Capstone Green Energy Corp (CGRN) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter fiscal year 2007 Capstone Turbine earnings conference call. My name is Mike, and I will be your operator today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of today's conference. [OPERATOR INSTRUCTIONS] As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Edward Reich, Vice President of Financial Planning and analysis. Sir, over to you.

Thank you. Good afternoon and welcome to Capstone Turbine Corporation's conference call for the second quarter ended September 30, 2006. I am Ed Reich, your contact for today's conference call. Capstone filed its quarterly report on Form 10-Q with the Securities and Exchange Commission on November 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 on 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 attaining positive cash flow, the sufficiency of existing cash balances and our anticipated cash needs, the ability to reduce costs and improve operational efficiencies, expectations of new product introductions and their performance characteristics, new product platforms and new product demonstrations, the ability to continue to increase product margins, expectations of increased sales in certain markets, including the New York market, and expectations of additional distribution [INAUDIBLE] and other markets, continued presence in the markets that we currently serve, expectations of growth in our existing distribution, including European orders, and our ability to improve product quality, deliver additional cost reductions, and to minimize business interruption.

These forward-looking statements are subject to numerous assumptions, risks and uncertainties, including the following, the broad [INAUDIBLE] 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 or listing on the General Services Administration schedule has not yet, and may not, result in an increase in sales and does not ensure 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 to the former Chief Executive Officer and the transition may have an adverse effect 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 cost or improve customer satisfaction.

Our release of new products and platforms may be delayed or may not perform as we expect. We may not be able to increase our sales and sustain or increase our 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. If we do not effectively implement our sales, marketing, service and product enhancement plans our sales will not grow and therefore we may not generate the net revenue anticipated and we may not be able to raise additional capital as needed.

These are among many factors which may cause Capstone's actual results to be materially different from future results predicted or implied in such statements.

We refer you to the Company's Form 10-Q, Form10-K 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 revisions 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. 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 the second quarter ended September 30, 2006. Our revenue for the second quarter was $2.9 million, which decreased approximately 48% from $5.7 million for the prior year comparable quarter, and 55% from last year's revenue of $6.6 million. Product sales to European and Russian markets declined approximately $2.3 million for the first quarter, although new orders of $2.5 million were received from these markets during the quarter.

Backlog at the end of the quarter was $6.8 million, an increase of over 26% from the prior quarter, although decreased over 45% from prior year comparable quarter. We are pleased to note in October, our major OEM customer placed a new order for 1.6 megawatts valued at $1.4 million. Our gross loss for the quarter was $2.3 million, or 79% of revenue compared to $1.1 million or 19% from the prior year comparable quarter, and $1.2 million or 19% of revenue from from the prior quarter.

The increase in gross loss and corresponding decline in the gross loss percentage reflects lower volume and increased warranty charge. Research and development costs were $2.6 million for the second quarter, an improvement of $100,000 or 5% from prior year comparable quarter, and $200,000 or 8% from the prior quarter. Expenses declined primarily due to continued lower spending on development hardware and reduced payroll costs.

SG&A expenses were $6.1 million for the quarter, an improvement of $700,000 or 11% from the prior year comparable quarter. The decrease from the prior year comparable quarter is primarily attributed to lower payroll, professional fees, offset by approximately $200,000 of increased non-cash stock compensation charges related to FAS 123R.

SG&A expenses increased $100,000 or 2% from the prior quarter. The increase from the prior quarter is due to slightly increased sales in marketing expenses and increased administrative costs with our annual shareholder meeting and proxy distribution.

Total operating expenses, excluding non-cash stock compensation were $8.7 million, down by $900,000 or 9% from the prior year and flat with prior quarter. Our net loss was $10.4 million for the quarter or $0.10 per share, an increase of $1.1 million from the $9.3 million loss, or $0.09 per share reported for the first quarter.

As a result of the slower than expected sales growth we are revising our goal of when we expect to achieve cash flow positive from the end of the second quarter of fiscal 2008, or September 2007, to the end of the fourth quarter of fiscal 2008, or March 2008. This a two-quarter shift from our prior goal.

Cash balances decreased by $9.4 million during the second quarter. As of September 30, cash and cash equivalents were $39.3 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. First, let me express my disappointment with our second quarter sales results. Our lower than anticipated sales volume was directly related to extended product demonstrations and their effect on our deliveries. In addition, product sales to European and Russian markets declined $2.3 million from the first quarter. As a result, our year-to-date revenue was flat over the same six-month period from the prior year.

However, during the period we were able to perform key product demonstrations with our control and remote monitoring systems. John Fink, our Executive Vice President of Sales and Service, also continues to build momentum with our relationships in the New York market.

We are pleased to report that our backlog has increased to $6.8 million up 26% from the last quarter. We continue to focus attention on managing our operating expenses. As Chuck stated, our operating expenses have decreased from $9.5 million to $8.7 million, or over 9% from the prior year. This decrease in operating expenses is attributable to continued cost reduction efforts made throughout this year.

Direct material costs have continued to show improvement. These improvements are a direct result of product cost reduction initiatives and efficiency improvements in our manufacturing facility. Our CR65, which was launched in March of this year, is also providing a shift in product mix which allows Capstone to achieve higher revenues and profitability.

We continue to focus our resources on development programs that are consistent with Capstone's core competencies to improve the MicroTurbine technology. We are pleased to announce that Capstone has demonstrated CARB 2007 emissions levels on a C65 MicroTurbine system at our development facility. The improvements will enable our C65 MicroTurbine system to meet the emissions standards which go into effect in January 2007 for the California Self-generation and Incentive Program, or SGIP.

You may be aware that the SGIP encourages customers to install clean distributed generation technologies such as our Capstone MicroTurbine by providing customers an $800 per kilowatt rebate. We are scheduling third party verification testing as part of the CARB 2007 certification process.

As you may recall, we announced that Capstone had completed beta testing of the C200 product. This quarter we committed engineering resources to begin product improvements in conjunction with finalizing plans for this product. The results of this effort will help Capstone provide a more definitive date on the launch of this product.

Our C65 MicroTurbine will continue to be the workhorse to provide near-term growth. This product continues to demonstrate value for our customers with its low emissions, low maintenance costs, smaller footprint for a reduced installation cost, and high exhaust temperature which provides higher system efficiencies in CHP and CCHP applications the market has come to expect from Capstone.

Improving our sales network to increase market penetration is a key element to the overall top line growth of our business. Florida and Illinois represent upcoming market opportunities where we are now negotiating agreements to add sales representation. In California, we have signed project resellers as part of our direct sales initiative including an energy services company focused on schools with swimming pools and hotel applications.

We are also targeting site and customer specifications to our products, as in our UL approved Class I, Division 2 MicroTurbine for offshore platforms and pipeline projects. This represents a growth opportunity for Capstone and we have located our sales resources for this market in Houston. As part of the growing installed base, we recently commissioned and installed an installation that provides power at a pipeline remote gas compression station in Bolivia.

We continue development of the northeast market, specifically the New York market. In September, Capstone installed our next generation power server product in New York.

The new advanced power server, or APS, operates with an off-the-shelf programmable logic controller for easy integration with building, balance of plant equipment, and third party building automation systems. The APS provides enhanced load following and intelligent dispatching algorithms to closely match MicroTurbine plant output with the customer's facility load demand and profile.

With the APS, Capstone MicroTurbines will minimize power supplied by the utility while maintaining the highest level of performance efficiency. This is the inherent value of the Capstone-designed load following and scheduling software operating in the APS. With the Capstone APS installed, our customers will maximize their savings through reduced overall utility costs.

The APS also includes our remote monitoring feature which allows customers and our service personnel to view the installed MicroTurbine systems via the Capstone service network, or CSN. CSN issues alarms to Capstone customer service for fast identification and diagnostic resolution of operating conditions that may impact system performance. We have installed and commissioned CSN at sites in California and New York.

In August, we increased our facility space in Brooklyn on Avenue D, where we will build new sales offices. We are completing the design to manufacture our new emergency elevator system's interface package, which we have named Capstone Safe Return System, or SRS. This Brooklyn location is also planned to be used for assembly and staging for certain accessory products for the New York market.

The Brooklyn facility is our East Coast test site to approve new application specific products for the New York market. This site is already operating our ICHP C200 advanced power server and remote monitoring products. We plan to install our elevator control test equipment at this location, as well.

Last year, New York City passed local law 86 which sets new green requirements for building construction and renovations. Buildings must now achieve a minimum lead silver status. Capstone ICHP and CCHP systems can provide lead points in support of silver, gold or platinum status.

We are also further enhancing our business development efforts in New York by providing our city approved documentation to the architect and engineering community to assist them in the site specification of Capstone MicroTurbine equipment. Coupled with our APS and remote monitoring system, Capstone offers integrated solutions to support green building initiatives.

At the end of the September, the New York state Energy Research and Development Authority, or NYSERDA, received a variety of customer applications for Capstone products on two program opportunity notices, or PONs. These potential Capstone customers have submitted several projects to NYSERDA for funding incentives to install Capstone MicroTurbines. While it is too early to predict how many of these projects will receive NYSERDA funding, it is a good sign that two customers have already received approval and their projects will now move into the detailed negotiation phase.

In October, we received new orders of approximately 1.6 megawatts from our OEM distributor for large scale CCHP systems valued at $1.4 million. European orders continue at a good pace as we grow new markets and our existing distribution gains momentum. We received our first order from our new distributor in Hungary and continue to receive repeat orders from our distributors across Europe and Russia.

France and Germany continue to offer long-term financial incentives for renewable power projects and our CR65 renewable fuel MicroTurbine is the ideal solution. We are working closely with our European distributors to develop these projects.

In closing, our management team continues to work to achieve profitability for the Capstone's shareholders and stakeholders. We remain focused on our core competencies and continue to decrease operating costs. We remain focused on our strategic market verticals, and have located sales resources in geographic locations where they can be most effective to drive top line growth. Thank you for joining us today and we will now take your questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] And our first question comes from the line of Sanjay Shrestha. Please proceed.

Hi, guys. It is actually Graham Madison in for Sanjay.

Hi, Graham. How are you doing?

Good, thanks. How are you?

All right.

I have a question. Looking at New York. And this is a process that's been coming for sometime. What are you hearing from your customers? It seems like sales are coming in a little bit slower than you expected or is it taking more demonstration work? What is the feedback you are getting from your customers?

The feedback we are receiving from the customers. Let me start with why our sales were longer than expected. Sales are longer than anticipated primarily due to product demonstrations and testing that Capstone is undertaking as a result of the MEA process. During the period, we did install applications, or the remote monitoring products in New York, and as I said we have remote monitoring sites running in California and in New York. So, from a customer perspective, what we are really seeing is just a delay right now due to demonstrations and the ability to deploy. But we are still seeing an interest from our customer base out there.

Okay. And so, there is nothing then. They are just saying they need to see more. It is a not a specific issue or anything?

Yes, the demand is still there. It hasn't disappeared. Really, the focus for Capstone has just been the longer than anticipated product demonstrations to meet the MEA requirements, and let me also reference that we had a number of customers during the period that submitted applications to NYSERDA for Capstone MicroTurbine projects, and of the applications that are submitted, we have already so seen two of those which have been approved.

Okay.

So we are beginning to gain traction in the New York market.

Okay. Great. In terms of the backlog you have, how quickly will that burn off? I mean does the backlog sort of lose timing in terms of when you see that flowing through?

The backlog is rolling for a 12-month basis. So when you look at it in any point in time it is no greater looking forward than 12 months.

Okay. And then just a final question, in terms of the SGIP opportunity, how big do you think this would be, and in terms of timing, when might we see sales start to come on there?

Yes, excuse me, this is Mark. The SGIP has actually been in place for some period of time now. And Capstone had previously CARB certified our C60 MicroTurbine product to the 2003 standard and the Self-Generation Program in place in California is used to encourage people to install distributed generation, but clean technologies that meet those emission requirements.

The ability to meet CARB 2007 allows Capstone to continue sales or continue meeting the SGIP requirement based on changes that will be effective in January 2007. Capstone has a number of installations within California. We have the Ritz Carlton, which has been installed with our partner, United Technologies, in the northern California, as well, Capstone recently released a sale to a large hospital customer, so it just allows us to continue those types of sales into California.

Okay, great. Thank you very much.

[OPERATOR INSTRUCTIONS] And the next question comes from the line of Walter Nasdeo. Please proceed.

Thank you, good afternoon, guys.

Good afternoon, Walter.

I would like to step back over to the New York market again. And you mentioned that the demonstration process is taking longer than originally anticipated. Can you explain what that process entails? I am not quite sure I understand that.

Yes, in the, I think it was May 24 of this year, Capstone had been issued an MEA number by the New York Department of Buildings, and under that MEA one of the things that was required of Capstone was enhancements to our advanced power server system or at that time our existing power server system to enhance the load following and building management algorithms, as well as to provide remote monitoring functionality.

As you can imagine, the NYSERDA and other agencies within the New York area have a push here for distributed generation given the shortfall of electricity in the market place. And with the deployment of these distributed generation products, the city would like to ensure that should there be an event, that the distributed generation resources are operating.

So there was some enhancements that they required of Capstone to our remote monitoring systems to ensure timely reporting and response from Capstone on those products. And within the past period we have installed that remote monitoring system at sites locally here in California, as well as a site in New York. So, we have demonstrated the capability of that product during the past period.

Okay. Now, so, the demonstration process is basically winding down and the sales process should ramp up now?

Yes. We've completed the demonstration process, and there have been, as a result of that, several customer applications that Capstone has actually assisted the customers in filing for the NYSERDA funding, and there are two of those applications that have been approved. So we are now in the detailed design phase of those projects to move forward with sales.

Okay. What is the efficiency now of your 60-kilowatt unit?

The efficiency of our 60-kilowatt unit? Is that correct?

Yes, please.

The efficiency of our 60-kilowatt unit is 29% plus or minus 2%. And an ICHP configuration which is the market segment which Capstone really operates. We see efficiencies of over 80% for on-site energy efficiency and now that is comparable to 33% electrical efficiency that we see from the grid.

Okay. Thank you very much.

Yes. Thank you for calling.

[OPERATOR INSTRUCTIONS] And we have a question from the line of Harold Weber, please proceed.

Hi, can you give a little, what is happening with the 200?

Yes, the 200-kilowatt, Capstone has had a number of systems in the field for beta testing. One of the units is actually installed at our site in New York, and as we reported on the last earnings call, operated during a grid emergency period for ConEd.

So the 200-kilowatt has operated successfully as we have completed what we are terming the beta demonstration of the product.

We have identified issues out of that beta program and Capstone is currently dedicating resources to begin addressing those product enhancements. As we get through, or more into the refocused efforts on completing those product enhancements, we will be able to gauge better timing of when we would launch that product.

Okay.

Any other questions there?

Can you give me a little bit of an additional update in regard to the, let's say the management shuffling that is going on? Is something going to be finalized about this in the not too far horizon?

Yes. As far as a new CEO, let me step back and say the existing management team that was in place is still all intact here at Capstone, and everybody here continues to be motivated about the prospects of the business and everybody is working very well together to drive sales which is our near-term objective.

As far as the CEO search, significant progress has been made towards identifying a new CEO for Capstone. The search for a new CEO began shortly after John Tucker's departure with a selection committee that was put in place by the Capstone board of directors. A number of candidates to date have been sourced and interviewed at the management team level, as well within Capstone, and the committee has reduced the candidate list to several well-qualified candidates.

Okay. Thank you.

Thank you.

At this time I am showing no other questions.

All right. Well, thank you for joining us this afternoon and we look forward to speaking to you next quarter.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect. Thank you very much.