Capstone Green Energy Corp (CGRN) 2008 Q2 法說會逐字稿

Good day, and welcome to the second quarter fiscal year 2008 Capstone Turbine earnings conference call. My name is Candace, and I'll be your coordinator for today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to Vice President and Chief Accounting Officer, Miss Libby Reynolds. Please proceed.

Thank you. Good afternoon and welcome to Capstone Turbine Corporation's conference call for second quarter fiscal 2008, ended September 30, 2007. I'm Libby Reynolds your contact for today's conference call. Capstone filed it's quarterly report with the Securities and Exchange Commission today November 8, 2007 If you don't have access to that document and would like one contact Alice Barsoomian at (818)407-3628 or you can view all 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 provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, future financial performance and obtaining positive cash flow , the ability to reduce costs and improve operational efficiencies, achieve positive gross margins, compliance with certain government regulations, opening new markets for our products and attracting large customers to our products, new applications for our products, including the hybrid bus market, our ability to improve overall product reliability, revenue growth and increased sales volume, our success in key markets, our ability to enter into relationships with channel partners and distributors and other third parties, the energy efficiency and reliability of our products and their ability to address utility capacity issues, value to customers of our low emissions products and the environmental advantages of our products. These forward-looking statements are subject to numerous assumptions, risks, and uncertainties including the following-- our expectations about expansion into key markets may not be realized; certain strategic business initiatives and relationships may not be sustained and may not lead to increase sales; we may not be able to reduce costs or improve customer satisfaction; our released new products may be delayed or or new products may not perform as we expect; we may be unable to increase our sales or sustain or increase profitability in the future; we may not be able to obtain or maintain customer distributor and other relationships that result in an increase in buying or revenue; we may not be able to comply with all applicable government regulations; 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 plan our sales will not grow, and therefore we may not generate the net revenue anticipated. These are among many 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-K, Form10-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 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, or the occurrence of any unanticipated events.

I will now turn the call over to Darren Jamison, our President and Chief Executive

Thank you, Libby.

Good afternoon. I would like to welcome everyone to Capstone's second quarter earnings call. With me today is Jim Crouse, our Executive Vice-President of Sales and Chuck McBride, our Executive Vice-President, and Chief Financial Officer. Mark Gilbreth is not with us today. He is presenting on my behalf at the Pacific Coast Equities Clean Technology Conference in San Francisco.

Today I would like to start the call with a review of our significant events to of the quarter and then have Chuck walk us through the financial results. Chuck will then turn the call back over to me and I will discuss our progress towards our strategic objectives, and review the progress in each of our key market segments before I open the call up to your questions.

Overall I am very pleased with your accomplishments this quarter. First we received a $2.4 million order from a major oil and gas company to provide C30 turbines along a natural gas pipeline. This order was a direct result of upgrading our sales talent in the oil and gas sector and ranks the second largest order for Capstone for 2001. Next we announced reaching a strategic agreement with United Technologies for the commercialization of the C200 product. I see the C200 as being a critical step to the company achieving profitability as essentially doubling our (inaudible) market and allows us to compete in the one to two megawatt range. This agreement was significant in several other ways-- first it provides $12 million in outside funding, of which we received the first payment of $1.5 million, during this quarter and contributed to reducing Capstone's cash (inaudible) rate, as Chuck will discuss; second it provided $800,000 of incoming services to assist us with material selection, life cycle testing and-in put on key vendor selection, among other things. UTC has an extensive track record in building rotating equipment, metal allergy, from their experience with the Pratt and Whitney segment. Third, it provides a strong endorsement of Capstone and the viability and significance of Capstone's products, as UTC is an industry leader in both cutting edge technology and environmental stewardship. In addition, UTC is a valued OEM partner and we expect our new C200 product to open more markets and key large scale customers to both UTC and Capstone. As they like to say; big likes to buy from big and UTC definitely has a proven track record with Fortune 500 companies, that might not otherwise invest in a new technology from a company the size of Capstone.

(technical difficulty) successfully negotiated the first commercial sale of our new C200 product (technical difficulties) environment for buyer gas plants in Germany. This $3.8 million order is a good start to the prelaunch program we will kick off at POWER-GEN in December. This order, Capstone's largest since 2001 from a key business partner demonstrates the market's interest in our larger, and more electrically efficient 200-kilowatt product.

We also announce three new distributer centers since last earnings call, as we continue to build out and strengthen our distribution network. All three are quality companies with industry experience and a strong customer base.

We then recently announced the expansion of the Board of Directors to include a executive from the oil and gas industry and one from the casino resorts industry. Both Holly Van Deursen and Gary Mayo are talented individuals that will contribute greatly to our board. The addition of these two directors brings our board members to nine. We could only do this if we were extremely confident in our ability to work together as a team and build on what is already a tremendous goup of talented business leaders.

And lastly in the quarter, we announced the launch of Capstone's ultra low emission product that not only meets California Air Resource Board 2007 requirements, but opens up the California market and makes Capstone an industry leader in low emission technology worldwide. By achieving the stringent carbon levels, were are now meeting the same emission levels as fuel cells at a fraction of the price per kilowatt with more fuel options and operational flexibility. As the world continues to look for cost effective solutions to energy efficiency and climate change, we believe our new ultra low emission product will be a tremendous value to our customers worldwide.

I'd this time in the call, I'd like to turn it over to Chuck, to review the second quarter results. Chuck?

Thank you, Darren, and good afternoon everyone. I'd like to provide you with our results for the second quarter, ended September 30, 2007. Total backlog at the end to have quarter was $10.4 million of which $7.2 million is short-term and is defined as converting to revenue within 12 months. Total backlog increased $5.1 million or 96% from the prior quarter and approximately $3.6 million or 53% from the same period last year. Our revenues for the second quarter were $7.2 million, an increase of 145% from the $2.9 million reported for the same period last year, and an increase of approximately 28% from the $5.6 million reported for the first quarter of this year.

Our gross loss for the quarter was $800,000 or 10% of revenue compared to $2.3 million or 79% of revenue from the same period last year and $2.5 million, or 44% of revenue from the prior quarter. Improvement in gross loss from prior year was primarily due to increased total volume and higher margin C60 series units and lower warranty and inventory charges of $1.3 million expensed during the same quarter last year.

Research and development costs were $2.4 million for the second quarter, decreased approximately $300,000 or 12% from the prior quarter and improved $200,000 or approximately 6% from the same period last year. R&D expenses are reported net of benefits from cost sharing programs such as our UTC fundings. We received the first $1.5 million of the $12 million commitment and applied approximately $100,000 of that receipt against R&D expenses this quarter. The remaining $1.4 million will be recognized against R&D expenses in future periods.

SG&A expenses were $5.9 million for the quarter an improvement of $200,000 or 3% from the same period last year and flat when compared to the prior quarter. Our second quarter net loss was $8.5 million or $0.06 per share, an improvement of $1.9 million from the $10.4 million loss or $0.10 per share reported last year. Cash decreased by $4 million during the second quarter. Cash used in operations was $5.4 million for the quarter compared to $9.9 million for the prior quarter and $9.6 million for the same period last year. As of September 30, 2007, cash and cash equivalents were $46.3 million. Our goal is to achieve cash flow positive by December 2008.

Now, let me turn the call back to Darren.

Thank you, Chuck.

Looking back at the second quarter of fiscal 2008, our revenues and backlog increased significantly as our new sales organization and marketing strategies began to get traction and yield positive results. I was also pleased to see the reduction in gross loss which demonstrates that as our volumes increase we can expect to achieve positive gross margins.

As an update to last quarter, our primary R&D efforts are primarily focused on commercializing the C200 product and the liquid fuel C65. As a result of signing the UTC agreement, overall R&D in our future periods will be lower despite our ramp up on the C200 programs.

We continue to see strong growth from last year as we discussed in our last conference call. Finally, I will take a minute and give you to progress on several of our key markets. Our strongest markets, Europe and Russia, we continue to see strong growth from last year as we discussed in our last conference call. In the New York market, we shipped product and received additional orders during the quarter, as well as our first order from our new distributer Cogen Contracters. In addition, Cogen Contracters is working with several sub-dealers and KeySpan to bring this critical market online for Capstone.

Speaking of New York, the hybrid electric bus market continues to generate substantial opportunities for our product. In this application the MicroTurbine acts as a giant battery charger and a bus powered by our turbine produces lower emissions, less noise, lower vibration, and improved fuel mileage. When you combine that with our high total reliability and cost of ownership it makes a natural fit for a transit property looking to improve bus pullout rates, lower operating expenses and basically improve overall customer satisfaction. Our partner Design Line has received positive feedback from demonstrations in New York, Los Angeles, San Diego, and other key markets looking to purchase thousands of HEV buses over the next several years.

Another strategic advantage we have in the transit market is Capstone's fuel flexibility. As New York is looking for diesel products or biodiesel powered buses, San Diego is using can compressed natural gas and Los Angeles uses propane and CNG as well. California remains a strong market opportunity which has been limited year-to-date absent a carb certified 2007 product. With our official certification from the Air Resources Board we will now be able to re-engage this tremendous market opportunity located in our own backyard.

In the oil and gas sector we had a strong quarter with significant orders from large oil and gas companies. Our strategy is to position Capstone to be the industry standard for power generation below two megawatts. Oil and gas customers are focused on reliability and total cost of ownership. I will look to continue to strengthen or broaden our global outreach efforts as we attempt to gain additional market share in this key market segment.

We continue to work hard in Asia with a major focus on the market in China for combined heat and power plants and resource recovery projects.

We are working on signing several new distribution partners, and I'll update you more in the quarters to come.

With the ever growing global environmental awareness and shifts in corporate and government policies, it is important that the Capstone branding and image be upgraded to reflect the capabilities of our green products. When people think of green, they think of solar, wind, and maybe fuel cells. We need to increase that awareness to micro-turbines and show the world our place in providing green energy and improved efficiency. We are well along the path of branding Capstone as a clean, green, and reliable energy provider. We have enhanced our corporate image with the induction of a new corporate brochure, updated product brochures and as well as a new marketing materials and campaign. We're in the process of updating our website to not only feature new branding but to be more educational on both the economic and social values of our systems and to be more interactive with our potential customers and investors. Over the next week, you'll see on our website, we will offer customers a simple financial calculator, and a simple carbon calculator so they can better evaluate the financial and social benefits of our micro-turbine products.

We continue to work with the media to get our story out and better educate our customers. During the quarter we have filmed an informational spot to be aired nationally on public television stations. In addition we have produced a longer video segment that is now on our website and will used as our sales tools global distribution network. Another key element of our strategy is working with federal, state, and local governments to to educate policy makers on how Capstone projects can help contribute to lowering greenhouse gases and solving important energy reliability and utility capacity issues. Whether its meeting with local California Senator Lloyd Levine to discuss the California Self-Generation Senate Program or participating in the Clinton Global initiative as I did last September. It is absolutely essential that Capstone be at the forefront of global energy policy making and be seen as a true solution provider in this changing world. In conclusion I am very pleased with our progress this quarter and I am excited to move Capstone to the next level as a leader in clean and green energy solutions.

At this time, operator, I would like to open the call to questions.

(OPERATOR INSTRUCTIONS) . Our first question will come from the line of Sanjay Shretha, Lazard Capital Markets. Please

Thank you. Good afternoon. Good progress here on a variety of different fronts. A couple of quick questions. First up again the gross margin performance that we achieved in the quarter, I just want to confirm that it's really the simple math with the higher overhead absorbs and on going cost reduction plans that you guys had, and there is no unusual one time item in the quarter, and that led to negative 10% gross margin, compared to pretty big numbers before, correct?

That's absolutely right., Sanjay.

Next question on the hybrid bus market your guys were talking about some opportunity here in New York. And sales cycle have sort of remained somewhat lumpy in the past. How big could that turn out to be? How should we think about that and how that will contribute to your backlog number here over the course of another 12 months?

Sanjay, let me handle that one. First let me say Design Line is doing a tremendous job with their buses around the country. They are booked out for the next several months doing demonstrations with that bus. New York will typically test a bus for 12 months before making a purchase decision and they have expedited those to a 12 week program, which Design Line is about ten weeks through that 12 week program. The bus, I think, then heads down to Miami and it's already had a tour out on the west coast. They're looking to build a facility in the east coast of North Carolina. That would build approximately five to 600 buses a year. We see the overall market definitely in the hundreds if not the thousands per year as major transits in the U.S. and internationally look to build out their fleet, and are moving more and more toward hybrids in years to come.

And in terms of you talking about sort of traction in the New York market, additional order from there and anticipated more order flow, are there going to be a standard (inaudible) application type of sales? Or will they be more like CCHP type of sales sales and I mean should we be a bit concerned about the lumpiness of these sales? Can you go into somewhat detail and share with us what you can talk about that market dynamics?

Absolutely. I'd love to, Sanjay. New York is probably our biggest potential market in the U.S. the followed by California, just because of the sparks spread between electrical prices and gas prices. Also, ConEd as you know is chopper block full and has capacity issues and very open to CCHP and CHP. To answer your question specifically we're going to see both CHP and CCHP. We are going to see UTC have success in that market, as well as Cogen Contractors working with KeySpan and other sub dealers. The real for us issue is hotels, hospitals, Class-A office buildings, Manhattan and other parts of New York as well as upstate New York. W are working on several renewable projects and landfills and digests things like that. New York on the bus side owns about 6600 buses to date. That fleet is old and aging and I am sure you can do some due diligence on that. They are looking to add several thousands buses over the next few years. We hope to be a big part of that, again as our product is less vibration, lower noise, better fuel economy. And if you think about a bus transit, they have two big issues, one is getting drivers qualified and getting good technicians. Obviously, our reliability and low maintenance intervals help them on the technician side and hopefully from a drivablility perspective will help them because it's low noise, and basing it on an electric bus, drivers will like to driving that bus more

Great. One last question then guys. Obviously one of your efforts has been to enhance product quality and sort of rebuild the reliability, sort of the perceived image of the product and hense the additional revenue component associated with that. How much of a growth that we should expect going forward, coming from an incremental service revenue, even without taking into consideration the increase in the unit sales of your product given a pretty big existing fleet of microturbine found in the marketplace.

First of all our MTBFs continue every quarter to get better. If you see the run hours at our website. We're calculating more and more hours every day. When we do have issues we're very focused on meantime to repairs. Our goal is to get the 48 hours to repair service units when they're down. So with the number of units out there with our MTBFs going up and meantime to repair going down, I think our reputation is getting stronger in the marketplace. But as you said, on the service side we have a tremendous opportunity to go after the existing fleet of over 4000 units and sign factory protection plans. We're not publicizing what those numbers are, but as the backlog continues to grow and becomes a more significant part of our business we'll start to give you more reflection on that business. But definitely, every new sale we look at we want to sell a factory protection plan, both in the U.S. and internationally and we have a very aggressive program to go after the existing fleet and sign up as many FPT as possible.

That's great. Congratulations.

Thank you, Sanjay.

(OPERATOR INSTRUCTIONS) Our next question will come from the line of Walter Nasdeo Ardour Capital Investments.

Good afternoon, guys.

Hey, Walter, how you doing?

I'm fantastic, thank you. What I'd like to do is go a little deeper into the back log and if you could give me just a little bit of information maybe on the geographic breakdown of it and which products. I know you don't want to break it down too far. But give me a little feel for where you're seeing the most growth in the back log and how you're deploying the sales distributor network globally to capture some of the opportunity.

First let me say the back log is growing both in Europe, Russia tends to be low this time of year and they were slow again this quarter as they take a lot of vacation. But Europe is definitely up. The U.S. which makes up about 50% of opportunities, our pipeline has still been slow, as New York comes online and California now comes online. With the MEA issue and carb just this quarter having those road blocks removed. We expect to see positive growth in the future in the domestic market. Currently over 60% of our backlog is international. We haven't had huge sales in hybrid bus vehicles yet but we expect that to grow. I'll let Jim talk about what we're doing distribution wise as far as the rest of the world in filling the holes and strengthening our organization. Jim?

I recently attended a methane-to-market partnership expo in Beijing. The show was very well attended with over 700 attendees. While I was there I was able to meet with seven potential new distributors and as a result we'll plan on adding new distributors in China and Hong Kong. We continue to meet with potential distributors in the U.S. and I've identified the companies that we plan to work with to complete our distribution network. In South America we've identified a partner in Brazil and look for the right partners in other parts of South America to enhance our sales and after market spark capabilities there.

Walter, to pile on here, the good news is growth in oil and gas. We expect to see growth in New York and in California. We're getting good traction in Asia, as Jim said, as we look to add more distributors there in the next couple quarters. Most of our key markets are going the right direction. Probably the biggest one this quarter looking backwards is the oil and gas. We announced that big order in the quarter and we have had several other small orders that really helped in the back log. The good news is we have a very balanced portfolio of major markets and a very global backlog both looking backward and forward.

Thanks very much guys. I appreciate it.

Thank you, Walter.

(OPERATOR INSTRUCTIONS) Our next question will come from the line of Bob Wall of Cumberland Please proceed.

Hey guys, it's Bruce Wilcox and Bob. Question -- a couple of questions. The payments that you're going to get from United Technologies, you've taken in $100,000. How is that going to flow through? Straight line over time or is it a volume metic or other milestone based calculation?

Hi Bruce and Bob, this is Chuck. This is Chuck. This quarter we actually received $1.5 million payment. The remainder payments due to us are milestone driven. Simplifying that going forward, you can look at payments approximately a couple million dollars a quarter going forward and in terms of earning that you see that as a contra against the R&D expense. We reduce our R&D expense based on work we've completed. During the quarter we reduced R&D by about $100,000 for program charges specifically for the C200. As we continue to do more and more work and accelerate on the C200 commercial launch. We'll see more and more reduction in our R&D spending as that gets applied. The cash will continue add a steady state.

Chuck, what I'm asking is can your just kind of get us in the ballpark if it was 100 for the quarter I can't remember when you inked that deal and the first payment came in. What might a quarterly run rate look like? Contra expense.

In the range of approximately $200 million.

Okay. Fine. I guess that question more for Darren. With the dollar weak as it is and the geographic mix of your business have we tilted outside the U.S. Are you seeing in acceleration in interest or doing anything you know pricing wise? Tell us a little bit about how the currency dynamics are affecting business.

Definitely the weak dollar is helping us internationally, but it has always been our strongest market historically, just because of their green incentives and the awareness they have for our product over there. We are evaluating our pricing today and we look to at the end of the year probably have selective price increases more on a market vertical basis and not across the board. So certain markets where we have better value proposition will probably have a price increase. Other markets where we are tight with the value proposition ramp higher competition between recib, we may have no price increase or a smaller price increase.

Okay, and just a couple of other things quickly. I'm curious about the size of your NOL. Can we take a cumulated deficit of you know-- I'm not sure these are the right numbers. Give me the size of your NOL as it exists now?

Cumulative deficit. NOLs are in $450millon, $500 million range. Effectively as we start to become profitable you would expect that we would not be a taxpayer.

And then lastly I just want to say thank you for in advance for the stuff you're going to be posting on the website. We have been looking for this for a long time. I think it will be extremely helpful for the understanding of your industrial story.

Absolutely, Bob and Bruce We appreciate it and we appreciate the feedback you've given us. Hopefully, that economic calculator and the carbon calculator are up, if not Monday then early this week. We were previewing it with the management team this morning. The team has done a good job. Very excited about getting that up on the website.

Very good. Thanks a lot.

(OPERATOR INSTRUCTIONS)

Okay if we don't have any more questions, we'll go ahead and sign off. I want to thank everyone for participating and look forward to talking with you next quarter. Have a good afternoon.

Thank you for your participation. You may now disconnect. Have a great day.