Capstone Green Energy Corp (CGRN) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Capstone Turbine Corporation earnings conference call for first quarter fiscal year 2014 financial results ended on June 30, 2013. During today's call, Capstone management will be referencing slides that can be located at www.capstoneturbine.com, under the Investor Relations section. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to now turn the call over to Mrs. Jayme Brooks, Vice President, Finance and Chief Accounting Officer. Please proceed.

Thank you. Good afternoon, and welcome to Capstone Turbine Corporation's conference call for the first quarter of fiscal year 2014. I am Jayme Brooks, your contact for today's conference call.

Capstone filed its quarterly report on Form 10-Q with the Securities and Exchange Commission, today, August 8, 2013. 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 at 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, growth of the oil and gas and transportation markets, increased production rates, higher average selling prices, ongoing new order flow, reduced cash usage, growth in revenue, gross margin and backlog, continued profitability, improvement in certain key performance indicators and strategic initiatives, the environmental advantages of our products, achievement of EBITDA breakeven before the end of fiscal 2014 despite first quarter results, and benefits from our cost reduction initiatives.

Forward-looking statements may be identified by words such as expects, objectives, 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 any 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 revisions to any forward-looking statements to reflect events or circumstances after the date of this conference call or to reflect the occurrence of unanticipated events.

I 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 of full fiscal 2014 earnings call. With me today is Ed Reich, our Executive Vice President and Chief Financial Officer.

As usual, I will start the call with a general overview of the first quarter and then turn the call over to Ed, who will review the specific financial results. Then, I'll close with some comments about our markets and order flow. And as the operator said, during our remarks, we will be referring to presentation slides that can be found on Capstone's website under Investor Relations.

Let's start with slide two. While the first quarter was disappointing from a topline perspective, with total revenue of $24.4 million and product revenue of $20.2 million, this was not a result of systematic business issues, but rather a timing issue with regard to collections and shipments. Our ongoing business fundamentals such as margins and backlog are strong. Our macro forces driving our markets is highlighted in slide three have not changed.

Strong demand for our smaller C30 and C65 MicroTurbines is led by the Australian coal seam gas market and we had lower-volume C1000 shipments globally for the quarter as we continue to see weakness in Europe and Russia as a result of uncertain regional economic conditions.

During the quarter, we produced and held 23 units of finished goods, primarily for three of our distributors due to the credit constraints and the timing of cash receipts. These cash receipts significantly impacted our revenue and cash usage during the first quarter. However, we chose not to relax our credit terms and I'm pleased to report that much of the finished goods have now been shipped or scheduled to ship during the second quarter.

In addition, I'm pleased to say we experienced a strong rebound in cash collections since the end of the first quarter. As of this morning, we've already collected more cash than the total cash collected in all the first quarter. This is truly a timing issue and not a reflection of any ongoing business trends. Ed obviously will have more specific comments in his prepared remark.

Despite what we believe to be a temporary drop in revenue in the first quarter, our gross margin climbed from 8% to 14% on a year-over-year basis, which showed the substantial improvements we've made in margins, as demonstrated in slide four. Slide four shows the first quarter margins for the last four years. Our 14% gross margin for the past three quarters is a Company record and we've now posted double-digit gross margin for the past three consecutive quarters.

We booked total orders of $27.1 million for the first quarter and backlog reached another new record of $155.8 million compared to $148.9 million at the end of March. Our order flow has been very strong recently, as we've booked $68.6 million over the last two quarters.

We decreased our net loss by 13% to $6.8 million and our net loss per share by 33% to $0.02 compared to the same period last year due in part to our ongoing efforts in reducing manufacturing cost and product quality and innovation.

As we proceed into fiscal 2014, we remain focused on closely managing our operating expenses and improving manufacturing efficiencies while simultaneously lowering direct material costs and increasing average selling prices. The keys to our success have not changed. The keys to our success are still continue to increase in C200 MicroTurbine engine production rates, higher average selling prices, lower direct material costs, ongoing one-to-one or higher book-to-bill rates, and reduced cash usage.

I'll stop there and turn the call over to Ed to go over the specific financial results. Ed?

Thanks, Darren. Good afternoon, everyone. Please turn to slide five for a review of the first quarter results. Revenue for the first quarter of fiscal 2014 was $24.4 million, down from the record $35.4 million for the fourth quarter and down from $28.8 million for the same period last year. Product revenue was $20.2 million compared to $29.1 million for the fourth quarter and $23.6 million for the first quarter of fiscal 2013.

Gross margin for the first quarter was $3.3 million or 14% of revenue, compared to $5 million or 14% of revenue for the fourth quarter and $2.2 million or 8% of revenue for the same period a year ago. The year-over-year increase in gross margin was primarily related to a $500,000 improvement resulting from a higher volume of C30 and C65 MicroTurbine product shipments and lower direct material costs during the first quarter of fiscal 2014.

We also had decreases in warranty, royalty, and production and service center labor and overhead expenses of $200,000 each, compared to the prior year. R&D expenses were $2.3 million for the first quarter of fiscal 2014 compared to $2.2 million for both the prior and year-ago quarter.

SG&A expenses were $7.6 million for the fourth quarter of fiscal 2013, compared to $6.7 million last quarter and $7.4 million for the first quarter last year. The net increase in SG&A expenses year-over-year was comprised of an increase of $300,000 in salaries and related expenses, $200,000 in supplies, $200,000 in facilities expense, and $100,000 in consulting, offset by a decrease of $600,000 in bad debt expense.

The net loss was $6.8 million or $0.02 per share for the first quarter of fiscal 2014, compared to a net loss of $4.1 million or $0.01 last quarter and a net loss of $7.8 million or $0.03 for the first quarter of last year. Loss from operations for the first quarter of fiscal 2014 was $6.6 million compared to a $3.9 million operating loss for the fourth quarter and a $7.5 million operating loss for the same period last year.

I'll now provide some comments on the balance sheet, cash flow activity. Please turn to slide six. Cash and cash equivalents totaled $21.6 million at June 30 as compared to $38.8 million at March 31. During the first quarter, we used $15.9 million of cash in operating activities and spent $300,000 in CapEx. This compares to cash used in operating activities of $7 million and $300,000 in CapEx during the year-ago quarter. Approximately $13 million of the cash used was related to working capital tied up in finished goods and receivables due to slower collections and lower than planned revenue as Darren discussed.

So at June 30, receivables were $23.7 million compared to $17.9 million at March 31. DSO was 89 days compared to 46 days in the prior quarter and 59 days for the same period last year. Inventories were $29 million at June 30 compared to $21.8 million at March 31. Inventory turns were 3.3 times in Q1 compared to 5.4 times in Q4 and 5 times at the end of the first quarter last year. Please note turns from the end of the first quarter of fiscal 2013 have been updated to reflect our new calculation as we mentioned on the prior call.

I'm pleased to report the cash collections through this morning have already exceeded the total cash received during to all of last quarter as Darren mentioned. Supporting that this is truly a timing issue, not a reflection of any ongoing business trend, we've managed through it prudently by holding firm to our credit terms and we believe we are still in position to meet our cash usage plan for the entire year.

Again, all of our long-term business fundamentals remain positive. If you look at slide seen, you can see that we once again had solid order flow during the first quarter coming off of a very strong Q4 with combined orders for the last two quarters totaling $68.6 million. Strong backlog of $155.8 million at June 30, up from the $148.9 million at the end of the year, which shows the strength of our pipeline and the macro factors driving demand.

That concludes my comments and back to Darren.

Thank you, Ed. Let's go ahead and turn to slide eight. Slide eight is our first quarter global shipment mix breakdown. Oil and gas and other natural resource applications continue to represent over half of our [biggest] business, comprising 57% of shipments, energy efficiency was 21% of shipments, renewable energy 10%, and critical power supply and mobile transportation products was 12%. As you can see, we're continuing to drive substantial penetration of the oil and gas market globally and this market continues to perform very well for us.

Slide nine shows us the US oil and gas customers that are currently using our Capstone technology. I'm sure we can all agree this is an impressive list, especially when you think by the fact that we have little or no US oil and gas penetration some 30 short months ago.

The transportation sector, especially marine, is very active to the tier four emission standards and our critical power supply data center product is gaining traction and both these are key areas of focus for future growth going forward.

Now, turning to slide 10, I'd like to highlight some of the more recent notable orders since our last earnings call in mid-June. Worldwide interest in Capstone's C200 product continues to grow and we announced our first order in Slovenia for two C200s to be installed at a major regional hospital. These will operate in combined cooling heat and power applications to lower emissions, increase energy efficiency, and ensure reliable power generation.

Fueled by clean natural gas, these are grid connected and provide electricity, heating, and hot domestic water for the facility. This order launches Capstone into yet another new marketplace where our value proposition of high reliability, long maintenance intervals, and low total cost of ownership provides an unrivaled product. Following installation of the C200s, hospital officials anticipate energy efficiency at the hospital increased from 34% to 73%.

In Asia, we received an order to provide four C200 Class one Division two MicroTurbines to a leading oil and gas producer for offshore platforms in Vietnam. The four C200 C1D2 MicroTurbines will run on wellhead gas that flows through the offshore platforms, eliminating the need for special fuels to be shipped to the platforms.

The MicroTurbines will provide all power on the platform which are expected to yield an oil flow of approximately 50,000 barrels a day. This combined with a production value makes it approximately $5 million per day. Capstone has extensive offshore operating experience in the Gulf of Mexico, Gulf of Alaska, the Mediterranean, Adriatic, the North Sea, South China Sea and the South Atlantic. And this contract in Vietnam is another example of our expanding presence in the global oil and gas sector.

Back home in the US, we secured 4.6 megawatts of orders from two leading natural gas producers in the Northeast, first of which is one of the nation's Top 10 natural gas producers who ordered their first two C1000 power packages and two C600 power packages that provide prime power at a liquid-stripping facility in West Virginia's remote Northern Panhandle. Another natural gas producer ordered two natural gas-fired MicroTurbines, a C800 and a C600 power package, to provide prime power to two remote Pennsylvania sites. In terms of sustainability, these two orders alone result in equivalent of taking over 3,200 cars off the road.

So, as you can see, the second quarter is off to an excellent start, with healthy order flow and excellent pipeline and rebounding cash cycle. We remain confident about our prospects for growth and continuing margin expansion in fiscal 2014. Despite our slow start to fiscal 2014, we still expect to achieve EBITDA breakeven before the end of this fiscal year.

It is certainly disappointing to not continue our tremendous record of 23 consecutive quarters of year-over-year quarterly revenue growth. But unfortunately, sometimes, you have to make difficult the calls for the long-term health and welfare of the business over short-term results.

When I look at the quarter, I see the silver lining of the first quarter. It is the fact that despite lower revenue, we still generated record margin levels which highlights the underlying improvements we've made to the business. The last time Capstone had a $24 million revenue quarter was back in Q1 of fiscal 2012, and at that revenue level, we generated only 2% gross margin.

The management team remains confident in our record backlog and looks forward to a strong rebound in Q2 and reaching our total year goal of continued revenue growth and EBITDA breakeven for the first time in Company history.

Finally, a reminder of Capstone's 2013 Annual Meeting of Stockholders will be held at our Corporate Offices here in Chatsworth on Thursday, August 29 at 9 AM. So I look forward to seeing some of you here, and if you're unable to attend in person, we will again be simulcasting the meeting and the management presentation of course will be available on our website.

That concludes our prepared remarks. Operator, we are now ready to open up the call to questions from our analysts.

Thank you. (Operator Instructions) Sanjay Shrestha, Lazard Capital Markets.

Okay. Thank you. So guys, I'm just trying to understand, so how much of this inventory of $29 million at the end of the quarter is finished goods and what was the actual impact that you guys were unable to ship and recognize as revenue in the quarter? So if all this sort of cash collection issue wasn't there, what would your revenue had been?

Sure. No, we had about -- in revenue about $7 million and so we had about $7 million of product to decide it with three distributors, and then we had about $750,000 worth of parts. So if you put those numbers together, there would be about a $32 million quarter for Q1 based on the production slots we had and the planning that we had.

Okay. And when did this sort of come about during the quarter in terms of, hey, that we might not get paid on time, so we're better off sort of holding on to the inventory and take in the short-term pain for the long term, when exactly did this happen in the quarter?

The last week of the quarter. All three distributors told us to not give up the slots that need the products and were telling us that they're going to pay right up to 11th hour. And like I said, several of the distributors paid the following Monday, Tuesday, earlier that week and made several payments, so very much this is a timing issue. If the distributors didn't pay, then obviously in the second quarter, we have time to repurpose those machines to other backlog and to other customers.

Have you received payment on all of it and then therefore this would be incremental, call it $8 million of revenue that will show up in Q2?

Yes. So we're still looking at Q2 on how we're going to do it. We want to make sure we have no finished goods in Q2 from a -- obviously, from a cash standpoint. We need to lower the inventory level in cash. We need to make sure collections are robust as we said they already are. But intuitively, there should be plus business for Q2, that is correct.

Okay. So few more things, guys, if I may. Now, when I sort of think about progression of the year, right, and at the -- and I know you guys don't give the quarterly guidance, but at the risk of getting another shock here. So how should we then think about your Q2 and the sort of the overall revenue growth rate for full-year fiscal 2014 versus 2013 for you guys?

Yes, as I said in the prepared remarks, we're not changing the guidance we gave you last quarter. So the backlog that we entered the year with is a good indicator of what we think we'll do for the year. We don't give specific guidance on a quarterly basis just for this very reason. As you know, we can be lumpy quarter-to-quarter.

Okay.

But I think for us, the most important thing is to manage our cash. Obviously, we don't want to do any more equity raises, especially before we're profitable. So we're really going to focus on the cash cycle, receivables, managing our inventory turns back up. Our goal is to have 6 turns by the end of the year. Obviously, Q1, we dropped from 5 turns to 3.3 turns. So we still do not change the total year backlog is at the highest point in Company history. Had we shipped that backlog would have been roughly $7 million lower, which would have been a 1 to 1 book-to-bill, which again, Sanjay, is our target.

Okay, okay. One final question, and I'll hop back in the queue, I'm sure other guys have question too. So the distributors, the three distributors where the issue came up with, right, and what end market do they serve, where are those guys and sort of, it is a surprise to you guys, it only sounds like [as to] how it all came about, and what sort of triggered it for them as to why they were basically kind of not in a way honoring what they said on time and sort decided to take longer than which everybody would like to see?

Sure. No, one of them was in Europe, Europe/Russia. The other was in South America and one was in the US. I think one market was oil and gas, the other two were CHP. Again, you got to remember, these are non-public companies. So for them to not pay on the 28th and to pay on the 3rd is five days. For us and our shareholders, obviously, it's a big deal. So we try not to let the quarter end drive our business too much, but obviously work very hard to meet the numbers and meet the production slots that we have slotted for the quarter.

Okay, got it. Thank you, guys.

Good questions, Sanjay. Thank you.

Thank you. Philip Shen, ROTH Capital.

Hey, Philip.

Good afternoon, guys. This is Matt on for Phil. Thanks for taking our questions here. Just wanted to start out with the service revenues as well. It kind of looks like service revenues also came in a fair bit lower sequentially and maybe you could just give us some color on what happened there?

Yes. Some of that is some timing we have with Pemex, our oil and gas customer. They've got an annual contract that has to be renewed and we're between contracts right now, so that will catch up again, a little bit of a timing issue. But in general, our parts service accessories run at 18% to 20% of our product revenue. So as product revenue slumps, so does our parts and service and accessory revenue.

Okay, that's helpful. And then, in terms of gross margins, I mean in holding them flat despite the revenue miss here is actually kind of a -- I have a positive read-through on that. I'm just wondering your take on sort of what gross margins could have come out at if you'd had that additional $7 million in revenue?

I mean obviously, we don't give specific guidance on that. But it's safe to say you're looking at 2 points to 4 points higher if we were at -- had that $7 million of product revenue and $750,000 in cash. That's what we would expect. If you look at where we thought we would be for the quarter, we thought we would become kind of the low 30s and high-teens. So --

Okay, great, that's helpful. And just one more if I may, just wanted to get a little bit more color on that Vietnam order. Yes, maybe you could just give us a sense for how you view the broader market in Southeast Asia in general. I mean are there other countries where your distributors see opportunities and are these opportunities primarily in oil and gas, are there other segments that could be attractive?

Yes. I would say, let me start with again the last question first. What we see in Asia, in India, and Africa, those are very first cost sensitive markets. So the first place, we're going to penetrate going to be oil and gas, where they're less first call centric. As I mentioned, the amount of money that flows through those platforms and the cost of downtime to still prohibit that they're looking for high reliability products.

So if you look at our sales in India, China, and Africa today, they are primarily oil and gas. Obviously, we've started to love our business that way. As we get the foundation in oil and gas, we then move into CHP, especially lot of US or European companies that are doing business overseas are great opportunities for us. So we're just scratching the surface from an oil and gas perspective in Asia, this Vietnam order is a nice win for us, so we hope to continue to leverage that obviously into many more business.

Great, that's helpful and that's it from me. Thank you, guys.

Thanks, Matt.

Thank you. Eric Stine, Craig-Hallum.

Hey, guys, it's Aaron Spychalla on for Eric. Thanks for taking the questions.

No problem.

Maybe along gross margins, can you give us an update on some of the parts that you were looking at to get you UL certification on and maybe how that's been progressing?

Yes. Obviously, I think as Matt just mentioned, the fact that our margins were flat on substantially 33% lower revenues last quarter means that we obviously got some DMC benefits and so we've had our C1000 enclosures now cut in, we're starting to see benefit from our power electronics new vendor that we're using It's some other PCBs or printed circuit boards to gave us some cost reduction in the quarter. We're also seeing some pricing improvements in the quarter. We did have the hit in warranty that pushed the number up a little bit, that's a timing issue with putting more into dollars on the books and then collecting it in Q2 from [CalMedix] is part of the T100 purchase. So, but overall, I think from a DMC and pricing perspective, we're very happy.

As I said in my prepared comments, to do a $24 million revenue quarter and still generate record margins is pretty impressive. I know it's disappointing not to see the topline growth, but it really shows you that our plan of lower DMCs, better pricing, and managing our warranty cost is really helping out. The other important piece of that is we're very close to getting the first reduction level on the UTC Carrier royalty. We should hit that this quarter in Q2 and you'll start seeing benefit in Q3. So that's another area of additional margin improvements.

With partial benefit in Q2.

Little bit of benefit in Q2, but most of them will be in Q3, correct.

Good, good, that's good color, I was going to ask that next. Maybe along that oil and gas slide that you had earlier, I mean as we look at that list, how many of those customers would you say that you've become part of their regular buying patterns? And then, maybe some kind of rough idea on your thoughts of what percentage of penetration within their footprint you guys are at, maybe? Just trying to better understand that opportunity, and I know it's tough to size, but just maybe trying to help us better understand that opportunity there.

Sure. No, the biggest user is probably Anadarko today, they are well over 100 machines. They were the first adopters of the C1000 technology in shale gas. Probably number two on the list would be Chesapeake. They came in shortly thereafter, after Anadarko. We had an engineer leave Anadarko and go to Marathon, that's how we got Marathon's business; very quickly, they were third. The rest of them are pretty similar. Pioneer, I guess, would be another one. They would be right up there with Chesapeake and Anadarko, very early adopter, has well over seven or eight C1000s if not more. I think [they've] actually 12 or 13; now, they think about it and then there see we C65s as well.

The newest ones on the list are Williams and XTO Energy. WPX is also new, these are folks that are hearing about our progress, hearing about our technology, seeing it in the field, and buying the product. So I think the majority of them besides Pioneer, Anadarko, and Chesapeake, I'd say were barely scratching the surface. Talisman is coming on very quickly; we're commissioning several megawatts, as we speak. So they're going to move up the list. I think with all of them, we're probably in the low-double digit as far as penetration. There's still a lot more work we can do, even just here in the US. Obviously, the big internationals like a Chevron, we've got some penetration here, but not globally compared to their footprint, BP and Shell in that list as well as getting some pockets of penetration, but globally, still a lot of work to do.

Okay. That is good. Thanks for the color. And maybe if I can sneak in one more. Along associated gas and kind of flare gas restrictions, are you seeing anything there yet? And maybe if you are, what's driving that? Is it more economics or regulation or some combination of the both?

I think combination of both. It depends on the market. I mean you're seeing North Dakota, Wyoming, there are laws that are being -- they're trying to push through. There is a lot of talk there about reducing flaring of gas, and I think a lot of oil and gas companies are seeing that trend and trying to get out in front of it. Up in Canada, we know there's some log in the books and we're seeing some opportunities. In Europe, there are several opportunities there, but I think the biggest opportunity for us is really probably South America, Africa, and then Russia is really where the biggest amount of gas flaring goes on and will have the biggest potential opportunity.

Okay, that sounds good. Thanks for taking the question again.

Great, thanks.

Thank you. Colin Rusch, Northland Capital Markets.

Hey, Colin.

Hey, how are you? Can you talk about on the sales front, where are you seeing any bottlenecks right now? Are you sure application engineers, are you seeing clients pull back on patents or is there anything else slowing things down potentially?

I mean, obviously, our biggest challenge continues to be Europe, Russia. I think if you look at the historic numbers for those markets, I'm going to pull them up here real quick, but we've -- Russia was, three years ago, $20 million in revenue, went to $29 million in 2002, it was $14 million last year. Q1 was not a great quarter for our Russian distributor. We do see Q2 as him returning to more historic levels, he is actually in the building today with one of his key customers. So we're optimistic that Russia is going to bounce back in Q2 and Q3. Europe has gone from 2011 from $15 million to $17 million, down to $12m.

As I said in my prepared comments, we got our first order out of France in probably three years. We've seen a couple nice orders from Italy, which has been very sluggish the last couple of years. Germany is definitely the strongest in Continental Europe. But the nice thing is we're starting to penetrate in order to trying to grow that market. We're getting into Poland, we're getting into Slovenia and some of the Eastern Bloc countries where we got zero penetration before and maybe we can make up for some of the softness that's still lingering in Europe. So it's not really an issue I think of application engineers or pipeline.

I mean, as I say every quarter, our pipeline continues to grow, well over $1 billion in pending opportunity. It's really the financing and ability to close these orders in the markets where they're still struggling financially. If you look at the Palace Hotel in New York, we quoted that project or RFP or distributed it five years ago, which is now being commissioned. So, economic factors definitely have an impact on these and good projects.

Okay. That's very helpful. And then, on the CHP side, can you just talk about trends and quotation activity at this point?

I think CHP in the US is trending very nicely. We're seeing lots opportunities on the East Coast down to Florida. There are opportunities through some parts in the South and even into Texas. California is a very good market for us. We're not doing much in the Pacific Northwest, obviously with a lot of hydropower and low utility prices. We've got some very close opportunities about to close in Hawaii, which should be interesting for us. We're seeing a new distributor we have in Alaska starting to get some traction in both oil and gas and CHP. So I think definitely North America, including Mexico is very strong. South America, Latin America is still slow but growing. I think it's more of an education issue there. Europe is very slow. I think in Russia, same thing. If you look at the Australia, Asia, that's still more challenging. Natural gas infrastructure, especially in China, is not as robust and is readily available as we like, they still have utility rates that are subsidized by the government. But those things I think will change over time and we'll see those markets improve.

Okay. And then, just one final one. Can you just give us an update on what you're working on to increase the service revenue per installation? (multiple speakers) asset base, there is a big opportunity there?

Yes, no, Paul Campbell joined us some six months ago. He has done a great job; he came from Rolls Royce. Really just to stabilize our after-market, lower our turn times, increase parts availability. We're working at kind of revamping our factory protection program that we've had out there for several years and trying to make it more economical to customers and improve the pull-through. But after that, as we get more mature products, we want to go straight to power by the hour and actually really live and die with our customers and have the machines operate. Obviously, that's more risk for the Company, but it's also more award. So as the C200 continues to mature and we mature our aftermarket business, we will move more to almost an airline powered by the air model with our product.

Alright. Perfect guys. Thanks so much.

Thank you.

Thank you. Ajay Kejriwal, FBR Capital Markets.

Thank you. Good afternoon. So that it's good to see that you holding the line on margins, despite revenues being where they are and I guess you are being disciplined on pricing and costs. So when I look at the orders in the quarter, and you alluded to difficult calls, was there any business that you may have walked away because that could have been margin dilutive for you?

No, it was really just a case of timing. Again, one distributor had plenty of room on its credit line, but he was past due. So we locked him down until he got his past due balances cleared up. Another distributor was out of credit line and the project is being third-party financed and the financing didn't come through in time. And the third distributor was in fairly good standing, but was just out of credit line and need to pay down his credit line and take more product and we chose not to increase his credit line. So we could have -- in all three cases, we could have made exceptions to our credit rules. We could have made the quarter a lot more attractive I guess for the short-term investors. But the reality is we need to make sure that we stick to our credit principles and all of these projects, again, we believe either have shipped or will ship in this quarter. So it's more of a timing issue and we don't want to start bat habits just to paint the tape on a quarter.

Of course. And then, as you look at the backlog, can you maybe give us some color as to what's the margin embedded in the backlog? Obviously, margin has been improving. So -- and you've talked about EBITDA kind of breakeven end of the year, but just any sense on that margin, the backlog?

Yes, no, as we talked about it, it's roughly 3 points to 4 points higher than what you're seeing today in the backlog. As I said in an earlier question, had we had another $7 million to $8 million in revenue, you probably would have seen us in kind of the 16% to 18% range on margin. We believe at around $35 million of revenue and 21% margin were at EBITDA breakeven. So we've obviously been at $35 million of revenue before, and we believe with the strength you're seeing underlying in our business, we're getting close to the -- within a short putt of low 20s as far as [bargain] goes. So as the cost reductions roll in, as the UTC royalty rolls off, as we continue to see the better pricing, we're also working on our parts pricing, our FPP pricing that we're very confident that within the end of this fiscal year, we will be EBITDA breakeven. Obviously, we don't end, we don't stop at EBITDA breakeven, we want to keep going and drive better results obviously from there.

Good, and last one from me. So, on the backlog, is that still a good indicator of the next 12 month revenues?

Yes, it is.

Yes, I think on the cash side, we really didn't talk about it, but I think Ed's plan shows that we will still make a full recovery on the cash side, maybe within $1 million of our internal plan. The majority of the burn, about $14 million of that, is in receivables, inventory, and a little bit on the bank line. So that's all stuff that can come back to us. So it's not truly a burden, it's a use of working capital. So a normalized quarter, you would have seen a $3 million to $4 million burn this quarter.

$3 million to $4 million, okay, good. That's helpful. Thank you very much.

Thanks, Ajay.

Thank you. JinMing Liu, Ardour Capital.

Thanks for taking my question.

Hi.

Sorry?

Hey, go ahead.

Yes, first, regarding the backlog, can you give us a breakout by applications of all the backlog you have right now?

Yes. If you look at it, it's very similar to what you're seeing in our shipments today. It's approximately 55% oil and gas, and then the other parts break out very similar to what you see. We're not seeing major changes in our backlog to our production revenue. So it may vary quarter to quarter, but in general, you're going to see similar to our current revenue splits today.

Okay. Can you comment on your opportunities in the US oil and gas industry given the current low natural gas price and the -- we understand that most of oil and gas companies are holding back their CapEx this year?

Yes, we're still seeing a lot of new orders out of oil and gas, so we're not feeling a huge cutback in CapEx, I know a lot of the bigger companies are. Again, because our market share is so small, I think we can still gain market share even as they're cutting back in a lot of areas. As I mentioned, the recent 4.6 megawatts is new projects, one in Virginia, one in Pennsylvania here in the US, those are both shale gas applications that are going in. So we're still seeing nice deal flow both in the US. Obviously, the two offshore platforms in Vietnam are new platforms, new opportunities for us. So I think, because we're still such a small piece and we're disruptive technology, we can still gain market share. And the flip side of that is low natural gas prices, obviously as an input fuel are driving business for us in the US, especially for combined heat and power. So low natural gas prices may be a bit of hindrance in the oil and gas market, but in the CHP market, obviously it drives more volume.

Okay, thanks a lot.

Thank you.

Thank you. We have no further questions. I would now like to turn the call over to Darren Jamison for closing remarks.

Thank you. Great questions as usual, everyone. I guess my closing remarks, let me take a minute and just reiterate the facts that management does not believe that Q1 is an indicator of any new systemic business issues. The only issues we have are timing and a lumpy business, which we talked about before. We've always said, you need to look at us on a year-over-year basis, not a quarter-over-quarter basis because of the nature of our business.

We do expect our Russian distributor, BPC, will return to historical revenue levels in Q2, he has had a nice start to the quarter and as I mentioned, he is in the building. That will be a big help to have both Continental Europe and Russia being down, has been challenging for us, having Russia come back will definitely help drive more revenue for us, and obviously he has been typically our Number 1 or Number 2 distributor, so that'll be nice.

Europe is still soft. I wish I could say it's not, we are seeing some nice signs, but it's still a fraction of what it used to be for us, still down 50% year-over-year. We've seen encouraging signs in Italy. And as I mentioned, in France, we got our first C1000 order in well over three years, so that's great news. Germany continues to plug along, but is definitely the shiny spot in Europe for us. I do believe countries like Poland and Slovenia will represent new market opportunities for us in areas where we can drive growth out of the European theaters that we haven't seen before and hopefully offset, Italy, Spain, some parts of Europe that are slow to come back.

The oil and gas business, whether it's offshore platforms, pipelines, whether it's coal seam gas in Australia, or shale gas here in the US, continues to be our biggest driver. We continue to gain traction. We're adding new customers every quarter, but more importantly, we are getting repeat orders every quarter. That one slide shows -- slide nine, I believe, it's -- it is, we've got a great list of oil and gas customers just in the US let alone worldwide. And as we continue to get market share with these customers, that's going be a great lever for us going forward.

Obviously, the management team is disappointed by the Q1 revenue shortfall. The cash especially being tied up and working capital is disappointing. But we are all very confident that these are areas that will rebound in Q2 and then we have plenty of time being in just the first quarter to make a full recovery for the fiscal year. So, I'm pleased that we achieved the 14% gross margin despite the lower revenue shortfall. Again, to think that revenue dropped 33% and gross margin didn't I think shows -- really highlights the underlying improvements we've made to DMC and product pricing.

I'm also pleased about bookings, very important for us that we have one-to-one book-to-bill ratio. This quarter was greater than one-to-one but on down revenues, I'll call it one-to-one on a normalized basis. But still very strong after coming off a big Q4. So new orders for the last two quarters are almost $70 million. Total backlog is up to $156 million. That's important, because really the backlog is what shows the leading indicator of our future performance. So with declining backlog, I'd be concerned; with growing and strengthening backlog, I feel much better about the years to come.

Really bottom line, we had to make some very difficult credit decisions at the last minute in Q1. We knew full well that they would be not popular, especially with shorter-term investors. However, as CEO and CFO, we need to make those tough decisions that would be the best for the long-term interest of the Company and long-term shareholders.

Capital management team is laser-focused on a strong rebound in Q2, especially on revenue and cash. And more importantly, laser-focused on reaching EBITDA breakeven before the fiscal year because that's key to our success. We need to stop being users of cash, we need to generate cash, we need to prove our vendors and our customers that we're here to stay, we're going to be here for a long time.

So with that, I look forward to speaking to everybody at the Annual Shareholder Meeting, whether you're here in person or you're on the simulcast. Thank you.

Thank you for your participation today, today's conference. This concludes the presentation, you may now disconnect. Good day.