Capstone Green Energy Corp (CGRN) 2006 Q4 法說會逐字稿

Welcome to the Capstone Turbine fourth quarter, 2006 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like the turn the presentation over to your host for today's conference Mr. Ed Wright, Director of Financial Planning and Analysis. Please proceed, sir.

Thank you. Good afternoon and welcome to Capstone Turbine Corporation's conference call for the fourth quarter and fiscal year ended March 31, 2006. I'm Ed Wright, your contact for today's conference call. Capstone filed its annual report on Form 10-K with the Securities and Exchange Commission on June 14, 2006. If you do not have access to this document and would like one, please contact Alice Barsoomian at 818-407-3628 and she 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 statements relate to future financial performance, the advantages of the approval of our New York City materials and equipment acceptance application, the approval of Capstone branded products for listing on the General Services Administration schedule, the Broad USA MOU and other such business initiatives, expectations of new product introductions, their performance characteristics and our ability to deliver additional cost reductions among other matters. These forward-looking statements are subject to numerous assumptions, risks and uncertainties including the fact that the Broad USA MOU is subject to negotiation and execution of a definitive agreement and such an agreement may not result in an increase in sales. Also approval of Capstone branded products for listing on the General Services Administration schedule may not result in an increase in sales and does not ensure that we will supply products to the federal government. Additionally, approval of the application for listing our products on the MEA index may not result in an increase in sales.

These are among many factors which may cause Capstone's actual results to be different from future results predicted or implied in such statements. We refer to the Company's Form 10-K, Form 10-Qs, and other recent 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 and undertake no obligation an d 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 will now turn the call over to Chuck McBride, our Executive Vice President and Chief Financial Officer.

Thank you, Ed. Good afternoon, everyone. I would like to provide you with our results for the fourth quarter and fiscal year 2006 which ended March 31, 2006. Our revenue for the fourth quarter increased to $7.6 million, up approximately 40% from the prior year comparable quarter, and up over 7% from the third quarter. Revenue for the fiscal year ended March 31, 2006, was $24.1 million, an improvement of over 42% from the prior year. The growth in revenue demonstrates the continued strength in Capstone's distribution channel and the performance of our distribution base as a result of the strategy undertaken beginning of fiscal 2005.

Backlog at the end of the year was $7.1 million, a decrease of approximately 13% from the prior year end approximately 29% from the prior quarter. The decrease in new orders is attributable to the delay in the New York City Department of Buildings, material equipment acceptance application approval issued May 24, 2006. Our gross loss for the fourth quarter was $3.2 million or 43% of revenue. Included in the 2006 fourth quarter gross loss was $2.4 million of inventory write-down offset by $800,000 of warranty recoveries. The reported gross loss for the fiscal year ended March 31, 2006, was $10.5 million or 43% of revenue, an improvement of approximately 8% over the prior fiscal year. The improvement in the gross loss percentage reflects the increased revenue over fixed manufacturing costs offset by the reported inventory writedown.

Research and development costs were $3.1 million for the fourth quarter, an increase of $500,000 or 17% over the prior year comparable quarter. Expenses were higher primarily due to increased spending for development hardware. Research and development costs were $11 million for the year ended March 31, 2006, a decrease of $700,000 or 6% from the prior year. The decrease is due to the benefits received from cost sharing programs. Selling, general, and administrative costs were $6.2 million for the fourth quarter, an increase of 200,000 or 4% from the prior year comparable quarter. The increase was attributable to costs incurred for the Company's demonstration site in New York.

Selling, general and administrative costs were $27.7 million for the year ended March 31, 2006, an increase of $7 million or 33% from prior fiscal year. Approximately $2 million of the increase relates to the interstate settlement agreement completed during the third quarter, additionally $2 million of the increase related to increased professional fees and $0.5 million dollars related to severance costs. Approximately 700,000 of the increase related to the demonstration site in New York and $1 million to labor related costs including salaries, recruitment, relocation to support our continuous process improvement throughout the organization. Our net loss was 11.8 million for the fourth quarter or $0.12 per share, an increase of $1.8 million from the $10 million loss or $0.12 per share reported for the prior year comparable quarter. Our net losses were $47.1 million or $0.50 per share for fiscal 2006, an increase of $7.6 million from the $39.5 million loss or $0.47 per share reported for fiscal 2005. Included in the $0.50 per share net loss was the $2 million settlement charge.

Cash used during the fourth quarter was $8.1 million. Cash balances decreased by $5.5 million during fiscal 2006 after consideration for the completion of the registered direct offering of our common stock during the third quarter resulting in a net proceeds of approximately $39.2 million. Cash and cash equivalents at the end of fiscal year were $58.1 million. Now let me turn the call over to our President and Chief Executive Officer, John Tucker.

Thanks, Chuck. Good afternoon, everyone. Before I begin reviewing the fourth quarter's activities and fiscal year '06 year end accomplishments with you, I would like to take a moment to thank Mr. Dick Donnelly for his three-plus years of service as a Director of Capstone. Recently we announced that Dick has indicated his desire to not stand for reelection due to his increasing professional commitments globally with Ripplewood Holdings. I personally would like to thank Dick for his valued insight and direction and wish him continued success and all the best in his future personal and professional endeavors.

I would now like to welcome Mr. Darrell Wilk to our Board of Directors. Darrell was appointed to the Board in June of this year. He currently is a strategic planning and marketing instructor at Concordia University in St. Paul, Minnesota, and he also teaches executive sales seminars at the University of Wisconsin at Madison. More importantly, from 2003 to 2005 Darrell was Vice President and Director of Sales and Marketing worldwide for the electronics division of ITT industries which as many of you may know is a global engineering and manufacturing company. From 1981 to 2003 he also held the position of Vice President and Director of Marketing and Sales Worldwide for the Switch products division of ITT Industries. From 1972 to 1981 Darrell served in sales and marketing management positions in North America at 3M Company. Darrell, we are pleased to welcome you to the Capstone Board.

Let's move onto the discussion of our fourth quarter and year end results. As Chuck summarized for you earlier, we had a very positive quarter with revenue of $7.6 million which is an increase of 40% from the prior year's comparable quarter. Revenue for our fiscal year 2006 also increased to $24.1 million which is an improvement of over 42% from the prior year. This past quarter and fiscal year while challenging has been filled with numerous accomplishments which positioned Capstone for success.

Let's take a moment to refresh and revisit some of these accomplishments. As I just mentioned, revenue growth of over 42% year-over-year to $24.1 million. We submitted our initial request to the New York City Department of Buildings for MEA approval on our Capstone branded products and our Capstone branded emergency elevator package.

During this year Capstone Microturbine global operating hours surpassed 11 million hours, and our product performance continues to improve dramatically year-over-year. We announced the release of our C-65 product that produces 65-kilowatts of energy and established a new 2.5 to 3-part per million typical and a maximum level of NOx at five parts per million or less making Capstone products one of the greenest distributed generation products available today. And when we introduced our enhanced C-65 probing to the onsite power market, we also introduced our new C-65 biogas product, and we became the first non-photovoltaic generator to be listed to Underwriters Laboratories very stringent 1741 interconnect safety and operations standard for national grid interconnection throughout the entire U.S. marketplace. Last year our C-30 and C-65 products were the only stationary engines to ever receive Underwriter Laboratory's certification for any C class 1 Division II classification which allows us to operate in hazardous areas such as oil drilling platforms, pumping stations, and other oil, gas and combustible atmosphere applications.

During the year we successfully completed the beta testing of our C-200 product in the cold weather environment of the Northeast and have now begun conducting additional market research and analysis to develop our go-forward market strategies on this important product line. In January and in following within the framework of our cookie cutter concept, we signed a memorandum of understanding with Broad USA. Incorporated which is a wholly owned subsidiary of Broad air conditioning, the world's largest manufacturing of absorption chillers to jointly develop a fully integrated combined cooling, heat, and power systems package for our expanding CCHP customer market. Our cooperative efforts have further advanced with beta test units in the design stage and we anticipate making these integrated solutions available to the market before year end.

Also in January we announced that Capstone branded products became the only microturbine approved by the General Services Administration for listing on the GSA schedule. We established a joint marketing initiative with KeySpan Energy to support microturbine sales efforts in the Northeast region. Additionally, we kicked off our global outsourcing strategy to improve our buying power and lower our material costs, and we're pleased with the progress we are making with this initiative today, and we signed a national sales representative agreement with WESCO Distribution Inc. to further expand our sales reach and to provide strategic development and closure of national sales account potentials.

As we completed our first full year under Sarbanes-Oxley, we focused on improving our business processes, strengthening the financial team, and worked diligently to eliminate internal control weaknesses identified during the last year end close. If you recall, last year our auditors identified and we reported three material weaknesses. We immediately put remediation plans into place, addressed those issues, and I am pleased to announce that we closed this year with no material weaknesses. These important accomplishments are core to our strategy. They have established the foundation necessary to accomplish Capstone's strategic goals, so we believe we are on track to succeed and because this year end conference call takes place in the first quarter of our new fiscal year, I would like to touch on some of our most recent accomplishments with you.

We announced the delivery of our first GSA order recently. Because of the nature and location of the sale, I cannot provide specific details or speak to the economic value of the equipment, but I can say this first delivery has allowed Capstone to perform under the necessary GSA sales protocols, procedures, and processes and deliver our products to the GSA customer effectively. We also completed our first of many scheduled shipments to one of the branches of the government for their secure power needs in one of the more challenging environments. On May 24, of this year we announced the receipt of our first MEA number, 193-05-E from the New York City Department of Buildings and the New York Fire Department. We have patiently worked with these city agencies to accomplish this important approval. This is a significant achievement for Capstone to say the least.

The New York energy market shortfall has been estimated to be 2.6 gigawatts over the next three years. Now that Capstone branded products and the cookie cutter concept are MEA approved, we believe they are the ideal solution for distributed generation and secure power for New York. And further, let me share with you some additional information that substantiates why we believe this to be the case for New York and the rest of the country. In a recently published DOE annual energy outlook 2006 report, the statement is made that with growing electricity demands and retirement of 65 gigawatts of older generating capacity, 347 gigawatts of new capacity including NUCHP will be needed by the year 2030. If we use conservative predictive assumption of capturing a 1% share of that market opportunity per year, then this would translate to an available market opportunity of approximately $150 million per year for Capstone. Those numbers can be attained with our existing microturbine manufacturing capacities and facilities.

With the receipt of the MEA approval we also received our first West Coast sales order for a 200-kilowatt system for TOTO manufacturing in Atlanta, Georgia. Additionally we recently signed an extension to the sales representative agreement with WESCO, further strengthening our working relationship. And as we continue to process incoming GSA sales opportunities, I am pleased to report that today we received an aggregate CHP order of approximately $1.4 million that will be installed in a variety of governmental facilities. As you can see this latest order is reflective of our increasing position and indicative of customer confidence in this important market sector. We are proud and enthusiastic about our fiscal year 2006 results and these recent additional accomplishments and the opportunity that they represent for Capstone. As I hope you can tell from this conference call, we are very focused on executing our plans for success and look forward to sharing and discussing these ongoing successes with you in the near future. I'd like to thank you for joining us today, ad we'll now take your questions.

Our first question is from the line of Walter Nasdeo with Ardour Capital.

I would like to chat a little bit on the ongoing implications of the MEA approval and how you kind of see orders shaping up here in New York and just on a general sense of what you expect to see the run of orders as you work forward now?

Walter, hi, this is John Tucker. How are you?

Good.

Now that we have the MEA, I guess I would like to share with you some of the real excitement that has generated in terms of folks contacting us and chatting with us now about their needs for distributed generation in CHP. It has really picked up quite a bit. As you may well be aware, currently we're participating in the New York building show at the Javit Center today and tomorrow. The level of interest that our sales team has received has been really overwhelming. We're really excited about what that means potentially in terms of the opportunities. As we've mentioned in previous calls, certainly we've been a little reluctant to move forward on these opportunities until we have the MEA finalized, and now with this finalization of it and the leads that have been developing along the way, and with the leads that we're now developing on a daily basis, we're really excited of the potential. In our database today we have well over 200 leads that we've identified for multiple applications of both CHP and CCHP and with this finalization of the MEA we can now start really formalizing the proposal process for each of those customers that have inquired about the Capstone products.

What is the kind of lead time from the time you kind of get that signed order until the time the turbine is up and running?

Well, it is really difficult, and I know you'll appreciate this to give you a fixed length of time for as sort of a standard, but we have our factory lead times now down to twelve weeks which is about a 25% improvement over where we were a year ago. What's really important is that with each site being just slightly different from the time we execute an order and place an order on the factory for units, do the permitting, the engineering drawings that will be based on the MEA approval, our estimate that probably on average we're looking at somewhere around 18 to 20 weeks.

Okay. Okay. And how is the progress being made down in the Brooklyn facility as far as the offices going in and inventory and things like that?

Well, to be very honest, we really held off on doing any capital investment at our facility until we were assured that we had the MEA approval finalized. Now that we have the MEA approval finalized, we've actually begun working on our plans to actually put in place our appropriate offices, always being mindful of the cost of course, but a training facility so that we can train up our installers, and also so that we can work closely with folks like KeySpan, the Fire Department and the Department of Buildings to assure that we keep them current with what Capstone is doing with its products and more importantly consistent with what we've agreed to relative to the MEA approval. We expect that before year end our offices and training facilities should be fully operational and we should be ready to go.

Before year end? Okay. That's good. And just real briefly, what's your expected head count then when that facility is up and running down there?

Well, I can tell you that our projected -- I hate to call it head count. Our projected professional staff will be in the range of 6 to 8 people.

They will all have heads, right.

Yes, they will. We're actually counting on it. In fact it's that intellectual property that makes it so valuable for us to push forward in the market place to be successful, but our staffing which will be focused on our -- initially our sales activity, and then further strengthening as we move on as we accumulate orders will be to strengthen our service team. While we currently have service capabilities in place out of the New York facility, obviously as we sell our products with the service package inclusive with each of the sales, we'll then be able to develop and ramp up our service team to be supportive of the New York market opportunity.

Okay. All right. Thank you very much. I appreciate it.

You're welcome, Walter, it is good to hear from you again.

Sir, our next question is from Sanjay Shrestha with First Albany.

Great. Thank you. Good afternoon, guys, a couple of quick questions here. First on this $2.4 million of inventory writedown which impacted the gross margin in the current quarter, can you guys talk about that a bit more? Is it behind us, what is exactly that related to?

Hi, Sanjay.

Hey, Chuck, how are you?

We continually look at inventory and as part of that our process is to evaluate the inventory and periodically make adjustments as appropriate, so we've gone through a good process of getting our inventories down and feel good about them, and we'll continue to monitor that, but we have a good balance sheet at this point.

Got it. So the write down then is related to stuff that was there a couple years ago or was it something very recently and also looks like the initiated that you implemented about enhancing the quality of the product might have led to this warranty recoveries here. I am just trying to understand is it something that happened, what was going on in the near term, was it something that was there in the past, and you guys said it is time to sort of completely fix it and let's move forward trying to get to that positive gross margin territory?

Sanjay, as you know, we've been really focused on improving our reliability as part of that. One of the benefits we saw was getting our improvement in terms of reliability and therefore a benefit on our warranty programs, and the other side of that is certain parts as we've gone through this became obsolete and we cleaned that up as part of that.

Got it. That's kind of where I was going with it. Okay. Another one here obviously looks like a pretty solid attention on the product here in the near term, especially in the New York market and now with the MEA approval and clearly the reflection on the sequential decline in the backlog. How should we think about it from -- you have the MEA now, you have the GSA now, maybe there is something incremental that's going to come out from the broad perspective. If you were to look at it, would we start to see your backlog kind of show the -- again things are lumpy. I understand that. Would we start to see the backlog kind of start to go up sequentially as early as Q1 of next fiscal year or is it probably more a lot of opportunity in the second half of fiscal '07 setting up for pretty robust growth into fiscal '08.

Hi, Sanjay, this is John.

How are you, sir.

I'm fine. Thanks. I think it is really a good question. While we're going to immediately address with this MEA approval, and do you point out as well the potential was broad albeit later in the year, we are actually doing some proposals today currently that include broad chillers with them. We are actually moving forward to push that ahead, but I think your suggestion of it happening in the second half is really insightful. The development of the things that we'll do now to generate these leads into actual orders and opportunities to execute on will really start to show up as we move now into the second half of this year.

Okay. Okay. You guys did talk about the 200 leads here and if we were to sort of try to handicap that and maybe think about the potential order flow, you've got some 300 units as kind of the number that the GSA talked about, what does this 200 leads potentially mean from the potential megawatt bookings perspective?

Well, let me give you a little bit of perspective here. The 200 leads that I spoke about first of all it is specifically related to the New York market.

Of course.

I am glad you asked that question so that I could clarify it. When I think about the New York applications, they vary, Sanjay, from two microturbines up to 10 to 12. So if you think about that, I think nominally we like to think as we try to project ahead to capacities somewhere between 3 to 5 units per installation.

Got it.

So that gives you if you will sort of a benchmark, and it focuses you a little bit better, I hope, on sort of the magnitude with what's been generated to date and I guess one of the things that's really positive from our perspective is that with this cookie cutter approach and the MEA approval, it now will allow us and it is clearly begun, we've begun working with a number of the large architect and engineering teams to provide them with this data that was developed in the standardization of the MEA to give them the ability now to not have to overextend themselves in trying to determine how best to install a Capstone microturbine solution, so the strategy here is in providing these, I keep calling them the cookie cutter, but this standard approach so that they can minimize their engineering effort and quickly adopt the process and the installation procedures that we believe are highly advantageous to the important installation in providing a successful CHP application for their customer, and if you start to think about that, I mentioned in our last call, I have been trying to figure out how best to get this product to market quickly and effectively and ensure for our end-users that hey get the kind of performance that they deserve from a CHP solution. We think this now with the MEA in place really sort of cantilevers our efforts to really do what we need to do to be successful.

One last question then. I missed one thing. You guys did mention $150 million of the revenue I think that you can support with your existing manufacturing capacity, correct?

Yes, we did.

Okay. Anything new on the UTC front?

No. Our relationship continues. We know they're actively out in the marketplace, certainly representing their products, and our relationship continues to move forward.

Terrific. Thanks, guys.

You're welcome.

[OPERATOR INSTRUCTIONS] Sir, we have a question from the line of John Jim Mckillry with Unterberg, Towbin.

Can you talk about how much operating expenses might need to increase in order to cultivate and deliver on these 200 leads and the more that are coming out of New York? Thank you.

Jim, this is Chuck. We really don't give guidance. The only guidance we've really given is when we're going positive cash flow which is Q1 2008 or June of 2007, but I will tell you that we do get with top line, we do get as you would expect leverage on our G&A, on our factory, and those are really important that we wouldn't be adding a whole layer in. We will have -- we would expect to see that our cost of selling, if you will, will increase as we bring more direct resources to help on the selling efforts along with GSA in New York, et cetera, so you can look for some cost increase, but we do have good fixed cost coverage as we get top line growth.

Did you give the head count at the end of the March quarter already?

It is in the 10-K which we filed which I believe is, if memory serves me about 243.

Okay. And that is expected to increase as you start cultivating the New York market.

Yes, particularly -- I think you are going to see more sales effort and certainly you are going to see the service for us grow as our install base continues to grow out. That's a nice annuity piece of business for us. It is exciting for us because it builds a whole layer of revenue that's repeatable in long-term and predictable.

Thank you.

Thank you.

Sir, we have a question from the line of John McKeon with Wachovia.

Hi, gentlemen, good to be with you.

Hello there.

Last year there were two installations, one in an A&P market I believe in Connecticut and the other one in a Wal-Mart test facility in Colorado. What are the expectations in terms of time for them to get a proper analysis of the equipment and once that's done, what would be the process afterwards to turn that into a business?

Well, John, this is John Tucker. Both of those installations were installations of Pure Comfort product which was developed by United Technologies, and as we know, being on the OEM producer and provider of the turbines, the information that we currently have is that both of those systems are performing quite well, and so I can't give you any direct feedback from the customer perspective, but UTC has been the lead in that regard, and we expect that they're working closely with both of those customers, and the positive effect of those evaluations should be felt at some time by Capstone.

Is that typically a one-year test period or a two-year test period or what would the expectations be?

It really varies a lot from I think customer perspective to customer perspective. I would tell you that one of the things on a new application, many times the customers would like to see it go through some seasonal activity. As an example, through the summer when it is the hotter period so you get the effectiveness of the chiller, and in the case of Wal-Mart, that installation was done at a brand new Wal-Mart facility in Aurora, Colorado, so I am sure the Pure Comfort system is getting a shakedown just like the rest that facility is and probably you can think of it in terms of 9 to 12 months, so if that gives you some perspective, but certainly the opportunities that are offered up by a customer like Wal-Mart are very exciting I am sure for UTC as it would be for us.

Thank you.

You're welcome.

Sir, we have a question from the line of David Zarub with Hauck, Shaw Capital Management.

Good afternoon. I apologize because I missed part of the call so if you've already answered this I apologize. Did you say what the megawatt shipments in the quarter were, in the fourth quarter?

No, I don't think we did. Actually we stopped reporting in megawatts and moved to dollars starting this year, so didn't say. Hang on for a second. Do you have them handy? I don't have them. I tell you what I will do is I'll pick it up and e-mail it back to you. I don't have it in front of me.

That would be great. Maybe I just got my metric wrong as far as what you report. Maybe bookings then in megawatts?

We've actually translated our backlogs, all indicators into dollars because the financial community really is primarily interested in how we're doing revenue growth.

Okay. And then I was wondering if you could clarify something for me. When I saw the initial press release for the award of the MEA number and then again when you mentioned it today, you talked about it being the first MEA number, and I was just trying to understand that a little bit better. Are there more MEA numbers to come or what does that mean exactly?

Well, we -- this is John Tucker speaking. What we still have to work on and we'll receive an additional acknowledgement by the Department of buildings is on our emergency elevator package. So we still have some demonstrative work to do on that package with the city, and so there will be an additional award provided to us relative to that elevator package. That's why we thought it important to mention that this was our first MEA award.

Sir, we have no further questions. Back over to management for any further comments.

Well, I would like to thank all of you for joining us today. We'll be talking to you shortly as we're a good way through our first quarter of this new fiscal year. I really appreciate your continued interest in Capstone, and look forward to speaking with you in the not too distant future. Thank you very much, everyone.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Good day.