Capstone Green Energy Corp (CGRN) 2009 Q3 法說會逐字稿

Good day, and welcome to the Capstone Turbine Corporation third quarter fiscal year 2009 conference call. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). Now I would like to turn the call over to Mrs. Jamie Brooks, Vice President of Finance and Chief Accounting Officer. Please proceed.

Thank you. Good afternoon, and welcome to Capstone Turbine Corporation's conference call for the third quarter of fiscal 2009 and at December 31, 2009. I am Jayme Brooks, your contact for today's conference call. Today we will be using a short PowerPoint presentation that we will reference during the call. The presentation is posted on our web site at www.microturbine.com and can be found under Presentations in the investor relations section.

Capstone filed its quarterly reports on form 10-Q with the Securities and Exchange Commission today, February 9, 2009. If you do not have access to this document and would like one, please contact investor relations via telephone at 818-407-3628 or e-mail ir@Capstoneturbine.com. Or you can view all our public filings on the SEC website at www.sec.gov or our web site at www.microturbine.com.

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 in attaining possibilities, the ability to reduce costs and improve income returns and contribution margins, continued growth in current market conditions, the availability of a line of credit, the launch of the C200 and C1000 products, compliance with certain government regulations and increased government awareness of our products, increased opportunities for our products in the Obama administration, the success of our new long-term rental program, opening new markets for our products and attracting large customers to our products, increased product part commonalities between C30s and C65 products, new applications for our products, 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 energy efficiency, reliability, and low cost of ownership of our products, and the expansion of our production capacity.

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 increased sales. We may not be able to reduce costs or improve customer satisfaction. The growth in our backlog has significantly exceeded our internal forecast. In order to meet this increased demand we may need to raise additional funds to meet our anticipated cash needs or working capital and capital expenditures during the next 12 months. The current recession could make it difficult or impossible for us to raise necessary funds and for our customers to buy our products. We may not be able to utilize our line of credit.

We may not be able to expand production capacity to meet demand for our products. We may not be able to obtain sufficient materials at reasonable prices. Our release of new products may be delayed or new products may not perform as we expect. 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 customer, distributor and other relationships that are expected to result in an increase in volume and revenue. We may not be able to comply with all applicable government regulations. We may not be able to retain or develop distributors in our targeted market 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 we expect.

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-K, 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 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 Darren Jamison, our President and Chief Executive Officer.

Thanks, Jamie. Good afternoon and welcome, everyone, to Capstone's third quarter earnings conference. Today's call will be referring to slides that are available on our website under the Investor Relations section. With me today is Ed Reich, our Executive Vice President and Chief Financial Officer, and Mark Gilbreth, our Executive Vice President of Operations and Chief Technology Officer.

Today I'll start the call with a review of our significant events of the third quarter, and then Ed will review the specific financial results. Ed will then turn the call back over to me, and I will discuss our progress towards our strategic objectives and review developments in some of our key market segments, and finally talk about what we hope to achieve in the coming quarters before I open the call to questions.

During the third quarter of fiscal 2009, we continued to see impacts of our marketing and branding strategies and the success of our new C200 and C1000 product launches. It was another quarter of significant progress for the company as we shipped our first C1000 to Spain in conjunction with our overall development program schedule. The C1000 product represents almost half or approximately $25 million of our current record $57 million in backlog. It is the catalyst that will propel Capstone into the $4 billion worldwide megawatt scale distributive generation marketplace, as illustrated on our first slide. This exciting, new product is compact in size, offers tremendous efficiency and reliability, life cycle cost and world-class emissions. I fully anticipate seeing an acceleration of our customer orders and increased adoption rates after we seed the market with several of these units and customers fully appreciate the superior value proposition offered by the first megawatt scale microturbine solution.

The $14.2 million in product bookings for the third quarter again outdates shipments of $8 million for the period. Total revenue for the quarter was $11.5 million, which puts us at $32 million year to date, which is $1 million ahead of last year's total year results through just the first three quarters of this fiscal year. Therefore Capstone will again deliver exceptional growth for the second consecutive year in the world's worst economy in the last 75 years.

Revenue for the quarter was lower than anticipated as we experienced several shipments being rescheduled as customers worked to better manage product shipments to project schedules and better manage cash flow in today's difficult financial environment. Accordingly, Capstone ended the quarter with approximately $3 million in C30, C65, and C200s in finished goods inventory at the end of the quarter. However, those rescheduled orders subsequently shipped in January or are scheduled for shipment later this month in February. That being said, it is important to note we are still not experiencing order cancellations or significant drops in exploitation activity. I attribute the quotation success to our new C200 and C1000 products continuing to gain market share as we continue our marketing efforts with these innovative new products.

During the quarter, we reorganized the operations group to better align and coordinate engineering and operations to expedite our product cost reduction initiatives. We have made significant progress to enable the reduction of our direct material costs of our products and plan to phase in these reductions, and expect to progress to a 30% cost improvement over the next four quarters on our new C200 and C1000 products.

One of the first steps toward this cost reduction is converting many of the C200 turbine components from machine parts to Caps' parts. This is a huge benefit from both a cost and a lead-time perspective. We are implementing the necessary design changes outlined during our last earnings call to improve the parts commonality on the C30 and C65 and are moving certain parts offshore to further reduce their costs. Our cost reduction program is leveraged by today's dramatically lower worldwide commodity prices, allowing us to use this leverage to better negotiate with our vendors. We will begin to see the positive impact of these cost reduction activities over the coming fiscal year as we consume our current inventories.

Another tremendous achievement for the third quarter was being awarded the Gold Supplier status by ACC Power. This is the highest level of supplier achievement and is awarded for excellence in lean manufacturing, on-time deliveries, service responsiveness, and overall engineering support. Capstone is proud to be the first UTC supplier to achieve this Gold Supplier status and one of less than 50 in all of United Technologies Corporation. This is truly a tremendous achievement when you think about only two short years ago when I arrived at Capstone the relationship had broken down to the point that both companies were threatening litigation.

We recently announced initial orders of our new, long-term rental program. This long-term rental program is designed to specifically target the oil and gas sector and telecom companies that frequently deploy clean, reliable energy solutions where they build-out permanent infrastructure. This program was extremely well received at our global sales meeting, as it affords our distributors another sales tool to continue to grow our market with option of our products. This long-term factory rental program fits our strategic objective by seating 20 of our proven C65 units into oil and gas customers who previously had no experience with our innovative green product.

And finally, a Capstone installation in Masonic Village in Elizabethtown, Pennsylvania, was recently recognized in the January issue of "Diesel and Gas Turbine Worldwide" as one of the world's best power plants. I want to congratulate our distributor E-finity for the tremendous installation of our proven C65 product.

At this point I'd like to turn the call over to Ed to review the specific third-quarter results. Ed?

Thank you, Darren. Good afternoon, everyone. I will now provide you with our results for the quarter ended December 31, 2008. As Darren mentioned, backlog at the end of the quarter was $57 million, or 567 units, an increase of approximately 13% from the prior quarter and 335% from the prior year comparable quarter. Revenue for the quarter ended December 31, 2008, was $11.5 million, an increase of $2.3 million or 25% from the $9.2 million reported for the same period last year, and decreased 12% from last year's revenue of $13.1 million. We shipped 116 units in the third quarter compared to 121 units for the same period last year and 172 in the second quarter.

Our gross loss for the quarter was $600,000, or 5.2% of revenue, compared to $40,000 or less than 1% of revenue for the same period last year, and $300,000 or 2.5% of revenue in the second quarter. The increase in the gross loss and the gross loss percentage for the same period last year reflects the lower margin product mix, primarily due to the introduction of our C200 and C1000 systems, along with increased manufacturing costs offset by lower warranty and the increased absorption of overhead into inventory.

Research and development costs were $2.1 million for the third quarter, an increase of $300,000, or approximately 17% from the same period last year, an increase of $31,000 or approximately 1.5% when compared to the prior quarter. R&D expenses increased as a result of labor, consulting and facility costs, partially offset by increased recognition of funding from United Technologies Corporation's power division for the cost-sharing program.

We expect R&D expense in fiscal 2009 to be lower than in fiscal 2008. This decrease is expected to occur as a result of lower overall spending due to outside funding from UTC Power Corporation for our C200 commercialization. SG&A expenses were $7.4 million for the quarter, an increase of $1 million or 16% from the same period last year. And a decrease of $300,000 or 4% from last quarter. The net increase in SG&A expenses, year over year, was comprised of an increase in labor, travel, marketing, and professional services offset by lower supplies and lower shared cost expense. The increase in labor and travel costs reflected the continued effort in developing worldwide distribution and launching the C200 and C1000 series products. We expect SG&A expenses for the fiscal 2009 to be higher than the prior year because of these efforts.

Our third-quarter net loss was $10 million or $0.06 per share, an increase of $2.3 million from the $7.7 million loss, or $0.05 per share reported in the same period last year. Cash balances decreased by $21.6 Million during the third quarter of fiscal 2009 based on a net loss of $10 million, $2.3 million in additional accounts receivable, and $7 million in additional inventories. We also invested $2.2 million in capital expenditures primarily related to our C200 and C1000 production lines. As of December 31, 2008, cash and cash equivalents were $24.4 million.

Let me turn the call back over to Darren.

Thank you, Ed. I'd now like to take a minute to update you on the progress in several of our key markets, and discuss what you should expect to see from Capstone in the coming in quarters. The European and Russian markets continue to show growth from last year, and have been enthusiastic early adopters of the new C200 and C1000 products. We received several large orders totaling several million dollars related to the [E-mal] project, the largest energy project in contemporary history of Russia. This project is unparalleled in terms of size, sophistication, and equal only to the development of western Siberia's field in the 1970s.

In addition, centers in the market like Germany, France, Spain, and Italy continue to drive Capstone's products into biogas, landfill, wastewater and treatment plants. We are pleased to have commissioned several of the first C200s this quarter into these critical markets and will be commissioning the first C1000 in Spain later this year. We expect to see the European and Russian markets continue to grow as we get positive results from our new C200 and C1000 products and continue to leverage our existing C30 and C65 installations.

The market in New York and the entire eastern seaboard continues to be a prime market opportunity for Capstone's products because of its need for clean and reliable energy solutions. Our bus OEM design line is now delivering the first hybrid buses for Walt Disney World in Florida and New York's MTA. This line's new factory in North Carolina is now operational and will look to build over 200 buses in that factory alone in 2009 for the US market. California remains a good market opportunity which was limited last year absent the Carb 2000 certified product. Our California distributor, Collicutt Energy, continues to gain momentum and we look forward to continued growth in this market close to home.

Capstone continues to focus on the oil and gas markets, and has received recent orders from Pemex, Petrobras, Petronas Gas, as mentioned earlier, and Dominion Transmission Company. We expect to continue to gain market penetration as petroleum exploration, production and transportation companies are more focused on reliability, maintainability, and total cost of ownership than they are on product first costs.

We continue to work hard in Asia, with the focus on the markets in China, Korea, and Japan. We continue to see growth in these markets as Capstone brings on additional distributors and leverages our current relationships. We are extremely pleased with the success of our Korean distributor Samsung, and we are currently in discussions about expanding their territory to other parts of eastern Asia and even Africa. In addition, we continue to work with UTC and its carrier division as they expand their PureComfort chiller business into the markets in China and India.

During the quarter, we built one C200 per week in the third quarter, and will increase manufacturing rates at two per week in the fourth quarter. In the first quarter of fiscal 2010 we plan to take manufacturing up to three units per week and beyond, depending on the ongoing order flow and backlog levels.

As a public company, the performance is measured on a quarterly basis. However, as a management team you must operate the business on a year-to-year or more long-term basis. During this quarter in context of revenue and backlog, our growth is combined over the last seven quarters as shown in slide 2. You will see the business whose products are gaining market adoption and that the new C200 and C1000 are truly the game-changers that we said they would be.

As you can see from slide number 3, the additional orders generated from our new C200 and C1000 products is driving our backlog and positioning the business for higher year-over-year growth in fiscal 2009 as well as fiscal 2010. In fiscal 2008 we experienced 50% revenue growth after being down 15% in fiscal 2007. This year we anticipate finishing 2009 strong as we increase our C200 build rates in Q4, and again look to post our second consecutive 50% year-over-year growth in revenue.

We continue to enjoy a strong order book that should ensure that we are well positioned to continue that momentum into our next fiscal year. We are making progress improving gross margins, but still need to stay focused and finish our current cost reduction programs and work through the inventory on hand to approach our target margin of 40%, hopefully by the end of this fiscal year.

Another area of critical focus at this time is our operating expense control. Over the last two years, we've been extremely focused on rebuilding our distribution networks, repairing customer and vendor/employer relationships, developing and launching the Liquid 65 and new 200 and C1000 products. Having successfully achieved those initiatives, it is time to turn our full attention to lowering our operating costs. We have made strides in improving our operating expenses as a percentage of revenue. However, we must, we can, and we will do better.

In support of this effort, we eliminated 16% of the company's white-collar work force last Monday. These are always difficult decisions to make as a CEO, especially in light of today's difficult job market. But it's an action that had to be taken as part of our cost-reduction plan and in the interests of our shareholders. This is the first of many critical actions to be taken by management to lean out our operations and accelerate our path to profitability. This reduction did not conclude any manufacturing personnel, as they will be needed to continue to increase production rates to deliver our record $57 million backlog. Instead this was a 16% reduction in our engineering, quality, procurement, planning, investor relations, and other departments. The average salary of the positions eliminated was $82,000 per year before benefits and represents approximately $3 million a year in operational savings.

Unlike most companies, this reduction in force is not the result of disappearing sales or massive order cancellations but a strategic plan to lean out the organization, reduce operating expenses as a percentage of revenue as the business matures toward profitability.

The next step in the process is moving many of our key vendors to tier-one suppliers to lower our inventory levels and supply new, just-in-time manufacturing processes. Fortunately for Capstone, our $57 million backlog gives us the ability to move from custom or batch-building manufacturing to planned production slot manufacturing which will dramatically lower our inventory levels over the next year and free up additional cash to support the working capital needs.

As a shareholder of Capstone stock, I, too, am extremely frustrated by the recent performance of the company's stock price. However, we must keep in mind the challenging economic conditions we are experiencing, and keep recent market developments in perspective. As you can see on our fourth slide, Capstone has outperformed distributive generation companies, alternative energy companies, and actually the overall NASDAQ index in both good times this year and bad times. I believe everyone on the call today will join with me in agreeing we're all looking forward to the end of this financial crisis, a turnaround to the global economy and a return to more prosperous economic times.

One of the keys to our nation's economic recoveries is the newly elected President Obama in his upcoming stimulus, energy, and environmental programs. Capstone is extremely encouraged by the new President's vision and looking forward to playing a part in recovery initiatives relating to green buildings and energy efficiency. We look forward to the new environmental plan, as it surely will focus on reducing the carbon footprint of our country, and enable a carbon tax or carbon trade program. Capstone's ultra-low emissions, high electrical efficiency compared to the grid, and ability to operate on renewable fuels should position us well under the nation's new energy bill.

In response to the election, Capstone has doubled our lobbying efforts on the Hill in Washington, DC. We will continue to make sure microturbine-based solutions are given full consideration. As they like to say in Washington, you don't have a seat at the table, you're likely to end up on the menu. Our political advisors believe Capstone is well positioned to make microturbine solutions a critical part of the Administration's new programs.

Another major area of focus is the working capital requirements of the company. As we grow this business 50% year over year, launch new products with significantly higher average selling prices, we are experiencing an ever-increasing demand in our working capital and have become more susceptible to large swings in capital requirements like we experienced this quarter. In the third quarter, as Ed said, our change in cash was $21 million despite the fact our operating loss was only $10 million. Therefore, approximately $12 million in cash was invested in our balance sheet in the form of additional inventory, higher receivables, and new capital equipment purchased for the C200 and C1000 product lines. It is important to understand that most of this cash was not burned but invested in our balance sheet and not lost as a result of operations. However, we cannot continue to support such high working capital requirements and are extremely focused on reducing inventory levels from the third quarter's high of $33 million to a targeted $16 million over the next year.

We expect this improved management of inventory will reduce our working capital requirements over the next year and allow us to free up cash from our inventory. This positive change in working capital will allow us time to phase in our product cost reductions, time to lower our operating expenses, and will significantly lower the number of units required to be sold quarterly to reach breakeven levels.

In support of our working capital strategy, today we announced a $10 million asset-based line of credit with Wells Fargo bank. It is our intent to utilize this line of credit to further mitigate our working capital swings and is a great start for building a long-term relationship with Wells Fargo as we grow the business going forward. We believe that as a business practice it's always good to have an option to have access to capital quickly should it be required. To this end, our $150 million shelf registration statement, identical to the one that the company filed three years ago, became effective last week. This new shelf will allow ready access to the capital markets over the coming years to ensure Capstone has adequate liquidity at all times.

I believe it's a testament to our company, our business plan, our market strategy, and our clean and green products that Capstone has been able to raise additional capital last September in the middle of the unprecedented collapse of the worldwide financial markets, and again today we gained access through a bank credit facility that is undeniably one of the most difficult credit markets of any of our times.

Another key focus in the coming quarters is continue to increase the manufacturing rate of the C30, 65, 200 and, most importantly, the new C1000 products. I am confident in our reorganized manufacturing team, I am confident in their capabilities. I'm confident of the new just-in-time production plan that we have will meet the challenges with less touch labor, better inventory turns, lower costs without compromising our outstanding product quality.

I encourage shareholders to take a step back and look at our progress over the last year and assess what Capstone can do to achieve in the quarters to come. Personally, as I look at the third quarter, I'm pleased with the continued progress and tangible success that Capstone is demonstrating against our strategic business objectives. Those objectives are rebuilding the distribution network, launching game-changing products, penetrating critical, new markets, rebuilding vendor relationships, lowering employee turnover, growing our service business, and, of course, building a record backlog. I'm very confident that we will deliver the same success in our new objectives as we focus the team on increased parts commonality, improved gross margins, reduced operating expenses, lower R&D, and, most important, improved inventory turns.

When I look at other companies in our industry and beyond, it's hard not to be encouraged by Capstone's tremendous revenue growth year over year in this challenging worldwide economic downturn. It's hard not to be proud of the new C200 and C1000 product development efforts. The launches were on schedule, with a remarkable marketing efforts that has led to unprecedented early customer adoption. It's hard not to be impressed with our ability to raise working capital during a crisis in world financial markets in September, and again today as we announced a traditional and most importantly nondilutive bank credit facility. I'm excited when I look at Capstone's products and how they're positioned to play in the new America. The America that looks for higher energy efficiency, lower emissions, lower dependence on foreign oil, and builds an electrical grid powered by a multitude of renewable distributed energy sources.

I am determined to deliver the best year in Capstone's history despite the overwhelmingly poor global economic conditions. I am committed to move Capstone from what has too long been a concept company and deliver to our loyal shareholders a profitable company whose concept has finally been realized. I'm incredibly focused on making Capstone profitable in the upcoming fiscal 2010 and start delivering real earnings in a stable, growing company in today's new America.

At this point, I'll open up the call to questions.

(Operator Instructions). Our first question will come from the line of Sanjay Shrestha with Lazard Capital Markets. Please proceed.

Thank you. A couple of quick questions, guys. Talking about that bond rate number -- and by the way, congrats on that credit facility for $10 million that you disclosed. So looking at it from the inventory and receivables standpoint, am I reading you right that you should be cash flow positive in the next quarter?

Sanjay, it's Ed. Not necessarily in the next quarter but in the coming quarters and definitely in 2010 we plan to be cash flow positive.

Okay, but the burn will go down pretty dramatically quarter over quarter, Q3 to Q4?

You should see inventories coming down. You should see better collection times on receivables helping that out, as well.

Okay. So when you guys talk about the working capital management and you guys have a difficult task at hand, you have to build the working capital to support the long-term growth, and you can't build it too much because you have to manage your cash and the balance sheet items, right. So what exactly -- I know Darren you talked about it a little bit -- but can you go into some more detail as to exactly what you are doing so that you can have a better working capital balance while making sure that you're not sacrificing the growth on a long-term basis?

Absolutely. A couple key issues here. We're moving from what was more of an aerospace, build for the customer demand, manufacturing process, or batch building, I like to call it. Because of our backlog today, we now can lay in production slots and build to those production slots, so we get much more level, sustainable efficient manufacturing process.

Second, we've got a lot of suppliers who are now moving to tier one. So instead of us buying materials a year ahead of time, moving it through three or four vendors, we're now having the vendor buy the material a year ahead of time and move it through their process. That means less inventory on our balance sheet and better use of our cash. Obviously with the lower commodities costs today, and the fact that our business is growing while many other businesses are not growing, we're in a great position to leverage our vendors and to get more favorable terms as well as pricing.

The real key for us is getting the ERP system. We run a full-blown enterprise SAP with all the inputs correct, get the turns up. We'd like to see those turns at four or higher here very quickly. As we bring the C200 production levels up, the C1000 production levels up, we'll see those turns also go up and inventory levels go down.

Okay. Great. So then that [$2.8 million] in the finished goods inventory that you guys talked about in the release here is reflective of what you talked about in terms of the customer being sensitive as to the timing of when they take the delivery or product. And I take it that that's going to get recognized into revenue in Q4?

Absolutely. A couple things. We had customers reschedule. We also had one customer that had bumped up against his credit limit. And another LC that was a little bit late. The customer that had the credit limit issue has since paid and that product is shipping. The LC is also in place in January and that product has already shipped. The other reschedules were based on customers trying to better match their deliveries to their project schedules. So we're not seeing order cancellations. We're not seeing a reduction in quotations. We are seeing customers be a little more sensitive to actually when they take a product and how fast they have to pay for it, better diligence on their part to make sure they maximize their cash. LCs are probably taking two to three weeks longer than they used to in the past and banks just seem to be being more deliberately these days, more cautious.

Okay. Great. One last question, guys. You talked about how you want to improve the margin on C200 and C1000. And I was wondering if you can actually talk a little about that as to what exactly you're doing. And second, just a point of clarification, I want to make sure that there's not going to be any C1000s shipping in Q4. Would there be significant revenue contribution from C1000 in Q4 for you?

There will be C1000s shipping in Q4 as well as C200s. We shipped the first C1000 recently, we've got another one shipping actually this week. So when we talked C200, C1000s, they're both, both production lines are up and running.

Sanjay to your point, as we discussed earlier, the costs are still higher than we'd like them to be on the C1000 and C200s. And Darren can explain more in detail. But over the next year, we plan to reduce the materials cost by 30%.

Yes, and I think the important thing here is most new products don't hit their cost targets in the program on serial number 1. Obviously we wanted to. I'm kin of a put interesting coffee in the microwave kind of guy. But obviously we're working very hard to make that happen.

The important point is we're not hoping to take cost out, we've identified the costs, we're negotiating the purchase orders with vendors, and it's truly a matter of phasing that lower cost product down into the assembly line. We've got to burn through the initial inventory at higher costs. In some cases, as I mentioned, we're going from machining parts to CAD parts. In some cases we're going from domestic vendors to international vendors. Whatever it is, we're working through that process very diligently. And Mark and his whole team will be extremely focused on that. Obviously it's such a big part of our backlog. That's another reason we haven't ramped the assembly line as fast as some folks wanted us to. We're not hitting our margin targets in the sense to get the product out that fast. We need to meet customer expectations to maximize our profits as much as possible.

Okay. That's it for me for now. Thank you.

Thanks, Sanjay.

And our next question comes from the line of Eric Stine with Northland Securities. Please proceed.

Hi, guys. Just a few questions. First just to touch on the inventory again. Could you just talk about how the finished goods is broken out between the 30, 65, and 200?

We don't break that out into details. I guess it's fair to say that if our backlog is more than half C200s -- are you talking about finished goods or raw material? Finished goods. Finished goods. We don't break that out, Eric. Obviously the c200s and c1000s, there's no 1000s in finished goods and very little C200s. It's mostly 30s and 60s.

Okay. Just going to the production lines. You talked about in the fourth quarter that we should think about two C200s per week. When you're referring to that, do you include the c1000 as part of that two per week, part of of the C200 family? Or should we think about the C1000 as a separate line?

You can think about the C1000 as being five C200s, so you're looking at the same kind of per week basis. Obviously it would take a couple of weeks to build a C1000.

Okay. And you talked about that given your costs, engineering those out, and taking a number of steps that you've detailed, I haven't had the chance to read the release, is there a new microturbine break-even number or something you can talk about going forward?

No. We haven't lowered the number untill we actually see those cost improvements come through the P&L. I would say that as we move forward to those cost improvements in the next couple quarters you should look to see that number come down.

Eric, I can say, too as the mix change is right, like Darren said, the number will come down. If we look at this quarter, the shipments were 116 units, and a year ago on lower revenue, they were actually 121, so you're starting to see the shift downward in the number of units it takes to get to our revenue numbers. But we'll revise that estimate when we have everything in place to announce it.

Also, as we focus on the operating expenses, we mentioned the headcount reduction we did as we continued to bring down the spend on the C200 and C1000 program. That's going to lower our R&D expenses. The marketing side of the business we're not launching major new products in the next fiscal year, so you'll see some of the sales and marketing expense trail down. So overall, the operating expenses will be lower and the product margins should get better as that's going to lead to a lower number of turbines to be sold per quarter to reach profitability.

Okay. And then just one last question. I'll jump back into line. Just UTC power, can you give us an update where you stand in the completion of qualification milestone, and then just talk about what that would mean as far as selling into the US?

Yes. We've got about $500,000 going left on that funding program. The final milestone to be achieved is the UL listing. We are in UL testing now. There's multiple tests, everything from rain tests to noise tests, both noise emissions as well as electrical noise, and performance of the product. So as we go through that test, we should be done roughly at the end of this quarter, we expect to receive the last $500,000 payment and close that out. Obviously, all the 200s and C1000s you're seeing sold today are CE listed and are going outside the US. Once we have the UL listing we can start shipping to customers inside the US.

Okay. Thanks. One last question on pricing. Can you just talk about how that's held up here? I know you put through a price increase in the fall, and if there's been any pushback?

We've had two price increases in the last 12 months. We've not had significant push back. Obviously the change in the dollar compared to other currencies has put a little more pressure on it. But overall, again, our quotation activity is up. We had a very good bookings quarter, especially when you consider the holidays that were in there. So, unlike most businesses today, we're very happy with the booking rate, the backlog, and really our focus now goes internally and the things we can control. It's inventory turns, it's cost, it's our operating expenses. I hate to say we're fortunate in today's market but I'd say we're more fortunate than other folks. Our key challenges are internal challenges, not external factors.

Okay. Thanks a lot, guys.

Our next question will come from the line of Sam Bradwell with Wachovia. Please proceed.

Hi, good afternoon, can you hear me okay?

Yes, Sam.

I'm calling on my cell phone this afternoon. A lot of my questions have been touched on. But going back to the UTC agreement. Is there any chance, especially in light that they're elevating you to Gold status, that they might re-up that, or otherwise, in a nutshell, it sounds like you guys are hunkering down here, but I guess what I'm driving at, is there any way that they might be able to step in and help you through this?

I think we're pretty comfortable with our cash position today. Obviously if that was something we needed to talk about, we could. The relationship is very good. We expect, after we finish the development program, to just go back to a more traditional OEM relationship with them. The group we're working with at UTC has actually switched to the Carrier Group. We see that as a positive carrier division, they've got more reach than the UTC Power division. We're also not in the same division as the fuel cell group. So recent changes at UTC are playing, we think, to our strengths, and we're looking to get more product with UTC going forward.

If you look at our balance sheet, we've gone from $14 million in inventory a year ago to $33 million, $34 million today. We don't need to be that high. If you look at even four turns a year, which are not Herculean, especially with the kind of enterprise, the SAP program we're running, we should really be down in the $15 million, $16 million range. So we've got almost $20 million can come out of our balance sheet, as well as the bank line obviously tracks with our revenue. So we would like to really borrow from the bank of Capstone first and Wells Fargo before we look to do anything else.

In terms of the rental program and the inventory build, how much of a dent do you think that can make, and what kind of time frame?

The rental program definitely obviously helps but I think we're looking at taking pretty big chunks, $4 million or $5 million a quarter, out of our inventory as we grow the C200, C1000s. A lot of that additional inventory, new inventory, is coming in for the C200, C1000. As that ramps up, you will see the inventories ramp down. Again, as I mentioned in the call, we're going to just in time. We've got a kanban system set up out here. We're really having vendors deliver on a weekly basis. In some cases every other day. Again, the good news is it's a great time to renegotiate your vendor contracts. They're very hungry and it's very fertile ground to get them to not only lower their prices but go Tier 1 with you and then deliver to the production line.

Okay, thanks very much.

And at this time I show no further questions in the queue.

All right, great. Thank you very much and appreciate everybody's time and look forward to talking to you next quarter.

Thank you for your participation in today's conference. You may now all disconnect. Good day.