Capstone Green Energy Corp (CGRN) 2007 Q1 法說會逐字稿

Welcome to the first quarter 2007 Capstone Turbine earnings call.

[OPERATOR INSTRUCTIONS]

I would now, like to turn the presentation over to your host for today's call, Mr. Ed Reich, Director of Financial Planning and Analysis. Please proceed, sir.

Good afternoon and welcome to Capstone Turbine Corporation's conference call for the first quarter ended June 30, 2006. I'm Ed Reich, your contact for today's conference call.

Capstone filed its quarterly report on Form 10Q with the Securities and Exchange Commission on August 9, 2006. If you do not have access to this document and would like one please contact Alice Barsoomian at (818)407-3628 or you can view all of our public filings at the SEC website at www.sec.gov.

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, among other things, future financial performance in obtaining positive cash flow, 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 memorandum of understanding and other such business initiatives as well as relationships with third parties and related expanded market opportunity.

Expectations of new product introductions and their performance characteristics, new product platforms and new product demonstrations, the ability to reduce costs and installation time, to improve quality and customer satisfaction, the expectations of increased sales to certain markets including the New York, and expectations of additional distribution agreements in various markets. Continued presence in the markets that we currently serves, hiring a new Chief Executive Officer and our ability to improve product quality, deliver additional costs, reductions and to minimize business interruptions.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties including the following. The Broad USA MOU is subject to negotiation and execution of a definitive agreement, and such an agreement may not be obtained and may not result in an increase in sales, approval of Capstone branded products for listing on the General Service Administration schedule has not yet, and may not result in an increase in sales and does not insure that we will supply products to the federal government.

Approval of the application for listing our products on the MEA index has not yet, and may not result in an increase in sales. We may not be able to retain a permanent replacement for our former Chief Executive Officer and the transition may have an adverse affect on the Company and its business relationships.

Our expectations about expansion into additional markets may not be realized. Certain strategic business initiatives and relationships may not be sustained and may not lead to increased sales. We may not be able to reduce costs or improve customer satisfaction, our release of new products and platforms may be delayed or may not perform as we expect.

We may be unable to increase sales or increase profitability in the future. We may not be able to retain or develop distributors or dealers in our targeted markets in which case our sales would not increase as expected and if we do not effectively implement our sales marketing service and product enhancement plans our sales will not grow and therefore may not generate the net revenue that we anticipate.

These are among many factors which may cause Capstone's actual results to be materially different from future results predictor of such statements. We refer you to the Company's Form 10Q, Form 10K and other recent filings with the Securities and Exchange Commission for a description of these and other 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 will now, turn the call over to Chuck McBride, our Executive Vice-President and Chief Financial Officer.

Thank you, Ed and good afternoon, everyone.

I would like to provide you with our results for our first quarter ended June 30, 2006. Our revenue for the first quarter was $6.6 million which is an increase of over 70% from $3.8 million for the prior year comparable quarter. However, this represents a decline of 13% from last quarter's revenue of $7.6 million.

The year-over-year growth in revenue reflects the increased demand for Microturbans, however, new sales in New York market are not increasing as quickly as originally planned. The delay in the MEA approval and extended product demonstrations have resulted in a longer than anticipated sales cycle.

Backlog at the end of the quarter was $5.4 million, a decrease of 55% from the end of the prior year comparable quarter and a 24% decrease from the prior quarter. The decrease in backlog reflects improved lead times from orders to shipment and a relatively flat order rate over the last three quarters.

Our gross loss for the quarter was $1.2 million or 19% of revenue compared to $3.4 million, or 90% of revenue from the prior year comparable quarter. And $3.2 million, or 43% of revenue from the prior quarter. Over the past year we improved gross loss by 71-points and by 24-points from the prior quarter due to higher volume and improved reliability.

Research and development costs were $2.8 million for the first quarter an improvement of $300,000 or 10% from the prior quarter. Expenses were lower due primarily due to reduced spending on the development hardware and reduced payroll costs. Selling, general and administrative costs were $5.9 million for the quarter, an improvement of $300,000, or 4% from the prior quarter.

Included in the SG&A during the first quarter was $700,000 of non-cash stock compensation primarily related to the Company's adoption of FAS 123R during the first quarter of fiscal 2007. Net of the non-cash stock compensation charges, SG&A expenses decreased approximately $800,000, or 13% compared to the same period last year. The improvement was related primarily to reduced payroll and related costs.

Our net loss was $9.3 million for the quarter or $0.09 per share, an improvement of $2.5 million from $11.8 million or $0.12 per share reported in the prior quarter. The first quarter net loss included an aggregate of approximately $800,000 of stock-based compensation expense due primarily to the Company's adoption of FAS 123R on April 1, 2006.

Excluding the costs associated with implementation of FAS 123R, total operating expenses included in the first quarter net loss improved approximately $1.1 million or 12% over the prior quarter as a result of the Company's continuing efforts to reduce expenses.

As a result of our most current forecast we have shifted our estimate of when we expect to attain our goal of positive cash flow from the end of first quarter fiscal 2008 or June 2007 to the end of the second quarter of fiscal 2008 or September 2007. Cash balances decreased by $9.3 million during the first quarter and as of the end of the first quarter cash and cash equivalents were $48.8 million.

Now let me turn the call over to our interim President and Chief Executive Officer, Mark Gilbreth.

Thank you, Chuck, and good afternoon, everyone.

Before I begin reviewing the first quarter's activities and accomplishments with you, I would like to recognize John Tucker for his three years of service as the President, Chief Executive Officer and Director of Capstone. During his tenure, Capstone made significant growth and achievements. On behalf of Capstone, I would like to thank John for everything he has done for the Company, its shareholders and its employees, and wish him all the best.

We have engaged an executive search firm tasked with identifying quality candidates for John's replacement. Additionally, the board has established a committee focused on rapidly moving candidates through our selection process. On a separate note I would like to thank John for his guidance and mentoring. It is a great privilege after working at Capstone for 11 years to have the opportunity to fill this important role.

During my time with Capstone I have led the engineering development team which has brought several new products to market. I spearheaded the growth of our customer service organization after initial product placement in the field and led the teams that improved reliability.

Most recently I was appointed to the position of Chief Operating Officer assuming responsibility for the day-to-day operations of Capstone. I look forward to taking on the challenging task of Capstone's interim CEO.

The fundamental strategy that the leadership team developed three years ago has not changed. For those of you that are new to the call let me recap the highlights of our strategy. Our vertical markets are and will continue to be combined heating and power, combined cooling, heating and power, resource recovery and secure power.

Geographically we primarily focus on three major areas, North America, Europe, and Asia. In North America the majority of our attention is focused on New York, the Federal Government and California markets.

Since January of this year we have received both GSA and MEA approvals. These new approvals have expanded the market opportunity for the Company. Our sales and distribution strategy remains constant. Under the leadership of John Fink, Capstone has streamlined its worldwide network of distributors and dealers.

Over the past three years, the Company has increased the overall quality of its distribution partners. In the near future, we expect to enter into additional distribution agreements in Florida, California, Illinois, and internationally. Additionally we market our turbines through an OEM agreement with UTC power, who supplies pre-engineered combined cooling, heat and power applications, focused on large commercial customers utilizing chillers greater than 100 tons.

We continue to pursue our relationship with Broad focusing on combined cooling, heat and power applications for smaller commercial customers. we have shipped Microturbines to Broad in Chine for the development of standard packages for their 20, 40 and 60-ton chillers. Upon successful completion of our agreement with Broad, we expect to introduce an integrated platform to the market which will significantly reduce the cost and installation time while improving quality and customer satisfaction.

During fiscal year 2005 we entered into the direct service business. We have deployed a direct service presence in California and New York, to supplement our authorized service companies and for future Capstone direct and dealer sales. We intend to continue to strengthen our representatives to our customers through our global service network.

Over the past three years the Company improved product robustness, reliability and lifecycle maintenance costs. During that period I had the privilege of leading the engineering team and we made substantial improvements in the reliability of our fleet. Over the last three years, our installed base run time hours tripled from 4 million to 12 million hours of operation.

With respect to new product development, Capstone has capitalized on its unique technology advantages in both its air bearing, and power electronics, building on its success with the C30 and C60 product series. We're nearing completion of our plan for the C200 product launch.

Finally, we are focused on improving our overall product costs through our international outsourcing efforts. Lee Estes is leading this initiative, recognizing the importance of protecting our intellectual property.

Now let me give you an update on our operating results for the first quarter. As Chuck discussed earlier, we had a positive quarter with revenue of $6.6 million, up over 70% from the prior year's comparable quarter with a gross loss improvement of 71-points. We continue to make progress on our goal to outsource non-critical components.

During the quarter we continued to focus on reducing costs. As a result of operating expenses for this quarter, excluding non-cash compensation expenses, improved $1.1 million, or 12% from the prior quarter. Our Europe, Middle East and Africa market continues to provide an avenue for sales opportunities, focused on Bio-gas and CHP, or combined heat and power applications.

Many of the countries within Europe have incentives in place to purchase electricity produced by generators that utilize renewable gas as the fuel source. Take for example France, which recently increased its incentive to 12 euro cents per kilowatt hour. In Germany, we received our first orders from a new distributor. The German market for renewable energy is growing and we expect our CR65 to be a good fit for the market.

During the quarter, we continued to see growth from our distributor in Russia where Microturbines are well-suited due to the relatively low natural gas prices and congested infrastructure. As part of our effort in New York we are expanding our market opportunity by working on our demonstration site for the emergency elevator package. We are branding our elevator package, the safe return system, or SRS.

The SRS is designed for emergency use of elevators and to support other emergency power requirements in the event of a loss of power. You may recall that the SRS was part of our MEA filing. Upon successful conclusion of the demonstration we expect to be the only MEA approved system in the New York market.

During this most recent heat wave in New York, the Capstone Microturbine systems installed at the New York sales office were used to offset 100% of the grid supply power coming into the facility providing ConEd voltage, frequency and power factor support. This is an example of how Capstone's distributed generation solutions can provide efficient on-site power, support existing grid infrastructure, minimize business interruption and reduce utility demand charges for our customers.

We continue to see a potentially substantial market for Capstone products in New York and are actively developing and pursuing sales leads. Capstone has relocated John Fink, Executive Vice-President of Business Development, to the New York office where he will support the sales effort associated with Keyspan and the West Coast Sales Representative network.

We are beginning to see the positive impact of the MEA, as architectural engineers are now specifying Capstone products for a distributed generation, heat and cooling applications. Capstone products have been specified on several lead certified building projects in New York City.

According to New York Business the Green Buildings Law will go into effect beginning in January 2007. Additionally, they said most municipal construction and substantial renovations by the city as well as private projects that get at least $10 million or half of their funding from the city must achieve lead silver status.

We believe Capstone products are a great fit in these projects and our products have already been used by buildings achieving platinum status. This is a good example of how we believe the market for DG is building.

In summary, our product performance continues to show dramatic improvements in reliability which should further enhance customer satisfaction. Our Capstone Microturbine product fleet already exceeds 3,500 units with 12 million operating hours. We are receiving positive feedback from our customers as a result of our direct service offering.

We made continuous improvements to manage the business move effectively, reduce costs and further our growth and market focus. There is a potentially substantial market for Capstone products globally, and most notably in New York where we are taking steps to allow us to actively develop and pursue sales leads.

We have a leadership team in place that was fundamental to the development of our strategic plan and is committed to achieving its success for Capstone's customers, employees, and shareholders.

Thank you for joining us today and we will now, take your questions.

[ OPERATOR INSTRUCTIONS ]

Your first question comes from the line of Sanjay Shrestha with First Albany, please proceed.

Great, thank you. Good afternoon, guys. Couple of quick questions. First, from the existing backlog at the end of the first quarter, what is the time line on the revenue recognition on that backlog? Is it all going to get burned in the second quarter? Or it is actually something that extends to the end of the year?

Sanjay, it's Chuck, our backlog runs through the next 12 months is our standard roll. The majority of that is sitting in the near-term quarter though.

Okay, now one other thing. Have you guys looked into from a planning standpoint, sounds like you are looking at some outsourcing, some procurement and cost reduction.

What sort of a revenue run rate do we kind of need to get to get to that gross margin positive or break-even and then also kind of to get to that cash flow break-even type of a number? Are you guys prepared to talk about that at least qualitatively at this point in time?

Sanjay, no, we've elected not to give guidance on our revenue other than to continuing guidance on where we think will go cash flow positive. We are not going to go there.

Okay and based on your recent backlog trend here, what are your expectation for--when do you guys think you might actually get to that cash flow break-even?

We think right now, September 2007 which is Q2 of our fiscal 2008, Sanjay.

Okay, great. One thing I am trying to understand a little bit better. Obviously we've had the heat wave, your product should actually be an ideal peak power solution especially from a command and power standpoint, you now have an MEA approval, but yet the bookings sort of had lagged here.

Now does it mean that there is pent up demand here so when we see your Q2 numbers that there is a dramatic jump on your backlog both on a sequential as well as year-over-year basis which sets the stage for fiscal '07 to be up year-over-year from fiscal '06? How should we be thinking about that at this point in time?

Sanjay, this is Mark Gilbreth, how are you?

As far as sales growth, in the New York area you are absolutely correct as I commented in the script here Capstone Microturbines are ideally suited for the application you mentioned, and what we have at least done in the near-term is we have seen an increase in demand from the marketplace in New York and that is why we, as a company, have assigned John Fink to the New York marketplace.

His role there will be to add sales staff to our New York office and additionally we are devoting technical resources as a team to accelerate product demonstrations in that marketplace.

Going forward, we anticipate that we will be making additional progress both with our GSA and the pursuit of those leads as well as in New York with our WestCo distribution channel and then the Broad and Safe Return systems as they come online.

Okay, so is it fair to say that--at least conceptualize that backlog had bottomed here and it should actually show some nice growth going into the upcoming quarter? Is that a fair assessment then?

We do see a lot of leads coming in from the New York marketplace and we are getting the tactical people on the ground to be able to process those leads and get sales orders in here as quickly as possible.

Thanks.

[ OPERATOR INSTRUCTIONS ]

Your next question comes from the line of Walter Nasdeo with Ardour Capital, please proceed.

Good afternoon. I would like to follow-up on Sanjay's questions about the New York marketplace. I am curious as to really what is the problem, what's the drag here, we waited so long for the approval, I would have assumed that something would be in place to hit the ground running as soon as the approval came through. Can you give me some clarity on that please?

Yes, Walter, this is Mark Gilbreth, as you can imagine the sales cycle time in New York, while we have significantly reduced that from our other markets with the MEA approval in New York, what we are seeing though is just the time to get through the project proposal cycle, and that is why we are deploying resources to the New York market area to help accelerate those efforts.

What is the sales cycle? How long are we looking at?

As we look at the sales cycle, really the cycle that we're moving through, is really--you go to the site and you have initial conversations with the customer, you move through, you make proposals getting to the right people within the organization that are going to make business decisions.

By bringing Lesko online as well as our--as our distribution partner, we have made the appropriate efforts and contacts to reduce that sales cycle time. But still, we can expect something on the order of about three to six months.

I don't mean to be harping on this, but it was last year when we had the mailing with Keyspan that generated a lot of leads here on the East Coast, what sort of development has been done with that group of leads? Are they getting close to signing? I am just a little confused as to why it is taking so long after that approval, I would have expected more orders to hit quicker.

Keyspan had sent out a mailer as you mentioned and we had a number of leads, but as you can imagine we were frustrated with the delay in the MEA approval as you would expect some of the people that responded to that mailer as well. Those people are still interested, however, the delays really put a lot of those leads on hold for some period of time. Now as the MEA was released on May 24th, we began the sales cycle at that point in time to reengage those customers and to get back into the sales process to close those orders.

Okay, so we should be seeing some hit here pretty soon. What is the capacity in Brooklyn now? I haven't been down to the facility in a couple of months. Has that been built up? Are you going to be moving a lot of products through there or how are you planning to meet the demand for the products here on the coast?

Yes, our intent there, again as I said, we put John Fink on the ground. He is there in New York meeting with our distribution channels as well as customers. We're working on hiring the sales staff to help accelerate those orders coming through.

Thank you.

[OPERATOR INSTRUCTIONS]

Correction, your next question comes from the line of Kent Holden with Gagnon Securities, please proceed.

Good afternoon, gentlemen. Just a little follow-up on that, what percentage of the sales were in New York this quarter?

Hold on just a second, Kent, we're looking up that information here quickly. I don't think we've given specifics there.

Our U.S. number during the quarter was approximately $2.5 million and New York still wasn't yet a real material part of that number as we move forward.

What about United Technologies?

United Technologies was around $77,000 I believe for the quarter.

Okay, thank you.

At this time, there are no further questions appearing in queue.

All right. Thank you for joining us this afternoon, I wish to express my personal excitement and the leadership team's excitement at leading Capstone through the growth ahead. I look forward to speaking with you all again.

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