Capstone Green Energy Corp (CGRN) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter 2005 Capstone Turbine earnings conference call.

[OPERATOR INSTRUCTIONS].

As a reminder this conference call is being recorded for replay purposes. I would now like to turn the presentation over to the host Cindy Martinez your contact for investor relations.

Good afternoon and welcome to Capstone Turbine Corporation's conference call for the second quarter of fiscal year 2005. I'm Cindy Martinez your contact for 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 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.

We refer you to the company's annual report and other periodic filings with the SEC for description of these risk factors. Because of the risks and 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 revision to any forward-looking statements to reflect events or circumstances after the date of this conference call or to reflect the current or unanticipated events. On the call are John Tucker president and CEO and Karen Clarke our CFO. I will turn the call over to Karen.

Thank you, Cindy and thank you, everyone for joining us today. I will begin with a review of the quarter's results and turn the call over to John for a business update. After that we will be happy to take your questions. Let us begin with backlog. At the end of last quarter we had eight megawatts of backlog. During the second quarter, we took orders for 7.4 megawatts and shipped 4.1 megawatts of product. So, backlog at the end of the second quarter was 11.3 megawatts, our highest backlog level since 2001.

The majority of the backlog is currently scheduled to ship in this fiscal year. For the first two quarters of this year we have taken orders for 12.8 megawatts of product. Last year we shipped 11.5 megawatts of product for the full year, so we believe based on the level of demand we are experiencing so far, and the fact that we have had this type of performance, that we are on track to meet our plan for the full year.

Actual shipments this period were 4.1 megawatts, more than double the 1.9 megawatts in the same period a year ago and roughly 1 1/2 times the 2.7 megawatts shipped last quarter. Our growth loss this quarter was $1.7 million, roughly a half million dollars better than both the same quarter a year ago and last quarter. The majority of the improvements this year versus last year resulted from the following items.

First, the higher sales volume this quarter provided a positive contribution. And second, the company recorded an $800,000 benefit from a warranty accrual adjustment. These two items that benefit the gross loss, were partially offset by higher operating cost in the period, resulting primarily from increased head count from operations. Now moving on to operating expenses, research and development costs were $2.9 million this period, up about $500,000 as compared with the same period last year, but $500,000 lower than last quarter.

The higher R&D cost versus last year reflect higher spending in the current period, driven in large part by higher personnel cost for our continuing product robustness and enhancement effort. As compared with last quarter the spending was lower this period, reflecting last quarter's cost for C-200 prototype. Selling general and administrative costs were $550,000 higher this quarter than the same period last year, but nearly identical to last quarter's costs.

As compared with a year ago, costs were higher this period for Sarbanes-Oxley compliance, staffing in the quality department and recruiting. Overall, our net loss was $9.1 million versus a $9 million loss a year ago. The items I have just reviewed plus higher other income, resulting from benefits of a legal settlement yielded net income nearly equal to last year's second quarter.

As compared with the first quarter of this fiscal year we saw improvements of the gross loss line, and had lower operating expenses, and other higher other income. Combined these resulted in an improvement in the bottom line of $1.4 million. Let's talk now about how these results impacted our cash performance. Overall, we used $9.2 million in cash in the quarter with $2.8 million more than in the same period a year ago. The higher spending in the current year's second quarter reflected higher operating costs, increased usage for working capital, and less cash contributed by stock option exercises. These are partially offset by higher contribution margins from sales and favorable other income.

As compared with the first quarter of this year, our cash use in the second quarter was $2.4 million higher. You will recall that in last quarter's results, we had a benefit from collecting $1.8 million from the Department of Energy. So, prior to that benefit the cash usage for that period was $8.6 million. Our cash usage this period was higher reflecting lower contribution margins, I'm sorry -- contribution from stock option exercises, and additional cash used for working capital.

Looking at the balance sheet, our days in accounts receivable which we calculate excluding receivables from the engineering cost reimbursement program, were down to 34 days at the end of the period from 62 days last quarter end, and from 66 days a year ago. Our total inventory was about $700,000 higher since last period end, reflecting inventory purchases in anticipation of future shipments.

Long-term inventory have been reduced to $2.4 million from $3.9 million at the beginning of the fiscal year. The warranty accrual has been reduced by roughly $900,000 since the beginning of the fiscal year, reflecting both this period's reserve reversal, and actual spending for performing on previously recorded warranty commitments. That completes the review of the financials.

Before I turn the call over to John I would like to provide you an update on the inventory of product in the channel. You will recall we previously reported that we believed the distributors' inventories contained approximately 500 units of our product, which were available for sale, but for which intended customers had not been identified.

We now believe that figure is roughly 300 units, with about half in the United States, and the other half with international distributors. We are continuing to work with the roughly half dozen distributors who hold these inventories to clear the units. We are pleased with the support and cooperation we have received from our distributors to create the reduction seen to date in the channel inventories. Now, I will turn the call over to John for a review of the operation. John?

Thanks, Karen. Good afternoon, everyone. During the second quarter we continued our efforts to improve performance. During our last call we spoke about our accomplishments, and how they supported our strategic initiatives. The second quarter was no exception. We continued to actively support our distribution channels and aggressively approach the market through direct contact with end users. Karen shared with you our second quarter results. Those results reflected sales of 4.1 megawatts, an increase of 50% over the previous quarter. This improved performance continued to come from a broad range of global customers.

By region, 65% of these sales in megawatts were made in the Americas. 27% in Europe, and 8% in Asia. Additionally, we continue to focus on key vertical markets. This quarter sales make-up includes 38% for CHP applications, 31% for CCHP applications, 14% for resource recovery, and 14% for distributed generation solutions. Similar to the first quarter approximately 95% of our sales were to strategic targeted markets. Karen also shared with you that our orders for the first quarter were 7.4 megawatts, taking into account shipments for the quarter our backlog at quarters end was 11.3 megawatts our highest back log level since 2001.

The breakdown of 7.4 megawatts of bookings for the quarter on a regional basis were 53% in the Americas, 25% in Asia, and 22% in Europe. Looking at these orders by vertical, 55% were CHP, 13% CCHP, 13% for resource recovery, and 16% was for distributed generation solutions. So, the takeaway is that we are on course with our strategy from a global as well as a market vertical perspective.

From a market channel perspective, I believe that you are all aware of our initiative to rationalize and strengthen our go to market approach. We continue to evaluate the performance of our channel initiatives, to ensure that our sales efforts are focused and well balanced to take advantage of the opportunities that align with our market strategies. And, in a similar fashion to the first quarter, approximately 90% of our bookings were generated by the distribution channel, with the balance generated through direct sales.

During our previous calls I have mentioned the importance of the geographies in our strategic actions. I also mentioned that we were implementing the direct sales presence in Europe. Today, I'm pleased to announce that we have finalized our activities in that regard. In the last few weeks we have established our European sales office in Milan, Italy.

This location is central to our targeted markets in the European Union and Russia. Additionally, during my recent visit to Japan, I announced the opening of our Japan sales support office, to ensure timely support to our Japanese distribution channels, and to become the focal point for our expanded activities in Asia. As a follow-up to Karen's closing remarks regarding channel inventories, I would like to further emphasize the progress we are making in this regard. The significant reduction of 40% from our previous report is an important and tremendous accomplishment.

I want to personally thank our distributors for their efforts and cooperation as we continue to work down the channel inventory. So, as I hope you can see, we are making good progress relative to our goals. But as in all businesses, there is always the need to adapt and meet the ever changing challenges. Recently, I realized that while we have begun to achieve a number of our objectives and make good progress against them, we needed to adjust our focus to ensure that we continued to improve our performance, and accomplish those goals. In that regard, I have repositioned the responsibilities of my leadership team, so that we have additional focus in a few but important areas of the business.

First, John Fink has moved from his role as senior VP of sales and service, and has assumed responsibilities of senior VP of operations. John has done an excellent job of reestablishing our sales and service activities, so I asked him to take on this new responsibility which he gladly accepted. His previous experience in purchasing and manufacturing operations, provide him with the skills necessary to move our operations activities forward in a focused and expeditious manner to meet our new demand requirements from the marketplace.

Mike Redmond, who moved from the senior VP of operations, which included engineering and operations to the senior VP of technology. Mike's redefined responsibility will be to focus our technical activities on engineering, new product development, such as the C-200 product development and test, and identify and develop cutting-edge technology programs to provide technical and commercial advantage for all new products offered by Capstone.

Additionally, I have named Tony Heinz to be the VP of sales and service, replacing John Fink. You will recall from our last conference call I discussed Tony's experience and background in the microturbine industry in some detail. So, I am extremely comfortable with his ability to pick up where John left off, and to lead our sales efforts successfully forward. I believe this realignment of our team's responsibilities will continue to keep the positive momentum we find in our business headed in the right direction.

Since I arrived at Capstone, I have focused my and this team's a efforts to attract the best, brightest, and most versatile people that we can to the business. This realignment was possible with no impact to the organization because of the broad capabilities of this team. Every team needs to develop a strong and versatile bench, and we will continue to do that at Capstone.

I have said that I would provide you with a continuing update on our C-200 beta testing. Regarding that testing at UC-Irvine, it continues to progress well. Our unit there has logged more than 3,000 hours of operation to date, and continues to perform extremely well with a mechanical and electrical point of view. Additionally, we have completed the construction of two beta units for test at U.T.C. They will ship shortly, and begin testing at the U.T.C. facilities.

With all of this in mind, I hope you can see that our performance continues to improve as we stay focused on our strategic objectives and continue to build the foundation for accomplishing those goals. As you heard from Karen, and now me today, our cash spending continues to be consistent with our expectations. We remain focused on our strategic targets, which include those targeted vertical markets identified in our presentation. Our clear presence in the geographies around the world, and a constant evaluation of our channel strategy effectiveness.

Our C-200 product development activities are progressing to plan, and more importantly, our order rate through the quarter has remained strong, and the market's level of interest continues to be strong for Capstone. I would like to thank you for joining us and, with that said, we would be delighted to take your questions.

[OPERATOR INSTRUCTIONS].

Please stand by for the first question. And your first question from Tyson Bauer of Wealth Monitors Inc. Please proceed.

Good afternoon, John and Karen. A couple of quick questions for you. The inventory reduction fairly dramatic, 200 less in the inventory, which I'm guessing directly corresponds with your reduction on the warranty expense expectations. Were those products actually sold and placed or how did -- I thought previously when they were sold or when products in the inventory were sold that is when you incurred those warranty expenses. What is the situation with that reduction in inventory and how it corresponds with the warranty expenses?

Well, Tyson this is John. I think it's a good question. We have been working very rigorously with our distributor partners. I will give you three approaches of how they have been worked down. Some is through sales of equipment. The second portion of it has been on some of that what I will call lingering inventory that has been around for some years. Some of our distributors have taken the decision to write it down and eliminate it from the inventories.

And then thirdly we have had distributors who have taken the inventory and, if you will, cannibalized it in terms of using those parts for the maintenance of their existing equipment that they have in operation for various customers. The combination of which, as we've done a very, very close look at the inventories there in the channel, has really led to that dramatic reduction. We are very pleased with the efforts of our distributors in that regard, and frankly, their working relationship with us in working down that existing channel inventory has been very, very positive for us.

And from Capstone's standpoint, would you prefer that they actually part them out or write them off, because then you don't need to expense those warranties, bring them up to standard, and plus that allows you the ability to sell new machines?

Well, obviously when you take units out of the channel it enhances your opportunity to sell new machines. Some of that inventory that was there in the channel, has been there for a significant period of time. So, what it does do is it takes away our need to go in and upgrade it and refurbish it to current standards that meet with the efforts that we have talked about on these conference calls for some period of time.

That is a cost that wouldn't have to be borne by our distributor, if they made that choice to do a refurbishment. So, if you will, it is more of a win-win, and some of that product that has been sitting out there for a while, I think our distributors looked at it, and said the best choice to do financially, economically, is to take the components that are appropriate, and use them for the equipment that's in the field, and for the rest of it, it is write off situation.

Last question, and this is directed to Karen. It appears once you back out that $800,000 on the warranty expense, you have lost $2.5 million on the gross side with increase on revenue. Although it appears we are losing less per sale of each -- incremental unit that you are selling. Are we closer to being able it define where that break point is so as you sell more units it is not contributing to greater losses?

Well, Tyson, for quite some time our product cost and pricing has been in a position that we do generate positive contribution margin on each unit that we sell. So, whether a 30 or 60 or typical average unit does contribute margin. And so, it becomes a matter of, A - increasing the contribution margin per unit through going to those markets that provide for higher contribution margins, better configurations and the like, and B - also getting the volume up, and C - working on addressing that imbedded base cost structure. So, it is all of those things. As we talked in the past, because of the mix of markets that we see in front of us and the various ways to our break-even point, we can't give a particular quantity that it takes to break even, because there are multiple scenarios that get us there.

I guess, if you could clarify for me, you increased your sales, correct? And you increased your - the loss from the sales on the gross margin. Is that correct?

In this period, you are correct, when I add that back it would go up. But that is not necessarily directly related to volume, because as I mentioned, we did have positive contribution margin in the period from the incremental sales. But we did have some higher costs going on in our operations area. So, as I mentioned, we had higher investments that we made in our production arena.

Thank you.

The next question is from Steve Denitilo (ph) from First Albany Capital. Please proceed.

Thanks for taking my call. Actually most of my questions were answered from the first caller. Could you possibly give a broad range -- and thanks for the insight as far as the channel inventory going down and the three reasons behind it. Is there any way to give a percentage of what of that was sales, what of it was the cannibalization of new parts, what was rate down? Is there anyway you could give a little more color on that?

To be absolutely precise, it would be really difficult. But I think to say about a third, a third, and a third is about a good representation of it.

OK. Great thank you. And also, can you give the amount of microturbines shipped in the quarter?

We are not giving out the information about the number of units that we are shipping. We think there is competitive advantage in that, that's why we talk in terms of the megawatts.

Sure. OK. Alright great. Thank you very much.

Thank you, Steve.

The next question is Harold Webber of Smith Barney. Please proceed.

Hi, guys. Could you give me an idea of the mix between the sales on 30s versus the 60s at this point. And also a little bit of an idea of the domestic sales East Coast versus West Coast, and the type of mix that's creating?

Harold, overall our mix of 30s and 60s has been relatively balanced. In any given period we see greater shipments of one or the other. But if we look at it kind of broadly, we have seen relative balance. As you recall, we expected to really have the volume of 60s outpacing the volume of 30s. And that was an expectation set quite some time ago. However, we continue to see strength in the 30s because of the unique market applications of the 30s, they continue to demonstrate a strong presence.

Hey, Harold, this is John. Let me kind of augment that, because I think one of the things that I really would like to point out, not only for you but for our listeners is that our whole approach on the strategy that we have talked about over the last several conference calls. That strategy was clearly based on us going to market with our existing product that we feel quite comfortable with, which is the C-60 and C-30.

I think what is really important, and while we are excited about how our beta testing moves forward on the C-60, I'm actually -- I'm sorry, the C-200. I'm actually delighted with the progress we have made in gaining traction in both sales and bookings through the first half of this year, with both the 60 and the 30.

In particular, our plan, what we saw at the beginning of our strategic planning process, and what we are seeing through the traction that we are developing throughout this year, is consistent with our expectations, and we are really quite excited about where we are with our existing products.

And in particular, we heard a number of comments that have come back through discussions with folks from the street that said gee, we thought you were going to actually eliminate the C-30 from your product portfolio. I would like to frankly, make it clear to everyone that our C-30 continues to be a very viable product, and is playing a key role in this uptick that we have seen in both sales, and with new orders booked.

So, it is really, it has been a very positive thing from my perspective with the product enhancements that we have made over the time that I have been here. And I think we are starting to get to where folks are really embracing the efforts that have been made at Capstone over this past 14 months, reflective in the improved numbers quarter by quarter over this year.

OK. The other part of my question was if you could address the East Coast versus the West Coast business. And one other thing, could you talk a little bit about how sales are going in the, let's say in the Methane to Biogas to recovery type stuff?

Let me try to take them in two parts. First the East Coast and West Coast, the majority of our sales in the Americas are continuing to come from, what I will call the west/southwest portion of the U.S. And that is in both our CHP activities, as well as the CCHP activities. A much smaller portion coming from the East Coast, if you will , albeit we do see some signs of opportunity there. But, so that's kind of the East Coast/West Coast question.

Relative to Biogas, we are very positive to the, what we call the resource recovery portion of our vertical market. Biogas continues to be a very good and viable market for our product. We have seen positive market involvement both here in the Americas as well as in Europe. And we continue to see positive signs of the Biogas activities in Japan as well. So, we are very positive about our product as it relates to Biogas applications.

So, you are continuing to see that -- that area opportunities continue to exist? I have been hearing many things, and I wanted to know how that was reflecting on you.

Yes, we really do. In particular we see it as a very positive here in the Americas. Our Japanese partners see it as a very positive segment for them in Japan. And we've, through the first and second quarter of this year, seen orders that have specifically come for Biogas products in Europe.

Thank you.

You're welcome Harold.

[OPERATOR INSTRUCTIONS].

Sir, you have no questions at this time.

Well, everyone, I very much appreciate your joining the call today. We are extremely upbeat here at Capstone with the second quarter's performance as we move Capstone to the next level. I want to thank you all for your time and your interest in Capstone, and look forward to talking to you on the third quarter conference call. Have a great day, everyone.

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