Capstone Green Energy Corp (CGRN) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2005 Capstone Turbine earnings conference call. (OPERATOR INSTRUCTIONS)

I would now like to turn the presentation over to your host for today's call, Ms. Cindy Martinez, investor relations. Please proceed, ma'am.

Good afternoon and welcome to Capstone Turbine Corporation's conference call for the third quarter of fiscal year 2005. I am Cindy Martinez, your contact for investor relations.

Yesterday Capstone filed its Form 10-Q with the Securities and Exchange Commission. If you do not have access to this document and would like one, please contact me at 818-407-3624 and I will forward one 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 provisions 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 to 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 risk factors 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 statement 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. Good afternoon, everyone. Thank you for joining us. We're going to follow our normal order for the discussion today. I'll review the financials, John will provide the business update, and then we'll take your questions.

So I'll start with a discussion on backlog. At the end of last quarter, we had 11.3 megawatts of backlog, which you'll recall was our highest backlog level since 2001. In the quarter, we took orders for 3.1 megawatts and 1.6 megawatts of prior orders were cancelled due to the delay of a major project. These orders are expected to be rebooked later. We shipped 4.5 megawatts of product in the period. This left backlog at the end of the third quarter at 8.2 megawatts. The majority of this backlog is scheduled to ship in the fourth quarter. Compared with the third quarter of last year, our shipments in megawatts this year were 90% higher. When we look at the pace of the last 2 quarters, our shipments have been double what we shipped in the same period a year ago.

Our gross watts this quarter was $1.7 million, roughly 40% less than the $3.1 million loss reported in the same quarter a year ago. This period's higher sales yielded more contribution margin, but this was pretty much offset by higher material costs and inventory charges in the period. The significant improvement between periods came from lower warranty charges this year.

As we've discussed in the past, our warranty charges provide for 3 things, our standard per unit warranty, reliability of repairs programs that we commit to, and accommodations. You may not remember, but last year we recorded a $1.7 million charge for preexisting warranties and reliability programs. This period our total liability for reliability repairs programs and preexisting warranties was reduced, reflecting updated cost estimates. And while our total standard warranty provision was higher this quarter than last year, that reflected the larger number of units sold in the year.

What isn't as evident is that the weighted average standard per unit warranty cost was lower by about a third this year as compared with last. This cost reduction resulted from the quantifiable demonstrated performance improvements that have been made as a result of our work to enhance the robustness of our product. We know we've been making important improvements, now the evidence of this is becoming clear.

Moving on to operating expenses. Research and development costs were $2.8 million in this period, down $200,000 as compared with the same period last year. This quarter saw the benefit of $200,000 in offsets for cost sharing programs whereas in the same period a year ago, there were none. Selling, general and administrative costs were $5.6 million for the quarter, flat with a year ago. Overall, our net loss for the quarter was $9.8 million versus an $11.6 million loss a year ago. We saw the per share basis was 12 cents this year as compared with 14 cents last year. As compared with the second quarter of this fiscal year, our bottom line this quarter was $600,000 worse. While improved sales in the third quarter produced higher contribution margin, this was more than offset by higher materials cots and inventory charges and higher SG&A costs. Nearly all of the increase in SG&A costs were incurred for our Sarbanes-Oxley compliance work.

Let's talk now about how this quarter's results impacted our cash. Overall, we used $10.7 million in cash in the third quarter, 2.5 million more than in the same period a year ago, and 1.5 million more than last quarter. The higher spending in the current period primarily reflects cash used for working capital. Most of it was for inventory purchases in anticipation of upcoming requirements. Those inventory purchases actually resulted in an increase in total inventories since last quarter end.

Accounts payable also increased since last quarter end, paralleling the higher inventories. Our days in accounts receivable, which we calculate excluding receivables from the engineering cost reimbursement programs, were at 42 days at the end of the third quarter from 34 days last quarter end and 39 days a year ago. Overall, our receivables continue to be well managed and our days outstanding are within expectations.

That completes our review of the financials. Now, I'll turn the call over to John for a review of the operations.

Thank you, Karen. Good afternoon, everyone.

In the last 2 quarterly calls I've shared with you the progress we've made on the strategic initiatives we established and described for you early last summer. You will recall that we set some very specific targets for areas we needed to develop as a result of that strategic planning process. Those actions were rationalizing our channels, focusing on targeted markets, growing our presence geographically, improving the robustness of our products, and focusing on our supply chain activities. In the third quarter we demonstrated continuing improvement.

I want to update you on our specific progress in rationalizing the distribution channel. To refresh your memory, at the beginning of the year we had 48 distributors in the Americas. We have reduced that number to 9 and expect over the next year that we will continue to see changes in the distributor base as some distributors with expiring contracts roll off and we add others as appropriate to serve our targeted markets. In addition to the distributors, we now have 3 dealers in the Americas. We created this new channel to provide another means of developing new sales opportunities for Capstone.

For clarification, I would like to explain the difference between a dealer and a distributor for you. A distributor is responsible for all aspects of the sales and service of our product. This means marketing, sales, application and installation, commissioning and service. Dealers differ from our distributors in that they are only responsible for marketing, selling, applying and installing our product. It is then Capstone's responsibility to commission and service the product for our end user customers. This channel approach is directly inline with and a key element of our direct service strategy that we launched earlier this year. As I have said in the past, our distribution channel is very important to us; 95% of the megawatts of orders we received this quarter were from the distribution channel and we expect this performance to continue into the future.

Let me now speak to our focus on key vertical markets. During our previous calls I've mentioned that our targeted markets were combined heat and power, combined cooling heat and power, resource recovery, and distributed generation. In the quarter, our orders booked in these verticals were as follows, 31% in CHP, 37% in CCHP, 8% in resource recovery and 22% in distributed generation.

Speaking to the geographies, no one in the microturbine space has penetrated the global market as Capstone has. While our earlier efforts seeded the markets, those efforts didn't particularly deliver the expected results. Those efforts, though, coupled with our renewed geographic presence and focus, are beginning to deliver the benefit. As we look at the orders we received from a geographic perspective, our results were as follows, 61% for the Americas, 32% for Europe, 7% for Asia. The results from the Americas compare favorably to last quarter and met our expectations. Europe as a percent of bookings was up for the quarter over last quarter, consistent with the mix achieved in the first quarter of this year. Our Asian orders were lower than in prior quarters, but we expect this to strengthen in the next few quarters.

The order information I just discussed relates to orders booked in the quarter, but I want to take this opportunity to highlight a few orders that we booked shortly after the quarter end, which are significant demonstrations of accomplishing the goals that we set for ourselves in the strategic plan. First, you should have noticed our press release regarding the 1.5-megawatt order we received from Samsung in Korea. Samsung has been a Capstone distributor for a period of time, but during this time they have developed their sales and application team and have deployed a number of demonstration units to develop market interest and establish installation standards that meet the requirements for the Korean market.

This order is significant not only from a volume perspective, but because it represents applications at 3 different and unique locations. The first site will deploy 240 kilowatts, or 4 units, and will be installed with an absorption chiller to provide cooling for the Samsung Plaza, an office building and shopping mall located in Seoul. The second installation will deploy 660 kilowatts, or 11 units, and will be installed at a local hospital to augment their energy requirements. And lastly, 600 kilowatts, or 10 units, will be installed in a CHP application to provide power as well as hot water at a high-rise apartment complex. We are delighted to have Samsung represent Capstone and are pleased that they are actively driving the adoption of Capstone microturbines in Korea. This is a perfect example of the commitment and engagement we expect from all of our distributors.

The Americas has been our largest market, as I think you all know, but our strategic analysis of this market reflected that we weren't really participating in key geographic areas. Particularly, that area was the Northeast region of the United States. So in early December we announced our commitment to the Northeast region and New York City with the opening of our New York sales and service office. We have established a direct sales effort that, in parallel with our channels, can make a strong impact on sales moving forward.

Additionally, we announced the appointment of our Vice President of Sales for the Northeast region. I'm very pleased that we were able to attract Mr. Peter Giasemis for this key position. Peter joins Capstone following a 20-year career at KeySpan Energy. Many of you may know that KeySpan is the largest distributor of natural gas in the Northeastern United States. Peter is a New York State Registered Professional Engineer and has a strong understanding of the distributed generation market opportunity in New York. With Peter's experience and knowledge of the New York requirements, supported by our local presence, our strength in distribution and the unique capabilities of our technologies, we believe that we have a solid basis to grow our position in this market.

Speaking of technology, our product capabilities, like Blackstart, which allows our units to start in the absence of grid power, our power quality and grid synchronization, along with a small footprint, (inaudible) and market leading emissions profile make us uniquely suited to New York City's needs. I would also like to point out that Capstone is the only microturbine manufacturer pre-approved for interconnect to ConEd's distribution system. This information I just shared with you can be found on the New York State Public Services Commission Website.

I think we all know that Missouri is called the "Show Me" state. Well, I think New York City should be called the "Show Me City". As a result of our efforts there, we are completing a 180-kilowatt ICHP Capstone owned demonstration installation at our office facility in Brooklyn. It will be used to provide energy and hot water for our building, plus provide us with an important sales tool to demonstrate the capabilities, flexibility and reliability of the Capstone product in the New York environment.

And while we're on the topic of New York, I want to highlight a recent press release about our first major order for New York City. This order for a 720-kilowatt ICHP application is in a major office building located at 1350 Avenue of the Americas. These dual mode ICHP units will be grouped into 2 6-pack configurations and used to generate a significant portion of the building's energy. As a dual mode unit, they will also be capable of providing backup power in the event of a grid outage. I'm confident that the Avenue of the Americas application is reflective of the application opportunities that we see throughout New York City. We are obviously really pleased with our efforts to date in New York and are now actively engaged in developing this market. I really hope that you can feel my excitement related to the progress that we are making in the Northeast and against our strategic initiatives.

During our previous calls I talked about our efforts to enhance the robustness of our products. I'm pleased to announce that our operating hours have recently surpassed the 8 million hours mark. No other microturbine manufacturer can demonstrate performance even close to these levels of operation. On our first call I mentioned that we had achieved our projected robustness targets. The benefit of these efforts to improve our products is directly represented by the reduction of warranty reserve figures that Karen mentioned earlier. This reduction is proof that our improvements are being realized in the operating performance of our products. Now let's move on and talk about our sales in the period.

Previously we mentioned that we shipped 4.5 megawatts of products in the third quarter. Of these shipments 61 percent went to the Americas, 10 percent to Europe and 29 percent to Asia. By vertical market 52 percent of the sales were for CHP, 23 percent for CCHP, 17 percent for distributed generation and 8.0 percent for resource recovery.

Everyone of our sales in the quarter were to targeted vertical markets. I've very pleased with the high level of consistency we're accomplishing and selling to our targeted markets. This is an important demonstration of our commitment to sustain our strategic course and not distracting our resources into non-targeted areas.

Racking up the discussion on orders and sales, you can see we are on course with our strategy from a global as well as a market vertical perspective and we're continuing to make good progress on our channel rationalization and development initiatives.

Keeping you updated on the C200 beta testing. Our testing at UC Irvine continues to progress well. The unit has logged more than 5400 hours of operation to date and continues to perform well. We have reached a key milestone in our beta test plan on this particular unit and we will return the beta number one to Capstone for detailed component valuation and analysis, all part of our plan.

Additionally, we have logged over 1200 hours on Beta number two at our facility here at Capstone with similar results to that of Beta One. We have delivered two beta units to UTC for their testing and UTC is in its preliminary phase for testing on the units prior to detailed beta and integration testing. To date we are very pleased with the results of our testing.

Another key initiative we talked about is costs. We have initiated several programs to reduce costs. We are focusing on our core competencies and outsourcing of activities that are not consistent with our ability to design, assemble, test and service our products. In conjunction with this activity we plan to significantly reduce our supply base. We will do so by pulling our spending into commodity groups and as a result we will be to drive our costs and focus on a smaller number of key strategic suppliers.

During this fiscal year though we have incurred increases to our costs for various reasons, but a key driver has been the increase in commodity metals prices. As a result of these increases, we have announced a price increase for our total product line.

Effective February 1 this year we have increased our prices by an expected average of seven percent. Since we rolled out our strategic plan at the beginning of this fiscal year we have made significant strides.

First in our market development we stayed focused on our intended geographies and targeted verticals and it put key building blocks in place. We now have staffed field offices in Europe, Japan and New York. We have fewer more focused distributors and dealers who are contributing in their areas of core competency and we're beginning to see the first proofs of this labor.

In the robustness of our products our affiliate performance data continues to improve to the expected performance levels and we will begin realizing those improvements at the cost line.

In our product development the C200 continues to progress well and we will build our plans for market introduction when we have sufficient data results to meet all of our objectives and the market demand warrants the additional investment needed to bring this product to market and we're continuing to deal with our cost position in a challenging materials price environment. So for the third quarter in a row, I hope that you can see that our performance has improved as we stay focused on our strategic objectives and continue to build the foundation for accomplishing our goals. Thank you very much for joining us today and with that said we will take your questions.

Thank you sir. [OPERATOR INSTRUCTIONS] It will be one moment sir while we compile a list of questions. Our first question comes from the line of Harold Webber of Smith Barney. Please proceed sir.

Hi guys.

Hi Harold.

Could you give a little - earlier you had talked about the open facility when its going to be opened and when do you plan on having this open house? We had talked about this a while back and I want to see that so people who would like to check it out. Haven't heard anything about it.

Harold we're actually making a few leasehold improvements, fixing up the offices so we can be proud of that - where we would have our official open house. We should be ready to make an announcement in the near term about that because (inaudible) as well.

I'm sorry.

I'm sorry I drowned you out.

I say as well as having the system up and running then?

Yes the system's actually going through some - the installation has been made. We're going through some of the final testing of the product. We're pretty excited about it. We thought we'd like to have at least reasonably working accommodations to bring customers into that should be wrapping up relatively shortly and we'll be making an announcement and have an open house.

Okay. As far as the C200, UTC power has already been talking about to some degree the website and other things - any kind of a timeline you could give us with that?

Well I think right now - we recently delivered those 200s to them. They are going through their beginning of the beta tests and integration with their product. We should be able to come out with a timeline shortly, but as of right now there's no real fixed date. For us on our stuff we're really pretty excited as I mentioned in my script that number one we're bringing back in from UCI and we're going to do a typical tear down like you might expect on your first unit built and measuring components assuring ourselves that what we've seen in operational performance is reflected in the components when we do an examination. One of the things that you always do with a new product so we're pretty pleased with where we are against our timeline and I think as we move forward and UTC gets some additional testing on their end we'll be better suited to answer your question probably in the not distant future.

Okay and with regard to a comment that was made in the beginning. Do you or someone I believe said that you were planning to deliver eight megawatts of stuff during the fourth quarter. Is that correct?

We did say that we had about eight megawatts of backlog most of which was scheduled to ship in the fourth quarter. That's correct.

Okay, so you say you're going to be able to deliver somewhere - five, six, seven (inaudible) of megawatts during the quarter? In that ballpark?

That would be the logical deduction.

Okay that sounds good. Thanks.

You're welcome Harold

Once again ladies and gentlemen if you wish to ask a question please key star followed by one on your touch tone telephone. Our next question comes from the line of Walter Neseatu (ph) of R&D Capital. Please proceed.

That wasn't really close but okay.

We know who you are Walter. Hi.

Hi good afternoon. I have a couple of questions. First of all it seems like things are starting to move in the direction that you've been pushing them for the past couple of quarters and that's certainly positive. Can you give me a little bit of color or feel for what your anticipated burn is going to be going forward over the next couple of quarters?

Well as you can tell we had some cash increases especially versus where we really thought we would be in terms of cash views. As long as we're continuing to develop and grow we're going to have some of these needs until we can get the benefits from it. The inventory usage - some of that obviously is just in anticipation of the growth coming through. The expense trend continues we'll have cash usage for core inventories. Over the longer term we foresee that coming down but in the immediate term we're at this burn rate.

Okay so this is a good number to go forward with for a little while?

For a little while. I wouldn't get use to it for too long because obviously our hope is that these efforts will yield additional contribution margin, that some of our cost reduction initiatives will yield some benefits, but for right now we're still in something of that investment mode.

What's your current capacity then as far as megawatts go on site?

We actually Walter can build today and deliver about four to five units a day and that's on a basis of about a shift and a half so depending on the mix as you might imagine whether there's sixties or thirties the megawatts can change quite a bit, obviously double, but I think right now if you do the math we're probably somewhere - we'll targeting for double where we are as opposed to last year and I'm feeling real comfortable with the current deployment of resources and that we have. Probably somewhere around 40 megawatts.

Okay, okay good. And can I have just one more quick one - and I apologize because I know you were talking about it earlier and I was trying to get all my notes down and I didn't quite get everything. As you were discussing the supply chain and how you reduce your distributors I think it was 48 to nine, is that correct?

We began the year with 48 distributors - came into this year with 48. We've been working diligently at reducing that. Today we have nine distributors and we've added on three dealers.

Now do you have any in-house sales people or are you strictly working through the distributors and the dealers right now?

We actually are doing direct sales as well as working through our dealers and distributors and maybe just for clarity - you know I get so use to - and comfortable with working with this number. Those nine distributors and dealers are specific to the Americas which means Canada, U.S., Mexico. Okay? So we do have additional distribution in Europe and in Asia.

Can you tell me on your direct sales force what's their compensation mix look like?

They're salaries folks.

Oh okay and then just one quick housekeeping. What's your shares outstanding right now?

Let me see. It is 84.8 million.

Thank you very much.

Your welcome, thank you Walter.

Bye guys.

Once again ladies and gentlemen if you wish to ask a question please key star followed by one on your touch tone telephone. I'm currently showing that we have no questions in the queue at this time. I'd like to turn the presentation back over to yourself Mr. Tucker for closing remarks.

Well I want to thank you all for joining us today. I hope you can see that we're continuing to work hard at accomplishing our objectives that we set forth in our plan and really look forward to talking to you in the not too distant future with more results from Capstone. So thank you very much and thanks for joining us.

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