Capstone Green Energy Corp (CGRN) 2003 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Capstone Turbine Corporation's first quarter earnings release. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch tone telephone. As a reminder, ladies and gentlemen, this conference is being recorded.

I would now like to introduce your host for today's conference, Mr. Wade Welch of Capstone Turbine Corporation.

Good afternoon and thank you for joining us today to discuss Capstone Turbine's results for the first quarter of 2003. As mentioned by the operator, I am Wade Welch and I am responsible for investor relations at Capstone. As part of our efforts to control costs, we are no longer using an outside investor relations firm. Please contact Capstone directly with investor relations questions. By now you should have received a copy of the press release which was issued this afternoon. If not, please call us at 818-734-5428 and we'll get a copy to you

On today's call are Emily M. Liggett, interim Chief Executive Officer, Karen Clark, Chief Financial Officer, and Harol Koyama, Senior Vice President of Sales and Marketing. Please bear with me for one moment while I read through the Safe Harbor statement.

During the course of the conference call, management may make projections or other forward-looking statements regarding the events or future financial performance of the company within the meaning of the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to numerous assumptions, risks, and uncertainties which may cause Capstone's actual results to be materially different from future results expressed or implied in such statements.

Capstone undertakes no obligation to release any revisions to any forward-looking statements. For a more detailed discussion of factors that affect Capstone's operating results, we refer you to the company's filings with the Securities and Exchange Commission.

At this time I'll turn the call over to Emily Liggett.

Thank you, Wade. Good afternoon. Thank you for joining us. I will begin today with an update of where we are as a business and what we've accomplished this quarter. Then, I will turn the call over to Karen Clark to provide a review of our financial results for the quarter. Finally, Harol, Karen, and I will be happy to take your questions.

We continue to see challenges in the market during the first quarter of 2003. We are facing a soft economic environment, in particular with weakness in our combined heat and power markets, CHP. In the face of those challenges, we are executing our business plan, focusing on building selective vertical markets, lowering maintenance costs, and developing targeted new products. We are also continuing to refine our long term plan. These plans show a path to reaching profitability and becoming cash flow positive within our current cash resources.

Let’s talk now about results for the first quarter. Sales during the period were 1.3 megawatts. While shipments were low, orders were strong, and we entered the second quarter with 7 megawatts of orders scheduled for shipments primarily during the second and third quarters of the year.

As part of working closely with our business partners, we have greater visibility into their project pipeline and we believe the majority of these orders are currently directed at identified projects. The backlog represents a change from the recent past, and that we're driving to book shipments well in advance of the required ship dates. This builds momentum into the next quarter and provides for better operational planning. In April this past month, we shipped 1.6 megawatts of these orders.

The versatility of our product has allowed us to go into other markets less affected by the current economic. For example, we shipped our first microturbines to the U.S. Navy as part of the missile defense program. We feel that selection into this important program highlights the unique attributes of Capstone's products and technology.

Installations continued to grow during the first quarter, with a net decrease of channel partner inventory. We now believe close to 600 units are available for sale from our channel partners compared to up to 700 units which we reported on our last call. This change reflects both new installations and units previously available for sale which are now sold and scheduled for installation. So, while sales were low in the quarter, orders and installations were strong. Our outlook for the year continues to be sales flat to down from 2002

So now let's talk about our efforts to build the business. On our last call, we told you about our efforts to provide total solutions for select vertical markets. Several attractive near term vertical markets are in CHP. We broadly group these CHP vertical markets into three categories. First, hot water. Second, direct exhaust. And third, chilling.

We believe the hot water markets provide near-term opportunities. Examples of hot water vertical markets where we have sold product in the past are hotels, health care, and swimming pools. To provide an proved solution to these markets, we recently launched an entirely new integrated combined heat and power product built upon our C-60 system. Our high efficiency heat exchange mounts atop this C-60 system to provide a total integrated solution. The system provides many benefits over our previous offering of separate heat recovery modules. These benefits include reduced total installed cost.

The integrated CHP product is priced about $3,000 lower than the previous single microturbine and separate heat exchange product. The new system also provides for increased total system efficiency. It's now greater than 80%. It greatly reduces the floor space needed. Almost 33% less floor space is needed for this installation.

And, finally, the electrical and thermal load following flexibility is important. We introduced this new product to our distribution network three weeks ago and received a very positive reaction. We've already booked orders for a number of units for expected first shipment by the end of second quarter. We expect to debut this product formally in the third quarter of this year.

Capstone is stepping up to deliver distinctive microturbine products to its targeted vertical markets. Also, Capstone in our strategic partner UTC Power, a division of United Technologies Corporation, met or exceeded all milestones for the first quarter. As an example, one of these commitments was to train a minimum number of sales and service staff from Carrier

During the last quarter's call, we discussed what we believe is an opportunity to create a step-change impact on our market acceptance through lower maintenance costs. This is an important factor in improving the competitiveness of our total cost of ownership. A cross-functional team within Capstone is making progress in identifying items that could lead to lower maintenance costs, to meet or beat the higher expectations of new mainstream customers.

To date, we have identified some components that have historically contributed to maintenance costs. We have prioritized the impact of these items and are working to find better solutions that result in lower costs in the future. Our third high leverage area is targeted new product development. We are making clear progress in this area.

In addition to the hot water CHP product just mentioned, we started engine endurance testing of our C-200 product during the first quarter. We believe the C-200 represents a significant manslaughter in microturbine technology and performance and will demonstrate Capstone's clear technology leadership in the industry. Reaching this endurance test development gate is a significant step in our plans to introduce the C-200 in 2004. We are closely monitoring our progress in this regard. We have already received several customer inquiries specific to the C-200.

In our last call, we also talked about actions we have taken to reduce our cost structure, resize the business, and lower our cash usage rate. The financial results for the quarter do not reflect the full benefit of these actions, as some of these changes result in higher costs in the short-term, but to pay back very quickly.

In addition to facing a soft economic environment for our product, the company is facing a challenging situation in the capital markets. As a result of our stock price closing below $1 for three consecutive trading days, we received notice from NASDAQ that we have until September 15th, 2003, to regain compliance with NASDAQ listing requirements. These requirements generally state that our stock must trade above $1 per share. We want to continue our listing on the NASDAQ national market.

One course of action directly under the control of our company is a reversed stock split. We are seeking stockholder approval for the authority to implement a reverse stock split, if necessary. Proxies are being mailed to stockholders this week with an explanation of the proposal. We urge our stockholders to vote in favor of this proposal.

We are continuing to execute our stock repurchase program. However, the company is limited to when it can participate in the market because we cannot participate when we have material, nonpublic information. For example, during the first quarter, our trading was limited to a few days after the last call. In addition, we are limited to how much we can purchase based upon the average trading volume of our stock. Since the beginning of the year, we have purchased just over 250,000 shares for a total of just over 450,000 shares to date.

Before Karen reviews our financials, I would like to mention that we are continuing to actively search for a permanent CEO. The Board has screened and interviewed a number of candidates. The timing is uncertain, and the details of these discussions are confidential, but we will keep you informed of our progress.

And now I'll turn the call over to Karen.

Thank you, Emily. Let's review the first quarter of 2003 financial results. I'll start with an overview and then get into more details. For the quarter, revenues were $2.8m, compared to $4.6m in the same period a year ago. The loss for the quarter was $7.6m or 9 cents per share, compared to a loss of $12m or 16 cents per share during the first quarter of 2002.

Let's get into the details now by starting with shipments. Shipments were 1.3 megawatts in the quarter compared to 4.7 megawatts in the same period of 2002. Shipments of orders consisted of 32 C-30s and six C-60 microturbines compared to 99 C-30s and 28 C-60 microturbines during the first quarter of 2002.

Geographically, our sales this quarter were roughly 84% from North America, compared with 25% from North America in the first quarter of 2002. During the first quarter this year, 50% of our sales were to two customers in North America, of which one was for the Navy project. In the first quarter of 2002 two customers, a European utility, and Sumatomo in Japan accounted for roughly 75% of sales.

Product sales in the current quarter were $1.4m compared to $3.8m in the same period a year ago. This quarter we also had revenues from sales of parts, accessories, and service of $1.4m. This compares to $800,000 in the first quarter of the prior year. We exited this quarter with 7 megawatts of orders scheduled for shipment primarily in the second and third quarter. These orders consist of almost twice as many C-60s as C-30 units.

We had a gross loss in the quarter of $2.2m compared to $3m for the same period in the prior year. The reduction in gross loss was primarily from increased sales of parts, accessories, and service and a higher average selling price for our microturbines. Research and development, or R&D costs, decreased to $1m in the period as compared to $1.4m in the first quarter of 2002.

R&D expenses are reported net of contract offsets. These offsets were $1.7m this quarter as compared with $1.3m a year ago. Therefore, gross R&D spending was comparable between periods. Selling, general, and administrative expenses decreased to $4.8m compared to $8.4m in the first quarter of 2002.

The decrease was due to several factors, including, first, there was no amortization expense for marketing rights in the first quarter of 2003, compared to 1.3m in the prior year. The marketing rights were fully impaired during the second quarter of 2002. Second, as the result of a settlement agreement with a professional services firm, $1.1m of administrative expenses recorded in prior years were reversed in the first quarter of 2003. And, third, there was lower spending in 2003.

Other income and expense decreased to $400,000 income this quarter, from $700,000 income in the first quarter last year. This reflects lower cash balances and lower interest rates in the current period.

Now, moving to our balance sheet, our accounts receivable balance was $3.7m at the end of the quarter, down from $4.9m at the end of the year 2002. The change in the receivables balance was due to lower sales in the first quarter of 2003, as compared to the sales level in the fourth quarter of 2002.

Total inventory increased $600,000 to $16.5m from year-end. The increase was due to inventory purchases under firm contract with our suppliers. Of the total inventory, $4.4m is now classified as long-term, as compared with $6.8m at the end of last year. As of March 31st, 2003, we had $132.6m in cash and cash equivalents. We used $7.7m of cash in the first quarter of this year, as compared with $6.5m in the same period a year ago.

Cash used for operations, excluding working capital, was $6.1m, $1.1m lower than in the first quarter of last year. This year, we used $800,000 for working capital, whereas a year ago, we had a source of $1.3m for working capital. This $2.1m change between periods was largely due to this year's first quarter having lower cash inflows from collections on accounts receivable, and higher cash outflows for inventory purchases. That completes our financial review.

With that I will turn the call back to Emily for some closing comments.

Thank you, Karen. In summary, we continue to make progress in our three focus areas - key target markets, lower maintenance costs, and focused new product development. We are also paying close attention to our cash resources. Despite low shipments in the first quarter, we are encouraged by the orders received, the market traction we're seeing, and the project milestones being accomplished. There is still a lot to be done, but we are seeing clear progress. I would like to thank our employees for their hard work and passion to build our business. Their focus, efforts, and commitment are impressive and key to our success.

Now, Harol, Karen, and I will address any questions that you may have.

Thank you. Ladies and gentlemen, if you have a question at this time, please press the 1 key on your touch tone telephone. If your question has been answered, or you wish to remove yourself from the queue please press the pound key. Again if you have a question, please press the 1 key on your touch tone telephone. And if you're on speakerphone, please lift the handset before asking your question.

Our first question comes from Eric Prouty from Adams Harkness.

Thanks a lot. Karen, a quick question on the R&D line and the R&D credits. Do you guys have any visibility into what sort of offset credits you might be receiving for the rest of the year, and that would work into what your outlook is for R&D expense in total?

As has been our history, our R&D benefits tend to be more front end loaded on our projects and also during the federal fiscal year. So the sources of results that we saw in the period are not necessarily indicative of trends. Further, certain aspects of the work inure hire reimbursement levels at other areas so we can't take what happened this quarter as a trend.

Would you anticipate spending the same aggregate amount, you know, combining both the internal spend and the external credit for the remaining quarters?

Well, of course we're continuing to undertake efforts to control our cost structure. But in general, over a relatively long time frame, we've had a fairly consistent commitment to R&D.

Sure. Great. A follow-up question, seems like you're getting some traction with some of your distributors. Could you give us a little more detail of if any distributors in particular are having more success with selling the product? Is there a handful of distributors that make up this 7 megawatts of orders over the next few quarters?

You know, Eric, I think we'll ask Harol to answer that question.

Hi, Eric, yes, actually there is a handful of distributors. Primarily those orders are centered in geographies in California and in Japan, and we are beyond that. We're seeing a sprinkling in the Mexico, Gulf of Mexico area. We don't normally give out the specific names of the distributors that are having more or less success, but I think those geographies are very representative of our strongest markets right now.

Great. And then one final question, Ingersoll-Rand is starting to talk more and more about their microturbine product. They highlighted on their recent conference call. Are you seeing them from a competitive standpoint out there in the market?

Yeah, the Ingersoll-Rand as well as the other microturbine products, we see very little direct competition with. Interestingly, one of the microturbine companies we recently did have a competition with on one project, which was unusual, but we happened to win that one.

Great, thank you.

Again, if you have a question, please press the 1 key on your touch tone telephone.

Our next question comes from Craig Irwin with First Albany Corporation.

Actually, it's Craig Irwin calling in for Sanjay. Just a question about your channel inventory. Obviously you've got the 600 units in inventory at your customers. I mean that is progress from previous account of about 700, but have you guys evaluated whether or not you could take a potential hit here or what your potential exposure could be in terms of a future charge, if some of this was to come back to you?

Craig, this is Emily. These are distributor inventories so they are owned by our channel partners. It's not our inventory. And we do have a no-return policy so we do not expect to see this product back. The only case it might come bang is if they choose to have it refurbished or changed, we sell many different models and fuel systems and so there are times when a channel partner sends something back for us to refurbish for it to make it into a different model. And that's part of what we're doing to help them sell their inventory. So, we do not expect to take a hit for channel inventory.

Okay. And then your exposure is simply what you've already queued for in your warranty reserves?

Yes, but if it's refurbished to change it from a different model that's not a warranty reserve. We charge for that.

Excellent, thank you very much.

Our next question comes from Ryan Vardaman.

Good afternoon. You guys said you are facing challenges in the capital markets and that stems from share prices below $1 and you've got the NASDAQ breathing down your necks over that. As a shareholder, it's really tough to get comfortable with when cash flow break-even is going to happen. You say that it's going to be prior to running out of cash, but your conference call last time was very nebulous and this time it's continuing to be nebulous. Could you provide any additional color with respect to I guess below the revenue line going forward, or is that just impossible? And then, secondly, have you thought about additional strategic alternatives, i.e., selling your company to somebody? Or returning $1 per share back to shareholders?

You know, Ryan, we can't comment on any -- speculate on different things that might happen in the future.

Okay, well, have you considered any additional strategic alternatives besides continuing to do business?

Certainly the company is always looking at alternatives and different ways we can run our business. So we're always looking for shareholder value. At this point, I'm not comfortable speculating on anything. In terms of your other question, about any comments below the line, I would just have Karen if there's anything she would want to add to that.

We are continuing to work on our long-term strategic plans. We have not shared any specific information as to when we think the company will turn cash flow break-even, Although we have said it's not an imminent sort of thing. It is going to be some period of time. But we're working on alternate views of what potential paths forward are, and those paths continue to show that we reach break-even within our current cash resources. But there are any different sorts of paths that we might pursue and we're not going into specific details at this point in time.

And any idea when you might share these long-term strategic plans with shareholders or the general public?

Clearly, at this stage of the game we think it would be inappropriate. We are in a stage with an interim CEO and we think part of the determination of the path forward and the timing, if we do communicate that, the decision and the timing of that would be more appropriately taken up with our permanent CEO.

Thank you.

Again you have a question please touch the one key on your touch tone telephone. I'm showing no further questions at this time. Please go ahead with any further remarks.

Well, thank you for joining us today.

Ladies and gentlemen, thank you for your participation in today's conference call. This does conclude the program. You may now disconnect.