20% and a reduction in operating expense of 51% versus the first quarter of fiscal 2019. We are focused on executing on all aspects of our Powerhouse business strategy. Moving to Page 9. Earlier, I talked about our revenue drivers and how the company is executing on its plan to build a sustainable, recurring revenue business. Today, we have 32.6 megawatts of power platforms on the balance sheet, driving both recurring energy revenue and services revenue. Additionally, we have another 40.6 megawatts of signed power purchase agreement projects in our backlog, which are in various stages of development and construction. At the end of FuelCell Energy's Fourth Quarter Fiscal '22, the company expects to have over 73 megawatts of operating assets on the balance sheet, producing sustainable and long-term recurring revenues. On Page 10, executing on our backlog, delivering on our Powerhouse strategy and remaining focused on leveraging our differentiated technology across the 4 major energy opportunity areas, FuelCell Energy is targeting to grow its generation portfolio by 100%, generate double-digit CAGR revenue growth and deliver positive adjusted EBITDA. Our future goals include winning new business around the world, achieving sustained positive EBITDA, positive free cash flow and strong returns on invested capital. To close, on Page 11, we have been focused on strengthening our balance sheet, refocusing our global team to execute on our purpose to enable the world to live a life empowered by clean energy, delivering superior technology and developing go-to-market plans to strengthen the company and drive growth. With respect to COVID-19, FuelCell Energy continues to follow the health and safety recommendation guidelines issued by the CDC and all requirements and recommendations issued by federal, state, local and international governments. We look forward to returning to normal. But for now, we endeavor to continue to operate our business and meet the needs of our customers in a safe manner. We also want to thank all of the first responders around the world. Finally, on behalf of the team, we hope you are all remaining safe and healthy. Now we will take a few minutes to answer submitted questions. Thank you.

So the first question is, provide an update on Toyota and Exxon. So as I commented in my prepared remarks. With Toyota, we did receive a favorable ruling by the California PUC. So we are starting to move that project forward in partnership with Toyota. I also commented on Exxon, we signed a new joint-development agreement with Exxon. We are well on our way in executing against that development, which is intended to last over the next 2 years, in which we will then begin to move forward with the demonstration project that ultimately gets us to commercialization of our product. So we feel very good about the progress we're making with Exxon. And as I said in my remarks, we really believe that Carbon Capture is 1 of the 4 largest energy opportunities that exist in the market today. Next, another question we got was that the wastewater application seems like a win-win for any municipality. We are seeing a lot of interest in our solution driven by 2 things. One, there's an increase in municipalities' use of anaerobic digesting, which means there is an increase in the production of biofuels. The reason why we believe that we're seeing a lot of activity for FuelCell and why we think our actual solution is differentiated is the fact that we have a proprietary gas cleanup skid technology. That allows us to actually use that biofuel on site without the need to clean it to pipeline quality and inject it into a common carrier gas pipeline. That coupled with the fact that we have a short time from construction and installation. We are very quickly helping municipalities turn off flaring of those biofuels. And so we think that's going to continue to grow that opportunity for the company. Another question is around any tangible developments in Europe, exposure and/or relationship with E.ON, a question in regard to POSCO and situation in Asian markets. With respect to Europe and E.ON, we are seeing strong market interest for our solutions. One of the solutions we've highlighted previously, as you just think about the type of solutions that we can deliver, whether they be megawatt scale or sub megawatt scale, for an example is the work that we do with E.ON at the Radisson Blu Hotel in Frankfurt, Germany, where our 400-kilowatt platform provides all of the energy needs for the hotel including all of the hot water that is needed for showers, kitchen operations and laundry services. We think those type of opportunities and the significant push for cleaner energy solutions across Europe will begin to take hold and create a significant opportunity for the company. As it relates to our market activity in Asia, we are continuing to move forward on our resolution process with POSCO. And once we have additional information to report, we will provide that update via an 8-K. Another question is, when do you think it will be necessary to sell the newly approved common shares? At this time, there are no current plans for those shares. Having access to the shares provides the Board and the company the opportunity to evaluate opportunities around convertible securities, at-the-market sales, the opportunity to create project growth capital for the company, and we'll continue to look at that. But at this time, there are no plans. There's another question about considering the moves by Connecticut and New York governors' ill-advised moves is enabling the spread of COVID-19, a devious shutdowns of the economies, would it not be better to look into moving HQ and manufacturing to Texas or Tennessee? Safety is our #1 concern as a company, and it will continue to be our #1 concern, whether it be because of COVID or because of the fact that we run a manufacturing operation, we also produce a product that generates electricity. So safety is the #1 concern, will continue to be a #1 concern. And we actually support the moves that have been made by the governors to get companies like ours and others to really step back and reassess how we can do things differently to ensure the safety of our employees, and we have complied with all of the rules and regulations that have been implemented, like I said in my prepared remarks, at the state, local level as well as the federal level and all international governments. And we will continue to look for how we operate in a safe manner for our employees and our customers. And as a company, we have no plans to relocate the company outside of Connecticut in our future. So I appreciate the questions. And thank you all very much for participating in today's shareholder meeting. I don't see -- there's no more questions at this time. So thank you very much for your participation. Thank you for your continued support as stockholders, and we look forward to continue to provide you updates on our progress. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.