Capstone Green Energy Corp (CGRN) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter three 2004 Capstone Turbine earnings conference call. My name is Kelly, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. If at any time during the call you require assistance please press star, followed by zero, and a coordinator will be happy to assist you.

I would now like to turn the presentation over to your host for today’s call, Miss Alice Barsoomian. Please proceed.

Good afternoon, and welcome to Capstone Turbine Corporation’s conference call for the third quarter of our fiscal year 2004. I’m Alice Barsoomian, your contact for the Investor Relations.

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 me at 818-734-5428, and I will get a copy to you.

As you all know, under the Safe Harbor Rules we need to inform you that 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 statements may include and are not limited to statements with regard to Capstone’s ability to address its market challenges, identify and successfully develop the market opportunities with strong potential, develop and implement a successful business strategy, improve the robustness of its product, 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 abilities of new management to effect beneficial changes. The ability of the company to develop and, or retain the distribution channels necessary to support planned sales. The ability of Capstone to successfully execute its production and marketing plans, and other factors detailed in the company’s filings with the Securities & 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 revision 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 & Exchange Commission.

On the call today are Capstone’s Chief Executive Officer, John Tucker, and our Chief Financial Officer, Karen Clark.

I’ll now turn the call over to Karen.

Thank you, Alice. Ladies and gentlemen, thank you for joining us today. I’ll begin our call with a review of the financial results for the third quarter. Then I’ll turn the call over to John Tucker for the business update. After that, we’ll take your questions.

Before we get into the results for the period let me make sure everyone understands that we’re now reporting our results on a fiscal year basis. In December we announced that we were changing our fiscal year from December 31 to March 31. We have issued our transition report for the period January 1, 2003 through March 31, 2003. And so for fiscal 2004 the year we’re in now, we’re reporting on the third fiscal quarter ended December 31.

With that, let’s review the results for the period starting with the backlog. We ended the third quarter with 4.3 megawatts of backlog. We received new orders of 4.3 megawatts and 6.24 megawatts, leaving a backlog at the end of the period of 6.2 megawatts. You’ll recall that we issued a press release in late December saying that shipments of a few relatively large customer orders totaling approximately 1.5 megawatts were delayed as a result of our customer’s request. Therefore, our shipments in the period were lower than we had anticipated.

This quarter we shipped about 70 percent of the megawatt volume as compared with the same period a year ago. However, the product revenues generated from those sales of $2.1m this period were 80 percent of the $2.6m reported last year. This change reflected a higher portion of products sold in the current period into more favorably priced markets. Parts, accessories, service and training sales were the same this year as they were in the third quarter of last year, at $1.1m. Gross loss this period was $3.1m as compared with $12.4m a year ago.

You’ll recall that in the October to December period last year we’ve recorded two significant expenses, $5m or six cents per share for the partial impairment of the recuperative core of manufacturing facility, and $3.6m or five cents per share to adjust the warranty reserve balance. Cost of goods sold last year except for those charges was $7.4m as compared with $6.4m this year.

Recorded in this period’s cost of goods sold was $1.2m in warranty costs for charges we will incur to address specific issues as part of our process of reinvigorating our Japanese distribution channels.

Research and development, or R&D costs for the third quarter were $3m. There were no contract offsets in the period. The spending levels were actually higher at $3.5m in the third fiscal quarter of last year, however, contract offsets of $1.5m reduced the net cost to $2m. Research and development spending in the third quarter this year was about a half a million dollars higher than in recent quarters. This reflects costs we’re incurring to improve the robustness of our products.

I should also note that there were two reasons we had no contract to offset billings in the period. First, the timing of work on some of our projects did not support building milestones in the period. Second, we suspended billings to the Department of Energy for the AMTS Program which funds C-200 development, because of the lack of committed program funding. As soon as additional funds are appropriated for this project we will resume billing the DOE.

Selling, general, and administrative costs for the quarter were $5.7m. While this was $1.1m lower than last year’s spending in the period it was about $1m higher than in previous periods this year. This increase in spending versus earlier quarters this year was the result of timing of anticipated costs and some costs incurred to set a new foundation for the business.

For example, some of these foundational costs were outside legal assistance, and helping us get more appropriate contractual relationships in place, and recruiting fees to bring new talent to the business. John will talk later in the call about some of our new team members.

Moving on, interest income net which was $300,000 in the period continues to be lower than in the same period last year, primarily reflecting the lower cash balances.

Now, let’s review the key balance sheet items. Receivables decreased since last quarter generally as a result of strong collections in the period. Total inventories at the end of the third fiscal quarter were largely unchanged from the end of the fiscal second quarter due to the lower than expected shipments. You’ll note that the long-term portion of inventories increased versus last quarter end. This increase resulted from a change in our 12-month rolling sales forecast which included changes in the forecasted product mix.

Cash at the end of the third quarter was $111.7m reflecting total cash use for the quarter of $8.2. Cash used in operations was $7.5m and cash used in investing was $400,000. Combined this spending was nearly identical to the cash used for operating and investing activities a year ago. Compared with recent quarters the cash use for operating and investing activities was higher this period. Backing out the affects of the changes in working capital the higher spending was roughly evenly into two main categories. First, spending for our program to improve the robustness of our products, and second, spending for the higher SG&A costs in the period reflected in the items we just discussed.

That completes our review of the financials. Before I turn the call over to John there are two more items I’d like to mention. First, [John Bennett Marcou] [ph] informed our Board that due to responsibilities of a new position he has assumed he will no longer be able to serve as a Director. Mr. Marcou has been a Director of Capstone since March of 2000 and we want to publicly thank him for his years of service. The Board has initiated a search to find a new Director to fill this vacancy.

And finally, as many of you are aware, in June 2003 we initiated a six plus one option exchange program. Under this program our non-executive employees could exchange their options with strike prices of $2.00 or more for a similar number of options. Of the slightly more than one million options eligible for this program roughly 600,000 were tendered for exchange.

On January 26th we issued approximately 486,000 new options with strike prices of $2.36. Our employees have six months vesting in these options and they will continue to vest over the next 3.5 years. This option exchange program strongly aligns the financial interest of the people at Capstone to the financial interest of our shareholders. So we all gain together as we build Capstone.

Now, John Tucker will provide the business review. John.

Thank you, Karen. Good afternoon.

Karen has shared with you our results for quarter three. I’d like to shift gears and talk to you about our operational activities in the quarter. During the last conference call, I shared with you what we had done to strengthen our leadership team. Since then, we have taken steps to further strengthen the organization. By now, I hope you have begun to see that our actions reflect the importance of delivering a quality product to our customers.

And in that regard I have appointed [Marty Segari] [ph] as our VP of Total Quality. In this position he is responsible for all aspects of the quality process at Capstone. Marty has over 20 years of experience leading quality organizations at recognized companies such as Mitsubishi, Consumer Electronics, Universal Electronics, [Talus] [ph], and Allied Signal. He is a trained and certified Sic Sigma Blackbelt and has a certificate in total quality management from UC San Diego.

Turning now to our sales and service organizations we have made several key changes that will enable us to drive the business forward. [Bob Denalt] [ph] has joined our team as the new VP of Service. Bob started his career with Combustion Engineering, and joins us from Olsten Steam and Gas Turbine business where he had over 20 years of experience in various service functions, including establishing Olsten’s service operations in Indonesia.

At the end of last year, [Alan McNaird] [ph] joined Capstone, and has assumed the position of VP Sales Americas. He is responsible for all sales activities in North and South America. He has over 30 years of sales experience with GE, Westinghouse, and most recently was engaged in a number of entrepreneurial activities.

To ensure additional focus on key market opportunities we recently promoted [Mark Aromoli] [ph] to the position of VP International Sales. Mark has been with Capstone for four years. Prior to joining Capstone, though, he was with United Technologies Fuel Sales organization. And while Mark is responsible for international sales it is important to note that Wade Welsh continues as the VP of Sales for Japan, which is as you all know, an important focal point for Capstone sales.

And we have further strengthened our sales team by adding [Kurt Nauss] [ph] as VP Business Development. In this role Kurt will lead our strategic planning and business development activities. Kurt brings to Capstone significant experience in the distributed energy field, having held positions at Honeywell Microturbines and most recently at [Hess Micro Gen] [ph].

I’m delighted to share with you these additional changes that will enhance our ability to drive the business forward, and to publicly welcome these new members to the Capstone Team.

Last quarter I shared with you a number of areas of focus for the Capstone Team. I mentioned that our top priority was and continues to be enhancing the robustness of our product portfolio. In this regard we are making good progress. The Reliability Tiger Team is identifying and implementing the improvements to enhance our operational performance. The Team is working on both the C30 and C60 product lines simultaneously, and is also incorporating those lessons learned into the new C-200 design.

Speaking of the C-200 we recently announced the schedule for testing and release of our C-200 product. We thought it was important to do this for a number of reasons. First, we continued to be asked questions about the availability of the product, and second having been at Capstone for five months I had become more confident in sharing a plan to release the product to market. We have elected to double the number of beta test units, the test period has been extended from three to six months, and we have established the beta test site locations so that we can closely monitor the unit’s operational performance with a high degree of confidence.

Now, let’s talk about sales. We have had a number of new installations of our products which have exciting potential for future growth. In January the Palm Springs Waste Water Management Plant dedicated its installation of two microturbines. These units are being used in a combined heat and power application where the exhaust heat is used for the digesters. Also, [Vineyard and Line Remagazine] [ph] has just released its second in a two-part series on the application of Microturbines at vineyards. The installation of our C60’s at Vineyard 29, a Napa Valley Winery, was featured in those articles. These are, in particular, two vertical markets which are being evaluated very diligently in our strategic planning process which I will talk to you about more later.

Turning to new business opportunities we have also been active in pursuing several new opportunities that pose long-term business prospects. Recently we concluded negotiations for an order for 40 bio-gas units for the French market. This will be the first significant order from this distributor who is very active in the European marketplace. We see this as the first of many opportunities identified by this channeled partner and in Europe in general.

Another important program is in support of the Ground Mid-Course Defense Project through the U.S. Navy. For this project the integrator, ATEC, combines nine C30 microturbines and associated equipment into a 57 ton enclosure that will be used in a backup remote power application. Installation of the initial unit is scheduled to begin in March, and the second unit is undergoing systems testing before final delivery.

Successful completion of this program provides an opportunity to Capstone to deliver 225 microturbines for use in similar remote power packages. While this opportunity is exciting in and of itself this project opens the door to several military and homeland defense opportunities. As a part of our strategic planning we are working with ATEC in evaluating the market opportunity and the requirements.

Another integrated package being developed is an 840 kilowatt remote power unit consisting of 14 C60 microturbines. This unit is intended for deployment in Nigeria. The energy service provider who will use this unit anticipates that it will be the first of many such units to be installed to support power needs at a steel mill, as well as in remote areas. Supply of this initial unit opens the opportunity for 30 or more additional units of this size. While financing is yet to be finalized for this project it offers another opportunity where several microturbines can be integrated to provide solutions for larger remote power applications. Furthermore, we have a capable authorized service provider in Nigeria who can provide the installation support and long-term service for this application.

Continuing the discussion of applications that integrate our microturbines into solutions for targeted vertical markets I am pleased to say that United Technologies’ power has launched its pure comfort, 240 combined cooling, heat, and power system. This system combines four of our C60 microturbines with a UTC absorption chiller. We are delighted that this integrated product is now available and that UTC Power has begun selling this solution into the marketplace. Also, UTC Power is selling their pure thermal branded product which is a Capstone integrated CHP unit. This unit provides solutions for combined heat and power applications.

Now, I’d like to expand on some of the changes we’re making in service. As I mentioned earlier, we have established new leadership in the service organization at Capstone. Currently we are focused on product performance and evaluating new approaches which will permit us to better serve our customers. For example, in December we initiated a new program for parts delivery in Japan. We opened an in country warehouse that provides for quick shipment of key component parts. Thus, supporting very, very diligently the needs of our Japanese partners.

Additionally, our service team is evaluating parts distribution alternatives for other service territories and is working to ensure that we win back the confidence of our customers with a ‘whatever it takes’ attitude.

During our last call I spoke about three specific issues. One, enhancing robustness. Two, improving quality. And three, completing the C-200 development. And I’m sure you will remember that I ended on the point that it’s all about execution.

Well, we are continuing to make progress on these issues to improve performance. But for us to really begin to execute we must have a well thought out and defined strategy that the entire company can embrace and drive to be successful.

We have formally begun the development of our strategic planning process to set the direction of the company for the next three-year period. As you might expect, we will focus on the attractive market opportunities that offer the highest returns to Capstone and our customers. We will evaluate our product requirements to enable us to execute successful projects in the selected market verticals, and as a result enhance our existing products as needed, and develop new products as required.

We will integrate our operational strategies to drive down our total product cost and support of this strategic plan. We will do this by evaluating our core competencies and keep those valued activities in-house. We will outsource our non-core activities to those that can provide us with the highest quality and best price while ensuring on-time delivery and the ability to grow to meet our product supply requirements.

The strategic planning process is the first element of three core processes being implemented at Capstone to provide us with a roadmap for success. The three processes are, as I just spoke to, the strategic plan. Second, the annual operating plan. And third, the management review process. These three processes are intimately linked together so that we can take our strategic plan goals and activities and tie them directly to our annual operating budget which will serve as our revenue, expense, operating result, and cash targets.

More importantly, the management review process will take the annual operating plan commitments and align them with each individual’s personal objectives to ensure that everyone at Capstone knows their role and accountability in accomplishing our goals. These are the same rigorous processes that I have used successfully at Allied Signal and know that they really stimulate positive performance. The plan will be presented to our Board in the early days of our fiscal first quarter, and I will share elements of our strategy with you during our next conference call.

Oh, before I forget, one very important aspect of the process that I should mention is that the three-year strategy developed this year will be revisited annually and adjusted accordingly to ensure that we do not lose focus of our goals. This is extremely important in an ever changing marketplace.

So I look forward to our next call, and thank you for your support and continuing interest in Capstone Turbine Corporation.

We will now take your questions.

(Caller Instructions.)

We’ll hold for just one moment while we collect questions.

Your first question comes from [Tyson Bauer] [ph] of Wealth Monitor. Please proceed, sir.

Good afternoon, Karen and John. A couple of quick questions. One, would be should we expect an increase in the cash burn? It sounds like we’re increasing the beta testing, trying to get product out to market. Or will the increase in business offset that and we should just have a continuation of the steady rate that we have been experiencing. Give us a little flavor on that, please, Karen.

Well, Tyson, as John said, we are working on our strategic plan. And I think as a result of that process we’ll be in a better position to be able to provide some longer term guidance for everyone. Obviously, we’re still continuing the work that was described in terms of the robustness of our product. And so in the short term we’ll continue to have those expenditures.

Was – you talked about doubling the beta testing and also the time period in testing those. Was there a problem with the product or is that just to make sure that we’re not going to end up with the same warranty issues as we’ve had in previous products?

Tyson, this is John. As I mentioned in the presentation, I did develop a high degree of confidence, and part and parcel to that was my direction that we needed to have more time in test to assure the level of quality when we released the product for the market. Clearly, it’s driven by the fact that we want to drive our reliability up and our warranty costs down.

And the last question, before I get back into queue would be are we taking an approach to try to standardize some of these installations? Maybe large scale orders or POs going after your marketing plan? You mentioned earlier some very specific projects that are using much larger quantities of turbines. Is that something we should expect in the future also?

I can answer it first by saying ‘yes.’ When I talk about market verticals and in particular those examples are certainly examples of market verticals. As we focus our attention on our strategic plan it’s all about getting to repeatability of product and repeatability of projects, so that we can get away from trying to be all things to all people. For me that kind of consistency is what will help drive us to the type of success and improved performance that we need.

Without a doubt when I shared those numbers for you, as an example, the ATEC project, it would be project driven so that the repeatable project that followed this successful prototype test would be if not identical, very, very, very similar to the same product.

Very well. Great job.

Thank you.

(Caller Instructions.)

Your next question comes from [Gene Korlanski] [ph] of [Pirate Capital] [ph]. Please proceed.

I guess the major question on my mind is I know you guys haven’t really talked about guidance, but when do you think we can return to positive sales growth and maybe what has to happen for us to get there? Is it mainly the release of the C-200, or is there other things working there?

This is John. The reason we addressed the strategic planning process is really to set-up the roadmap to identify what is it going to take us to get there. And I’m really excited about the engagement of the folks here at Capstone as we look at markets and opportunities, and really focus our efforts on the appropriate verticals, as I mentioned earlier, that bring not only the opportunities of let’s talk about it in terms of premium pricing and greatest advantage to our end user customers.

And so as we develop that process and we will present it to the Board in early next quarter it will give us the opportunity to be able to speak more freely and answer many of the questions that you and others have.

I’m sorry, the C-200, we were thinking about the product release, around what time? Is it immediately following the beta testing period, or when should we think about that?

What we had said on our press release was that we were going to go through this beta testing period, and then following that when we had indications of the results of that testing we would then announce the schedule.

Great. Just a last question here. Do you have any sense of how the channel is, how the inventory is out there?

We continue to work with our distributors regarding the inventories that they have in their channels. Some of the work we’re doing now is in terms of refurbishing that inventory so that it can be in a better condition for them to go ahead and sell it through. But we are continuing to work with them to lower those levels.

I’m sorry, I just had one more question, actually. Do you know what the breakeven level of sales or units is for you guys?

That, again, is something that we’ll be better able to talk to you after our strategic planning.

Okay.

As John was just saying, we do have different market target potentials, and those carry different price points for sales and also different cost structures. And so after we’ve done our strategic planning and we can talk more about which markets we’re targeting we’d give you a better indication of when that is.

Okay, thank you.

You’re welcome.

You’re welcome.

(Caller Instructions.) There are no further questions in queue at this time.

Thank you all very much then for joining us today, and we look forward to talking with you again next quarter.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Have a good day.

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