Capstone Green Energy Corp (CGRN) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Capstone Turbine Corporation earnings conference call for first quarter fiscal year 2013 financial results ended June 30, 2012. During today's call Capstone management will be referencing slides that can be located at www.capstoneturbine.com under their Investor Relations section. I will now turn the call over to Ms. Jayme Brooks, Vice President Finance and Chief Accounting Officer. Please proceed.

Thank you. Good afternoon. Welcome to Capstone Turbine Corporation's conference call for the first quarter of fiscal year 2013. I am Jayme Brooks, your contact for today's conference call. Capstone filed its quarterly report on a Form 10-Q with the Securities and Exchange Commission today August 9, 2012. 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 of our public filings on the SEC website at www.SEC.gov,or on our website, www.capstoneturbine.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 market expansion, new product development, growth in new revenue, gross margin and backlog, attaining profitability, helping certain clients meet their power generation goals, improvement in certain key performance indicators and strategic initiatives, low cost of ownership, and advantages over competing technologies.

Forward-looking statements may be identified by words such as expects objective, intend, targeted, plan, and similar phrases. These forward-looking statements are subject to numerous assumptions risks and uncertainties described in Capstone's Form 10-K, Form 10-Q and other recent filings with the Securities and Exchange Commission, that may cause Capstone's actual results to be materially different from the future results expressed or implied in such statements.

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.

Thank you Jayme. Good afternoon and welcome everyone to Capstone's first quarter fiscal 2013 earnings call. With me today are Ed Reich, our Executive Vice President and Chief Financial Officer, and Mark Gilbreth, our Executive Vice President and Chief Technology Officer.

Today I will again start the call with a general overview of our first quarter achievements, and then turn the call over to Ed, who will review our detailed financial results. During our remarks we will be referring to the presentation slides that can be found on Capstone's website under Investor Relations. Let's go ahead and start with slide two. We continued our strong execution during the first quarter on most of our key performance indicators. We were able to increase revenue year-over-year despite the challenging economic conditions worldwide, due to two key factors. First, we continued growth and the broadening of our distribution network, and secondly, the continued market acceptance of our new C200 and C1000 series microturbine products.

Product revenue for the quarter was $23.6 million, up 13% year-over-year. New product orders totaled $24.1 million for the quarter, which again gave us a positive book to bill ratio. We shipped 25.1 megawatts,which was up 15% from 21.9 megawatts in the first quarter last year.

Most importantly, we again delivered positive gross margins which we have now done seven of the last eight quarters. Gross margins increased to 8% or nearly 600 basis points year-over-year as we realized strong sales volume from higher kilowatt products, and a 44% higher average revenue per unit while continuing to focus on reducing direct material costs. We also maintained a record level of backlog at $139 million, and a strong balance sheet at over $45 million. In market sector penetration we made great progress during the quarter, especially in the oil and gas and other natural resources market.

Now let's turn to slide three. At our last call in June we secured 4 megawatts of new orders for 17 microturbines ranging from 65 kilowatts to 1 megawatt, and generate prime power in nine remote LUKOIL Russian oil fields. All of the microturbines we deal buy untreated associated gas from the well sites that otherwise would have been flared. The nine microturbine power stations will help LUKOIL meet its goal to use 95% of associated gas from its oil wells for power generation activities.

In the US, we received an order for 12 microturbines totaling 1.9 megawatts from a large oil and gas producer headquartered in the south. This customer selected Capstone for their higher reliability and low emission products and benefits of around the clock at the remote power generation sites. We also received follow-on orders for two C1000 power packages to be installed in remote natural gas facilities here in California. We received a C1000 follow-on order from an oil and gas producer for use in the Eagle Ford shale play in Texas, along with a second order for five C200 microturbines that will provide power, 1 megawatt at each multiple well site and oil and gas pads in Alberta Canada.

We have recently penetrated the Colombian natural gas market, with multiple orders from two natural gas service companies, for a total of 2 megawatts of prime power generation. The first of these was for a purchase of a C1000 and a C200 to be used in a CHP application for a large gas treatment plant. The energy generator will provide 100% of the power for the facility, and the heat will be utilized in the gas treatment process.

The second order was for a Capstone power package by a large natural gas transportation company. This installation is the first of its kind in the Colombian oil and gas industry, and our system was purchased to generate reliable on-site power at the remote compressor stations. We also made further inroads into the Asia Pacific market, we recently sold five low-emission C65 Capstone microturbines to a Fortune 100 oil conglomerate in Thailand. These microturbines will be the prime power source for the remote natural gas pipeline station and nearby village,that both are completely isolated from the utility grid.

Turning to slide four. During the quarter we continued to gain interest in all five of our major vertical markets. Product shipments during the first quarter of fiscal 2013 were 70% for use in oil and gas and other natural resources, 24% for use in energy efficiency applications, and 6% for use in renewable energy applications. While transportation products were less than 1%.

The 19% increase is in revenue for the first quarter compared to the same period last year is the result of business developments in North America and the Asian markets. The increase in North American market was primarily related to the increase in the US shale gas market, and the increase in the Asian market was primarily because of our continued efforts to improve and strengthen our distribution channels. We did see modest decreases in revenue in the European and South American markets year-over-year, and we do expect revenues from Europe will continue to be soft as a result of the economic conditions there.

On slide five you will see a recap of where we stand in each of our key performance indicators, or KPIs. All KPIs are demonstrating positive business trends and sound execution by Capstone's team. I will stop here and turn the call over to Ed for a review of our specific financial results for the first quarter. Ed?

Thanks, Darren. Good afternoon everyone. Let's begin on slide six. Revenue for the first quarter of fiscal 2013 was $28.8 million, a modest decrease of 4% from $30.1 million for the fourth quarter of fiscal 2012, and a substantial increase of 19% from $24.3 million for the first quarter of fiscal 2012. Product revenue was $23.6 million, down 5% quarter-over-quarter, but up 13% year-over-year.

Average revenue per unit increased to approximately $176,000 compared to just $167,000 for the fourth quarter of fiscal 2012, and $122,000 for the same period one year ago. These increases are the results of both higher pricing and a shift in mix to larger capacity products. For both the first quarter of fiscal 2013 and the fiscal 2012 fourth quarter, revenue from accessories parts and service was $5.2 million and was $3.5 million for the first quarter of fiscal 2012. This year-over-year increase in higher margin recurring revenue was the result of higher sales in microturbine parts, microturbine service work, and factory protection plan enrollments.

Gross margin for the first quarter was $2.2 million or 8% of revenue, compared to $900,000, or 3% of revenue for the fourth quarter of fiscal 2012, and $500,000 or 2% of revenue for the same period one year ago. The shift in mix to larger capacity products increased pricing and lower material costs continue to drive improved gross margin. Capstone has now posted positive gross margins for seven of the last eight quarters. R&D expenses were $2.2 million for the first quarter of fiscal 2013, compared to $2 million the fourth quarter fiscal 2012, and $2.2 million for the same period a year ago. SG&A expenses were $7.4 million for the quarter, and flat compared to the fourth quarter of fiscal 2012, and up from $6.6 million for the same period last year.

Net loss was $7.8 million, or a $0.03 loss per share for the first quarter of 2013, compared to $8.3 million, or $0.03 loss per share for the fourth quarter of fiscal 2012, and $2.9 million, or $0.01 lossper share for the first quarter of fiscal 2012. The loss from operations in the first quarter was $7.5 million compared to $8.5 million for the fourth quarter of last fiscal year, and $8.3 million for the first quarter of last fiscal year.

Capstone's net loss of $7.8 million, or $0.03 per share for the first quarter of 2013 is larger than the $2.9 million,or $0.01 loss per share we reported last year, due to the fact that the net loss for both fiscal years was affected by Accounting Standards Codification 815, Derivatives and Hedging, which requires warrants accounted for as liabilities to be adjusted to fair value. We recorded a noncash benefit of $149,000 to change in fair value of warrant liability during the first quarter of fiscal 2013, our net loss for the first quarter of fiscal 2013 before considering the noncash benefit to the change in warrant liability would have been $7.9 million, or $0.03 per share.

Firstly we reported a noncash benefit of $5.6 million to change in fair value of warrant liability during the first quarter of fiscal 2012. Our net loss for the first quarter of fiscal 2012 before considering the noncash benefit to the change in warrant liability would have been $8.5 million, or $0.03 loss per share. Please refer to the noncash warrant charges slide in the Appendix for a reconciliation.

Turning to slide seven. Here you can see a visual representation of our revenue growth quarter-over-quarter and for the past five years. On slide eight you can see our gross margin analysis for the quarter. While our reported gross margin is up 600 basis points year-over-year and nearly 500 basis points sequentially, we believe that the 8% gross margin percentage for the first quarter is still somewhat masking the improvement that we have seen as a result of higher average selling prices per unit, and lower direct material costs.

This slide isolates changes in various line items in our cost of goods sold that have affected the numbers in the last two quarters. These items include higher accruals for future warranty costs, physical inventory adjustments, and timing of overhead absorption, rate charges and factory labor. You see when you strip these items out our adjusted gross margins have increased from 8.5% in the third quarter of fiscal 2012 to 10.4% on an adjusted basis in the first quarter.

Let me now provide some of the balance sheet and cash flow activity for the quarter. Please turn to slide nine. Cash and cash equivalents totaled $45.1 million at June 30, 2012 compared to $50 million at the end of the prior quarter. [Receivables] were $18.5 million compared to $18.6 million in the quarter before. DSO or days sales outstanding were 59 days compared to 56 days in Q4, and 75 days a year ago. Inventory was $20.1 million at June 30 with inventory turns of 4.1 times similar to the fourth quarter at last year, and improved from 3.6 turns in the same period last year.

Overall we continue to maintain a strong balance sheet with a healthy cash balance and minimal debt. Cash flows we used $7 million of cash in operating activities, $300,000 of cash in investing activities, and generated $2.5 million incash from financing activities during the first quarter. Compares to cash used in operating activities of $12.3 million, cash generated from investing activities of $900,000, and cash generated from financing activities of $100,000 during the same period one year ago.

Finally on slide 10 you can see a visual record of our consistent growth in backlog since the beginning of 2009. Darren mentioned we maintained a record backlog of $139.5 million at the end of the first quarter. That concludes my comments on the first quarter financial results. Now back to Darren for some closing remarks.

Thanks, Ed. Looking ahead our upcoming marketing events we have an exciting lineup of activities for the next two months, which you can see from slide 11. In September certain of our distributors will be representing Capstone at the following events. Shale Gas Insight 2012 at the Philadelphia Convention Center. The 2012 Taipei International Invention Show & Technomart in Taiwan.

And 9.29.12 -- 10.3.12 WEFTEC, Water Environment Federation's Annual Technical Exhibition and Conference held this year in New Orleans. And in October, Capstone distributors will be representing at KIOGE 2012, the 20th year of Kazakhstan's largest Oil and Gas Show, Advanced Energy 2012 at the Jacob Javits Convention Center in New York, and finally, the 35th World Energy Engineering Congress in Atlanta.

So in closing remarks, it is clear our distributors have the business experience, capabilities, and connections to support our growth plans in our targeted markets, and they are doing a fine job for us. It is also clear that with our new product and marketing development initiatives we are continuing to broaden our market penetration geographically, and most specifically in the oil and gas sector. This is critical as we manage our operating expenses for improved manufacturing efficiencies, and by lowering direct material costs. We will continue to work diligently toward achieving profitability as quickly as possible.

At this time, Operator, I would like to open the call up to the analysts questions.

(Operator Instructions). Our first question comes from the line of SanjayShrestha with Lazard Capital Markets. Please proceed.

Great, thank you. Given the changes we have seen in the US rig count, especially in the gas shale plays, is that having any impact on your discussions you are having with your customers, and any sort of change in order momentum that you are seeing, and then I have a follow-up after that?

Sanjay, thank you, great question. The reality is we still have got a fairly small market share, probably mid to high digits in the US shale plays. So even with rig counts softening a little bit in the US, we are still seeing great opportunity for further penetration so we continue to get repeat orders from customers. The Anadarkos, the Chesapeakes, the Pioneer Natural Resources, and then new customers like Marathon, Shell, all coming in recently. We see no slowdown. Also our activities are both in the liquids and in the natural gas side of US shale plays.

Got it. The second question was on the international markets could you touch a little bit on the momentum you are seeing in the international market, and especially your recent orders have come all of the way from Colombia to Thailand, and touch a little bit on the near to medium term opportunities you are seeing in some of the key markets there?

Definitely we are seeing continued momentum in the Russian markets. That has always been a strong market for us, it continue to be a leader. Australia and Asia are picking up nicely. We have seen nice orders C1000s going into Thailand, into Singapore, which is a great opportunity for us. We are seeing Australia start to pick back up again. We are expecting another follow-on order from Origin Energy, which is something we have been waiting for quite a while, we seem to be very close to getting that done. But Australia in general appears to be a good market for us. South America, Venezuela, Peru, Colombia all very nice recent orders picking up, and Mexico has actually been a very good market for us. I think internationally with the exception of Europe, we are seeing very strong trends in all of those markets.

Great. Thank you.

Thank you, Sanjay.

The next question comes from the line of Ajay Kejriwal, FBR. Please proceed.

Thank you. Good afternoon.

Hey, Ajay.

Maybe on revenues a little like at least versus our models is that just lumpiness in shipments, or is it Europe, or is there anything else is going on there?

I would say it is two things, Ajay. we had two orders ended up in finished goods at the end of the quarter. You will see our inventory numbers up $1.2 million quarter-over-quarter. $1 million of that is product and finished goods. A timing difference. One customer was an oil and gas customer that asked for a witness test at the 11th hour, and we couldn't accommodate that before quarter end, and the other one was just timing of a payment to release that system. Both of those occurred very early in July. If you look at it that way the revenue would have been right close to $30 million, or $29.8 million. Fairly flat quarter to quarter. That being said you are probably a million to two million light out of Europe this quarter from previous quarters, so I think we are experiencing a little bit of the European slowdown that we are all reading about in the papers.

Got it. And based on the backlog you would expect things to pick up? What is the visibility, and what is the expectation in terms of the ramp for the rest of the year?

Obviously the million dollars that didn't ship last quarter is going this quarter. We expect a very strong Q2. And then obviously the $139 million leads us to feel pretty strong about the overall year. I think from a growth perspective, I know a lot of folks are modeling 30% to 35% growth for the year. Depending on what happens in Europe that may be a little bit aggressive. Depends if Europe comes back in the back half of the year. If it doesn't then the numbers should probably be in the 25% to 28% growth. Regardless very strong, and we feel very good about the backlog, and hopefully some of the other markets like South America and Asia will make up for Europe, or even more than make up for Europe.

Got it. Maybe a clarification on that backlog. Is that all product, or is there any service included in the backlog numbers?

That is products only. And so that is product we anticipate shipping in the next 12 months. Obviously that can move around a little bit, but that is all what we consider short term backlog. The service backlog is roughly $34 million, and that moves around from quarter to quarter. But that is a separate backlog. Because the service backlog is mostly the five to nine year contracts we don't mix the two backlogs together.

Got it, that is helpful. Maybe one last one for me before I pass it on. This warranty reserve is that related to the C200s, or is there anything else flowing through there, $869,000 that I see on slide 8.

Yes, that is primarily related to the C200. A little bit for the TA100, but mostly for the C200. So what we tried to do on the slide is just try to give more transparency, because what we have in changes and warranty accruals, manufacturing variances, overhead and other adjustments, makes it hard for you guys to see the underlying benefit we are getting from cost reductions and average selling prices. If you strip that away and make it apples to apples the third quarter, you are seeing margin rates go from 8.5 to 8.9 to 10.4. That justsays that our average selling prices and direct material costs are improving, as we have been saying they were going to.

Should this warranty, what is the expectation, does that go down from here, or what kind of rate?

$0.5 million of that was additional accrual. That increased our reserve just to make sure that we are properly accrued for the next 12 months in warranties. Our anticipation is that it will trail down as the year goes on, I think the second quarter will still run pretty hot, but Q3 and Q4 we expect to kind of come out on the other side. But it is an area we are very focused on, and obviously you want to make sure that before that we care of all of the early C200 adopters and that they have a good experience with the product.

Got it. Very thankful, thank you.

Thank you.

The next question comes from the line of Walter Nasdeo with Ardour Capital. Please proceed.

Good afternoon.

Hey, Walter.

A lot of the stuff I wanted to talk about has already been kind of thrown out there. As far as the backlog goes, is this still kind of skewed to the larger systems?

Absolutely. I think if you look at their average selling prices being up 44% year-over-year, it is really because so many of our customers, and our new customers are buying C200 and C1000 series products. The majority of our cost reduction, marketing efforts, and growth are C200 and C1000 related, absolutely.

Got you. With what is going on in Europe, how has the distributor network kind of grown over there? Is there still interest from the distributor side of things to be involved with Capstone, or has that kind of slowed down simply because of the economic conditions over there?

There is no lack of interest. The biggest challenge for our distributors is customer project timing slowing down. Customers hesitant to make decisions. Third-party financing tightening up. We have seen no lack of interest from our distributors, just the inability or difficulty of them to execute. We are watching that very tightly, and as I said it is definitely having an impact on our business. Overall, Europe was 16% of our total revenue last year. We still see a very good growth year, a very strong backlog, but Europe will continue to be a worry item for us and we will watch it closely.

Right, okay. And then back on the distributor side, has there been any changes, still culling out the bottom, or are you pretty well set in now with the guys that are performing well for you?

We are continuing to weed and feed folks that aren't performing. I think what we are actually seeing is the top performing distributors are separating themselves even further from the lower performers. It is getting easier and easier to sort out the A players and C players. The A players are getting more territory and more support, and the C players are losing territory or losing their contracts, so that will be a major theme for the sales and marketing group this year, is to really make sure that we support the A distributors in the A markets, and either train up or force out the lower performing distributors.

Got you. Thanks, guys.

Thanks, Walter.

We have no further questions at this time. I will now turn the call over to Darren Jamison for any closing remarks.

Thank you. The analysts questions I think were great. There are definitely positive trends that we are seeing. I think the continued oil and gas penetration worldwide is huge for Capstone. These are very strong customers and strong value, balance sheets. They value our value statement and understand the complexity and the benefits of our product. I think trends toward associated gas restrictions worldwide are moving in the right direction, and will only help us going forward.

The record low natural gas prices in the US are stimulating that market, and we see the CHP market especially inthe US to be very robust in the next several quarters. We are seeing nice upturn in our California business. The SGIP is having an impact in California. I was just recently with two customers this week, both California manufacturers looking to leverage our product. I think we are going to see some nice movement in the California market as a result of being included in the SGIP. As I mentioned the North American, Australian, Asian and South American markets are all looking very good. Europe is our only market that we are concerned about, and will continue to watch. The distribution channels are maturing but we are very much in a weed and feed stage, as we work to support the strong distributors that are executing and work out the ones that are not.

If you look at our future opportunities we have the five market segments, three of which are really generating 99% of the business, but we do see the data center market and the HEV market as great potential future markets, we will continue to work with folks in those markets whether it is IBM or Design Line, we are going to plant those seeds and get those key initial customers in place to be able to leverage that for future growth.

I think also important that we didn't talk about in the Q&A session,the cash cycle. We are very focused on DSO, our DSOs are down at some of the lowest levels since I have been CEO. We are working hard at matching our cash disbursements and our cash receipts, and our cash burn for the quarter was less than $5 million. I think that our range was $3.5 million to $5 million. A little bit on the upper end of our range, but definitely within our range, and we see the cash burn trending down as the year goes on.

As I look at Q1 in summary at a high level 30,000 feet. Total revenues was $28.8 million, the second highest in Company history, with $1 million in finished goods that did not get out. I think that is very strong for revenue for the quarter. The oil and gas penetration is phenomenal, and again highest in Company history, 70% from the oil and gas sector. Shale gas and associated gas really driving those markets. Gross margins of 8%, up600 basis points year-over-year. Second highest in Company history. That is on a GAAP basis.

As Ed showed you adjusted gross margins we took kind of the double-digit range of 10.4% ,if you get apples-to-apples with Q3, and more importantly, we are seeing the improvement in ASPs and DMCs starting to pay some dividends. Gross margin on a cash basis about 13%. Obviously that is important. Cash is what we use to pay the bills and to lower our spend. Average selling price up 44% year-over-year, and the real shift to the C200 and C1000 series products, which we have been saying is going to happen, we are seeing it now come to fruition.

Direct material costs down 4% year-over-year. We would like to do better than that. We need to do better than that. We have got 15% still in process, we hope to execute that in the next three quarters worst case four quarters, but we should see DMCs come down every quarter from here on out, we look forward to reporting that. Inventory turns, no easy task, get to 4.1, our target is to get to 5. Mike and his operations team are very focused on making that a reality, to get those inventory turns at the higher revenue rates as we go.

Cash balance I mentioned $45 million, and book to bill slightly over 1 to 1. With a backlog of $139.5 million, we feel very good about the year, and continue to have strong revenue growth, especially on a year-over-year basis. With that, operator, we will end the call and I look forward to talking to everybody in the second quarter, and at the Annual Shareholder Meeting. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect. And have a great day.