Capstone Green Energy Corp (CGRN) 2005 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q1 2005 Capstone Turbine earnings conference call. My name is Christie, and I'll be your call 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. As a reminder, this conference is being recorded for replay purposes. I'll now turn the presentation over to your host for today's call Ms. Cindy Martinez of Investor Relations. Please proceed ma'am.

Good afternoon, and welcome to Capstone Turbine Corporation conference call for the first quarter of fiscal year 2005. I am Cindy Martinez, your contact for the Investor Relations. This afternoon Capstone 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 818-734-5300 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 future events or financial performance of the Company within the meaning of 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. We refer you to the Company's annual report and other periodic filings with the Securities and Exchange Commission for a description of these risk factors. Because of the risks and the uncertainties Capstone cautions you not to place undue reliance on these statements, which speak only as of today. We undertake no obligation, and specifically disclaim 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. On the call today are, John Tucker, our President and CEO, and Karen Clark our CFO. I'll now turn the call over to Karen.

Thank you Cindy, and thanks everyone for joining us today. I'll begin with a review of the first quarter results and then turn the call over to John for the operating update. After that we'll be happy to take your question. Let's start with a go forward on backlog. At the end of fiscal 2004, we had 6.5 megawatts of backlog. During the first quarter, we took orders for 5.3 megawatts and shipped 2.7 megawatts of products. We had 1.1 megawatts of orders canceled during the period. The cancellations occurred largely as a result of distributors not receiving anticipated financing for their businesses. John will talk with you later about how we are addressing these types of issues. So, overall backlog at the end of the first quarter was 8 megawatts. This is our highest backlog level since 2001. Remember though in 2001, the backlog contained units that were ordered as parts of distributors from purchase commitments whereas today we don't have that type of paper pay contracts with our distributors. Our backlog is all currently scheduled to ship this fiscal year with over half of the shipments scheduled for the second quarter. The 2.7 megawatts of product shipped in the period resulted in product revenues of $2.3m.

Additionally, we had sales of parts, accessories, service and training totaling $700,000, which resulted in, total sales of $3m. While sales this period was slightly higher than the last quarter, they were $1.2m lower than in the same period a year ago. Last year's first quarter sales represented 40% of the total product shipments and nearly a third of the total revenues in the year. Despite lower sales, our gross loss this quarter was lower than in the same period a year ago and was significantly better than last quarter. We generated a gross loss of $2.1m, which was $0.5m better than the $2.6m gross loss in the first quarter of fiscal 2004. This improvement is attributable to lower charges this year for warranties and sales return reserves. Compared with last quarter, the gross loss is $6.7m better this period, primarily as a result of lower warranty charges. You'll recall that in the last quarter of fiscal 2004, we recorded a $6m charge for cost beyond warranty to address issues with products in the field.

Now, moving on to operating expenses, R&D costs were $3.4m this period, up about $1m versus the same period last year, and essentially flat versus last quarter. The higher R&D costs versus last year reflects higher spending this year, product by cost related to see 200 development activities and a higher personnel costs for our continuing product robustness and enhancement efforts. SG&A costs were $0.50m higher this year than last year. Roughly 50% of the increase is due to a doubtful account charge taken in the period, and the balance is split nearly equally between higher recruiting costs and staffing costs, predominantly from building our quality department. As compared with the fourth quarter 2004, our SG&A costs were $600,000 lower this period, reflecting reduced relocation, recruiting and other employee related costs. Overall, our net loss was $10.5m, $1.1m higher than the $9.4m loss a year ago, but $7.3m better than the $17.8m loss reported for last quarter. Lets talk about how these results impacted our cash performance. Overall, we used $6.8m in the quarter, a $0.5m more than in the same period a year ago and $2.6m less than we used last quarter. We had a benefit this period from selecting $1.8m from the Department of Energy. So, prior to this benefit, our cash usage was $8.6m in the quarter. Fixed level of spending is about $700,000 less than we used last quarter, and this primarily reflects lower spending for recruiting, relocation and other employee costs.

Now, looking at the balance sheet, our days in accounts receivables, which we calculate excluding receivables from the engineering cost reimbursement program stand at 62 days at the end of the period, down from 68 days last quarter end and up from 57 days a year ago. Our total inventory was down about $400,000 since last period end, and this reflected the usage of inventory, driven primarily from reductions in our total long-term inventory component. The warranty accrual was reduced by $400,000, and this reflects spending during the period for performing on previously recorded warranty commitment. That completes our review of the financials. I'll now turn the call over to a John for review of the operation.

Thanks Karen. Good afternoon everyone. Before I begin the operating segment of our discussion today, I would like to provide you an update regarding our Board. For those of you who have not yet seen our press release, which went out this morning, Mr. Dennis Schiffel has been appointed to our Board of Directors. We are delighted to have Dennis join us. He will serve as the financial expert on the Audit Committee. He also brings years of experience in the oil and gas market as well as in the energy industry. The nominating committee of our Board is continuing to search for additional members to broaden and deepen the skills and knowledge base of the Board of Directors. Now let's talk about operations.

The first quarter was very engaged in this plan. You will recall that during our last call, we shared with you an overview of our strategic direction. We identified a number of initiatives that we would be implementing during this strategic timeframe. I would like to share with you the progress that we are making in a number of the areas that we discussed. One of the questions that I recall being asked prior to my arrival at Capstone was, what does your sales force do? Well, over the last ten months, we have dramatically changed the complexion and the activities of our sales and service organization. We have changed over 46% of the sales and service force personnel. We are actively supporting the distribution channel and we are aggressively approaching the market through direct contact with end-users. That being a far more proactive approach than existed a year ago. Karen just shared with you our first quarter results. Those results reflected sales of 2.7 mega watts. While we are certainly driving to improve our growth quarter-over-quarter and year-over-year, there are a few points that I would like to share with you concerning our sales organization's activities during the last quarter. You will recall that I talked about the importance of having a global focus in the marketplace. Our shipments are reflective of that. By region, 65% of the first quarter product sales in mega watts were made in the Americas, 21% in Asia, and 14% were shipped to Europe. Additionally, we spoke about the importance of being focused on key vertical markets.

So, let me share with you that the sales for the first quarter did just that, 42% of the units were shipped as CHP applications, 37% were for resource recovery applications, and 9% were for CCHP installations. So about 90% of our sales were to targeted focus markets. More importantly, I would like to point out that these results were right in line with our strategic direction. Karen also shared with you that our bookings for the first quarter was 5.3 mega watts and that our backlog at the end of the quarter was 8 mega watts. The breakdown of the 5.3-mega watts of bookings for the first quarter on a regional basis was 52% in the Americas, 34% in Europe, and 14% in Asia. Looking at the bookings by verticals, 47% was CHP, 23% was for CCHP, 16% was for DG or power only application, and 11 % for resource recovery. I would like to note that the majority of the CCHP orders were for just one installation. So, the takeaway is that we are executing our strategy in line with the plan on both a global and focused vertical bases as targeted. Overall, we are doing well, although our CCHP market development is currently trailing expectations. Another key strategic initiative that we identified was the re-evaluation of the distribution channel.

During our last call, I mentioned that we needed to rationalize the distribution channel. We have begun to do so vigorously. At the beginning of the year, we had 48 distributors in the Americas. A very limited number of those distributors delivered orders for Capstone products. During our last call, I reported that we would be eliminating the non-performers, converting others to dealer or manufacturer's rep type arrangement and adding new representations that are experienced in our focused target markets. The results of our efforts in this regard today are that we have discontinued about half of our relationships with that distributor base. Well, we have been very active in this regard. I would like to point out that the majority of our first quarter bookings were generated by the distribution channel. In fact, 92% was generated by our distribution channel and 8% was generated through direct sales, and these channel-driven orders were generated by a total of 17 active distributors. We are pleased with the results of our efforts today and are in discussions to convert several distributors to manufacturers . Additionally, we are in the process of negotiating several new distributor or dealer agreement in key focused markets, which we believe will have a positive effect on our ability to perform. At this point, I would like to shift to speak about the geographies. The America's has been and will continue to be our largest market. The year-over-year statistics that I shared with you are clearly reflective of our perspectives in this regard. I previously mentioned that Asia would see moderate growth and that Europe would offer significant opportunities. Again, last quarter's accomplishments in European bookings were reflective of our expectations for the opportunities in that region.

During our last call, I also mentioned that we would be establishing direct sales presence in Europe. We are actively implementing that element of our strategy and have assigned Mr. Mark Aramli to lead that effort. Mark has been with Capstone for four years in increasing levels of responsibility. Prior to joining Capstone, Mark was with United Technologies in their fuel sales and Hamilton's Standard Divisions. He holds a BS Mechanical Engineering from the University of Connecticut and an MBA from . He is in the process of relocating to Europe and setting up our sales office as we speak, and in conjunction with this move, he has been identifying and developing relationships to expand our European channel presence in the marketplace. While we are on the subject of geographies, I would also like to announce another positive change within our sales organization. I am pleased to announce that Mr. Tony Hynes has resumed the position of Vice President of Sales for Asia and the Pacific Rim. Tony joined Capstone recently and brings more than 13 years of experience in the field of power generation and micro turbines. Tony previously held senior positions during the early stages of Capstone's development. He left Capstone in 1999 to accept the position of President for Bowman Power Systems Inc., California. We are delighted to have an individual with the experience and capabilities of Tony rejoin the Capstone team and contribute to the future success of the company. With the activities and focus, which have begun to occur, I am confident that we are on track with our strategic initiatives in the market arena. The first quarter orders and the opportunities that we are currently working have headed in the right direction to achieve the sales objectives, which we discussed during our last call. While I am pleased with the results today, there are still plenty of works to be done.

Now, I would like to shift our discussion to the subject of the product robustness. During our last call, we discussed the importance of product performance and the competitive cost of ownership. I shared with you our target for equipment performance. You heard me speak numerous times about the efforts of our reliability tiger team to focus on and implement improvements for enhanced performance. A number of these improvements and enhancements have been incorporated into our products and which have accomplished our initial target objective of 8,000 hours predicted meantime between failure for products that we are manufacturing today. Also, I shared with your efforts to develop a real-time remote monitoring in diagnostic feature for our micro turbines to enhance our ability to better support our customer base. We are on target with this effort and during the last quarter we installed our first prototype unit to begin evaluating it features and overall performance.

Now let me tell you about our C200 progress. We spoke about the beta testing for C200 unit. I told you again, that our first unit was on test and performing very well. To keep you informed of progress I would like to share the following information. Today, our unit at turbine has logged over 1460 hours of operation. The unit is performing very well from a mechanical and electrical perspective. We are making the few minor adjustments to the mechanical configuration as a result of this testing to enhance the units overall performance. This type of enhancement is specifically with beta testing is designed to identify and our engineers are ensuring that these adjustments will be incorporated prior to serial production of C200 product. Another key areas to discuss is our efforts to improve our performance overall. We cannot be successful with addressing our overall cost position. We have said previously that our spending will go up slightly this year in support of our key strategic initiatives. Previously, our talks about our plan to improve our product component and sub quality, delivery, and costs. The evaluation of this activity has been underway for sometime. To execute this effort, we have recruited Mr. Dennis to be the Director of Supply Chain Management. Dennis is a season professional in Global Strategic Sourcing and brings the Capstone over 25 years of experience in supply chain and he is a certified Purchasing Manager. He has over 20 years of experience with Xerox corporation and positions of increasing responsibility. He was the Director of Contract and Commodity Management at Unisys Corporation and most recently he was responsible for strategic sourcing of capital equipment at Amgen. Just last week Dennis held our first supplier symposium at Capstone. This symposium's objective was to set the tone, requirement and expectations for our relationship with our valued suppliers. Attendance at the symposium was very good and the feed back from the attendees was extremely positive and supportive of our go forward sourcing strategies. Supply chain improvements are a key element of achieving our strategic objectives. As I hope you can see we have been very focused on our strategic objectives, which set the foundation for improving our overall performance. Specifically, cash spending has been consistent with our expectations we are making significant progress in the realignment of our distribution channel. Our product will this efforts are taking hold. Product development activities are progressing, We have dramatically strengthened our supply chain and sales leadership and our order rates in the market’s level of interest in Capstone’s products have been strong. So I would like to thank you for joining us today and with that we'll take your questions.

Ladies and gentlemen, if you wish to ask a question, please press star followed by one on your touchtone telephone. If your question has been answered or you wish to withdraw your question press star followed by 2. Questions will be taken in the order received. Please standby for your first question. And your first question comes from David Yu of Capital. Please proceed sir.

Hi. Thank you very much. Just a rough calculation. It appears that each megawatt of product shift approximately equivalent about 1m revenues for the quarter that being the case your backlog of 8 megawatt either more or less is about 8m in future revenues, which I think Karen mentioned, you expect 4-megawatt growth in the second quarter. And I was wondering if you could provide a little bit more guidance as to when you can expect the rest of backlog into income statement. That being said do you still expect a double sales from fiscal 2004?

David this is Karen. At a macro your is pretty good. That's roughly the megawatts of sales by the time you blend in that kind of supply sales, it tend to go out with that and it has turned out to be about a million bucks of megawatts, so it is not bad on below.

Okay.

And, to get to the end of your question then, yes we do still feel that we are on target to achieve the doubling of sales objective as John said in his portion. Now, as far as the timing, I said at least a roughly half of the year and it's scheduled to go in this quarter. And that is kind of a rough number because some of the timing of as much as our lives tend to focus around quarters so do our customer's lives and so, we get some bubbles and so, things can go kind of one side or the other of the quarter line. But, we have a good chunk of them scheduled to go now and then a smaller portion in the third quarter and then another decent part of them that people have put out towards the last quarter where we perceived we will get greater level of sales and so they are kind of getting their foot in for that timeframe and so, if they do blend out, but we have a big chunk of them going into the next quarter.

Okay, great. Thank you very much. I'll get back in queue.

All right. Thank you.

Again it is star followed by 1 for any questions. And your next question comes from Jason of Wealth Monitors. Please proceed sir.

I have one quick question regarding a recent article coming out of the Department of Energy. You may have seen this, John and Karen, regarding the U.S.S to initiate a program to aid nations and methane conversion into electricity initial programs. Should be about $53m to help Companies help going to the different countries and start changing what you guys have already done here in the U.S, changing methane gas from coal or other sources landfills into electricity. Are you playing a direct role in this program? Are there any direct or indirect benefits that you will receive from this?

Jason. Yes, I picked that up recently as well and clearly got great some nice opportunities for us as people recognize the environmental harm of methane. We have a ready solution that is available for the marketplace today, and so that creates some very nice places for us to go leverage that funding availability to get MicroTurbine to solve the level of issues.

Well, how much of your business that you have done up to date has been required either some time of subsidies or other financial means to make the installation of your machines feasible for the entities using them?

Interestingly, enough, relative to a number of other new technologies, particularly new distributed energy technologies; we have a relatively small portion of our sales that are dependent on that sort of intensive program. We are and we have been competing on the commercial viability of our products and have not gotten the sorts of significant funding and subsidies that have been made available to others such as fuel cell and wind and solar.

In regards to your penetration to Europe, what should we expect to see in the coming quarter or two as far as benchmarks to track the Company's strategic plan and penetrating that marketplace? Should we look for partnerships from JVs, other different activities?

Jason. It's John. I think what you will see and will report on it because what I did try to do this time, I hope this was obvious, was to really come back and touch on the elements that I spoke about in the first quarter of the year-end conference call, and we'll try to give you some guidelines and directions so you'll see continuity in each of the calls, but in Europe, you'll see from us, that is I mentioned some distribution activities taking place. But, what for me is most important is this direct presence that we'll have by setting up ourselves office in Europe with Mark Aramli so that we've got really a personal presence on the ground developing these relationships that will grow. We'll have the combination of dealers, distributors and some sales reps as well as we've talked about are the three main ways we see is going into market. Outside of our direct efforts to really drive revenue and I was very pleased by the performance in the order booked in Europe in this past quarter.

Okay. And a final question I have, obviously your doing in the beta testing on the 200 products, UTC, you mentioned in the last call is also doing their own independent testing. Can you provide us with any update on how many hours or machine they have in place and how their testing is going?

Yes, I can the update that I provided you is the hours that we have running specifically on our first saving units, that's University of California Turbine. UTC has not undergone any testing of this C200 as yet. We are in the process of pulling together that the beta units for the UTC to begin their testing and we see that coming sometime in the October, November right timeframe. When that begins to happen, I am sure we will coordinate the performance of those units as well into our figures for you all.

Does that imply that commercial availability of these turbines, the larger ones maybe delayed into the '05 year?

Yes, it does and as I have said on a number of calls that -- previously that, you know, we will be comfortable with the robustness of the units as the result of the testing before we let our new product gets to commercial marketplace. It's right inline with what we talked about in pervious calls and it's not going to be significant in terms of our time that we're expected to be at market.

Okay, thank you.

And your next question comes from David Yu of Capital. Please proceed, sir.

Hi, guys. Just a follow-up question with the C200. I just picked up that you expect, I guess to go out in '05 then -- I'm sorry next year, next calendar year, is that correct?

Next calendar year, correct.

I would like to know then after your sales force or product, their marketing has picked up on where you are generating the most interest for this product and possibly I guess then, maybe which industry is, or any other applications that you are gaining all the interest from?

For the most interest today has been through the CCHP applications, which is the combined cooling, heat, and power applications today. But what I would tell you is that overall, it's really not seen a whole lot of pull from the marketplace yet, and we believe that while we certainly been engaged in discussions with our customers, the market is certainly lagging in terms of its pulling us through from an order perceptive, and that's primarily from the CCHP perceptive. So, while we're still moving forward with the plant testing of the unit, John Fink and his guys are very much working the marketplace to understand the need, their requirements, but what I would tell you is that, we are frankly pretty delighted right now because as you probably recall from my operational discussions, we are really moving the CHP products, and that's where we see the pull in the marketplace today not only here in the America's but also abroad. So, CCHP product isn't having a big impact on our go-forward strategy.

Okay, can I ask a question to Karen. Do you expect to still incur a higher R&D cost related to the development of C200 looking forward?

While it has a pretty high cost recently because just to get it to the plate of data testing, we incur cost and then when do build the data unit, we incur some pretty high cost for those test units. And so because, we have the technology at this stages again that only make sense to continue to the development of it from where it is, while our sale force continues to explore the applicability and alike. It would certainly be a declining cost overtime, as we move through this stage of the -- getting all the data's out there, but it will not disappear.

And, just last question. Can I ask how many employees you have right now, total?

We have just over 200 employees.

About 200. Thank you. Thank you very much.

Okay. That is star followed by one for any questions. There are no questions at this time.

And thank you operator.

Well, once more I would like to thank everyone for joining the call today. And, I look forward to talking to you on our next call. Thanks again.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, good day.