Good day, ladies and gentlemen, and welcome to FuelCell Energy Reports the First Quarter 2011 Results Conference Call. [Operator Instructions] I would now like to introduce our first speaker today, Mr. Kurt Goddard, the Vice President of Investor Relations. Sir, please go ahead.

Good morning, and welcome to the first quarter 2011 earnings call for FuelCell Energy. Delivering remarks today will be Chip Bottone, President and Chief Executive Officer; and Joseph Mahler, Senior Vice President and Chief Financial Officer. The earnings release is posted on our website at www.fuelcellenergy.com, and a replay of this call will be posted two hours after its conclusion. The telephone numbers for the replay are listed in our press release. Before proceeding with the call, I would like to remind everyone that this call is being recorded and that the discussion today will contain forward-looking statements, including the company's plans and expectations for the continuing development and commercialization of our fuel cell technology. I would like to direct listeners to read the company's cautionary statement on forward-looking information and other risk factors in our filings with the U.S. Securities and Exchange Commission. Now I would like to turn the call over to Chip Bottone. Chip?

Thank you, Kurt. Good morning, everyone and welcome. It's a pleasure to speak with you today. I was elected to succeed Dan Brdar as President and CEO of FuelCell Energy. Under Dan's leadership for the last 10 years, FuelCell Energy evolved from primarily an R&D business into the world's leading fuel cell company. Thanks to his leadership, we are well positioned to accelerate our growth and take full advantage of this important and expanding global market. My background is very pertinent to FuelCell Energy. I spent 25 years in Ingersoll Rand, a $14 billion global diversified industrial company, in a variety of global business leadership roles including business unit President. The last several years, I focused on energy businesses that were very well aligned with the business model, global markets and potential clients of FuelCell Energy. I was appointed Senior Vice President, Chief Commercial Officer of FuelCell Energy in February of 2010 and have been focused very intensely on accelerating profitable revenue growth. I believe very strongly in FuelCell Energy's future and am thrilled to be leading this company as we progress to profitability. FuelCell Energy's first quarter financial results showed strong increase in revenue, along with significantly improved product cost ratio. Current activity in our key markets points to further ramp up production during 2011. I'll discuss our plans for growth and areas of focus after Joe Mahler, our Chief Financial Officer, reviews our financial results for the quarter. Joe?

Thank you, Chip, and good morning, everyone. FuelCell Energy reported total revenues for the first quarter of 2011 of $28.1 million compared to $14.6 million in the same period last year. Product sales and revenues in the first quarter were $25.8 million, more than double the $12.8 million reported in the prior year. The company's product sales backlog, including long-term service agreements, totaled $159.2 million as of January 31 compared to $84.1 million as of January 31, 2010 for an increase of 89%. For the first quarter of 2011, product order backlog totaled $78.9 million and backlog for long-term service agreements totaled $80.3 million. For the first quarter of 2010, product order backlog was $58.3 million and backlog for long-term service agreements totaled $25.8 million. Service agreements are for terms of one to 20 years, revenue was recognized on a pro-rata basis over the life of the agreement once the power plant begins commercial operations. The year-over-year growth in service revenue backlog reflects strong order volume in the second half of 2010 that was accompanied by customers entering into long-term service agreements with us. Product margins improved over the prior year by $2.9 million. The product cost to revenue ratio was 1.09:1 in the first quarter compared to 1.41:1 in the first quarter of 2010. The improvement in product margins and the cost ratio is due to lower product, commissioning and warranty costs. Lower product costs reflect ongoing cost reduction efforts as the power plants are gross margin profitable on a unit basis. First quarter 2010 costs included commissioning-related costs in Korea that did not reoccur in the first quarter of 2011. Research and development contract revenue was $2.3 million for the first quarter of 2011 compared to $1.8 million for the first quarter of 2010. The company's research and…

Thank you, Joe. The team and I are very confident in the future of FuelCell Energy. We offer our global customers solutions to their business, energy and environmental challenges that are unmatched by competing baseload and renewable power generation technologies. Now as our markets grow and our customers gain experience with our products, we have an opportunity to make our value proposition even more compelling both economically and environmentally. Our Direct fuel cell power plant are ultra-clean efficient and reliable. Their low emissions profile virtually eliminates pollutants and helps customers reach their sustainability goals. Their high-efficiency results in more output for a given unit of fuel, reducing operating costs and emissions. An ideal distributed generation solution, they provide power at the point of use without additional investments in transmission and distribution. This reduces reliance on the electric grid and enhances energy security independence without detrimental impact on the local community. Our strategy is to expand in key geographic markets and areas while continuing to reduce product costs. To accelerate growth and achieve profitable operations as quickly as possible, we have articulated a compelling mission and vision to which our talented management team and associates are fully committed. Our mission is meeting the world's energy needs today. Our vision is provide ultra-clean efficient distributed generation baseload power for less than the cost of grid-delivered electricity. We will achieve these by focusing on three key aspects of our business: driving growth, operational excellence and customer satisfaction. Driving growth simply means solving more problems or delivering value for more customers more quickly. Our two primary markets are ultra-clean power, defined as fuel cells operating on natural gas and renewable baseload power defined as fuel cells operating on renewable biogas. These two primary markets encompass 11 different and diverse submarkets that we are pursuing.…

[Operator Instructions] And our first question comes from the line of Sanjay Shrestha with Lazard Capital.

A few questions. First off, can you talk about South Korea a bit more now that we have a visibility in terms of the portfolio standard mandate? How do you sort of see that order opportunity materializing for you guys through your partnership with POSCO?

Good morning, Sanjay, and thank you for the kind words. I think that now with the RPS in place and detailed rules, POSCO certainly is talking to us in advanced stages of our next order. As I also mentioned, we've got -- their production began at their own stacking facility. So some of these things, frankly, took a little bit longer than anticipated just due to some somewhat delay on the details of the RPS at the end of last year, but that kind of feeds right into now. So I think they're going to have a fairly smooth transition here, and that's why I think the discussion of the order is probably pertinent to have as we’re having it, as things would turn out. But we had them in last week. The RPS is the first step in what they are trying to do there. There's other projects we're working on, such as the building application. There’s an export opportunity. So we want to do this right and my expectation is here in the next couple months, we’ll have a fairly sizable order from POSCO.

Two quick follow-ups. I mean, and so when we think about your capacity ramp and the scale benefits, especially in light of some pretty solid progress there on the cost reduction roadmap, did I hear you correctly that to get to 90 megawatt is a minimal CapEx? Can you sort of share with us what would that CapEx number be to go to 90 megawatts from 35 megawatt?

Yes, Sanjay, the estimate that we have right now is about $5 million to $7 million to get to 90 megawatts.

And then, one last question. Just want to make I'm doing the -- I have the right numbers here. So, Joe, this is a question for you. So backlog at the end of last fiscal year was, what, $164 million, correct?

Correct.

So it went up sequentially and the only announcement you guys sort of made -- there was not a lot of new incremental press releases out of you guys. So your book-to-bill ratio was even higher than the one even in this current quarter. So what were some of the things we didn't hear about?

We added about $15 million worth of service agreements that were trailing the orders, Sanjay. So they came in. So you're absolutely correct; we had about 1.7 megawatts of product orders and then we added service backlog.

Our next question comes from the line of John Quealy of Canaccord.

It’s actually Chip Moore for John. Was wondering if you could give us some color on how much of your existing backlog you think should convert to revenue for the rest of the year. And then how you see product cost ratio tracking to that.

So we have about 78 megawatts in product backlog. We expect that, that will come in to revenue over the next 12 months. So that should be pretty consistent with what we've reported on in the past. We ran in service quarter, about $2.5 million. I think on the last call, I said that service will continue to creep up on a quarterly basis. I think that in the last call, I said that we’d get over $3 million by the end of the year and I think that's still correct.

Okay. And then, any sense on the cost ratio?

The cost ratio is sustainable at our current production rate of 35 megawatts. We've alluded to the fact that we're going to expand production. As we expand production, we would expect that the cost ratio will continue its decline.

Okay. Okay, that’s fair. Then you mentioned expectations of cash burn at $6 million to $8 million per quarter. What kind of assumptions do you have embedded in there for production levels?

Production levels would basically be between 35 to 50 megawatts of throughput. As you get to 50 megawatts of throughput, it gets to the lower number. So it’s in that range.

Okay. And then, lastly, I guess, how are you guys thinking about potential new business development opportunities given the focus on the booming natural gas market particularly upstream?

Yes, that's a great question. We have seen a rotation, actually, of people back to natural gas applications, given the fact that pricing at Henry Hub anyways averaging about $4, give or take. So I would expect to see that we're going to be -- you'll see some new order activity on the natural gas side of things. But I think the other news on that is that I think the forecasts have been that the pricing of natural gas, while it might go up from its low, is certainly going to be a little more stable going forward because a lot of that is driven by what the supply is and they seem to be discovering more natural gas all the time. So while we’re not going to take our focus off of some of these biogas applications frankly, with the natural gas trends, the other one is the applications have come -- we’ve seen increased activity there.

Our next question comes from the line of Walter Nasdeo of Ardour Capital management.

Maybe I could just dig a little bit deeper into the sort of the shift into a more sales-focused type of organization. And what you foresee, especially, as you kind of like roll out globally. I mean, I know there's still some kind of relatively low-hanging fruit in some of the markets that you're already kind of seated into. But when you look at kind of expanding out, what do you foresee as far as establishing a sales force? Is it going to be a distributor type of a model? Are you going to do an inside sales force? Are you looking at maybe replicating what you're doing with POSCO and maybe in Europe as far as establishing assembly kind of facilities over there so that you can kind of distribute out of those facilities? Can you just kind of maybe go into a little bit of that?

Well, that’s a great question, Walter. I’ll do my best to keep the answer short. I think, first let me start with where we go. Clearly, we’re focusing our efforts on Korea both through domestic market as they grow in their domestic market and future opportunities and expand on that, and clearly, that's a partner model. They’re great when they get a balance sheet; they’ve put in some local production to help us on the same journey that we're on in the cost reduction. And we've been supporting those guys. And they’ve done a great job as well with some policy development. In the U.S., it's really California first and the East second. And there, we obviously have the base of operation that we need. It's really about execution. We talked earlier about these 11 different markets. That would apply, frankly, to any state or any country. So we've identified what those are. And based on different economics, which are most attractive in the largest markets, we're pursuing those, and that's a combination of a different type of partner. It might be a partner that might be helping us with financing or something, but the other half of what we do is a direct model there. In Europe, it's probably going to be -- it's certainly going to be more of a bigger type partner model like we see in Korea for the similar reasons. We’ll need some aspect of local supply on certain things if nothing less than the balance of plant. And obviously, the local traction that we can get from government engagement. So that's how I see it. I see it outside the U.S. as a -- we got a lot of experience now, frankly, with some mostly good and some bad about how do you pick the right partner. And we're in discussions with several people in Europe right now to find that perfect combination. But that's how I see it unwinding. And as far as people, I'll tell you as I travel around, we've got very, very impressive people. And customers tell us that, our partners tell us that. So frankly, in the U.S., what we're doing there is just taking the resources that we have and pushing them forward to basically be more efficient and effective. So I don't see a big expense frankly on the commercial organization for us. And then thirdly -- or lastly, once we have those channels established, we're going to feed those channels, not just with today's products, with other hybrid products that we've talked about in the past that offer higher efficiency and things like that. So trying to find that match between what capabilities we have with a partner using ourselves more on the technical side as we expand in on our knowledge of how things can develop commercially, and working with people to have the balance sheet and the same expectation and vision that we do is how we're going to get there.

And our next question comes from the line of Matthew Crews of Noble Financial.

This is a question -- I’m going to go back to POSCO in this one. And maybe, Joe, you can help me out with this one. The POSCO backlog as it stands today, is that going to wrap up in the current fiscal second quarter?

I think second quarter and into the third quarter, Matthew.

Okay, so you get some in Q3. So when we stated the possible orders a couple months out, I'm pretty confident that you're going to receive it, but just in case you don't receive it in time, is there a chance of disruption [ph] in how you're loading the Torrington facility?

No, Matthew. I think that the domestic U.S. business is actually pretty strong. If I was to breakdown the dollar backlog at this point, it's about $24 million in for Korea and there’s about $55 million in for the U.S. So the U.S. should effectively carry us through those quarters. And our expectation is that the Korean order is in the short term here.

Okay. All right. Thank you on that. In terms of the megawatts that you need ship up, looking at when you might be able to turn gross margin positive on a consolidated basis, is there a type of megawatt that you need to ship on an annual basis to reach that gross margin positive?

We were targeting -- I think in the 10-K, we do a range of 35 to 70 megawatts, based on product mix. With our current product mix with the Korean component sales being a good portion of it, we're looking at about 50 megawatts would be our target today.

And then just lastly, in terms of how you're working through your current backlog from California orders, can you kind of give us a sense for how that's going to work through the remaining fiscal '11, in terms of Q2, Q3? Is that pretty level loaded? Are you going to have a kind of a bubble in the middle quarters?

No, I think it's going to be pretty level loaded. It’ll follow our production levels and probably comes through over four quarters.

[Operator Instructions] And we have no further questions at this time. I'd like to turn the conference back to management for any further remarks.

Thank you. We’d like to thank everybody for joining us today. We certainly look forward to updating you on our continued progress. So have a great day and look forward to talking to you for the next quarter. Take care.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.