Capstone Green Energy Corp (CGRN) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Capstone Turbine first quarter 2006 earnings conference call. I will be your coordinator for today. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Ms. Melody McCoy. Please proceed, ma'am.

Thank you. Good afternoon and welcome to Capstone Turbine Corporation's conference call for the first quarter year 2006. I am Melody McCoy, your contact for today's conference call. Capstone filed its 10-Q with the Securities and Exchange Commission on August 9, 2005. And if you do not have access to this document and would like one, please contact me at 818-407-3740 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 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 to the Company's 10-K and other periodic filings with the Securities and Exchange Commission for a 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 occurrence of unanticipated events. I now turn the call over to John Tucker, our President and Chief Executive Officer.

Good afternoon, everyone, I thought I would start out the call today a little different than we typically do. But I would like to take the opportunity to welcome Chuck McBride to the Capstone leadership team. As our new CFO, Chuck will help us accomplish our objectives and continue on our path to success. As you probably have read in the press release, Chuck's experience and successful track record will have a positive impact on the Capstone team. So, today I would like to officially welcome Chuck, and I look forward to working with him as we move forward in our success driven journey of Capstone. So, Chuck, welcome.

Thank you, John. It is a real pleasure to join the Capstone team. Over the past 15 years, I have been fortunate to be part of several successful leadership teams, primarily in technology companies. I started with Xerox. Worked for companies like Computer Consoles, CalComp, Nelcore(ph) Emulex and most recently with FCG. s When I was doing my due diligence on Capstone I looked for fundamentals or key ingredients of any successful Company.

Here is what I found at Capstone, number one, people. Over the past two years, John has put together a strong team of experienced leaders who have dedicated their lives of making distributive power generation a commercial success. Number two, our technology has really got proven performance. It is both - - it is in the C-30, it is in the C-60, and we are working on it in the C-200. We are in a growing market, number three. Any time you're a big market that is growing, it is a good position for a Company that's emerging like we are. And number 4, at the time, we had about $63 million in cash in the bank as I looked at the Q4 year-end statements.

So, now let me provide with you an overview of our first quarter fiscal 2006 results ending June 30, 2005. So the way I would like to go about this is to talk about year-over-year comparisons first. And then I will talk about sequentially quarter over quarter comparisons. And for those of you keeping score, I've got eight major categories I will talk about. So the left bar is going to be backlog and megawatts. It is going to be backlog in dollars. It is going to be revenue, gross loss, operating costs and expenses, net income/loss, EPS and cash. And in the first segment of this, I am going to give you a comparison of year over year; that is, Q1 '06 compared to our Q1 '05. And it is a lot of numbers but I really want to you get an understanding what is going on inside the Company. And we want to offer more transparency than we have in the past and begin to get people better briefed on our financial position and condition.

So let me start with backlog for the quarter. Backlog for the quarter was 15.5 megawatts. We were up 7.5 megawatts or 115% from a year ago. Our backlog in dollars, $12.2 million, up $6.7 million or 146% from a year ago. Our revenue, $3.8 million for the quarter, up 0.8 million or 27% from a year ago. Gross loss was worse, about 900,000 or 36%.

Our operating expenses were at improved about - - is was 7.9, excuse me - - 7.9 million which improved about 0.4 or 400,000 from a year ago or 5% down. Our net loss was worse about $400,000 at 10.9 million and our EPS was essentially the same. Our cash for - - from last year was down 43.6 million and we are at 52 million today.

So, let me turn my comments over to the sequential look. Again, I am going to use the same categories we talked about before, but this time I am going to compare Q1 results to Q4, so you get a feel for where we have gone sequentially from the last quarter. So, again, starting with backlog and megawatts, 15.5 megawatts, we are up 4.7 or 44% in terms of backlog in megawatts for the quarter from Q4. In terms of backlog and dollars, we are at 12.2 million, as I mentioned. We are up $3.7 million or 46% from last quarter. In terms of revenue, we were at $3.8 million, down 1.6 million, which is 30%.

And if you saw the press release we issued this morning, there were two items worth noting, one is we are staging for our rapid deployment in our New York markets. So, 1.5 million of our shipment we directed to New York rather than to customers that would have generated revenue. And additionally, we had another $600,000 that we chose not to ship because we hadn't received payment from certain international customers. Our gross loss was 3.4 versus 1.8 in Q4, which was worse $1.6 million. This was - - this is really a swing. If you recall in Q4, we recorded a $1.6 million benefit from our warranty as we improved reliability and then in this quarter we had around $600,000.

So, it's really the swing of Q2 on that event, because as we mentioned - - as I mentioned before, 1.6 million was a big swinger in Q4. Our operating costs and expenses at 7.9 million, an improvement of 700,000. Largely driven as a - - due to a cost sharing program we have with the Department of Energy, and improved our operating costs about $900,000. In terms of EPS, we are about $0.01 worse than we were last quarter, and our cash is at 52 million, and we were down 11.6 or 18%. So hopefully all those statistics that weren't too boring. But I wanted to give you more transparency in terms of looking at the numbers.

As we move forward, our focus is obviously - - focused on continuing to work on reducing our product costs and decreasing our cash burn rate. One of the areas I really like to highlight is material weaknesses. As you may recall, we had three material weaknesses at year end, and they were depreciation calculation, accrual for legal, and inventory control. We have completely remediated the depreciation accrual - - the depreciation accrual material weaknesses and expect to cure the inventory material weakness by the end of December, 2005.

Moving to investor relations, finally, during the week of July 25, John and I met with several institutional investors in New York. The purpose of our visit is for John to introduce me to Capstone's financial community. As a result of these meetings, we scheduled two follow-up Investor Relations days August 24 and 25. John will host the group in our New York office - - in our New York office, excuse me. And I will cover the Los Angeles office. Now let me turn the call over to John.

Thanks, Chuck. Good afternoon, everyone. It has been a very active and engaging first quarter. We manufactured 5.9 megawatts of product in the quarter. 3.8 megawatt of product shipped to customers and generated revenue. This performance was down from fourth quarter but up year-over-year. Backlog increased to 15.5 megawatt, as Chuck mentioned at the quarter's end, up 94% from the prior year's comparable quarter and up 44% from the fourth quarter.

On our July 6 call, I reviewed with you the numerous accomplishments that we made during the past year. At that time, I discussed our robustness target accomplishments, our cumulative run-time performance improvements, our product improvement program affect on warranty accruals, our C-200 beta test program and recently released customer market requirement survey, our geographic market expansion, initiation of our supplier development program. And that program was focused on improving our cost position.

Let me take a moment to expand or our supplier development initiative actions. We have targeted four major areas to improve our supplier and cost position, those being; electronics, electromechanical devices, sheet metal, and machinings and castings all of which make up the majority of our product. As a result of these focused actions, we have placed purchase orders that will result in savings of approximately $1,100 per unit, which will impact C-60 products shipped in the third quarter of this year.

Additionally, we are taking similar actions on our C-30 product as well. All of these accomplishments are being targeted to improve our overall performance. During that time frame, we were developing additional initiatives, but unfortunately, we weren't quite ready to share those initiatives with you at that time. But as you have seen over the past month, we have shared with you a number of those initiative accomplishments.

While these initiatives are just beginning to take hold, I would like to recap them for you. On July 6, we announced the signing of a sales representative agreement with WESCO Distribution Inc. WESCO is a leading distributor of electrical construction products, electrical and industrial maintenance, repair and operating supplies and is the largest provider of integrated supply services. We are currently scheduling sales and product information training for the West Coast sales force, and expect the first training sessions to be completed within 30 days.

Additionally, I would like to point out the three offices of WESCO have already provided us with conceptual approval requests for three major projects with a combined volume of 2 megawatts of CHP equipment. I feel very good about the initial indications of interest being generated by the WESCO folks. We look forward to a long and successful relationship with them as we move forward together to find success.

The second key initiative that we announced was our jointly developed marketing promotion with KeySpan Energy Delivery for the sale, installation and factory-direct service of on-site generation products. I am very pleased that we could develop this joint program with the nation's fifth largest distributor of natural gas and the largest provider in the northeast. You should know that the first mailers were sent to approximately 1,200 customers that have or were identified to have on-site distributive generation needs. By the way, if you haven't seen the mailers yet, just go to our Website, www.microturbine.com under "what's new." To date, we are pleased with the initial responses to the mailers. We have received approximately 70 direct calls in response to the mailer.

Once we've received these inquiries, let me explain how the process works. First, we schedule a visit by a joint KeySpan and Capstone sales team to visit the prospective customer and evaluate their distributive generation requirements. This evaluation includes numerous aspects of the site to ensure that a cogent solution is the right answer for that perspective customer. Once this determination is made we obtain the previous year's energy bills to understand the customer's demand requirements and costs. With this data in hand, we then have the opportunity to provide a definitive proposal to the customer for consideration. While we are only three weeks into this initiative, we are very encouraged by the initial response.

Before I discuss our third initiative, I would like to highlight the announcement that we made on July 14 regarding our UL certification of any C, Class 1, Division 2 C-30 product. The importance of this certification has incredibly significance. We are first manufacturer to obtain UL certification for a product that meets these specifications and standards. We are pleased with this accomplishment because it provides additional market opportunities for the Company. And it reflects our commitment to provide our customers with safe, certified products from one of the most stringent and well recognized certification agencies in the world.

So you may be asking, why am I being so pointed here? It is because when you look at our competitive landscape, you see a number of our competitors who claim to be UL compliant. Notice they don't say "certified," just compliant. Well, in my view, compliant doesn't cut it with customers today. And as the need for on-site power generation increases, regulatory agencies and customers alike will want the assurance that the products they approve or buy will be certified to meet the rigorous requirements of the Underwriters Laboratory.

I would also like to inform you that we are currently preparing our C-60 product to receive the Class 1, Division 2 certification as well. And we expect a completion date for this certification to be the end of September this year. Discussing our UL certification is important because I believe that our product certification by UL played an important role in achieving our interim materials equipment acceptance number with the New York City Department of Buildings Division. The filing number we received will be referenced on all Department of Buildings filings that we're required to provide work permits for city-wide installation of Capstone-branded microturbine equipment. This approval will ensure the appropriate agencies, which must approve the installation of on-site generation, a consistent, safe, and preapproved installation standard for Capstone products in New York City. Additionally, the standard approach offers a consistent cost-effective solution for our customers. So I believe this proactive approach will improve our ability to execute sales more effectively in the future.

As we look at the opportunities before us, I would be remiss if I didn't mention President Bush's recent signing of the National Energy Bill. This Bill provides incentives for our companies to utilize our products for their on-site generation requirements and receive a 10% tax credit when they create and conserve energy with microturbine generators. Additionally, there are other aspects of the Bill that we believe will have an additional favorable effect on the sale of our products. Including $0.015 per kilowatt renewable energy production credit for biogas-fueled installations. And a requirement that electric utilities offer grid interconnection based on a nationwide standard. So, when you take into account the very positive aspects of the Energy Bill, what does it mean to Capstone? It means that a normal installation of two C-60, ICHP's will have a return on investment to an end user customer that could be improved by between 20% to 33% based on the Energy Bill impact and other applicable incentives, which vary from state to state. That's significant.

While we believe these accomplishments and developments are significant, we know that we have more to do. On August 2, we executed a distribution agreement with Shanghai Aerospace Energy. SAE is engaged in the manufacture and distribution of natural gas reducing and metering equipments. The use and availability, as you may know, of natural gas is expanding in China. And as this occurs, we see numerous opportunities for product sales by SAE and Capstone.

SAE's commitment to the energy sector and their natural gas market knowledge makes them an important partner to grow our microturbine business in China. In addition to distributing our products there, they will also support our outsourcing and cost reduction activities. We believe that there are significant opportunities on which to capitalize in China, and I will keep you informed of our progress in future calls.

On other fronts, today we announced receiving a 1.5 megawatt order for propane fueled C-60 microturbines for the Mexican government. You might recall that in our 10-K, we noted this new C-60-based propane product offering. While, this is the first order for this recently qualified product. And as I mentioned in this morning's press release we expect this fuel flexibility to be very valuable where natural gas is not readily available but is in the implementation stages.

On our last call, I mentioned that we were in the process of establishing Capstone Mexico. Next week, I will be travelling to Mexico to sign the necessary documents to establish our Capstone Mexico entity. The establishment of this entity will further demonstrate our commitment to this important marketplace. These key developments, I believe, will continue to build on our improving market position. And more importantly, I will keep you appraised of our progress on additional initiatives that we are currently developing. So I hope you've seen that our continuous efforts to improve have not diminished, nor will they in the near term. I want to thank you for joining us and we'll now take your questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Sanjay Shrestha of First Albany Bank.

Hi, guys, this is actually Steve calling in for Sanjay. Thanks for taking my call here. Just looking to get a little more color on that 15.4 megawatts that is in your backlog right now. Does that include the Mexico order that you just received?

No, no, Steve. That order falls into second quarter for us.

Oh, okay. So, I was wondering if you could kind of give us a breakdown here of the 60's and 30's in that backlog right now, and perhaps how much you expect to ship during 2005?

Steve, we are really not going to go down to a level of granularity in terms of giving mix and in terms of objectives. I think the transparency we're giving on the backlog gives you, both in megawatts and in dollars now, a good feel for where we are going with the business and don't really want to report on that granularity.

Thank you very much. Had to ask.

For competitive reasons obviously.

Sure, sure, I understand. Maybe just switching gears a little here. Looking at KeySpan obviously that is a great relationship you had. It seems like you are having some nice traction with the mailers that you put out. What are the chances of you expanding that relationship with KeySpan to say other markets? Obviously they cover a lot of different areas outside of the Metro New York City area. What are the chances of you kind of expanding into the Massachusetts area or things like that through KeySpan?

Well, if you recall from our year-end close call, Steve, we did say that we were looking at the possibilities of an office in Boston, and we are still looking at that. I think what's important right now for us mutually, that is KeySpan and capstone is as we have released these initial groups of mailers, we want to make sure that we have the process right. We want to make sure that we were able to respond effectively to our customers, and as we improve, we will start to look I am sure at other opportunities.

Great, great. And just one more question if I could. You talked about, I believe it was $1,100 a unit as far as cost reductions that are going to go into effect in the third quarter of this year.

On the C-60 product.

Yes, yes. How much - - when you look at your cost reductions and hopefully growth margin traction going forward how much do you look at as low-hanging through easy kind of cost reductions that you can create here? And how much is more going to be kind of longer term when we kind of eventually get to hopefully to that break-even gross margin?

Well, I think it is really hard to give you anything firm in that, but your question is really a good one. If we look at this $1,100, I'd probably would characterize that a little as low-hanging fruit. And I think as we now move to the next stage you always work a little bit harder as you work to get more traction in that arena. So I really feel pretty good about where we are right now. But it's really going to be, I think, one of the things that, perhaps I'd mentioned in the past, is that it is going to be about having John Fink and his team develop the supply base to give us the opportunity to share with them the real excitement that we have in the marketplace that we are starting to see as we gain traction. I believe as our suppliers begin to see the headway we make in the marketplace, we will be able to transfer that same enthusiasm on to them so that they can see similar opportunities. And as we're gathering this traction today, I know that's one of the areas that John is beginning to work with his supply base. So it is that ongoing development that has to occur. For us it is pretty exciting and it should over the long term, we should see benefit from it.

Great, great. Thanks a lot.

Our next question comes from Walter Nasdeo of Ardour Capital.

I would like to revisit the staging of the $1.5 million or so in expected revenue that actually came over to the New York area. Are you expecting that revenue clump to hit in the second quarter? Is there a product shipment that will make up for that expected revenue or is that just going to flow into this quarter as regular revenue?

Yes, we expect it to turn into revenue in the second quarter, Walt. And what we'll do as we look at this, as we balance customer requirements with the sales team. We will look at driving the revenue that meets our customer requirements and equipments in the quarter. As you may know, while our lead times are fixed, our requirements by customers aren't always exactly tied to lead time. Some of them, quite frankly, are sometimes in lead time - - within lead time and some are sometimes more than lead time. So, what we do on an ongoing basis is balance the commitments we that make to customers with their requirements. And we'll convert to revenue what's available

What is available?

I don't have that number right off hand in front of me but we can make that available - -

Okay.

- - perhaps on the next call. We will be prepared to answer those questions for you. But we are pretty comfortable with where we are right now converting the backlog into revenue.

Okay. What is the time frame as far as your expectation goes for the positive gross margins that we are - - that we have been kind of talking about?

Yes. We stated in our 10-K's and Q's, we are targeting to try to make that happen, and I think it is the end of fiscal 2006. And then positive cash flow - - excuse me - - thank you for correcting that. 2007, pardon me. That is our long-term goal is to really get on to being positive cash flow to answer your question, Walter.

But you are saying the gross margins are fiscal year '07 for the cash flows are '07.

Yes, both.

Both? Okay.

Both. My apologies. I had the answer wrong. I am being coached.

What is the current backlog as we stand right now. I know the quarter end was 15.5, but where are we at now because you have picked up some, right?

Hang on just for a second. We're looking for that number for you.

Okay.

Where are we at? Yes. We're - - as of 8/10, we have 18.3 in megawatts right now.

That is over all of last years?

Oh, yes.

Without a doubt.

Yes.

All right, good. And when do you expect that to start hitting the revenue line?

Again, we're not -- it is hard to predict tactically, and we don't - - we are not really giving tactical guidance, Walter because it doesn't make sense. We're - - what we are doing right is we know we've got a good opportunity or great opportunity in New York. And we want to make sure we have products positioned on the ground and our customers so that they can see it, kick the tires. Do what they need to do.

Hey, Walt. Another way just to answer on that 18.3. That's definitely all this year revenue.

Okay. That's was where I was going with that.

Kind of thought, yes. It is all - - it is not into next year. That is all this current year revenue. That backlog will be converted to revenue this year.

Perfect, that's what I needed to know. And if I could just briefly address the cash burn. A little over 11 million this quarter. Is that a number that we will be looking at for the next few quarters? Or how are you going to be able to bring that down a little bit and when do you expect that to kind of pull back a little bit?

Precisely when Walter, I honestly don't know. It depends on how fast we are ramp in terms of our order flow. And that's one of the things we want to put under the microscope in terms of the next 90 days to get a better feel of where we are at in terms achieving our goal. So, we will give you an update on the next call - - hang on for just one second. Okay. Four weeks? Four weeks. Yes, just for - - yes, sorry. John is sending me a note just reminding everyone I have only been here four weeks. So, I need to get my arms around some of these numbers. [LAUGHTER] So my apologies.

That is not a problem. I appreciate it, and I will talk to you later on. Thank you.

Thank you.

Our next question comes from [Vicram Kora] of Unterberg Tobin.

Thanks, good afternoon. Just two quick questions. First a follow-up on that $1.5 million related to staging in New York. Was that product marked for a specialty customer or was that out of the general inventory?

It was general related to New York to fulfill, as Chuck mentioned in his presentation, to fulfill immediate needs that would come out of some of these initiatives that we've put in play.

But you had enough flexibility to deliver it to customers at a later date?

Correct.

Okay, and also the 0.6 million payment from an international customer, what is the status of that? Has that been received? Did you expect to receive that this quarter? What is the status of that.

It's been shipped, and we've received payment.

All right, thank you.

[OPERATOR INSTRUCTIONS] It appears there are no further questions.

Well, I guess I'd like to take this opportunity, again, to thank you all for joining us today. We're really are excited about the momentum that we are gathering through this first part of our fiscal year 2006. And, again, on behalf of the whole team, I really want to welcome Chuck to the Capstone team. And we'll look forward to talking to you on our next call or seeing you on our New York Investor Day. Thanks, everyone. So long.

Ladies and gentlemen, this concludes the conference. You may now disconnect. Have a good day.