Capstone Green Energy Corp (CGRN) 2003 Q3 法說會逐字稿

Good day and welcome to the third quarter 2003 Capstone Turbine earnings conference call. At this time, all participants are in a listen-only mode. My name is Mike and I will be your conference coordinator today. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. I would now like to open program over to your host for today's conference, Karen Clark, Chief Financial Officer at Capstone.

Thank you, Mike. Good afternoon everyone and thank you for joining us today to discuss Capstone Turbine's results for the third quarter of 2003. This afternoon, the Company issued a press release which contains the financial results for the period. If you do not have a copy of the press release and would like one, please call us at 818-734-5428 and we will get a copy to you.

During the course of this 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 may include, and are not limited to, statements with regard to Capstone's ability to address its market challenges, identify the market opportunities with strong potential, successfully attack the targeted market, improve the robustness of its products, improve its customer service and drive change in the business. 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. Such factors include, but are not limited to, market acceptance and trends; the ability to enhance the quality and reliability of Capstone's products; the limited operating history characterized by net losses; the ability of new management to reflect beneficial changes; the ability of Capstone to successfully execute its production and marketing plans and other factors detailed in the Company's filings with the Securities and Exchange Commission. Capstone cautions you not to place undue reliance on these statements which speak only as of today. Capstone undertakes no obligation and specifically disclaims any obligation to release any revisions to any forward-looking statements to reflect events or circumstances after the date of this conference call or to reflect the occurrence of unanticipated events. For a detailed discussion of factors that affect Capstone's operating results, we refer you to the Company's filings with the Securities and Exchange Commission.

For today's call, I will start with a review of the financial results for the third quarter, then I will turn the call over to John Tucker, our CEO. John will provide you with his observations from his first 90 days on the job and give you an update on the status of the business. After that, we will take your questions.

So, let's begin with the third quarter results. As we told you last quarter, we entered the third quarter with 5.1 megawatts of backlog, most of which was scheduled to ship in the quarter. In September, we identified quality issues with some components used in the manufacturing of C60 products and low-pressure natural gas C30s. We delayed shipping these products until the issues were remedied. Shipments resumed for the C60 products in late September and for the low-pressure C30 product in mid-October. It is important to note that no orders were canceled as a result of these production delays. We shipped 1.9 megawatts of product in the period. During the quarter, we received new orders of 1.1 megawatts, leaving backlog at the end of the third quarter at 4.3 megawatts. This quarter, we shipped about 60% of the megawatts volumes as compared with the third quarter last year. Product revenues this period of $1.6 million similarly reflected about 60% of the revenues generated from product sales a year ago. Sales for parts, accessories, service and training were $700,000 this period, bringing total revenues for the third quarter to $2.3 million.

Gross loss this period was $2.2 million, $200,000 favorable compared to the $2.4 million gross loss in the same period last year. This improvement came from lower production overhead spending. Research and development, or R&D costs for the third quarter this year, were $2.4 million, net of $100,000 of contract reimbursement offset. Actual spending this year was $900,000 lower than a year ago, but offsetting funding for projects was $1.4 million lower this period. Because of these lower cost reimbursements, reported R&D spending was $500,000 higher this quarter than in the same quarter last year. As you will recall, the timing of contract funding varies significantly depending on the phase of program.

Selling, general and administrative costs for the quarter was $4.6 million, two-thirds the amount reported last year reflecting lower spending rates this year. Interest income net, which was $300,000 in the period, continues to be lower than in the same period last year, reflecting both the lower cash balance and lower interest rate.

Now turning to the balance sheet. Receivables decreased since last quarter generally as a result of the lower sales this period. Total inventories at the end of the third quarter were largely unchanged from the end of the second quarter, due to the lower than expected shipments. You will note that the long-term portion of inventory increased versus last quarter end. The increase in the long-term inventory resulted from a change in our twelve-month rolling sales forecast, which included changes in the forecasted product mix. Cash at the end of the third quarter was $119.9 million, reflecting total cash use for the quarter of $6.4 million. Cash used in operations was $6.9 million and cash used in investing was $400,000. Combined, this spending was roughly 70% of the amount used for operating and investing activities a year ago. This period, the company received $1.2 million from exercises of stock options.

That completes our financial review. Before I turn the call over to the business update, I just want to say a few words about the CEO search. On prior calls, some of you had shared your frustration about how long it was taking to find a CEO. You will recall that we had said that the Board was taking its time to find the right person for Capstone. Well, speaking for myself, I'm delighted at the results. John Tucker has been here now for 95 days and the business is really changing and changing for the better. There are a lot of challenges ahead, but I believe the Board's efforts succeeded in finding the right leader to take Capstone forward. With that, I would like to introduce our CEO, John Tucker.

Thank you, Karen, and good afternoon. Some of you may be aware of my background, but for those of you who are not, it may be useful to know that I am a mechanical engineer by training. I started my career with Westinghouse Electric Corporation and held positions of increasing responsibility in engineering, program management, sales and general management over 20 years in the rail transportation business unit.

In 1988, the business was acquired by Daimler-Benz, and I was promoted to the position of President of AEG Westinghouse Transportation. Between 1988 and 1992, we restructured that business and refocused to grow revenues significantly and became highly profitable. As a result of this accomplishment, I was asked to accept the position of CEO of Daimler-Benz's jet engine business, called MTU, located in Munich, Germany. I gladly accepted the position and became the first American responsible to lead a German-owned company in Germany. In three years, we repositioned MTU to become one of the top performers in the Daimler-Benz aerospace group.

My next assignment upon returning to the states was President of Allied Signal’s Aerospace Equipment Systems business, located in Torrance, California. There, I was responsible for the cabin pressure and controls product line, aircraft braking systems, engine systems and accessories, and aircraft electrical subsystems. It was my business unit that developed the Allied Signal version of the microturbine generator, so I was fortunate to be involved with the business modeling and with that technology which is very similar to our product at Capstone.

Following Allied Signal, I became COO and later CEO of York International, a leading HVAC Company. At York, I implemented many of the needed infrastructure and process changes which has helped position York to become successful. Having this background in HVAC has given me insights relative to our partnership with United Technologies. I have a special appreciation for the prospects of combining microturbines with absorption chillers to enhance the operational performance. Additionally, I'm very pleased to have the opportunity to work in a close partnership with UTC once more, as Pratt & Whitney was a key strategic partner when I was leading the jet engine business for Daimler-Benz.

So enough with my background, here I am. I'm sure you all would like to have my take on Capstone based on my first 90 days -- I guess, Karen points out, 95 -- and what has transpired over this period of time. My first priority was to talk with our customers and understand what their thoughts and perceptions were of Capstone, our products and our overall performance. So far, I've spoken with about 30 distributors and end user customers in this regard. A number of common themes have emerged from those conversations.

Most importantly, there is a very strong support for the Capstone technology. Many of the customers that I spoke with said that they had performed a thorough analysis of our technology versus other competitive solutions for distributed energy and combined heat and power. They told me that they believe our technology is sound, which supports my own independent analysis of Capstone. However, they expressed concerns about the robustness of the products that we have been delivering to them, and I will expand on this point more in a moment.

It has also become clear that a number of the robustness issues were caused by improper installations. In numerous cases, there was a lack of understanding of the specific application requirements. Additionally, several of our distributors described difficulties in obtaining timely, responsive assistance from Capstone for product or technical issues. In all cases, I found my discussions to be very direct, as well as very supportive of Capstone and they all expressed a desire for us to be successful.

For instance, during one of my first customer discussions, one of our West Coast distributors offered to assist Capstone in any way possible. I immediately took him up on his offer an asked him to join me at my first all-hands meeting and share with our employees what he had told me in our private discussion. For me and for our employees, this was an important, well-received step to visibly bringing the voice of the customer into Capstone, so that we can start the cultural change needed to focus on customers first.

Another example of the support we have received was from one of our very important Japanese distributors. As you all may know, Japan is our second biggest market opportunity. I requested and they accepted my offered to have one of their top engineers come to Capstone to share with us their experience with the performance of our equipment in the Japanese marketplace. That collaborative effort has provided us with valuable information and the opportunity to identify solutions to a problem that now will be resolved.

These offers of support continue as we become more willing to accept input to suggestions from our valued distribution network. It is clear that they are committed to working closely to achieve mutual successes. As a result of these conversations, discussions with our employees and my personal observations, it became clear we needed to make some changes at Capstone and do it quickly. First, I felt we must improve our execution in delivering robust products to our customers and providing timely responsive service. Next, we need to provide one face to the customer. One element of our response in this issue was caused by our organizational structure. Sales obviously worked closely with the distribution channels at the front end of the process and then the customer service organization took over aftersales startup and support. But for me, there was a real disconnect as the process moved from sales to the service phase. Additionally as I mentioned in my first point, robustness and execution can be affected by a number of causes. For me, it became clear that there was a need to better integrate the design and manufacturing process in order to deliver our products to the level of quality expected. And, we had the need to inject more seasoned leadership into the organization to enhance the depth of experience and solid business fundamentals.

I chose to quickly address the organizational requirements. Within my first three weeks, we announced significant changes to the leadership team and since have continued to build depth of experience in this organization. On August 25th, Mike Redmond joined as our Senior Vice President of Operations. Prior to joining Capstone, Mike was a 15 year veteran at Boeing, where he progressed in various engineering management positions, including his role as Chief Engineer for Boeing's 737 next-generation program. Following Boeing, Mike was the Vice President of Engineering and Technology at Allied Signal Aerospace Equipment Systems, where he worked with me. I think it is important to note that Mike was also at Allied Signal during the development phase of the Allied microturbine project. Most recently, Mike was the Vice President of R&D at Schweitzer Engineering Laboratories, which is a manufacturer of digital products for electric utilities and industrial companies. To accomplish the integration of engineering and manufacturing process effectively, the engineering and manufacturing functions at Capstone both report to Mike.

On August 25th, John Fink also joined Capstone as the Senior Vice President of Sales and Service. John had previously served in leadership positions in sales, marketing and customer service at AEG Westinghouse, Daimler-Benz and York International. I have known and worked with John for the better part of 20 years and have high regard for his talents and leadership skills. The sales, marketing and customer service functions have been combined under his leadership to provide that one face to the customer that I just spoke about.

Additionally on the 25th of August, Sharon Faltemier assumed the position of Vice President of Human Resources. Sharon had been serving in this function as a consultant since January of this year. She accepted my offer to join us as a member of the leadership team. Sharon has a broad experience in human resources. She was the Vice President of Human Resources at divisions of Northrup Grumman, Litton and at Boeing. Sharon is an engineer by training and prior to moving into the HR arena, she was a quality engineer and a quality manager for Procter & Gamble. Because of that background, Sharon has been acting as the Vice President of Quality while we search for permanent leadership for this vital role at Capstone. Sharon will play a key role at Capstone as we implement programs to offer developmental training to our employees.

As you know, the human capital of an organization is key. A Capstone, I have found a solid base of outstanding individuals and employees. It is my job to provide our employees with the tools, training and leadership to facilitate the growth of this company.

Mike, John, Sharon and Karen and I comprise the new leadership team at Capstone and we look forward to completing the hiring of the Vice President of Quality position to finalize the team. This new team has been together for 10 weeks now. I would lead to share with you some of the things that we have been doing. First, in Sales and Service, John Fink started out much the same way I did, by meeting with distributors and customers. To date, John has met with over 40 of our distributors and customers, listening to and understanding their issues and product needs. He is working to improve and enhance customer service to our end-users. This involves addressing not only the timeliness and quality of our customer service organization, but addresses standards and performance of our installers and authorized service providers. Key to driving these improvements will be providing customer service with experienced leadership. John is in process of searching for the new Vice President of Customer Service. Under this new leadership, we will set targets for what constitutes timely, quality customer service and to develop metrics to monitor performance to those standards. These metrics will help us measure and identify areas which need corrective action to improve performance.

In Operations, Mike Redmond has restructured the organization to provide clarity to the functional roles. He has recruited a new Vice President of Manufacturing to lead and address our processes in manufacturing, production planning, supply and logistics. He has also identified the need for and created a program management function to provide a structure to coordinate internal development efforts and manage major outside projects. The leader for this group was recruited and resources were applied from other areas within the organization. This new program management function is installing the necessary tools and disciplines needed and necessary to improve our performance on significant projects like the C200 development, which I will talk more about later.

In addition to supporting the organizational changes which are taking place, Sharon has been driving the development of our quality functions and processes. She has recruited two new quality engineers and has instituted several processes to change and enhance our product quality. Throughout the business, we are working to drive the improvement of quality, fundamental processes and metrics to measure our performance. This effort isn't about building a bureaucracy in Capstone, it is all about establishing sound fundamentals and the basic building blocks to drive quality execution throughout the business.

Since I joined three months ago, we have made a number of organizational changes, but I think it is important to note that the overall employee count has not changed. We are redistributing our resources to better match the skills with the needs of the business. We're continuing to enhance the skills in the business by recruiting skilled and experienced people in the key roles and by initiating training opportunities for our employees.

That summarizes some of our key actions in the last 90 days. But before I move on to discuss the status of key business activities, I should mention that we have also had changes in our board recently. Our board it is now comprise of seven members -- John Jaggers, Eric Young, Jean-Rene Marcoux, continue to serve as long standing members, and Eliot Protsch serves as Chairman. Dick Donnelly was added to the board earlier this year and in August, Carmine Bosco and I joined as board members.

Now I would like to shift to the status of ongoing business activities, again starting with sales and service. I have talked quite a bit about what we have learned from our distributors and customers, but we have only begun to tap their wealth of knowledge. One area we have yet to fully explore is their assessment of the market opportunities. John and his team will be turning their attention to evaluating those market opportunities promptly. That assessment will clearly be important to the prioritization of our product and channel development activities. Our intent is to assess the market opportunities and drive our business structure and product development efforts to support these market applications and then systematically attack those targeted markets.

What I just described is business 101, but that is what we need to do. Capstone has done a number of demonstration projects in various markets. We need to leverage those experiences, take those projects, learn from them, focus and execute. For example last quarter, we announced the installation of a C60 at an A&P Waldbaum Supermarket in New York. This is a demonstration project funded in part by the Department of Energy. The Waldbaum's installation is delivering energy savings from a dessicant-cooling CHP system. This system is a good solution where humidity control is a key concern.

Hotels are another market where Capstone has demonstrated presence. You may have noticed our recent press release about the two hotels in Southern California that have installed our new integrated combined heat and power product. These units are used to supply hot water for the hotels and to supplement their power requirements. We believe the economics for this application are quite strong and that this represents a significant addressable market opportunity. The top 10 hotel chains in the U.S. account for more than 20,000 hotels. There is a significant difference, however, between selling the few units into a market and really penetrating the market opportunity. We will develop a defined, disciplined approach to addressing these targeted markets. We will talk about our progress on this subject more in upcoming conference calls.

As to our current sales activity, we continue to work closely with our distributors and respond to customer requests. Earlier, I mentioned that we were working to improve the robustness of the products we offer. Our fourth quarter shipping schedule is reasonably booked, in part due to the delays from the third quarter. Keep in mind, however, that shipments could change from what we expect today. As you have already seen, we're absolutely committed to shipping quality products. As Karen discussed earlier, we halted production in the third quarter to address issues we identified with components in our C60s and our low-pressure C30s. This attitude about quality is part of the new culture we're bringing to Capstone while we're working to improve the quality of what we build. We are also working with our distributors to address the performance of the fleet of product already sold and in their inventories.

One final comment about sales. There have been a number of questions about the impact we're seeing as a result of the Northeast blackouts. We have experienced increased interest and inquiries about our microturbines. However, the sales cycle for microturbines take six or more months from concept to sell, so we expect the impact of the Northeast blackout to truly be seen sometime next year.

Moving on to operations. Enhancing reliability and the C200 development are two top priorities in this company. Engineering is a focal point of both of these efforts. We have established a reliability [tiger] team. This team is led by one of our senior engineers who, in his prior assignment, was involved directly with customer support. Now he is leading the team to drive the necessary improvements. We've performed analyses of the key contributors to our product performance and are systematically addressing them. This will take some time, but as I mentioned, it is a top priority and it has a high degree of urgency.

The C200 development is our other top priority. We're continuing to develop this new product according to plan. Included in the development plans is a higher degree of product and system level qualification testing that then was incorporated in prior product development efforts at Capstone. We're working to ensure that the lessons learned from the C30 and C60 products are fully incorporated into the C200 product.

While the key focus areas are enhancing reliability and developing the C200, we are also assessing our core competencies to determine those functions that may be more effectively performed through outsourcing.

One final area I would like to mention is an update on the UTC relationship. We are working in a very supportive, productive relationship with United Technologies. Last week, a team from UTC was here working with us on the many aspects required to bring the combined microturbine and chiller products to market effectively. Another team also participated a few weeks ago in a joint design review of the C200. Their engagement, observations and input have been extremely helpful in continuing the process to successfully complete the C200 development activities.

We've provided a lot of information today, so to summarize, we believe the technology of this company is fundamentally sound and that there is a market need. We have begun and will continue to focus on the blocking and tackling skills necessary to improve our performance. Our immediate priorities are enhancing reliability, improving the quality of our products, and completing the development of the C200 product. Our next steps will be to assess the market opportunities and develop the associated plans to address the selected target markets and execute, execute, execute. It has been an exciting first 90 days. I am thoroughly delighted to be here and more than ever believe in the prospects for our business. There is a lot of hard work ahead but I believe that we're building the right team for the job. I am particularly pleased with my leadership team. This team has come together from different backgrounds and quickly found both common ground and genuine respect for one another. Additionally, we at Capstone have some very talented and dedicated employees who, with a new leadership team, are committed to taking Capstone to the next level. I look forward to talking with you again in 90 days to share what we have accomplished by then. With that, Karen and I will be happy to take your questions.

(Operator Instructions). John Quealy, Adams, Harkness & Hill. Please proceed.

Good afternoon. Quick question for you. With regards to the glitch in production in this quarter, could you talk a little bit about what exactly was going on, whether it was supplier parts or parts that you folks had fashioned and installed? Could you give us a little bit more detail on what the issues were there?

Yes, John. This is John Tucker. It was our parts on the C60 recuperator, and we identified an issue that could have some long-term impact if it had gotten out to the field over time and would have caused a reduction in power performance. And so what we chose to do was to implement a corrective action on the parts and make some corrections on any units that would ship to the field.

Okay.

One of the things I think is important to note is that on the units that are in the field, many of the applications do not utilize the full power requirement of the C60. And so it there is in our view a very limited impact on any of the units that are out running in the field today.

Relative to the other impact, it was on our C30 low-pressure gas units, it was on our internal design compressor, and it was an issue with bearing. It is on our forward bearing that is on -- that supports the shaft in the compressor and what we found was that in some cases in some very limited applications that there would be some additional wear than what would be seen to be normal. So what we did was again interacted a change and it was tested for a significant period of time on both cyclic as well as full application over a long period of time. We have begun to implement those changes into the product that are leaving, just to give us that additional assurance that the product will perform once it is in the hands of our customer.

Quick follow-up. You went through quite a list of issues that you are heading up here. In terms of your priorities, I know all of them seem to be high priorities, but what areas, whether it be customer service or operations or sales, do you folks think you could make the most impact in the next quarter or two?

Initially, my first priority is on customer service. I think there are a number of the changes we have already begun to make and deliver, relative to parts availability and our responsiveness out of our technical support group. I believe John Fink and his team of really taken on the task and the challenge to move forward. Certainly, that will make a difference as I have noted in my presentation as it relates to the feedback I received from numerous distributors and customers. The second one is the area of operations. We are undertaking a number of steps to evaluate material flow through the factory and we're planning to rearrange the factory as we go into the beginning of next year to look at enhancing our operational performance in that regard. The third one is just evaluating what I mentioned near the end of my presentation, of looking at what makes sense for us to do within the Company and what makes sense to look at outside of the Company, in terms of outsourcing issues that don't fit with the core competencies of Capstone. All of that being said, I really have to tell you that I am excited about the opportunity that this newly created tiger team brings to Capstone. We have applied resources very diligently over the last several weeks, and my focus more than anything is to make sure that we can impact the performance of the equipment that is in the field to deliver the type of performance that I have heard that our distributors and end-user customers would like to see.

Great. Last question. When you talked about the blackout in the Northeast part of the country here in late summer, you mentioned it led to a lot of inquiries thus far. Could you talk a little bit about what types of businesses were inquiring, whether they are previous customers of Capstone -- I'm not talking about the specific company -- but rather the industry or any more details that you can give us on that?

Let me give you one quick example that has really taken on a high focal point, and that is the food processing industry. In particular, I might point out to you it is kind of a double hit on the point you made. One of our key customers had a unit that did keep his operation performing throughout the blackout. That raised a high level of attention within the corporate hallways. We’d had some discussions about the impact of what that could mean on a number of their other facilities. And for me, as I spoke about in my presentation, being focused on markets, one can imagine the advantage of having a demonstration project that can be repeated over and over again in various installations. So we have a lot of excitement about this moving forward into next year when, as you well know, new capital appropriations are made as people look at their budgets going forward into the new year.

Great, thank you very much.

(Operator Instructions). There are no further questions at this time. Mr. Tucker, please proceed.

I would like to summarize and thank everyone for joining us on the call. I hope that you could have a sense of how excited I am and how excited our team is to have this opportunity to really move Capstone forward. I want thank you all for joining us and look forward to giving you an update next quarter. Thanks again and goodbye.

This concludes your third quarter 2003 Capstone Turbine earnings conference call. Thank you for your participation today. You may now disconnect.