Capstone Green Energy Corp (CGRN) 2015 Q1 法說會逐字稿

Welcome to the Capstone Turbine Corporation earnings conference call for the first-quarter fiscal year 2015 financial results ended on June 30, 2014. During today's call, Capstone management will be referencing slides that can be located at www.capstoneturbine.com under the Investor Relations section. I would now I 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 2015. 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 7, 2014. If you do not have access to this document and would like one, please contact Investor Relations via telephone at 818-407-3628 or email 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 and diversification of our end markets; increased production rates; strengthened distribution channels; ongoing new order flow; reduced cash usage; growth in revenue, gross margin, and backlog; attaining profitability; improvement in certain key performance indicators and strategic initiatives; achievement of our EBITDA and cash goals; adequacy of capital resources; improved operating leverage, new product development; shifts to larger markets for our products; benefits from our cost reduction initiatives; opportunities in the Bakken shale play; growth of key markets; new certifications; and compliance with government regulations. 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, risk 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 revision to any forward-looking statement 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 2015 earnings call. With me today is Ed Reich, our Executive Vice President and Chief Financial Officer.

Today, I will start with a general overview of the first quarter and then turn the call over to Ed who will review the specific financial results. I will then close with some comments about our markets and geographies. And as Jayme said, during our remarks, we will be referring to presentation slides that can be found on the Capstone website under the Investor Relations tab.

Let's go ahead and start with Slide 2 for the first-quarter highlights. For the first quarter, revenue was $23.3 million. Gross margin was $3.4 million or 15% of revenue and we achieved another record for backlog at $175.2 million at quarter end. Our balance sheet is strong with $46.7 million of cash at the end of the quarter.

The lower-than-expected revenue for the first quarter was due to delayed shipment requests for the delivery and installation of equipment on project sites, and this resulted in excess finished goods at the end of the quarter. The timing fluctuations are not the result of any ongoing pattern of project cancellations or postponements by customers that we are seeing, but instead demonstrate the lumpiness of our business on a quarter-to-quarter basis.

Our business is very sensitive to our customers' specific project timing. If a customer is not ready to take delivery of the equipment on a project site, we cannot ship the product until it is ready for installation. In conversations with some of our key distributors, none of their projects have been canceled and it is not an event driven slowdown or indicative of a market turn down. But there have been delays on certain projects that have affected our shipments in the first quarter.

New order volumes are also down compared to the prior quarter, but this is typical pattern we have seen in previous years and experienced historically given our annual price increase in April. However, our pipeline remains stronger than ever as a result of the long-term secular trends driving the market for distribution generation. And we do believe that we can make up the first-quarter shortfall in revenue over the course of the remainder of fiscal 2015.

As I mentioned, we set another record for backlog, which now sits at a $175.2 million at the end of June 30, 2014.

A bright spot for the quarter is we received orders from several new partners during the quarter, including Seven Turbine Power Optimal in Australia, Pipeline Supply Company, [Sutherland] [RyderG],[Tunega Energy], Energy Systems of the Caribbean, and Vergent Power Solutions. These new customer orders represent a positive sign that we are improving the diversification of our business, which is critical to our overall revenue strategy and long-term growth.

Let's turn our attention to Slide 3. Slide 3 shows gross margins for the quarters. Gross margin of 15% for the first quarter showed a modest increase year-over-year despite actually lower revenues than last year. This demonstrates the operating and direct material cost improvements that we have made to our manufacturing processes. The first quarter of fiscal year 2015 marks our seventh consecutive quarter of double-digit gross margins.

I will pause here and turn the call over to Ed for the first-quarter financial summary. Ed?

Thanks Darren. Good afternoon everyone.

Let's begin on Slide 4 with a review of the first-quarter results. Revenue for the first quarter of fiscal 2015 was $23.3 million compared to $36.4 million for the fourth quarter of fiscal 2014 and $24.4 million for the same period last year. Product revenue was $17.6 million compared to $30 million for the fourth quarter of fiscal 2014 and $20.2 million for the year-ago quarter. Revenue from accessories, parts, and service was $5.7 million compared to $6.4 million in the prior quarter and $4.2 million for the first quarter of last year.

Turning the Slide 5, we shipped 125 units representing 17.9 megawatts in the first quarter of fiscal 2015 compared to 173 units representing 18.9 megawatts in last year's first quarter. So while megawatt shift decreased due to overall lower sales volume, average revenue per unit increased based on the mix of micro-turbines shipped during the quarter, which was more weighted towards our larger products than in last year's first quarter.

Gross margin for the first quarter was $3.4 million, or 15% of revenue, compared to $6.1 million, or 17% of revenue, for the fourth quarter of fiscal 2015 and $3.3 million, or 14% of revenue, for the same period last year. The 100 basis point year-over-year increase in gross margin primarily reflects lower royalty and warranty expense offset by the impact of lower revenue and the unfavorable overhead absorption because of lower volumes.

First-quarter R&D expenses were $2.3 million compared to $2.5 million last quarter and $2.3 million for the first quarter last year.

SG&A expenses were $7.8 million for the first quarter of fiscal 2015 compared to $6.8 million for the fourth quarter and $7.6 million for the same period last year. The year-over-year increase is primarily due to an increase in salaries and related expenses, which were offset by a decrease in supplies expense.

Net loss of $6.8 million, or a $0.02 loss per share, for the first quarter of fiscal 2015 compared to a net loss of $3.4 million, or $0.01 per share last quarter, and a net loss of $6.8 million, or $0.02, for the first quarter of last year. The loss from operations for the first quarter of fiscal 2015 was $6.7 million compared to $3.1 million for the fourth quarter and $6.6 million for the first quarter of last year.

I will now provide some comments on the balance sheet and cash flow activity. Please turn to Slide 6. Cash and cash equivalents totaled $46.7 million at June 30, 2014 compared to $27.9 million at the end of the prior quarter and $21.6 million one year ago. In May, we posted a public offering for 18.8 million shares of common stock which was allocated to a single institutional investor. Net proceeds from the sale of the shares, after deducting fees and other operating expenses, was approximately $29.8 million. Additionally, on June 9, we increased the maximum bond capacity of our credit facility with Wells Fargo Bank by $5 million, increasing it from $15 million to $20 million. We also amended the financial covenants and extended the maturity dates of the line of credit to September 30, 2017. But between our cash in hand and our expanded credit facility, we believe that we have ample liquidity to fund our growth plans and to meet our increasing working capital requirements that would be required generally with larger orders.

We maintain our focus on reducing our cash requirements and we used $9.1 million of cash in operating activities of which $4.5 million was used for working capital, and spent $200,000 in capital expenditures in the first quarter of 2015. This compares to cash used in operating activities of $15.9 million and $300,000 in CapEx during the same period a year ago.

Receivables were $24.2 million at June 30 compared to $28 million at the end of the prior quarter and $24 million a year ago. DSO was 95 days in Q1 compared to 70 days in Q4 and 89 days for the same period last year. Inventories were $25.4 million at June 30, up from $21 million at March 31 and down from $29 million a year ago. Our inventory turns were 3.4 times compared to 5.3 in Q4 and 3.3 times in Q1 of 2014.

Finally, Slide 7 shows our growth in backlog since the beginning of fiscal 2007. Backlog increased to $175.2 million as of June 30 compared to $171.6 million as of March 31, 2014 and $155.8 million at the end of the first quarter of the prior fiscal year, representing a 12% year-over-year increase. While we are disappointed in the product shipment delays during the first quarter, we are encouraged by our backlog, which is a positive indicator for future growth. As our customers work out their project completion schedules over the course of the year, we expect to make up for the lower revenue. In addition, we anticipate continued margin expansion in fiscal 2015 based on a shift towards larger units and larger projects and continued progress in our cost-saving initiatives. We maintain our expectation of crossing over to positive EBITDA during the fiscal year.

That concludes my comments. Now back to Darren.

Thank you Ed. Now let's turn to Slide 8 for our global shipment mix for the first quarter. As you can see, 62% of our shipments for the use in natural resource applications, including oil and gas, 32% was for the use in energy efficiency applications, 5% in use of renewable energy applications, followed by 1% for use of applications, including critical power supply and mobile products. On Slide 9, you can see the same data on the megawatt shipments by geography.

Geographically, we are particularly excited about the Bakken shale play in North Dakota, a region that has been largely untapped by Capstone. We've also made inroads into Oman and the Middle East for oil and gas production as well as recent expansion into Indonesia and Finland.

Please turn to Slide 10. As I mentioned, Vergent Power Solutions is one of our newer distributors. We are very excited about the partnership with Vergent and as they tackle the Bakken shale play where recent gas flaring initiatives have provided excellent opportunity for Capstone product.

The Bakken has emerged in recent years as one of the most important sources of oil in the United States. Most new Bakken drilling and production has been in North Dakota, although the play also extends into Montana, Saskatchewan, and Manitoba. As of 2013, the Bakken produced more than 10% of all US oil production. In November 2013, the US Energy Information Administration projected that the Bakken production in North Dakota and Montana would exceed 1 million barrels per day by December 2013. As a result of the Bakken, North Dakota has become a second largest oil producing state in the US as of 2013, behind only Texas in the volume of oil produced. We fully expect the Capstone Turbine technology will enjoy similar success in the Bakken shale as we have achieved in the Marcellus, Permian and Eagle Ford shale plays.

Turning to the Middle East, we received our first order in Oman from Pipeline Supply Company, our new distributor for Oman and Qatar. Oman is one of the top 20 flaring nations in the world but is dedicated to taking steps to eliminate this unnecessary waste of energy and negative environmental impact. Capstone micro-turbines were chosen because of their perfect fit in flare gas to power projects. This order is an exciting development as this is that the first of what could be potentially hundreds of micro-turbines installed to help Oman reduce its gas flaring.

We also recently received an order from United Technologies' Carrier division for 10 C65s for a hospital in Southern California. This is the first product order from UTC since 2011, so obviously this is a very positive development.

In looking at the transportation space, the transportation markets continue to be a key focus for Capstone. In the marine market, several new boatbuilders are seriously considering the features and benefits of our unique technology. Changes in the Sulphur Emission Control Area, or SECA, will affect all shipping within, into and out of the Baltic, North Sea and English Channel beginning in January 2015. SECA will limit fuel emissions from ships to 0.1% sulfur compared to the current limit of 1.5%. In addition, California coast has similarly new legislation coming soon. International Maritime organization rules now strictly limit sulfur oxide emissions by ships. Ordinary diesel and heavy fuel emit a large amount of sulfur oxide when burned. Conversely, LNG is virtually zero SOx emissions. All of this becomes more efficient, less polluting if hybrid electric powertrains are used and these have many secondary benefits as well, not the least of which improved performance.

Speaking of improved performance, Ian Wright, the founder of Wrightspeed, who was also involved in the development of Tesla, continues to get traction with his unique electric hybrid vehicle solution utilizing the Capstone product. He is working on finalizing a 25 unit follow-on order from FedEx and a 19 unit order for garbage trucks for a Bay area refuse company.

Let's turn our focus to R&D on Slide 11. We continue our focus on advancing turbine performance, materials technology and updating our products for compliance to new European grid interconnect standards. The US Department of Energy remains a strategic partner for advancing materials and supporting the C370 micro turbine program. Based on the success last year on the C250 demonstration program, which is the low-pressure spool for the 370, the project team is focused on optimizing the architecture and the component down selection for the integrated dual spool system. We are planning to hold a final design review with the DOE at the end of this calendar year and next year we plan on building a test platform to demonstrate C370 performance.

The AFA recuperator project has recently completed the first face of development and successfully achieved 3000 hour elevated temperature tests. The next phase includes a formal qualification testing program and production evaluation. We remain very excited about this program as it supports a low-cost alternative to existing alloys used in high-temperature components in our micro-turbines.

Capstone R&D is also working very closely with the European certification agencies and European distributors to support new grid interconnect standards. We are currently finalizing our product designs and upgrading our internal development labs to demonstrate this compliance. Initial certifications are expected later this year and future compliance work is planned into next year. We believe the upgrades for our products position us well for future interconnect requirements now being discussed in the US and Canada and other critical areas to Capstone growth.

As a global company, we continuously monitor the changing geopolitical environments in areas in which Capstone is doing business or has plans to do business. More specifically, we are focused on Russia, the Middle East, Iraq, Israel, and Africa. The largest potential impact of our current business is definitely Russia and the ongoing tensions in the Ukraine. The US government is working very hard to impact Russian interests without placing any undue harm on US companies. To date, we are not aware of any imminent changes or impact at this time related to the Company's business in Russia or that of our Russian distributor, BPC.

Turning to the policy front, in June, HR4916, the Power Efficiency and Resiliency Act, or POWER Act, was introduced in the US House of Representatives by a bipartisan group of legislators. The legislation would modify tax incentives for combined heat and power and waste heat to power increasing than from the current 10% investment tax credit to a new 30% investment tax credit. This change provides support on par with tax incentives available for renewable energy and other technologies. By reducing initial capital costs of deploying these energy efficiency systems, the legislation seeks to encourage greater investment in these new high efficiency technologies.

Also in June, the California legislature passed the governor's Budget Trailer bill, which includes a straight extension of the self-generation incentive program for five more years. Capstone micro-turbines for natural gas CHP applications are eligible for up to a $0.55 per watt incentive, which includes an additional incentive for being a California company. Capstone's bio-gas CHP projects are eligible for $2.17 per watt incentive. The SGIP incentives are paid for up to 3 megawatts of capacity with tiered incentive rates.

In July, New Jersey launched a $200 million energy resilience bank, an infrastructure bank focused on energy resiliency. The initial funding will come from New Jersey's community development block grant disaster recovery allocation from the federal housing and urban development department. In addition, capital from the private sector is also expected to build on this initial funding. Focus for the bank's funding will be on supporting distributed generation resources, primarily combined heat and power for water, wastewater, treatment plants, and other targeted sectors, including hospitals, emergent response centers, town centers, transit networks and disaster relief centers.

Lastly, earlier this week, Mexico's Congress passed energy reform that will end 75 years of state control over the energy industry. This ground-breaking reform will allow major international oil and gas companies to finally enter the Mexican market oil and gas, which is expected to increase oil output and natural gas exploration activities. Capstone is seeing great growth in the oil and gas market and would likely benefit substantially from increased natural resource development in Mexico.

In closing, I want to mention that Richard Lewis, our new Vice President of Operations, has been on board about 10 weeks now and his addition to our team is already paying dividends. I am expecting that Richard's 25 years of global supply chain, SAP and lean manufacturing experience will soon take Capstone's manufacturing operations and inventory turns to new levels of performance. Hopefully some of you will get a chance to meet Richard at our upcoming annual meeting of shareholders later this month. As reminder, our 2014 annual shareholder meeting will be held at our corporate offices here in Chatsworth on Thursday, August 28, at 9 AM. So we look forward to seeing you there. If you are unable to attend, we will again be simulcasting the meeting and management presentation, as always, will be available on our website.

In addition, Capstone's marketing team is working on an all new Capstone website with increased functionality, improved brand recognition and key word search capability, so look for that in the coming months as well.

So to sum up our prepared remarks for today, despite a slow start to the fiscal year from a revenue perspective, our business is being fueled by our strengthening distribution channel and record $175 million backlog. As you know, backlog is the leading indicator of future revenue growth and therefore we still expect to grow topline revenue for the year, expand our margins, and achieve our fiscal year 2015 plan.

Capstone continues to find innovative and creative ways to expand micro-turbine adoption, strengthen our brand, and increase our market presence. We are excited about the future and look forward to updating you on any number of important milestones throughout the fiscal year.

Operator, we are now ready to open the call up for questions from our analysts.

(Operator Instructions). Eric Stine, Craig-Hallum.

Good afternoon gentlemen. This is actually Dillon on for Eric. Just real quick regarding the delayed shipments, and Ed, you touched on this briefly in your prepared remarks, you expect to make that up throughout the remainder of the year. Just wondering what kind of visibility you have? Are there any orders that you guys have booked or shipped already here in Q2? Does that mean we are going to see a bolus of business come through in Q2, or just what kind of cadence do you guys expect just with regard to those delayed shipments?

This is Darren. I will go ahead and field that. We are expecting a strong bounce back in Q2. I do not think all of the Q1 orders will ship in Q2, but I think at least half of them if not more will, so we will clean up a lot of that finished goods.

We also had an imbalance. We had too few C65s slotted for the quarter and too many C1000s for the quarter. So it was really a combination of project delays and a mix change that we did not anticipate. So we are increasing our C65 production over the next couple of quarters to handle that increased order flow. And obviously the C1000s we believe will ship either Q2 or Q3. So from a cadence standpoint, I would expect a strong bounce back in Q2. Q3 is typically our best quarter of the year. I do not see any reason why that will not be the same this year, then finish hopefully strong in Q4.

Okay, great. And then I apologize. I'm going to bounce around a little bit here with regard to a couple of different opportunities. But on CHP, with the agreement with Related Companies, just get an update there, what kind of long-term opportunity there are we looking at? Just an update really.

Yes, no, with related, New York is one of our markets that didn't take product in the quarter like we thought they would. I think Related is moving forward. They are looking at I think six different sites, and the first unit should be installed here in Q2. So I think, like many things in New York, project timetables tend to move to the right. But again, as I said in the prepared remarks, no cancellations. Related I think will be important as they will be one of our biggest customers at the end of the day but they are really kind of a hallmark for us or an anchor store to get into more REITs and larger companies like themselves. So I think anytime we get a major end user in a new vertical, that is obviously very important for us.

Okay. And then kind of along that same line with the new users, the pump jack, what additional testing or development still needs to go into that opportunity? And have you guys been seeing interest from distributors or customers? What kind of -- has there been a pipeline or a backlog that is built up for that?

Well, we haven't accepted orders for that product yet. That is still in sealed development work. Obviously that is a huge market opportunity for us. We are still testing that product, so I think we're probably still a quarter away, maybe two, from fully releasing that. Obviously, we want to be able to operate as many loads in the oil and gas fields as we can, and so that is just another step in that process.

Okay. I will jump back into queue. Thanks.

Colin Rusch, Northland Capital Markets.

Thanks so much guys. Can you just -- I'm sorry to kind of beat a dead horse here -- talk about the nature of the delays that you're seeing with these projects. You know, having projects push out more than a quarter is actually a fairly long timetable. So, you know, I appreciate that you have got a new customer that is ramping, but I think we are going to get a lot of concern around visibility and how trustworthy that visibility is. So, if you could just give us a bit more detail around that, that would be very, very helpful.

Yes, I would say that California and the East Coast were the two biggest areas in the US. I think we did see a little bit in Europe, a little bit of push out. Some of the changes in the new grid interconnects are creating some havoc in Europe. But the vast majority of the project push outs were larger C1000 series product here in the US, Eastern and Western seaboard.

In California, it is more of a permitting regulatory drag on the project cycle times. New York, it is more just the timeline of how these projects go forward. NYSERDA is not exactly the fastest organization to work with, unlike UL and some other organizations.

I think, if you talk to our distributors, Ufinity, RSP, Regatta, they will tell you that their pipelines are robust, they feel very good about the business. This is a short-term anomaly. You know, air permitting in California always takes longer than you think it should. We have got some carb issues we are going with our products for the mobile application. So, again, I think folks may be spooked by this, but we are a project-based distance. Projects moving three or four months to the right is not anything significant. We do not see a problem from a annual basis.

And if you think last year, this is very similar numbers we had last year. We came off a good Q4, had a slow Q1, rebounded nicely in Q2 and Q3. So, we are expecting something similar. Again, I know folks that aren't familiar with project-based businesses and doing these types of building retrofits and new construction may be concerned about it but, again, we have always said quarterly forecasting is always challenging for us. And something sleeps even 30 days, it moves outside the quarter for us. So hopefully that -- that was a long winded answer.

Yes. Just the quick recap is that this is regulatory approval and interconnection approvals that you're dealing with, not a change in financing structure for these projects or other sort of construction related delays. This is just primarily permitting issues, is that correct?

Yes, no, I mean if you look at our top five distributors, four of the five revenues down over the previous quarter. You talk to all five of them, and they all feel more robust about the business this year than last year and they are not seeing any structural changes. So, again, if you want to judge Capstone on a quarterly basis, that is going to be challenging. And we cannot ship product without a place for it to go. We cannot ship before we have building permits or air permits, so it is, unfortunately, the nature of the beast. And hopefully we will bounce back strong in Q2 and Q3 and put this behind us.

Okay, that is perfect. And then can you just walk us through the cash cost trajectory on the manufacturing, you know, ex all the other charges? And I know you've been working hard on the supply chain. Can you walk us through the progress quarter-over-quarter as well as year-over-year on cost reduction?

Yes, it is difficult to see because our revenue is so low this quarter. I think, if you look back a couple of years, it is similar revenues, even $27 million to $30 million. We are probably 3%, 6%, 9% gross margin. We posted a 15% on a very low revenue, so I think that shows you how much we have improved our internal cost structure. Even last year's number of $24 million of revenue, I think we did a 14%. So if you equalize that revenue, you're probably looking at a 16% over a 14%. So we are definitely making progress. I will reiterate we expect 500 basis points for the year. I would say we are well on our way in the first quarter. Again, the lack of revenue, or lack of product shipments kind of masks that a little bit. But again, 15% on such low revenue is, frankly, amazing if you look back just to where we were just two years ago.

Okay. And then one final question. Obviously, looking at the map on Slide 9, you've got zero megawatts shipped to the South America and Africa where there is obviously I think fairly compelling economics for your solution versus other solutions. Are you looking at upgrading your distributors in those geographies? Can you talk a little bit about the channel work that is being done in those areas, or is that not really a focus given the number of opportunities that you have in a little bit more established markets?

No, I would say it is absolutely a focus. I mean we shipped 5 megawatts into Africa in Q4, zero this quarter. Definitely there's huge opportunities, especially in North Africa. We have got some new distributors in place. The Middle East has got some great opportunities, as I talked about. And we have got some new distributors that are going good work there.

South America should be a jewel for us. Colombia, Brazil, Peru, again, those projects tend to move to the right. But if you look at the pipeline that we built up of opportunities, it is huge. So, I fully expect South America to put up some very nice numbers this year. And a lot of our growth, as we've talked about, is in these other markets. I mean the US market is very good, Europe is coming back, but we need to see Australia where we've made distribution changes, Africa, we have new distributors, South America where we're getting some traction, we need to see those markets pick up. And so I think this quarter was not a very good example of the diversification that we are getting, but if you look at some of the recent order flow, some of the names I talked about, we are seeing newer distributors start to contribute, which is important.

I think if you look at our lumpiness, it is two things. One, we're a project-based business and we don't ship the product until the customer pulls it from us. That is part of our challenge. But concentricity is an issue. We have several big distributors and a whole bunch of new distributors that need to contribute. So as we are seeing new distributors contribute, that is going to take one of those two lumpy parts of the business out of the business. So, I think that it's very important for us.

Okay. Thanks a lot guys.

Philip Shen, ROTH Capital.

Hey guys. It is Matt on for Phil. Thanks for taking our questions. Just wanted to start off with the pipeline. Could you guys just kind of break it out for us a bit maybe by project size? And then just could you give us a sense for how it breaks out by geography?

I think, if you look at our pipeline by geography, obviously North America is the biggest. Europe would be next. Asia probably would be next. I think South America is probably our biggest pipeline with the lowest amount of closures right now, so it is probably our biggest area of opportunity. Some of the biggest projects we have talked about that we're looking at, the 50 megawatts, 80 megawatts, 20 megawatts, are in Mexico; they are in South America; they're are in Africa. So some of these areas that are challenged for energy infrastructure are potentially going to be some huge opportunities for us. So, I think, from a great standpoint, we are still hovering around $1.3 billion, $1.4 billion of identified opportunities, but we need to continue to turn those opportunities into orders and push those orders through obviously as fast as we can.

Okay. Could you also just touch on sales cycles with the larger projects and the 5 megawatt plus quotations that you're doing? I mean how long are those taking currently, and sort of any change in the larger project quotations?

You know, our typical sales cycle, even for smaller projects, can be a year to 18 months. The bigger projects are probably 18 months to two years. Sometimes they can go quicker if we get in on when they are already started. But I think the reality is the bigger projects tend to move slower just because the financing is more complicated, the permitting, citing of the sites.

So, again, I think we are getting a shot at those bigger opportunities. I would like to think we are going to book a couple of those this year. We may not ship them this year but I've like to see us get the orders by the end of our fiscal year and demonstrate to the Street and to really the entire world that we are not just the 1 megawatt guys or the small micro-turbine guys.

Great. That is it from us guys. Thank you.

JinMing Liu, Ardour Capital.

Hi. Thanks for taking my question. Firstly, just looking at your new booking for the quarter, it looks like to me the book to bill ratio was lower than 1 for the quarter. And can you give us some explanation why the booking was also low for the quarter?

Yes. When we measure our book to bill, we look at product bookings and product shipments. Our actual product booking was higher than our product shipments for the quarter, so it is a positive book to bill. We do not look at it compared to total revenue, because the total revenue has accessories, parts and service and other things in it, so it is not part of our backlog. Actually, our service backlog is north of I think $40 million, does not include in our (multiple speakers)

Yes, $49.3 million at June 30.

Yes, $49.3 at June 30 for the FPP backlog. So a positive one -- more than 1-to-1 on book to bill. Typically we see a slowdown in Q1 because we do our price increase in April, so we have a really good Q4 from a booking standpoint ahead of that price increase and then a slowdown in Q1 that picks back up in Q2. But I think our actual book to bill product shipment versus product bookings is 1.2-to-1 for the quarter.

Okay, I see. I misread that thing. Okay.

And regarding a few future opportunities you mentioned, like the New Jersey opportunity about the infrastructure resilient, your structure opportunities. I do not think you have much sales into the critical power market so far. So is there any step you are going to take to address that?

Yes, I mean it depends on your definition of critical power, but definitely a lot of what we sell today is considered critical to the customers from providing emergency backup power as well as prime power. From a data center standpoint, we have a data center specific product. We actually have lowered the pricing on the product this year, trying to make it even more competitive. I think we have done six data centers to date.

But if you look at data centers and hybrid vehicles, either marine or over the road, those are less than 1% typically of our revenue and a huge area of upside for us.

So I mentioned the good work that Wrightspeed was doing. They sold two units to FedEx. Those have been in operation for about six months. They have got a 25 unit order they are about to execute and then they have got a 19 unit garbage truck order that they are getting ready to execute as well. So, I think seeing data centers start to adopt the technology, seeing the marine expansion, see the over-the-road truck expansion, although not driving big numbers in the next couple of quarters, two to three years from now, that could be some of our biggest markets. Obviously for market potential, it is huge.

Okay. And then switch to the new material, the EFA thing, what kind of timetable we are looking at here? Say how long will it take you to actually put that new material, if everything works, into production? And also how much the cost saving we are looking at at this moment?

Yes, the cost saving is going to be a minimum of about 20%, maybe as much as 30%. And we will use it in the recuperator, which is our most expensive component on the micro-turbine, as well as other hot sections of the micro-turbine. By the time we do some field testing and actually cut into production, we are probably looking at next summer. We may probably rill it into the C30 and C65 first, get some hours on it and then roll it into the 200 and 1000 series product. But definitely within the next four quarters, maybe three quarters, if things go very well. But again, that is very exciting for us. The main thing is just making sure that we get the life out of the material. Plus I think you'll also see that our current vendors that are supplying the current material may sharpen their pencil when we have another alloy that we can leverage them against. So I think, either way, we are see significant cost savings and not give up any life of the technology or life of the product.

Okay. That 20% or 30% saving numbers you are referring to, are those for the direct material cost or for the total production cost?

No, that would be direct material costs such as the cost of the alloy from what we are purchasing it for today.

Okay.

So if you look at, let's talk about DMC for a minute, we didn't put a specific DMC slide in here this quarter but we have about a 9% to 10% cost reduction that we have identified that we are still taking out of technology. We then have this AFA material which is additional cost reduction. Then we also have the C250 which is going to drive better margins. So there is a lot that we are going to further improve the margins of the product. We'll probably continue to raise prices modestly every year. You've seen our warranty expense come down. The royalty expense dropped in half recently. So I think we've obviously got a ways to go to get to our 35% operating model or target model, but I think, as I said before, book back two years on similar revenue and you're going to see a dramatic improvement with the 15 points of margin on this obviously what is very low revenue for the quarter.

Okay, got that. Thanks a lot.

And there are no remaining questions at this time. I would like to turn the call over to Mr. Jamison for any closing remarks.

Great. Well, thank you for another great list of questions everyone. Obviously, Q1 2015 did not meet Wall Street's expectations or management's expectations from a revenue perspective, which is disappointing. But I think, when you look at it, we are very confident that we still have the backlog and that we are going to deliver the year that we talked about. Choppy or lumpy quarterly results for an early-stage project centric company, which Capstone is, is unfortunately par for the course. And I know it is frustrating for shareholders and potential shareholders, but it is the lot in life that we have with the type of technology have and the markets that we are in. Q1 last year and Q1 this year were perfect illustrations of how these project delays, push-outs, and revenue moving from quarter to quarter can impact the business. But like last year, we expect a strong improvement.

I think the big key is that our backlog is still improving. The macro business drivers are still improving, whether it is the changes in Mexico, changes in the SGIT incentive, New Jersey. All of the different things we are looking at seem to be going in our direction.

Management is not backing away from the full-year expectations. We are not lowering our expectations. If anything, we are doubling down and going to make sure that Q2 is as strong as possible and roll right into Q3 ,which, again, is typically our strongest quarter of the year.

If you look at the recent improvements in distributor channel, I am very excited about that. We need to be more diversified in our channel. We need to be getting more sales outside of the US and Europe. We need to see South America, Africa, Australia, Asia, Eastern Europe, whether that is Slovenia or Poland or other types of areas that are not doing a lot of business with us day, there's huge opportunities there. The Caribbean, Haiti we've talked about in the past.

So I think seeing new distributors, seeing different geographies, that is going to help with our lumpiness. Obviously, being a project based business, we are always susceptible to lumps, but getting less concentricity with our top five distributors is going to help us quite a bit. And I think that is really the key for us, is to continue to drive that distributor development, continue to get as many distributors as we can doing $1 million, $2 million, $3 million a year, growing their business, reinvesting back into their companies. We not only have sales targets for our distribution channels today. We also have employee targets on an annual basis. So, the key is to make sure that as they grow their revenue, they reinvest that profit, hire more salespeople, hire more application engineers, hire more service techs and keep building that business. So I think, from that perspective, silver lining on what is a down quarter for revenue, but like I said before, we are very confident we going to rebound in Q2 and Q3. And with that, I invite everybody to attend our annual shareholder meeting and look forward to any questions and good dialogue at that meeting. So, thank you.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. To you all, have a great day.