Capstone Green Energy Corp (CGRN) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Capstone Turbine fourth quarter and fiscal year ending March 31, 2007, earnings conference call. My name is Rob and I will be your coordinator for today. At this time, all participants are in a listen-only mode but we will conduct a question-and-answer session toward the end of this conference. (OPERATOR INSTRUCTIONS)

At this time I'd now like to turn the call over to your host , Mr. Ed Reich, Vice President of financial planning and

Thank you. Good afternoon and welcome to Capstone Turbine Corporation's conference call for the fourth quarter and fiscal year ended March 31, 2007. I'm Ed Reich, your contact for today's conference call. Capstone filed its annual report on Form 10-K with the Securities and Exchange Commission today, June 13, 2007. 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 and and obtaining positive cash flow; the ability to reduce cost and improve operational efficiency; after-market service potential under manufacturing opportunities and maximizing service revenue; the potential for licensing and selling technologies; our ability to improve overall product reliability; revenue growth and increased sales volume; our success in key markets; our ability to enter into new relationships with channel partners and distributors and other third parties; the potential of products to improve our overall electrical efficiency; increasing our focus on customers and building strong, long-lasting customer relationships; our ability to improve the efficiency of our sales group and to improve sales effectiveness and execution; and our ability to finalize (inaudible) and commercialize the Company's (inaudible) products.

These forward-looking statements are subject to numerous assumptions, risks, and uncertainties including the following: Our expectations about (inaudible) in the key 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 may be delayed or new products may not perform as we expect; our expectations with respect to after-market service, remanufacturing and licensing and sales of certain technologies may not be realized; we may be unable to increase our sales and sustain or increase our profitability in the future; we may not be able to obtain or maintain customers (inaudible) in other relationships that result in an increase in volume and revenue; we may not be able 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 plan our sales would not grow and therefore we would not generate the net revenue we anticipate.

These are among many factors which may cause Capstone's actual results to be materially different from future result predicted or implied in such statements. We refer you to the Company's Form 10-K and Form 10-Q 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'll undertake no obligation and specifically disclaim any obligation to release any revisions 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'll now turn the call over to Darren Jamison, President and Chief Executive Officer.

Thank you, Ed, and good afternoon, everyone, and welcome to the call. With me today is Mark Gilbreth, our Executive Vice President and Chief Technology Officer, Chuck McBride, our Executive Vice President and Chief Financial Officer, and Jim Crouse, our Executive Vice President of sales. Today, I'd like to start with the call with a review of our financial results for Q4 and fiscal 2007 and then I'll discuss the progress of my 100-day plan, and finally, I will talk about what you can expect to see in the coming quarters from Capstone before I open the call up for some questions.

At this point I'd like to turn the call over to Chuck to review the fiscal 2007 and fourth quarter results. Chuck?

Thank you, Darren, and good afternoon, everyone. I'd like to provide you with our results for the fiscal year ended March 31, 2007, and the fourth quarter. Revenue for the year ended March 31, 2007, was $21 million, a decrease of 13% from the $24.1 million reported in the prior year. The gross loss for the year was approximately $5 million or 24% of revenue compared to $10.5 million or 43% of revenue from the prior year. This represents an improvement in gross loss of 19 points. The year-over-year improvement in the gross loss is primarily due to to reduced labor and overhead and inventory charges, offset by increased warranty expense.

R&D costs for the year were $9.4 million, which improved $1.6 million or 15% from the prior year. R&D expenses declined primarily due to to reduced payroll, consulting, facilities, development hardware and supplies, offset by decreased funded engineering. SG&A expenses for the year were $24.6 million, a decrease of $3.0 million or 11% from the prior year. Included in SG&A expenses for the year was $2.3 million of non-cash stock compensation compared to $1 million in the prior year. This increase is a result of the Company's adoption of FAS 123(R) during the first quarter of 2007. Excluding the 123(R) expenses, SG&A decreased $4.5 million compared to prior year. The decrease was primarily attributable to a legal settlements incurred in the prior year, reduced professional services, lower labor and consulting costs, offset by increased bad debt and facilities cost.

Our net loss for 2007 was $36.7 million, which improved $10.3 million or 22% better than last year, despite lower sales. Earnings per share for the same period was $0.32 per share or $0.18 better per share last year on higher shares outstanding. As of March 31, 2007, cash and cash equivalents were $60.3 million. Cash balances at the end of the year increased by $2.3 million compared to the prior fiscal year. The Company completed a registered direct offering of its common stock on January 24, 2007, resulting in net proceeds of approximately $42.5 million. Backlog at the end of the quarter was $5 million, decreased 38% from the prior quarter and over 29% from the prior year. Our revenue for the fourth quarter was $5.8 million, which improved 1% from the prior quarter, although decreased approximately 23% from the same quarter last year. Our gross loss for the quarter was approximately $1 million or 17% of revenue compared to $3.2 million or 43% of revenue from the same period last year, and $500,000 or 8% of revenue from the prior quarter. The quarter-over-quarter decline in the gross loss was primarily due to higher warranty costs offset by decreased labor and overhead.

Research and Development costs were $2 million for the fourth quarter, which improved $1.1 million or 37% from the same period last year and were consistent with the prior quarter. R&D expenses declined primarily due to reduced payroll and consulting (inaudible) development hardware offset by lower funded engineering. SG&A expenses were $6.3 million for the fourth quarter, an increase of $100,000 or 2% from the same period last year, and a decrease of $100,000 or 2% from the prior quarter. This increase is a result of the Company's adoption of FAS 123(R) during the first quarter 2007. Excluding the 123(R) expenses, SG&A decreased $300,000 compared to the same period last year, primarily attributable to to reduced labor marketing costs, offset by increased bad debt and facilities. Our fourth quarter net loss was $8.5 million, which improved $3.3 million or 28% from the prior-year comparable quarter. Cash used in operations in the quarter was $7.5 million. This is our lowest cash burn since June of 2004. Earnings per share for the same period were $0.06 per share and approximately $0.06 per share better than last year on higher shares outstanding.

Now let me turn the call back over to Darren.

Thank you, Chuck. As I look at the Q4 and fiscal 2007 numbers, I'm encouraged by the continued trend toward lower operating expenses and positive gross margin. These two trends are contributing to the reduction in our overall cash burn. However, I must say I'm disappointed in our flat revenue and the conversion rate of new prospects to orders. On our last earnings call I outlined the key initiatives of my 100-day plan. My first 100 days as CEO have been extremely rewarding and I'm pleased with the progress we're making overall as a Company. My primary focus in the first 100 days was on the following four areas: First, build a strong balance sheet, and to insure the Company has the right foundation from which to grow; second, was increase the number of unit sales and provide top line revenue growth; third was reduce the cost of selling and R &D expenses; and last was become a customer and market-driven Company.

So let's start with the first item on my list, our balance sheet. As you know in January, Chuck and I went out to the capital markets and raised an additional $45 million. Today we have a strong balance sheet, with over $60 million in cash, which we believe is enough to fund our operating plan to reach cash flow positive in 2008. Without this strong balance sheet it would be extremely difficult to both fund the business and simultaneously attract the type of large customers and business partners we need to be successful. In addition I look to the final commercial development and product launch of our C200 kilowatt microturbine as being a critical step toward growing the business and moving us into larger projects. The launch of the C200 will more than double Capstone's addressable market in most places throughout the world.

Because of my goal to build a strong balance sheet I decided to look outside the Company for a partner to fund a significant portion of the C200 development cost. I have approached four marquise companies from within our industry to explore the possibility of providing us outside funding for the final stages of engineering, testing , manufacturing, of the C200 product. At this point I'm pleased to announce that these discussions are progressing extremely well and I will update you on our progress next quarter.

My key second initiative is to increase our top line revenues. In order to do this we intend to improve our sales execution, invigorate our existing channels, leverage new channel partners and add new strategic OEMs. To this end I brought in Jim Crouse, who's a 20-year industry veteran, to lead our sales and marketing efforts. During the quarter Jim has upgraded our direct sales staff by hiring five new proven industry sales professionals. These new sales resources come from within the distributed generation industry from companies like Solar Turbines, GE Hombacher and Ingersoll Rand. Jim has visited most of our current channel partners worldwide and has been successful in reinvigorating several of our current and past channel partners like UTC, Samsung, San Wan Systems, Shanghai Aerospace, Interexpert and others. In addition, Jim and I have been successful in tracking new distributors and new OEM partners to help improve our access to the global markets. These companies include [Cochrane Contractors] in the New York metropolitan area, Efinity in the Mid Atlantic region and Stellar Industries, an important OEM partner with global outreach.

Jim also signed an exclusive sales agreement with a company called Turbogenics that makes a small scale organic rank and cycle, or ORC product. This product will help Capstone be more competitive with the incumbent reciprocating engine technologies in applications where a customer does not have an on-site thermal load requirement for the waste exhaust stream we produce. This ORC product has the potential to boost Capstone's overall electrical efficiency from approximately 30% to almost 44%. This is critical in markets like landfill gas, biowaste, agricultural digesters and other markets where there is limited use for thermal energy but high utility rates. Jim has also implemented a new Customer Relationship Management system, or CRM system, to better manage our sales pipeline, grant us increased visibility of our leads and customer requirements, as well as forecasting pending orders. Overall I'm disappointed that we did not close more orders in the quarter but I believe Jim is laying the foundation to build a stronger sales organization, reinvigorating existing channel partners, signing new quality channel partners, and will develop a robust sales pipeline.

Last call, I discussed the need to grow our after-market service business, and that I had begun the search for an industry veteran to lead and grow our service remanufacturing business. Less than 100 of our units under long-term service agreements, this is a great untapped revenue stream for Capstone and our shareholders. With approximately 4,000 units in the field today, we have the potential for substantial multi-million dollar service annuity that as yet remains to be harvested. I was pleased to announce during the quarter the hiring of Shelby Ahmann. Shelby's a strong industry professional whose distributed generation company I purchased while at Northern Power prior to joining Capstone. Shelby made a tremendous impact in his three short months here at Capstone, as demonstrated by his service quotations issued for over 250 legacy units as well as 80 new units.

The third area of focus is on reducing selling and R&D expense. I began by moving away from Capstone's factory-direct sales model in California and New York to a more traditional indirect distribution model. With this model I've started the transition of several sales resources to our new distributors. These employees will transition over the next several quarters, but leave Capstone at the end of the day with an overall lower cost of selling. We continue to look for ways to lower our operating expenses and obtain outside R&D funding. My goal is to drive Capstone's cost of selling from today's approximately 45% to below 10%, with increased volume and lower direct selling costs.

Lastly, I've been focused on reshaping Capstone into a more customer-focused and market-driven Company. I've conducted several end-user customer meetings, as well as distributer meetings to build stronger, long-lasting relationships. In fact, after today's call, I'm immediately boarding a flight to Germany for a dedication ceremony with our distributer, Green Environment, at a new agricultured energy plant. This is a tremendous market for Capstone, and Green Environment could potentially become one of our largest distributors in the next year or two. I also started a distributer advisory council that is focused on the market needs of our key distributors and OEM's. I believe by listening to our global partners and using the feedback to drive our product development, we can expect to increase revenue, build stronger, loyal channels to market, with more satisfied repeat customers.

Now, I'd like to turn my focus to what we can expect to see from Capstone in the next several quarters. You should see Capstone reach positive gross margins. As you leverage our relatively fixed manufacturing costs with increased volumes you should expect to see positive gross margins. You should see us execute a definitive agreement that will enable us to offer our 200 Class C200 microturbine product to the market. You should continue to see Capstone announce new distributors, new OEMs, strategic business partners, all aimed at strengthening our product offering and sales channels in a global marketplace.

You should see Capstone build a world-class service business and to capitalizing on the thousands of units already in the field, and begin selling long-term service agreements with solid margins and positive cash flow. You should see Capstone start to tap the potential market for licensing and selling of our air bearing and power electronic technologies, as we leverage our over 95 patents in unique and electrical properties. You should see us continue to improve our overall product reliability and meantime between failures, putting further distance between Capstone and the competition in the small-scale power generation industry. And finally, at some point in 2008 I believe you'll see Capstone become positive cash flow and move to the next phase of our development as a profitable Company.

In closing, I strongly believe that not only does Capstone have the best microturbine solution in the industry, but we have the best solution for distributed generation below 2 megawatts. I believe this and my management team believes this because of our combined years of experience in developing, installing, servicing a variety of distributed generation technologies. I believe most customers below 2 megawatts do not want a solution that requires frequent maintenance, and the amount of scheduled and preventive maintenance required by most [recipient] solutions is too much for most small to mid-size customers. I also believe Capstone's reliability of over 8,000 hours between failures, combined with redundancy you get from networking microturbines, is favorable when compared to small reciprocating engine solutions. Finally I believe the world is looking for low-cost, highly-reliable, environmentally-friendly energy solutions that are both efficient and provide power when and where it's needed.

With that, Operator, I'd like to open the call to

(OPERATOR INSTRUCTIONS) Your first question is from the line of Sanjay Shrestha from Lazard Capital Markets.

Hey, guys, it's actually Graham in for Sanjay.

Hey, how are you doing, Graham?

Good, thanks. How you guys doing?

Great.

Quick question. I was wondering if you could give a little bit of color on the market opportunity in New York in terms of what are you seeing there?

Okay, great. The market opportunity in New York is still strong. As you know, we've moved through the MEA process and issues with the building department as well as the fire department. With the utility costs that are out there and the natural gas costs, we're very excited about moving forward with our new distributor, Cochrane Contractors. We've reengaged with Key Span; I think they're a critical part of our solution in New York and we look forward to seeing nice orders coming from both CCI, as well as UTC has also been active in the area.

So you're definitely beginning to see a bit of traction with the new team in place and the new focus?

Absolutely. We expect to see traction in the next couple quarters with the new team and the new focus.

All right, great. And then in terms of the timing on the 200 Class, when do you think we might be hearing an announcement on that with the partnership agreement, in the next quarter you're saying?

I think we'd like to see something before the end of the year. We're very encouraged with the negotiations that are ongoing, but obviously, because they're ongoing we can't say too much about them at this time.

Absolutely, I understand. And then just one final question. In terms of the outlook in key international markets I know you mentioned Germany. Can you just talk about some of your other opportunities?

Absolutely. Germany has been very strong for us, but our largest market has been Russia to date. Our distributor over there, BPC, has done projects with Intel, they've done ski resorts, pharmaceuticals, they continue to be a very major market for us. In fact, some of the team members are going over there this week to look at improving our service support over there and other issues. So Russia's a growing market, Germany's very strong, Spain is coming on, Italy continues to be a good market. We're looking for a new distributer in the UK and we hope to have a solution there shortly, as that market's also starting to be a little more robust.

All right, great. Thanks very much.

Thanks, Graham.

Your next question is from the line of Paul Clegg of Natexis.

Hi, guys.

Hey, Paul.

Just wanted to -- maybe this is a question for Jim Crouse, I don't know if he's there or not.

He is.

Maybe just a little more insight into the conversations you are having with those customers with whom you're reinvigorating relationships. What kind of discussions are you you having with them? What do they want to hear from you? What's the new pitch that you give them when you go out? What's getting them over the hump to give you, I guess. "a second chance" or to reestablish that relationship?

I think that for the most part, a lot of the customers had been -- felt neglected, that they hadn't seen anybody from Capstone. While our customer service center was there to answer the phone, they hadn't seen a face or just didn't get the impression that we were actively engaged in helping them grow their business. So most of the existing partners that I've been out and met with were very happy to see that we were here to support them and get them updates on product and where we were at as a Company, and once we did that, they were eager to get back to helping us sell the product.

Was any of it also as a break down in those lines of communication, leading to just them not being able to properly market the products? Is their knowledge of the products as good as you'd like it to be today?

I think -- and this may be an analogy you've heard in the past -- but Capstone had been very good about issuing fishing license, but not very good at teaching people how to fish.

Okay.

Selling microturbine solutions is different than selling other solutions, so signing people up as distributors but not showing them how to apply our product or how to run economics based on its performance didn't enable them to be successful.

Okay. And maybe a follow up here, the Turbogenics announcement, maybe if you guys could talk about what you saw in Turbogenics specifically that you liked? And should we think about that agreement being significant for your outlook or is it a series of announcements that we would need to move the needle on order volumes?

I think it's a significant technology that others have worked with, and we see it as a way to enhance our opportunity for customers, as Darren mentioned, that don't have a useful on-site need for thermal energy. I don't see it being a significant portion of our business in the near future.

Okay.

Paul, I really see it as an enabler and to make us more competitive with some of the reciprocating engine solutions demand (inaudible) that are out there that maybe have [straight] a little bit higher engine efficiencies if there's no recovery of exhaust heat. So it's really leveled the playing field and it gives us a little bit of an advantage. It also puts us up against fuel cells quite nicely, when you look at the efficiencies of the fuel cell versus our product and our cost structure.

Okay, but still, in terms of moving the needle on any sort of volumes, it's still going to be a relatively small percentage for the time being?

I would say it's one of many things we're doing to make ourselves more competitive in the marketplace and move more product.

Understood. Thanks very much, guys.

Thank you, Paul.

Your next question is from the line of [Max Vandeveld] of UBS.

Good afternoon, gentlemen. I apologize because I missed the first ten minutes of the call, but the jist of my questions would go along this line. It seems to me a couple years ago there was a reliability issue with a product that's been ironed out. They've shuffled the deck chairs two or three times on marketing efforts of what it would take to jump start the market and get interest generated in the product, and yet it still comes back to me that there must be a problem with a cost benefit for the microturbine that we haven't seen more reception in the marketplace. It's hard to believe that it's just a marketing effort that has consistently fallen flat on its face that's created the problem, and I'm just wondering if sort of [candid], is it -- is it a cost benefit equation or what do you sense aside from you haven't found the right combination yet that really has slowed the process down as long as it has?

Yes, Max, this is Darren. I'll answer that. Being from the industry and competing with microturbines for the years that I did, their reliability problems made them very easy to compete with. Their poor marketing techniques -- frankly arrogance and other stuff -- made them an easy target for large companies. Nobody ever got fired buying from GE Hombacher or from Caterpillar; those are the ones we're competing with. So in order to compete with those guys, we need to have a very strong marketing presence. We need to hire people from the industry, which we've done and will continue to do, that know how to compete and know the works of that product. And the reliability, we have solved it recently, but until we really came out and said here is our main time between failures, now go ask your current supplier what his MTBF's are, and he's not going to want to give you those answers or sign a long term service agreement. And we would -- our sole value proposition is one moving part, higher reliability, low maintenance, but we weren't signing long-term service agreements, we weren't offering extended warranties so we were talking the talk but not walking the walk.

I hear you.

When you're competing with the GE Hombacher, Caterpillar, Waukesha, you have to walk the walk. But I think any time you compare us with our total cost of ownership against those, what I consider antiquated technologies compared to our product, you're going to see us come out very well.

Nobody has ever said and you probably won't -- we hope to get to cash flow breakeven or even positive in '08 or by the end of '08 -- but would you make a projection as to units that you need to sell or megawatts to get to a cash flow? What's the goal to get there? Where do we need to get on the revenues or units?

We really don't give those specific guidance. I think the answer is it's in the magnitude of around 3X where we are today, but it really depends on mix. Obviously, our margin is on a 65 is better than a 30. We've actually seen a strong resurgence of the C30 as we move forward, especially in oil and gas platform applications. Oil and gas market is different from a cost benefit than traditional CHP, so it really depends on market mix of the product. The C200 obviously will add a different flavor to that as well, so I'd say 3X is kind of a general idea. We've got a plant that can do plenty of capacity. We can do over 2,000 units with very little CapEx, so the real issue we have is we have a fabulous product and a great value proposition and we need to execute more orders and compete against the big guys.

And when we were talking about foreign markets, with the exception of Russia, it's all Europe. I thought there was some interest being generated in the Far East as well; is there not?

There is definitely interest in Asia and I mentioned Samsung who's from Korea. Samsung has done a great job with our product on new buildings. They've got several new buildings coming out. In fact, they recently had an ad in the paper showing one of their projects with our product as part of the ad. But they've really looked at new construction, which has been slower to materialize. Obviously it takes (inaudible) permit design, build and construct a large-scale building. We're now working with them to move them toward actual existing retrofits to try to (inaudible) orders forward, but they are very engaged, doing a great job. Our conversations with [Broad] continue and we signed an MOU and when we get to the point we can announce a definitive agreement with Broad we will, but our units are installed at their R&D facility, they're running very well. We've been over talking to them last quarter. We hope to have good news to report there shortly.

And lastly, just a broad question to generalize, if we were to say the market is either -- it's a market there because of the efficiency of the unit, it's a market that's there because people need a standby backup power supply, or it's a market that is needed for distributed generation, does any one of those stick out as a bigger potential than the other?

I was hoping you're going to give me item C, which was all of the above. But obviously, first cost is an issue, total cost of ownership is an issue. As you look at Kioto and environmental reasons as we reach carb 2007 levels, emissions are driving us. We're seeing a lot of platinum lead buildings coming out with our products. Security is definitely an issue, as our machine actually [hacks], I guess, in some cases.

Sure.

But you have to have the cost driver. You have to have a reasonable three to four-year payback. It's great to be green, it's great to have security, but the product needs to pay for itself.

Right. Okay, thanks very much.

Thank you. All right, with that, operator, I think we'll close the call. Thank you very much.

Ladies and gentlemen, that concludes the presentation. You may now disconnect and have a great day.