Capstone Green Energy Corp (CGRN) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Capstone Turbine Corporation earnings conference call for second-quarter fiscal year 2016 financial results, and on September 30, 2015. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Clarice Hovsepian, Vice President, Human Resources and Corporate Counsel. Ma'am, you may begin.

Thank you. Good afternoon, and welcome to Capstone Turbine Corporation's conference call for the second quarter of fiscal year 2016 ended September 30, 2015. Capstone filed its quarterly report on Form 10-Q with the Securities and Exchange Commission today, November 5, 2015. If you do not have access to this document and would like one, please contact us by email at IR@Capstoneturbine.com. Or you can view all for public filings on the SEC website as 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, collection of reserved accounts receivables, shipment of finished goods, benefits from our cost-reduction initiatives, improved operating leverage and organizational efficiencies, strengthened distribution channels, new product development, implementation of new Capstone finance business, product reliability, product price increases, growth and diversification of our end markets, performance in light of macroeconomic headwinds and attaining profitability.

Forward-looking statements may be identified by words such as believes, expects, objected, intends, 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 within 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 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 Capstone President and Chief Executive Officer Darren Jamison.

Thank you, Clarice. Good afternoon, and welcome, everyone, to Capstone's second-quarter earnings call. Joining me today besides Clarice is also Jamie Brooks, our Chief Financial Officer and Chief Accounting Officer.

Today we're going to mix things up a little bit. As we've already preannounced second-quarter results, I think for this quarter it's more important to focus on the future rather than to dwell on the past. Therefore, I will skip my normal remarks about the quarter and go straight to Jamie, and she'll be giving you a brief overview of the second-quarter financial results. And I'll be spending all of my time with you today talking about our future strategy and how we intend to get back on track to achieve our revenue growth and improve our bottom-line results as quickly as possible.

I will then take some questions from our analysts. But in addition, as you will note, as Clarice said, we will not be referring to any presentation materials in today's call. But feel free to review our second-quarter press release and associated 10-Q, as they have many additional details.

With that, then, I will go ahead and turn the call over to Jamie to discuss our Q2 financial results. Jamie?

Thanks, Darren. Good afternoon, everyone. As Darren mentioned, the second quarter of fiscal 2016 was a challenging quarter for us, as revenue came in below our expectations due to continuing macroeconomic headwinds, continued softness of the global oil and gas market, delayed customer shipment of orders from finished goods and the strengthening of the US dollar, which makes our products more expensive overseas.

Revenue for the second quarter fiscal 2016 was $17.9 million, a decrease of 44%, or $14.3 million from last year's second-quarter revenue of $32.2 million. Product revenue was $11.6 million for the second quarter of fiscal 2016, compared to $26.7 million in the second quarter of fiscal 2015.

We shipped 11.6 megawatts during the second quarter of fiscal 2016, compared with 28.5 megawatts in the second quarter of fiscal 2015. The decrease in product revenue and megawatts shipped in the second quarter of fiscal 2016 over the prior-year quarter was the result of reduced volume of MicroTurbines shipped; and we had no product shipments to BPC, one of our Russian distributors; continued challenges oil and gas market; and a shift in customer project timelines.

Revenue from accessory parts and service increased 15%, or $800,000, to $6.3 million for the second quarter of fiscal 2016, compared to $5.5 million for last year's second quarter. This increase is primarily the result of higher FPP contract enrollment in MicroTurbine service work.

Gross margin for the second quarter decreased $1.9 million, or 11% of sales, compared with gross margin of $5.2 million, or 16% of sales, for last year's second quarter. This decrease was the result of lower volumes, MicroTurbines shipped and a shift in product mix totaling $5.4 million.

R&D expenses for the second quarter increased $0.8 million to $2.9 million compared to $2.1 million in the second quarter a year ago.

SG&A in the second quarter of fiscal 2016 decreased $2.8 million, or 29%, to $6.7 million from $9.5 million the second quarter of fiscal 2015. The net decrease in SG&A over the second quarter last year included a decrease of $3.1 million in bad debt expense, offset by an increase of $0.2 million in marketing expense and $0.1 million in consulting expense.

The operating loss for the second quarter of fiscal 2016 was $7.6 million, compared to $6.4 million for the second quarter of fiscal 2015. Net loss for the quarter was $7.9 million, compared with $6.5 million for the second quarter a year ago. Net loss per share was unchanged for the prior year of $0.02 per share.

Now I'll provide some comments on our backlog, accounts receivable and cash flow.

Our product backlog as of September 30, 2015 was $104.8 million, compared with $172.3 million as of September 30, 2014. The year-over-year decrease was $67.5 million, or 39%. The decrease in backlog includes our decision to remove $5.24 million, or 200 units totaling 64.5 megawatts in backlog, from BPC to align our backlog with management's expectations because of the current macroeconomic climate in Russia in the oil and gas market.

Our [SEP] service contract backlog at September 30, 2015 was $65.3 million, compared to $61.2 million as of March 31, 2015 and $60.9 million at September 30, 2014. These increases reflect our growing installed base of MicroTurbines as well as the ongoing efforts of our more mature distributors to sell our FTP service contracts, which enables the end customer to achieve a lower total cost of ownership.

Our accounts receivable as of September 30, 2015, net of allowances, were $16.2 million, compared to $13.1 million at March 31, 2015. Our days sales outstanding, or DSO, was 82 days during the second quarter of fiscal 2016, compared with 65 days in the second quarter of fiscal 2015. The 17-day increase in DSO was due to the lower-than-expected revenue and slower collection of accounts receivable.

There was no bad debt expense during the second quarter of fiscal 2016 and the six months ended September 30, 2015. We recorded bad debt expense of approximately $3.1 million primarily for EMI, one of our distributors for the Middle East and Africa during the six months ended September 30, 2014.

Inventories were $31 million as of September 30, 2015, up from $25.4 million at March 31, 2015. Inventories increased primarily as a result of finished goods not being shipped.

Our cash used in operating activities for the second quarter of fiscal 2016 was $11.6 million as compared to $5.6 million in the second quarter of fiscal 2015. At March -- at September 30, 2015, we had cash and cash equivalents of $10.6 million and $5 million of restricted cash related to our Wells Fargo credit facility for a total of $15.6 million. Compared to cash and cash equivalents of $32.2 million as of March 31, 2015.

Next I will provide you with an update on the recovery of our two main bad debt (technical difficulty) with reserves. EMI has indicated it has signed a contract to sell the three C1000s they had from their canceled project in Africa. We expect this will allow them to clear the $2.6 million past-due balance with us in Q4 of fiscal 2015, which has been fully reserved. This will give us substantial cash recovery coupled with a large credit to SG&A when the payment is received.

BPC made payments of approximately $150,000 during the quarter for spare parts, and a portion of the product that was shipped to them in March. The portion of this payment related to the products shipped to them in March was recognized as revenue in the second quarter of fiscal 2016. As you may recall, BPC has agreed to payment terms of cash on delivery plus a 15% premium to pay down their past-due balance, which has been fully reserved.

With that, I would like to turn the call back to Darren to discuss our forward business strategy.

Thank you, Jamie. As Jamie said, this quarter has been an exceptionally challenging one for our Company, our vendors, our employees and our shareholders. It's particularly disappointing coming off such a strong first quarter that was the second best first quarter in Company history.

Revenue for the second quarter was substantially below our internal expectations. Because of that, we ended the quarter with 72 MicroTurbines, or 12.7 megawatts, roughly $13 million of units in finished goods that were not shipped to customers for varying reasons. The simple answer is though we had a variety of customer projects that were taking longer to execute than we expected.

Today we shipped approximately a quarter of the 13 million from last quarter's finished goods, with approximately another third expected to ship in November. And we anticipate the balance of the finished goods will be reconfigured to fill other customers' planned orders and is expected to ship in December.

In addition, we have pushed out the timing of new raw material deliveries with receipts to make sure that the attempt to substantially reduce our overall inventory levels by the end of the fiscal year. However, accelerating the shipment of finished goods and pushing out our incoming inventory receipts are not the only corrective actions that we are undertaking to quickly improve our business situation and help us achieve our goal of reaching EBITDA breakeven despite these challenging macroeconomic headwinds.

I want to review with you some of our actions that we have taken recently and plan to take moving forward to lower our operating expenses and regain that revenue momentum despite these headwinds.

Looking back to April, we started at the top. We started at the top by consolidating responsibilities and eliminating three top-level executives from the Company. All three of these executives were a member of my leadership team.

In July, we followed our global distributor conference with our distribution partners committing to add over 100 new salespeople by Christmas. Pleased to announce that we are well on the way to making that a reality.

Over the past couple of months, we eliminated a total of 29 positions here at Capstone, which included some full-time and some temporary workers. We ceased all hourly overtime wherever possible. We suspended the annual Companywide merit increase, and we converted all cash commissions and cash bonuses to Capstone stock.

In late October, we canceled most of the planned CapEx spend for the remainder of the year and the majority of next year. In late October, the management team agreed to voluntarily suspend the executive bonus program and forfeit any unvested executive stock options.

Today, we're suspending the commercialization of the C250 C370 program so that we can reduce our R&D spend and focus solely on our core Capstone products.

In mid-November, we'll continue to monitor expenses, and we'll be finalizing a comprehensive spending reduction plan that will even further reduce our targeted G&A and R&D sales and service spending, and will continue to drive deeper cost savings in travel, marketing, advertising, et cetera.

In late November, we expect to finalize Capstone finance JV business that will finally allow us to write third-party ownership for US oil and gas customers that do not have the capital budgets but want the product today.

On December 8, at PowerGen International, we will proudly unveil our new enhanced C1000 product series with new reliability and design improvements targeted specifically at the growing CHP market.

In January, we will affect a product price increase for the US markets only while continuing our aggressive direct material cost reduction efforts in this next year.

Taken in aggregate, these actions are expected to lower our total operating expenses approximately 25%, therefore lowering our quarterly EBITDA breakeven level from approximately $40 million per quarter at a 25% gross margin to $30 million per quarter at a 25% gross margin.

The 100 new salespeople to be added to our distributors, the new Capstone finance JV, the new C1000 series product with features focused on the CHP market and improved reliability will all help drive future top-line revenue growth, and they will complement our robust and growing aftermarket service business.

In addition, our renewed focus on Latin America, Africa, Middle East and Australia is driving new opportunities. These new opportunities are reflected in our second-quarter results, specifically in Australia, which made up 30% of our overall revenue. To put that in perspective, during the second quarter we shipped nearly as many megawatts of product to Australia as we did during the entire previous fiscal year.

In addition, we recently received orders from Latin America, with strong, growing business opportunities in Brazil, Colombia, Chile and Ecuador.

I recently returned from a US Department of Commerce Trade Winds trade mission to Africa, and I'm happy to report we're making good headway to Nigeria, Angola and South Africa. The opportunities in Africa are enormous, with heavy demands for distributor generation in oil and gas, CHP and biogas.

The headwinds we are facing are real, and they have impacted our largest customers, our largest vertical markets and have also made our already premium-priced product that much more expensive overseas. While some companies our size may have wilted under such heavy economic pressure, I can assure you as I sit here today, we are more dedicated than ever and more unwavering than ever to make this Company and its clean-and-green MicroTurbine engine solutions not only survive but thrive.

The good news is these headwinds we face are cyclical and they will ebb eventually. However, in the interim we are actively working on new areas of growth while also making hard decisions to structure the Company to be sustainable at much lower revenue levels. The key element in a situation like this is determining the right revenue levels.

In doing so, we looked all the way back to fiscal 2012 to today. The average revenue for the Company over the last 18 quarters is approximately $30 million per quarter, with revenue exceeding $30 million 9 times and reaching at least $27 million 13 times. So, said another way, based upon our new cost structure with reduced expenses by 25%, we would have been breakeven or close to breakeven 13 of the last 18 quarters when revenue at least hit 27 or beyond. Therefore, I'm very confident that we can again quickly get back to these revenue levels and reach EBITDA breakeven with our new cost structure.

At this point, operator, I think I'm ready to go ahead and take some questions from our analysts.

(Operator Instructions) Moses Sutton, Cowen and Company.

This is Moses Sutton on for Jeff Osborne. Thanks for taking our question. What specific measures are you taking to improve the close rate on your $1.5 billion pipeline from around 10% to, I believe, the 20% goal?

Moses, it's actually 11% currently today of the $1.5 billion. We'd like to see that north of 20%. If you look at it, that close rate is a mix of all of our distributors, both mature and new distributors. Our mature distributors are well north of that 20% close rate, and our less mature, newer distributors are down in the 2%, 3%, 4%.

So really, it's twofold. It's a matter of training. In fact, we've got about 20 distributor salespeople here in the plant today for a couple of days doing sales training. But it's sales training; it's application training; it's helping them market the product. It's doing four-legged sales calls with them. We also do a lot of B2B events with our distributors as well.

But one of the most important things is just time in the market. The longer they understand the market, the longer they are in the market, the more effective they become, the better they can target the right customers.

I met recently this week with our Brazilian distributor. He made a lot of progress in the last year since I was in Brazil. He got a better understanding of the market, how to attack it, where the opportunities are. He's also come up with financial solutions and financing for his customers, which is obviously a very big key to his success down there.

So, again, I think for us, execution is key and the better our distributors get, the better off we'll be. Having a better product that's more market-focused, cheaper and easier to install also will help them. But, no, great question, Moses.

Great. Thanks. That's very helpful. Also, is Latin America or North America still the majority of your pipeline? How has that mix been shifting over the recent quarters, and what do you see going forward?

Definitely, North America has been our most successful market. If you look at the US because of the strong dollar and the low natural gas prices, we are seeing CHP in the East Coast and the West Coast be extremely strong. You talk to our distributor here in California, and he'll say has backlog is pending orders, it's the best it's ever been. And get the highest confidence.

Very similarly, you talk to our East Coast distributors as well. We've got a new distributor in Canada that's making some hay and doing some good work. New distributors in Alaska and Hawaii that are both doing extremely well.

But, again, the most important thing is a successful project. So as we get one or two good projects in these areas, we can leverage other customers.

Mexico is very strong. The energy deregulation and changes they are making in the Mexican market is really driving DTC, our distributor there.

So, most of our growth and opportunity in kind of that hemisphere is South America. We're seeing a couple of small orders from Brazil recently, a nice C600 for Columbia recently. Chile and Ecuador still have huge upside. So definitely we see a similar amount of opportunity in Latin America but at a much lower close rate.

So, again, North America is closer to that 20% close rate. Latin America is down in the single digits. But as our distributors in Latin America mature, we expect to see similar close rates.

Obviously, I mentioned Australia is extremely robust right now. We are happy what's going on in Europe; it's steady but improving. We are currently on the ground right now with a new salesperson, and our VP of Sales, Jim Crouse, is in Russia this week as we speak. I think we're feeling better about that market that it's finally bottomed out. And we're hopeful, knock on wood, to see some return to growth for that market.

Great. Thanks. That's quite helpful. And just one final question, in Russia with the BPC, you noted that you received, I think, $150,000 this quarter in payments. How much of the receivables are still outstanding? Do you expect any visibility into future payments next quarter or thereafter?

Yes, like I said, we are on the ground this week meeting with them. The good news is they are still viable. They've diversified their business into some gas compression and some other areas, so that's good. Over half their revenue right now is coming outside of Russia, primarily Belarus and some of the other stands.

So I think they've done the right things to overcome the headwinds they have in the market. They are forecasting about seven to eight megawatts next year. We're hopeful to get a payment from them before the end of the calendar year to help pay down that receivable. Bu that receivable is still approximately $7 million today.

So I think there's -- again, Russia can't get worse for us, it can only get better. We do have a second distributor in Russia called Electrosystems that we're looking at ways to leverage their capabilities as well. So I do think we've seen the worst, knock on wood, in Russia and that next year we're going to see some return of the receivables as well as some revenue growth.

Okay. Thanks. That's very helpful.

Eric Stine, Craig Hallum.

Hi, Darren. Hi, Jamie. It's Aaron (inaudible) on for Eric. Thanks for taking the questions.

No problem.

First, you touched on South America a little bit. But can you just kind of go into a little bit more detail there? It sounds like just part of it is just getting the distributor network trained up. But are there any other gating factors before we see some traction with the large order opportunities down there?

Yes, financing in Latin America is still challenging, a lot of projects. We have a large 30-megawatt project in Ecuador that we've all but won, but financing for the project is still pending. I think getting financing in Latin America is more challenging with the strong dollar and some of the economies down there.

Again, I mentioned Brazil. Our distributor Heimer, they've done a good job at lining up some financing. It's still a little too expensive, but I think it is going to enable us to go forward. When I was down there in Brazil, we did everything from spend time with gas companies, industrial manufacturers, hot dog food processing. We've actually got some nice industrial companies that are ceramics and things like that that seem like very good opportunities.

Also, if you look at the gas pipeline that runs from Bolivia down into Brazil, the Bolivian side is all Capstone product long pipeline and the Brazil side is all Waukesha. Those Waukesha machines are internal combustion engines. They've reached the stage they need overhaul. Their reliability has been very poor and the cost operating has been very high. So I think we have a nice opportunity there to go in and repower a lot of those Waukesha reciprocating engines along the pipeline and put in a better technology.

So it's really everything from oil and gas opportunities, CHP -- Ecuador is almost all CHP. I think if you look at Colombia, it's both CHP and oil and gas.

But the markets are big; the opportunities are large. Finding the right partners that can solve the political issues or the financing issues is really the key. But I think we're very comfortable. If you look at the distributors we've had down there, they haven't changed for the last three years. All of them are maturing and look for much future success compared to what they've had.

All right. Thanks for that. And then maybe on Capstone finance, you kind of touched on a little bit here in late November, hoping to get that thing finalized. Can you just kind of talk about demand and pipeline there and how quickly you think you might be able to get some traction there?

Yes, if you look at it, we use Salesforce.com. So, any lost orders, we put in the reason for losing the order. I would say that more than half the orders we lose are because financing is not available or it's too expensive. And so to have our own Capstone financial vehicle, I think, is critical.

The major market we want to go after, though, is US oil and gas. We've seen a major drop, especially in shale gas, in the US as capital budgets have been slashed, as oil prices have dropped to $40 a barrel and a little bit below.

So, we have a lot of good customers that currently have Capstone products. We want to put more Capstone products in the field. They've got free fuel that they're getting out of the ground as part of their drilling opportunity. So if we can find a way to put product on the ground, to make it part of their operating expense, lower their operating expense and then give them the opportunity to buy that product in the future when they do have capital budgets that return, we think that's right thing to do. It solves the customer problem.

And I think that either we can flip those projects into somebody else's yieldco or sell them back to the customer and then kind rinse and repeat and get those dollars put back to work to do more sales. We are not looking to be a finance Company. We are looking to solve customer problems and turbocharge our sales that have lagged in the oil and gas space.

So we have spent a lot of time putting together the national account agreements, all of the purchase rights with the power purchase agreements, all the legal documents, tax issues, and all of those things are 99% complete. We should be going into the signature phase here very shortly. We already have term sheets out to customers. So as we get the entity formalized and set up and everything in signatory, we'll then start executing on those term sheets.

So, definitely, I would hope by the end of November we can announce our first term sheet has been signed and we're moving into contracting, and maybe get some product on the ground before the end of our fiscal year.

Okay, good. That's good color. Maybe last for me, I guess, just looking at backlog -- so, scrubbing out BPC makes sense. But just as we look out over the next few quarters, how should we look at that backlog now as an indicator of revenues?

Yes, in the good days back in 2012, 2013 and 2014, even part of 2015, I would say you could look at that, and our backlog was a good indicator of next year's revenue and really held through for several years. In today's markets, I think that's less easy to say.

So we actually thought about not even showing people our backlog right now just not to confuse people. I think taking out BPC voluntarily -- I think it's important to note they did not cancel those orders; we took them out voluntarily in the backlog. Because we don't want to mislead folks on what the revenue is going to be for the next year.

So as we look at it, I think the backlog that we have now more accurately reflects kind of ongoing revenue levels. But it's really difficult. If you look at the miss we had for Q -- for the quarter, it was the hospital, it was oil and gas, it was an industrial company, it was a hotel chain. It was really across the board.

So I think with the overall strength of the dollar, the slowdown in oil and gas -- and then just generally people are concerned about the economy right now. So things just aren't moving as fast as we'd like.

I know that was a bit of a non-answer answer, but I think the reality is, I'm very comfortable we can get back to a $30 million revenue level. If you look at that -- as I said in my prepared remarks, if you go back to fiscal 2012, we hit $30 million three out of four quarters. If you look at 2013, it was four out of four. If you look at 2014, it was three out of four. Fiscal 2015 was three out of four. You know, our first quarter of the fiscal year was $27 million.

So I'm very comfortable that with the growth we're going to see in some new markets and CHP growth here in the US, we can quickly get back to that kind of $30 million quarterly run rate.

So that being said, Q3 and Q4, we're still a little uncertain on what the markets are going to do. But I think for next fiscal year, we should be targeting at least about $30 million per quarter.

Good. That's good color. Thanks. I'll hop back in the queue.

Thank you.

Sameer Joshi, Rodman and Renshaw.

Thanks, Darren. Thanks, Jamie. My question relates to EMI. Has there been any recovery from them? I heard Jamie say they signed the agreement. But has there been any recovery from them so far?

No. They have signed a first agreement with another customer because the project -- the original project was canceled. They have made $500,000 or $600,000 in just kind of good faith payments since the original project was canceled. They have a robust pipeline of pending orders. So we are fairly confident we're going to get them flushed through in the fourth quarter or our March quarter, and that will come through as 100% recovery.

I think, again -- I think we'll see some BPC payments as well in that timeframe. So I do think that, call it, $10 million or $11 million we have reserved, we'll see 30% to 40% of it before the end of our fiscal year. And that's a good start, and then we'll hopefully do more next year.

Okay. Thanks. And then the next question relates to the $13 million of orders that were pushed out from the last quarter. I heard you someone -- I heard you say one-fourth of that was shipped in October, one-third will be shipped in November. So, does the remaining roughly 40%, is that still considered backlog orders to be delivered or will it be repurposed?

Great question. Of the 13 megawatts, none of it has been canceled. As you said, we shipped in October about 25%, about roughly 4 megawatts. We've got about one-third of that lined up to ship in this quarter. Some of it still this week, next week, but definitely before the end of November.

The final piece of that, though, we will probably repurpose for other orders just to make sure it goes. We want to make sure that we don't carry any backlog or as little as possible into the fourth quarter. So I think those orders may come later, but we want to make sure we get all that backlog out the door.

Having 72 MicroTurbines sitting on our finished goods floor is not something we want to continue to do. We have worked with all of our vendors; they've all received push-out notices. I've been on the phone with several of our largest vendors. Obviously, they weren't happy to receive those push-out notices, but they've been very flexible and accommodating and understanding that we can't run at these elevated inventory levels. Our balance sheet is just not that big enough to support it. So we need to get the finished goods out of the shop, slow down the incoming inventory and get the inventory right-sized.

Before the slowdown and the headwinds, we were running close to 5 inventory turns. Richard and his team want to see those numbers closer to 6 or 7, so we need to strive to hit those numbers and right-size our inventory.

Oh, okay. And then the next question relates to the service revenue. I know that the service backlog, the FPP backlog, has increased. But how was this quarter's service revenue related to the previous quarter?

The service revenue continues to increase. We've actually broken it out for the first time in the Company history because it's a large enough piece of our business that we need to break it out separately.

So if you actually go into our Qs and Ks, you're going to see product got broken out as well as parts and service. So, more granularity in that area that you've seen. Also some associated margins I think people are looking for for a while. So, that's something we'll do going forward.

Our service business continues to grow. Year over year, the number of contracts and backlog continues to grow. So even though, again, we had a down product quarter, our service business grew in both FPP and in parts. So I think the total service backlog does about $65 million, Jamie? Is that (multiple speakers)?

Right, and we were at $63 million in Q1.

$63 million in Q1 and $65 million. So, each quarter obviously revenues coming out, but we are putting more on. So, a positive book to bill there. And I think the good news is where our markets are growing and CHP has much higher attachment rate than oil and gas. So we are seeing continued growth and should still be continued growth.

If you look at our biggest distributors in the US, with being E-Finity, RSP, Regatta, all three of them have almost 100% attachment rates in their CHP customers for the FTP. So we expect more good things there.

The new product we're launching in December hits our reliability targets, which we've set similar to our C65. That's only going to drive better margins in our FPP going forward.

Oh, okay. Was there no reduction in the FPP backlog related to those $52 million backlog reduction of the parts?

No, the product backlog was product only. There was no reduction for BPC related to FPP.

Oh, okay. Just one more last question related to the operating expenses that you plan to reduce. I heard you say that you're eliminating the C250. Did I hear that right?

We're suspending; we're not eliminating. So we're not going to be commercializing it next year. And so what we've done is we're finishing up the C200 and C1000 series product. So it has met all of our reliability requirements, and we've done some changes to it to make it more effective and cheaper to install and more beneficial in the CHP market, as that's a growing market for us.

So we are very happy with where that product is. We'll work on it just to do some testing and certification for the next six months. But for the most part from a design standpoint, it's pencils down, we're done. So we'll focus on some other areas next year, but our R&D spend will be down probably 35%, 40% from the prior year. We'll also be down quite a bit in our SG&A and our marketing expenses.

The good news is we're at the point where our products are where we want them to be. We've got our distribution channel that's maturing very quickly. They are adding 100 salespeople. We are training them as fast as we can and they're maturing very quickly. So I think we can step back and do less and let them do more, which I think is great. And that's the beauty of the distribution channel and what we pay them, the discounts that they get on the product.

When I look at it, yes, we're going to be reducing our overall footprint about 25%. This will be the leanest we've been since I've been at the Company in every facet. But I think we'll actually be as effective or more effective going forward because we'll be lean, we'll be very tight and very agile.

Great. I think you are certainly taking the right steps, and good luck in the coming quarters.

Great. Thank you.

Matt Koranda, ROTH Capital.

Just wanted to start out --

Is that actually you, Matt, or do you have an understudy?

I'm the only one without an understudy today. I've never had one, unfortunately.

Okay. (laughter) you need to get a [plug].

Yes, I guess I am the understudy here. (laughter) I wanted to start out with what you guys are planning with the introduction of the more CHP focus, C1000 and PowerGen. Could you just give us a little bit of color on what you plan on doing to drive a more impactful presence in CHP? You guys have made inroads that seem pretty good so far. But what are some of the design tweaks? Or just give us a little flavor for what you might be talking about without stealing the thunder from the announcement.

I was going to say our marketing people are not real happy that you asked that question. The reality is we have been doing a lot to the product, and we've been trying to keep it under wraps as best we can. We've really been focused on that product for the last 18 months. It had a fairly large program internally. And so -- but like anybody, you don't want to talk too much about the pending product.

We've actually been rolling in a lot of improvements from the 250 program into the 200 over the last year. So we haven't talked a lot about it, but that's a lot of how we're getting reliability improvements we're looking for.

We're trying to make it more integrated, make it easier to install. As you know, our C65 product has integrated recovery equipment. So we're really trying to make the C1000 much more like the C65 and a more mature product line in every way.

So without saying too much more, we will have a C1000, a full-blown C1000 at the show. It will be front and center in the hall when you walk in. So I invite you to come to Las Vegas and come in and see it.

Great. Okay, that's helpful. I was curious if you could maybe help us understand or maybe quantify the potential sales lift that you guys would get from flipping capital budgets into operating budgets when it comes to that Capstone finance solution. If you could -- I don't know if you can quantify it or if you could just talk about the sales lift you could get on maybe an annualized basis there.

Yes, as I kind of said before, if you look at the sales we've lost over the last year, it's probably $40 million in sales because of financing-related issues in the US alone. It's bigger than that, obviously, globally. So I think it would be misleading to think we'd get all $40 million of that, but we could probably get half of that.

So I think we are going to start small. But I think within a couple of years, we'd like to be driving about $20 million in revenue from Capstone finance.

But I think more importantly, there's customers where if you put a piece of paper in front of them saying here's a project with a 25% IRR and three or four years simple payback and if you can't do it, we will. I think a lot of customers may repurpose some of their capital dollars because they want achieve that savings. If not, we'll go ahead and do it ourselves, obviously, and move that forward.

So, again, I look at it as a 10% to 20% top-line leverage for us, maybe more. But I think we'll start at a reasonable expectation.

Got it. Okay, very helpful. The mix of CHP revenue was impressive -- I mean, 68% on the quarter. Does the same hold true for the mix of product that you have in the backlog currently? Could you kind of pick that up for us?

No, our -- yes, I can. Our backlog has been more historical to our revenue mix. So I think if you look at our backlog, it's still probably 60%, 65% oil and gas. That's why it's challenging to give timing of the backlog. Now, the new bookings are 65% to 70% CHP. So I think it's going take probably a year to 18 months to turn the backlog over to reflect the kind of new reality of our business. But I think you are going to see a year from now, we are going to be 70% CHP in both backlog and revenue quarter in, quarter out.

Intel oil comes back, I think -- when oil gets at about $60 a barrel, I think we'll see a pickup in our business. That being said, I think the Middle East, we can grow revenue now; they're still drilling. They've done very little with their associated gas, and I think that's a huge opportunity for us.

Okay, got it. That's great. Maybe one or two more here if I can. You covered the rationale for moving BPC out, and that's understandable. Is there any -- are there any other potential items that you guys might elect to remove from backlog yourselves based either on maybe non-performing distributors or any other rationale I guess that would cause you to remove anything from the backlog on a go-forward basis?

I cannot say never. But as I sit here today, I can't think of anything. BPC is by far our most challenging distributor today. Most everybody else is in pretty good shape. As I said, we are there this week. We are happy that they are still very viable and that they've diversified their business and that they're pretty realistic about what they think they can do in the coming year both in Russia and Belarus. I think we'll look to do something with our second distributor over there, which we got through the -- purchased the [T8100] product line.

And so I think again -- I think we've seen the worst there, and that will only get better. I think there's more opportunity for success than the opportunity for another surprise.

All right. Great. I'll jump back in queue and take the rest of my stuff off-line. Thanks, guys.

Noah Kaye, Oppenheimer and Company.

Thank you, Aaron, for taking my question. I'd like to actually pick up on CHP theme. There's one area where we've seen abundant low-cost financing as well as increasing deal flow. It's in the deep retrofit space, particularly here in North America.

You started talking a little bit about the mix, but I was just wondering about what you're seeing in terms of flow and quotation activity in the efficiency space, in the CHP space. How -- to what extent is that trending up? Thanks.

Definitely, as I said earlier, talked today to the Regatta -- Steve Osvaldo, the owner of our California distributor here. His exact quote was it's the most robust he's seen it, and he's more comfortable -- or confident in the future than he's ever been. Similar comments from Jeff Beiter, who is our distributor in kind of mid-Atlantic area, and I think the same thing out of New York with RSP and Cory and his team.

So I think our distributors in the US that are most in tune to CHP feel very good. You've got incentives in place on both a government level but more importantly on a state level in all those areas. Low-priced natural gas makes it very easy; financing is getting much easier. So they are seeing projects with three to four years simple payback, which are pretty good especially if you can get low-cost money. We're also seeing [Chris Field Pacific], our distributor in Hawaii, just did a megawatt project for a major hotel chain and they just ordered 3 more that we just delivered. So I think he's can going to get some traction in Hawaii. He's got very expensive obviously utility rates in Hawaii. We can run on propane, which is reasonably priced. Our distributor up in Canada is doing a good job, and even through the Midwest.

So I think CHP through Canada, down into Mexico and the US is going to be very strong. Latin America will both be CHP and oil and gas opportunities. But CHP is going to be the driver for our business. We are still -- I think 90% of what we're doing is retrofitting existing facilities. But we are seeing some new builds come out of the ground, especially in New York -- you know, related properties and folks like that that are actually adopting the technology at the engineering onset level, which is obviously kind of the Holy Grail for us.

Absolutely. Just wanted to turn to oil and gas now. You mentioned earlier that the point of Capstone Finance in many respects for the oil and gas customers is, as you said, transformed (technical difficulty) that spans from (technical difficulty). And it strikes me that the rental power fleets have been pitching the same thing, too. You know, the producers and the explorers now for both several quarters of prices have kind of gone down and created that crunch.

So just wondering about the roots in market with the product. To what extent are your distributors and this financing product partnering at all with the rental company? Are they more of an opportunity? More of a threat? How are you viewing that in the competitive dynamics out there? Thanks.

Definitely a good question. The rental power space is a -- or portable power space is an area we've been focused on for a while. We have had a lot of conversations with folks in that space. Our machines are portable but typically not trailer mounted. So you can forklift any one of our machines and move them around from place to place, but usually you do that on an every-few-year basis.

We haven't set our product up to be trailer mounted and moved around every other week. That's certainly something we can do. We have talked with different packagers on how we do that and probably look for a partner to do that right now with the way kind of our engineering budgets are. But definitely that's an opportunity both in other parts the world as well as in the US.

But more importantly, I think when oil is $110 a barrel, it was drill, drill, drill, I don't have time to talk to you. When oil is $30 or $40 a barrel, the silver lining, again, is that we can actually get into some customers and have some good dialogue.

I think national oil embargo is a great example. We could never get the door cracked, and now we're having some great meetings and conversations with them. We're looking at maybe getting on one of their potential drilling test rigs and playing around with the product.

So I think there's some opportunities when oil and gas companies are looking at new creative technologies to lower their operating expenses because they're so focused on their operating expenses. So, when one door closes, another one opens, and we'll look to maximize it as best we can.

Okay, very interesting. And then I was going to ask you some questions about the product, but I'll take your cue and save it for December.

Carter Driscoll, FBR Capital.

I'll try to squeeze a couple in here and not prolong the call too much. Maybe just talk about the -- you plan to shave your break-even point by 25%. Talk about is there any outside measures within the numerous items you talked about and how that corresponds with the drive to increase your direct sales force. I'm assuming there is a heavy variable component to compensation there. Whether there's any decision to maybe flatline the hiring process there as you get to $30 million. And then I have a couple of follow-ups.

Yes, our sales force -- I'll take the last part first. We've got regional sales managers all over the world. So we've got folks in Asia, Latin America, Africa, Middle East. They're covering Australia. One here in the US. But they really are channel managers. So, they are managing the distributors. They are helping train the distributor sales folks, doing four-legged sales calls and lunch-and-learns with customers, those kind of things.

So, the number of sales people we have hasn't changed. We did add a Russian-speaking salesperson recently but then took another salesperson out of the organization. So, we are flatlined right now, and with $1.5 billion of pending opportunity I don't think we need more sales folks.

From a distribution perspective, we are in low 90s, I think, right now in number of distributors. That we'll add a few and we'll probably merge a few together, so that number probably won't change significantly, maybe stay around 100.

From the other costs we're looking at, as I mentioned, the C1000, C200 series product program is winding down to a conclusion. If you look at our spend last year for the fiscal year, it would be around $11 million of R&D. And, again, that number will drop 35%, 40%. A lot of that is hardware spend that we're not spending. That's dollars with the UL, with CE, all the certification efforts we did for Europe this year.

So we spend a lot of money in hardware development and in paying certification bodies and agencies as well as consultants and other folks. So as we kind of dial back our R&D, as we dial back a little bit on the marketing side of the business, that's going to free up some dollars.

Obviously, I mentioned we did take some headcount out of the business. We are looking to be as lean as we can wherever we can. But there's lots of other areas. As I mentioned, the leadership team forfeited their executive bonus; that's something we accrue for on a quarterly basis whether it's deserved or not, and we true it up at the end of the year. We are voluntarily giving up our options, which is non-cash but it actually hits the P&L every quarter as an expense.

So as we get rid of some of those things, we have got a Board meeting next week. We'll be talking to the Board about ways they can help reduce operating expenses by having Board meetings telephonically, just reducing travel costs. All those good things.

So, there's no sacred cow. Every part of the Company, we're sweeping the corners to make sure we get this thing as lean as possible. And I think we can get to that, call it, 25% reduction across the board by a whole host of activities. And the leadership team that I have is very engaged and has taken that challenge, and I think they're very confident they can make that happen.

So, getting the cost structure right -- we couldn't have done this, though, a year ago because we were still building the distribution channel. We were still working on the major C200, C1000 program. So I think the timing is right, and if we can do the kind of marketing activities in some of these new markets -- Africa, Latin America, Middle East -- I think we're going to be able to get the revenue back very quickly.

And I'm assuming given what you talked about in terms of trimming the CapEx that you feel confident that you can hit your target date of April 2016 (inaudible) for the execution of the plan that you have adequate capital to get there? I know you have, I think, an ATM in place; I don't know if you utilized it or not. Just give us your comfort level with where that stands and potential other measures you could do so if it gets elongated.

I think that's a very important point. I think if you look at it, our cash level right now is about as low as I'd want it to be. We don't want to run too close to the treetops. So we've got the ATM in place that we did a little bit last quarter just to make sure that it works and we understood function of it. I think about $1 million of cash came in last quarter from the ATM.

So we do have that in place. We're confident with the ability that the folks have that they're going to execute it, that they are sensitive to not putting too much pressure on the stock when they do do it.

But the reality -- we also have Wells Fargo. That bank line was recently increased to $20 million. Because of our poor quarter last quarter, we blew our covenants and we had to get them to come in and reset them again, and they did. So I thank them for their patience. They've been with us for a long time and seen the good days and bad days, but they're still on board and still confident in our business, which is a nice endorsement.

But more importantly, we've got to get the finished goods out, get the cash cycles going, get our DSO down. We probably have a good $10 million that we can convert to cash between receivables and finished goods this quarter. So if we can get that $10 million kind of wrung out of our balance sheet, that will make the next quarter look a lot better and give us that kind of breathing room that we need. But our goal is to avoid any large equity offering at these kind of prices in this market if we can help it.

Obviously if we have to, we will. But we think between the ATM, the bank line and our balance sheet cleaning up some of those receivables and inventory, we can avoid it for a long time.

And then just maybe a somewhat speculative question I had of finalizing Capstone finance. Do you think that if you had that in place, that could've helped BPC at all? And how do you think about that type of financing risk either by geography or split between CHP and oil and gas? And how do you kind of, let's say, rank what the priority finance opportunities are going to be? I realize that's jumping ahead of your (multiple speakers).

No, I think it's a good question to ask. We want to go lowest risk first. So I think we're going to start US based, then we're going to start oil and gas. Oil and gas is low risk for twofold. One, the project is much simpler. You're not installing CHP. You're not trying to do it at a New York high-rise, class-A office building with union labor and closing down Manhattan streets.

Putting your product on the ground in the oil patch is very simple and quick. Permitting is not an issue typically. So I think we can find a blue-chip customer that's got a great balance sheet. We've had good cash flow coming out of the well or an operation we can put the product at, be very confident we're going to get paid and that the project is going to go in quickly and easily.

So, number one focus, and it's a market that is down that we're losing orders and the customers have a problem that we can fix. So that's why we're focusing on US oil and gas first. After that, if it's successful, we'll open it up to US CHP, but we'll still look for hotel chains, bigger industrials. We're still going to look for better, more blue-chip clients in the beginning.

As that portfolio grows, I think we can add little more risk to it and take a little more credit risk and customer risk. But in the beginning, we want to make sure it's very high-end.

And, again, we don't want to talk about a yieldco or what some of the other folks are doing in our space. But I think we may be able to sell something like that that's in the yieldco or, more importantly, sell them back to the customer, get the cash back into the JV and then rinse and repeat and we'll do it again.

Perfect. I'll take the rest of mine off-line. Thanks for your time.

Great. Thank you.

I'm showing no further questions at this time. I would now like to turn the conference over to Darren Jamison for any closing remarks.

Great. Well, thank you, guys. Great participation. I know there's a lot of other earnings calls going on, so I appreciate you guys taking the time to be on the call. And, as usual, very good questions.

I guess in conclusion as I look at it, I really believe that this new cost structure that we can get ourselves into in the next 60 to 90 days is really going to put us in a great place. I believe that the price increase that we're going to be held put in place on the new product in April, the 100 salespeople we're going to add globally, the new Capstone finance, the JV we've been talking about and also the new products -- all these things are going to help us perform and have a more robust revenue and hopefully get that revenue growth back.

I looked back recently doing a little soul-searching. I think last year and this year were the only two years of my career I didn't have year-over-year top-line revenue growth. So, not a neighborhood I want live in. And when you get back to growing the business, the opportunity is definitely there. We just need to execute better and make sure our products are as good as they can be.

Very excited about Latin America, very excited about Africa. That was my first trip to Africa. We've had some of our folks go, but it was first time I've been there. We've got some great distributors that are doing a lot of work, and the opportunities are huge. We've already got product down there, but I think there's a lot more we can do.

Middle East, Australia, we had a great quarter. I think definitely we're going to see some growth and really diversification. So more importantly, we've gone from a business that was very dependent on US, Europe and Russia, and we're going to move toward a business that's Canada, US, Mexico, Latin America, Africa, Middle East, Europe, less dependent on Russia. Australia is doing great.

And so having lower exposure to high-risk countries like Russia but also better diversification in our portfolio of customer base will make us more immune some of these headwinds going forward. And I think diversifying more to CHP, which is actually a bigger market for us than oil and gas, will be very good.

So I think going forward, we can drive higher revenue growth but more importantly better-quality revenue, more diversified, lower exposure to certain markets. You're always going to have exposure as a global company. But, again, I think the more diversified we can be, the more of those macroeconomic headwinds will -- the least they'll impact us.

Our goal has not changed: we need to get to EBITDA breakeven as fast as possible. It's been long enough. I know other people in our states maybe have been doing it longer than us, but I feel like the time is now. Despite the headwinds, we need to cut our expenses, right-size the business and get to EBITDA breakeven as fast as possible despite the headwinds. And then when the headwinds come back, we'll grow even better.

And the headwinds will come back. It's not a matter of if but when; they are cyclical.

I want to thank our employees and our distributors because I know they're all in. They are all in both financially and to the heart and soul of the technology.

It's been a challenging quarter for everybody, but I want to thank our shareholders and everybody who participated in today's call. Again, not great having great news, but I think looking forward we've got the right plan and the right partners and the right product, and we're going to have some good quarters coming up.

So with that, I look forward to talking to everybody after the third quarter. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.