Capstone Green Energy Corp (CGRN) 2020 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Capstone Turbine Corporation Earnings Conference Call and Webcast for the financial results of the third quarter fiscal year 2020 ended on the December 31, 2019. (Operator Instructions) As a reminder, today's program will be recorded.

At this time, it is my pleasure to turn the floor over to Mr. Colby Petersen, Corporate Counsel. Sir, the floor is yours.

Thank you. Good afternoon, and thank you for joining today's fiscal 2020 third quarter conference call. On the call with me today is Darren Jamison, Capstone's President and Chief Executive Officer; and Eric Hencken, Capstone's Chief Financial Officer and Chief Accounting Officer.

Today, Capstone issued its earnings release for the third quarter of fiscal 2020 and filed its quarterly 10-Q report with the Securities and Exchange Commission. During the call today, we will be referring to slides that can be found on our website under the Investor Relations section.

I would like to remind everyone that this conference call contains estimates and forward-looking statements that represent the company's views as of today, February 6, 2020. Capstone disclaims any obligations to update or revise these statements to reflect future events or circumstances. You should not place undue reliance on these forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. Please refer to the safe harbor provisions set forth on Slide #2, in today's earnings release and in Capstone's filings with the Securities and Exchange Commission for information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements.

Please note that as Darren and Eric go through the discussion today, when they mention EBITDA, they are referring to adjusted EBITDA and the reconciliations that are located in the appendix of our presentation.

I would now like to turn the call over to Darren Jamison, President and Chief Executive Officer.

Thank you, Colby. Good afternoon, everyone. Thanks for joining today's fiscal 2020 third quarter conference call. Before I go into our third quarter financial highlights, I'd like to give you a progress report on our plan to achieve positive adjusted EBITDA in the upcoming June quarter. After that, I'll quickly review some business highlights from the quarter and then turn the call over to Eric to review the specific financial results.

So let's go ahead and start by turning to Slide 3. Slide 3 is a high-level look at our important positive adjusted EBITDA initiative. Reaching positive adjusted EBITDA is the primary near-term focus of the Capstone management team as we view it as a critical milestone for the company that will help unlock our future growth plan.

As we move into calendar 2020, Capstone's focus remains on lowering our quarterly operating expenses from an average of $6.5 million to a range of between $5.2 million and $5.7 million. In conjunction, we want to reduce our direct material cost approximately $3 million on an annual basis. This I'll detail in more detail on a later slide. Also, we are lowering our R&D engineering spend by 15% starting in April and delaying all nonessential product development efforts.

The new long-term microturbine rental fleet is also a key consideration in achieving our positive adjusted EBITDA target. Today, we stand at 7 megawatts deployed, up from 6.2 megawatts last quarter. As a reminder, the rental fleet presents us with higher margin and reoccurring cash flow source of income over a 20-year life cycle of an asset with a compelling ROI and a 24-month simple payback in most cases.

Also important to our EBITDA breakeven is [the knowledge of] spare parts, which are a vital aspect of our business as well, which is why we recently upgraded the U.K. Integrated Remanufacturing Facility or IRF. With this completed, it will enable us to generate improved Factory Protection Plan or FPP, long-term service contract margins and significantly advance our profitability goal as remanufactured parts represent a 40% cost savings compared to new parts.

Next, I'd like to comment on warranty expenses. Lower warranty expenses directly translate into better margins, which makes quality control paramount. As we have discussed in prior quarters, we faced a vendor manufacturing quality issue that was very disruptive and expensive to Capstone. This is now very close to being fully processed. And this, along with other internal initiatives, should have a very positive impact as we drive warranty and FPP expenses down heading into the all-important upcoming June quarter.

However, as I emphasized in recent quarters, growing the FPP service contract business is the most critical margin booster to the company. We track our progress by measuring both attachment rates and backlog, and I'm very pleased to say that the data shows our success.

If you look at Slide 4, today, we announced that we have a record 54% of our eligible fleet under FPP totaling 265 megawatts. This amounts to approximately $84 million in future long-term service contract revenue. This slide provides a summary overview of the strengthening aftermarket business. As I said, one of the key elements of this plan is the recently announced completion of several significant upgrades to our U.K. remanufacturing facility.

Another key element I touched on is the $3 million reduction in annual direct material costs. This cost reduction initiative is outlined at a high level on Slide 5. It is essential that we help drive margin expansion in both new product and aftermarket side of the business. This cost reduction initiatives have been previously identified and are just now starting to be cut into our manufacturing operation and should be fully utilized by June.

In addition, we're also taking steps to better position ourselves for long-term revenue growth and have made key strategic move that we think will enable better targeting and closing of larger international customers going forward as we look to grow our product sales back to a minimum of $13 million a quarter.

We recently announced that we divided our sales and marketing team into 2 separate organizations, as highlighted on Slide 6. We believe our strategic reorganization will help us lower cost and improve overall sales effectiveness. The first group will remain focused on developing and managing the existing Capstone worldwide distribution channel, while the second is responsible for expanding Capstone's national account businesses, OEMs and long-term rental fleet. We believe that having a direct sales model focused on key global customers will help to accelerate our closing rate and build even stronger ties with large marquee customers who have an opportunity for widespread adoption of our technology.

In conjunction with the increased focus on driving our distributor network, we plan on beginning hiring additional salespeople for national account development. As previously mentioned during the last quarter's conference call, we are not planning on displacing the current Capstone distributor network; rather, serve to be a better resource in developing new corporate relationships and expanding current corporate roles.

Let's go ahead and take a look at Slide 7 now. On Slide 7, we see a number of factors driving revenue growth going forward. These include new nondistribution business opportunities; additional OEM direct sales and national accounts; expanded product portfolio; continued distribution improvement and expanded distribution in new geographies, like Eastern Europe, Middle East and Africa; improved customer satisfaction to retain existing customers and expand our business as well; customized products by market and matched marketing campaigns, which we expect will help improve our presence in California market as the recent forced power outages caused by the wildfires; targeted pricing programs for national accounts and key customers to make sure we are not over or underpricing our solutions relative to the value proposition that we bring and drive widespread adoption within each major customer; improved targeted marketing and branding strategy to build awareness with potential customers as they explore distributed energy generation solutions; and lastly, sales bundling through our higher attachment rates with our products to include product, installation support, aftermarket service and accessories.

All of these changes lead us down a financial path for a short-term positive adjusted EBITDA goal, as outlined on Slide 8. Looking at Slide 8, this highlights where we are last June, where the business is today and what the business should like this June, if we continue to execute our strategic plan. As you can see, reaching positive EBITDA goal is in large part the result of expected improvements in our aftermarket margin performance. From today's 28% to June's forecasted 45%, which is attributable to the elimination of the vendor part manufacturing quality issue, expansion of our distributor support system program, continued deployment of our long-term rental business, increased availability of the 40% lower cost remanufactured parts from the new upgraded U.K. facility. These additions, along in combination with lower OpEx, lower DMC, increased product sales growth and the continued overall growth of our FPP service contracts should yield a sustainable positive adjusted EBITDA outcome.

As I mentioned specifically in our press release today, this afternoon, we remain optimistic that we'll be able to reach our target of being adjusted EBITDA positive in the quarter ending June 2020.

Now I'd like to provide you the summary overview of the financial highlights for the third quarter ended December 31, 2019. So let's go ahead and move on to Slide 9 and discuss the Q3 high-level accomplishments. Total gross margin increased $0.4 million or 18% to $2.6 million compared to $2.2 million in the year ago quarter despite lower product shipments. The increase in gross margin was driven by lower warranty expense, our cost reduction initiative and the growth of our long-term rental fleet.

Gross margin percentage expanded by 25% to 15% from 12% a year ago, but stayed flat on a sequential basis despite lower revenues, demonstrating the additional progress in our cost and efficiency efforts.

Accessories, parts, service, rental and DSS revenue was $9.5 million, up 20% from $7.9 million in the year ago quarter. We are especially pleased with this progress as we have reiterated, this is a critical factor underlying us achieving our set goals.

We also made additional progress in the quarter, growing our rental fleet revenues 13% sequentially with our long-term rental fleet now standing at 7 megawatts approaching the planned 10. We are excited to see the high-margin division of the company grow, and we expect continued expansion throughout the year with our 10-megawatt target squarely in our sights.

Our book-to-bill ratio was 1.2 to 1 for the third quarter for fiscal 2020 compared to 1 to 1 in the second quarter of fiscal 2020 and 1.3 to 1 in the year ago quarter. Although shipments were lower in the quarter, we were encouraged by the growth in our book-to-bill ratio on a sequential basis.

During the calendar year 2019, Capstone received $1.9 million from its new DSS program.

Total revenue for the third quarter was $17.4 million compared to $18 million in the year ago quarter. The slight decrease in revenue was due to lower microturbine product sales.

Now I'd like to hand the call over to Eric Hencken to discuss the detailed third quarter financial 2020 financial results from Slides 10 to Slide 12. Eric?

Thanks, Darren. I will now review in detail our financial results for the third quarter of fiscal 2020. As Darren just mentioned, the financial results can be found on Slides 10 through 12.

Total revenue for the third quarter of fiscal 2020 decreased $3.3 million to $17.4 million compared with $20.7 million in the second quarter. The decrease in total revenue was primarily due to lower microturbine sales. Total revenue decreased $0.6 million compared with total revenue of $18 million in the year ago third quarter. This decrease in revenue was primarily due to lower microturbine sales, partially offset by increases in accessories, parts and service revenue, which includes rental and DSS revenue.

Product revenue for the third quarter decreased $4.1 million to $7.9 million compared with $12 million for the second quarter. Product revenue decreased $2.2 million compared to $10.1 million in the year ago third quarter, primarily due to weakness in the U.S. oil and gas market.

Accessories, parts and service revenue increased $0.8 million to $9.5 million in the third quarter compared to $8.7 million in the second quarter. On a year-over-year basis, accessories, parts and service revenue grew $1.6 million or 20% compared to $7.9 million for the third quarter of fiscal 2019, primarily due to higher engine shipments and higher FPP revenue.

Gross margin percentage for the third quarter and for the second quarter of fiscal 2020 were both 15%. Gross margin dollars in the third quarter decreased to $2.6 million compared to $3.1 million in the second quarter. However, compared to the same period last year, gross margin increased $0.4 million from $2.2 million, representing an 18% increase.

Operating expenses in the third quarter were $6.3 million. On a sequential basis, operating expenses decreased $0.1 million from $6.4 million in the second quarter and compares to $5.5 million in the third quarter of last year, which included a $0.4 million bad debt recovery. This increase compared to the third quarter of last year was primarily due to onetime restructuring costs to exit our Nordhoff facility.

Adjusted EBITDA loss was $2.7 million in the third quarter compared to adjusted EBITDA loss of $2.2 million in the second quarter and adjusted EBITDA loss of $2.3 million in the third quarter of last year.

Cash and cash equivalents were $16.7 million as of December 31, 2019, compared to $20.9 million as of September 30, 2019. Accounts receivable, net of allowances, were $19.8 million as of December 31, 2019, compared to $18.1 million as of September 30, 2019. The increase was primarily due to delayed collections from our international customers.

Accounts payable and accrued expenses were $19.4 million as of December 31, 2019, compared to $15.9 million as of September 30, 2019. The increase was primarily due to our overall management of working capital.

At this point, I'll turn the call back to Darren.

Thank you, Eric. One of the keys to growing and diversifying our global microturbine is the continued growth of our energy efficiency or CHP business and projects utilizing renewable fuels. As you can see on Slide 13, our energy efficiency business has grown from 40% to 54% of total revenues compared to last year. And if you look at renewable projects, we essentially doubled our business year-over-year. Renewable projects for Capstone are landfill gas, digester gas, animal waste, green waste, renewable natural gas and biogas from some of the world's largest breweries.

As you can see on Slide 14, Capstone is focused on low carbon renewable future. And as part of our efforts, we currently announced a new 100% renewable project with 247Solar at a test site in Morocco, which should be commissioned later this year. Capstone's microturbines will be used to generate 100% renewable power using concentrated solar energy to expand superheated air across the microturbine. After the completion of this test project, we expect additional opportunities from 247Solar.

Our second 100% renewable product is with B+ K, a German company focused on wood waste energy superheated air products. B+ K has been successfully operating a Capstone C65 powered pilot project for more than a year and is currently moving into the commercial sales phase with several projects planned for sales and installation in 2020. We are excited to be able to work together with companies like 247Solar and B+ K to create a greener tomorrow through a renewable future.

Now let's move on to Slide 15. For years, Capstone's been working with a Swiss company with their product development phase to operate C30 on methanol. And a multiyear test program was recently completed. The company is expected to move into the commercial deployment phase in the near future, which will create further opportunities for Capstone to develop the relationship and return future product orders.

Also, we are planning on starting to offer renewal power using hydrogen as a fuel source for our microturbines. Currently, we have a unit operating on a blend of natural gas and 30% hydrogen, but we have a plan in place to release a commercial 100% hydrogen fuel-capable microturbine over the next couple of years.

We strongly believe in social responsibility and strive to build a sustainable business for ourselves and our customers. We are excited to be able to execute on our 100% renewable initiatives as we see great potential for both renewable fuels and products that can affordably utilize them.

Let's go ahead and turn to Slide 16. On Slide 16, we discuss the increasing focus we are seeing on environmental, social and governance. The rise in ESG principles, regulations, government policies are creating a strong tailwind for the renewable energy sector globally. There's growing investor interest in ESG investing estimated to be over $20 trillion in assets under management as investors are demanding more corporate responsibility worldwide. I know this slide has quite a bit of text on it; however, I thought it would be important to include as it highlights just some of the ESG criteria which Capstone inherently meets as well as our internal corporate focus on culture that exemplifies these important principles.

With that, I'd like to open the call up to analyst questions. Operator?

(Operator Instructions) And our first question comes from Colin Rusch with Oppenheimer.

(inaudible) on here for Colin. You had a pretty steady stretch of strong bookings in recent quarters. Can you speak to any acceleration in the sales cycle and specifically on your guys' ability to maybe accelerate the time between closing an order and recognizing revenue?

Yes. No, that's a great point. I think we've seen kind of an upturn almost globally across the board, especially in the last couple of quarters, whether it's CHP projects, it seem to be accelerating as with more and more green building going on. Obviously, we're seeing a shift in oil and gas from CapEx to rentals as oil and gas companies are focused more on free cash flow and increasing dividends and stock buybacks. But that's good because we'd already started a rental program. And so that plays into our strategy for long-term rentals.

And then renewable business has doubled year-over-year as we're seeing more opportunities for biogas, a lot of breweries and other opportunities for wastewater treatment plants and landfills. I think the biggest change for us is moving to a split sales approach where we still manage our distribution channel. We've got a new direct sales organization focused on customers that already have Capstone microturbines at 1 or 2 locations, but are large marquee customers and could expand across other parts of their organization. So that -- selling to an existing customer, expanding their business portfolio is faster path to market than new customer development. So I do think we should see some acceleration, and we're very hopeful to get back to kind of the $13 million in product sales by the June quarter, which is obviously just couple quarters away.

So definitely I think lots of opportunity there. We're working on our branding and our marketing. Obviously, our DSS program is pitching in almost $2 million now to accelerate our marketing and branding efforts, and so all that's helpful in paying dividends. Our sales force, pending order list, is about $1.3 billion. So lots of opportunities. It's really about execution, and to your point, how quickly we can get those opportunities turn into quotes and quotes turn into orders.

Great. Kind of switching gears. Do you see any opportunities to reduce working capital at this point? Looking at inventories and receivables relative to payables, it looks like you guys may have some capacity there. So just some thoughts.

Yes. No, absolutely. We've been a little working capital challenged the last couple quarters, and so we've got an opportunity to reverse that trend in the next couple quarters. Kirk and his team are very focused on pushing out inventory where we've got too much inventory and pulling it in where we need to pull it in. We're working closely with our vendors to make sure that they're Tier 1, and they're giving us the right parts at the right time.

Obviously, the rental fleet is taking up some of our capital investment, but that's a planned expenditure. And as I said, that's both a 2-year simple payback, high-margin, high-return business that fits our reoccurring revenue model. And really, our energy-as-a-service model that we're moving toward with our rentals and our FPP contracts.

And so I think that you'll see improvements in our DSO in the next couple of quarters and improvements in our inventory. Our inventory commitments are down and the purchases are down, so you should see that flow through the balance sheet here and P&L fairly quickly. So I think, again, we've had probably 3 negative working capital quarters, we're hoping to put a couple positive working capital quarters together the next few quarters.

And our next question comes from Rob Brown with Lake Street Capital.

On the rental business, have you seen -- I guess, what's sort of the revenue run rate in that business at this point? And are you seeing kind of any returns or turnover in the customer base?

Yes. No, I think a great question, Rob. We really are looking at longer-term rentals. And so every rental we signed so far has been a minimum of a year. The very first ones we've signed have already renewed for another year. So we've seen, knock on wood, no returned equipment and 100% rentals so far. And so the type of customers we're going after are the Shell and larger oil and gas users that don't have the utility at the site. And so they're paying a small premium to rent to a Capstone generator that's cleaner, greener, more efficient, more reliable but not that much over traditional rental generator sets.

So we think they're going to stay out there for multiple years at a time. We'll continue to build that rental fleet. As I said, we're at 7 megawatts now. Our goal is to get to 10. And I think we will probably be there in the next 2 quarters, if not the next quarter. I think we've got a lot of pending opportunities on the rental side.

So we really see that as a nice business for us, especially with the oil and gas customers in the U.S. on the back of kind of the shale tale going on, moving more toward a rental model or a high cash flow model. So I think it fits with where the industry is going, it fits where we want to go as a company. And I do see us eventually expanding the rental fleet beyond where we are even targeting today.

Okay. Great. And then in terms of the orders in the backlog, I guess, with your backlog where it's at today, I think you had some things come out of it, but could -- does that give you visibility toward hitting the June EBITDA positive? Or do you need to kind of win more orders to get there?

It's a great point. I think the biggest issue in hitting the June EBITDA positive is really on the -- on some of the other sides. I mean, product is important. But the biggest driver for our business is our reoccurring high margin business. So it's our FPP, it's our DSS, it's our rentals. And so if you look at any given quarter, 40%, 50%, 60% of our revenue will be product, but 80% or 90% of our margin will come from the service side of the house. So the biggest change for us is getting the U.K. facility online. So we have 40% cheaper remanufacturing costs and then getting that bad part out of the system. And so those 2 things really get us close to EBITDA positive in June.

The final kicker though will be growing some product sales and then getting the final push we need to get across the goal line. So we do need to get some orders closed, but I'm fairly confident we're going to see some nice deal flow here early in the year. Again, we've got distributors performing well, market's coming to us, and we're starting to see bigger customers. I mentioned Marriott, Mohawk Carpets, we just commissioned that 5-megawatt plant. We're seeing bigger customers coming to us. And as we approach EBITDA breakeven, we expect even more larger customers to come to us.

And as I mentioned in my prepared remarks, we really want to move more to a direct sale, national account kind of model and really sell on payback and not just straight cost. And so we want to partner with these larger customers and say, "Okay, Mr. CFO of Mohawk Carpet or Pepsi or Marriott, what kind of payback and years are you looking for at each site?" And if the answer is 5 years, then we'll go do as many projects as we can and hit that mark. And so I think changing it up a little bit and then kind of backing into the customer's requirements as opposed to going in with the distributor, with a set discount and a set price.

(Operator Instructions) And next, we'll move to Amit Dayal with H.C. Wainwright.

Darren, Eric, can you talk about the FPP attach rates on new sales? Are we getting 100% level on attach rates or a little lower than that?

Yes. Amit, on a blend, it's greater than 50%, 5-0. Our rates, renewal rates, are about 85%. So we're getting over half, and then 85% of them are re-upping if this is a 5-year contract and it expires. I think we're seeing more growth, I think, in the oil and gas side, that's been the harder side for us to get attachment than in the past. And so any large FPP that we press release, it's oil and gas related, it's a good win for us. On the energy efficiency and renewable side, we have a very high attachment rate typically just because they're not looking to do that work themselves.

I think the other important thing we've now passed over, over half of our megawatts available for FPP are under FPP right now. So that's a big new trend for us. And so I think we're seeing additional growth, and just the fact that we add contracts every quarter and very few are rolling off. And if they are expiring, they're renewing. So we're very excited with the FPP program. Those margins should be over 50% here in the next few quarters. I think June should get close.

And so as we continue to build that backlog, I think we're up to almost $87 million in long-term service contract backlog. It really fits our business model of energy-as-a-service and more importantly, partnering with our customers. So we're [afraid] of every failure worldwide, we're constantly making the product better, but we want to benefit with our customers as we make the product better, and we help to make sure their sites are as highly functional as possible. So definitely over 50% and improving and over 85% on a renewal rate.

Got it. And then, you provided a forecast for the first quarter of fiscal '21. Can you talk a little bit about the fourth quarter of '20, what you're expecting? Should we look for improvements on the product revenue side as you bridge towards the $13.5 million from roughly around $8 million this past quarter?

Yes. No, great point. I think Q4 will probably look a lot like Q3. I think we'll see improvements in several areas. But I think from a product side, it really depends on how many rentals we put out. We put out 1 rental unit last quarter. We may put out more this quarter. So if we do, that will limit a little bit some of the product revenue. So it's really going to depend on how many rentals we ship versus product we sell. We'd rather get a rental out there with Shell or Anadarko, a major customer, again because that fits our long-term revenue model and helps us get to that positive EBITDA, and more importantly, sustainable positive EBITDA.

As you know, we got to positive EBITDA for 2 quarters in a row, but we weren't able to maintain it for multitude of reasons. We want to make sure when we get back to positive EBITDA this time, it's sustainable when we're there, and we start generating cash and don't look back, frankly, because I think once we start generating cash, a lot of good things happen. I think more large customers will be confident in buying our technology. The value of our long-term FPP program goes up because that's essentially insurance policy. And if we're profitable, that insurance policy is more valuable. It allows us to look at accelerating additional long-term rentals, maybe looking at some M&A activities. So lots of good things happen when we start generating cash.

Understood. And then just your post-Brexit, how has Europe sort of been responding now? Or maybe more specifically U.K., depending on where you were seeing some of the pushouts? Any improvements with engagement over there or progress with deploying these projects?

Yes. We've had a slow go in the U.K., I'll admit that. That's been -- it's one of our underperforming territories. We've got a couple distributors over there now and we're looking for some near-term project wins. I think they've been fairly distracted with their Brexit and their political issues and obviously, we can understand that here in the U.S. as well. We look for them to bounce back this year, though, and have a good year. Europe and Italy or -- Germany and Italy are doing very well for us. So the U.K. should be a similar-sized market.

I think from a logistics side, having the hub over there, the remanufacturing center, being able to service Europe from the U.K. should still be positive for us. We've taken steps to make sure that we don't have logistic issues or slowdown in shipping and have done as much homework ahead of Brexit as I think we can. But again, I think there may be some short-term interruptions and complications as it initially happens. But I think overall, we're seeing it as a positive move in that getting Brexit in the rearview mirror will be positive for our business.

And our next question comes from Eric Stine with Craig-Hallum Capital Group.

Just going back to backlog. So it looks like this quarter, so you removed BPC, it looks like completely and I know you removed GESS last quarter. I mean is this the backlog now? I mean, you've really cleaned it up. Is this a backlog that you kind of view as a true backlog where -- I mean, sure, you're always going to be concerned about certain areas, but that's pretty solid.

And then just second part of that question. I know, over time, your backlog had kind of been extended 15, 18 months, somewhere in that range. I mean now that you've really got the backlog dialed in, I mean, do you think that it could go -- it could return more to that normal 12 months that it might have been a few years ago?

Yes. No, great analysis. You obviously covered us a long time. So absolutely, taking those 2 customers out that unfortunately were disappointments for us. We want the backlog to be, like you said, 12- to 14-month turn. And I think we're approaching that point now. So I think that the backlog is smaller, but it's solid and should turn faster. So yes, you're right on the mark.

Okay. Good. And then maybe last 1 for me. Just looking through the filing, it looks like -- and you'd kind of alluded to this, you wanted to light a fire under your -- some of your distributors. It looks like you cut a fair amount of them, it looks like 69 maybe from 88. So just curious, I mean, is -- obviously, part of the restructuring. How do you break this down as part of this because you are going to focus more on national accounts, but just maybe the thought process there. And is this -- the number that you have now, is this more the number that you think is the right number going forward? Just what are your plans?

Yes. No, we've been really kind of having a bake-off in several areas. And where we've had distributors that have struggled and neighboring distributors that have done better, we've rewarded the neighboring distributors and given them more territory. So if you look at E-Finity was mostly mid-Atlantic. They now go down through the South. They also have the Caribbean. And so I think we're trying to expand where our distributors have been successful, and more importantly, run our model distributor program, reinvest in the business, meet their KPIs, train their technicians, meet their stocking guidelines for spare parts, go to our sales training seminars, get to know their local utility and gas company and just do all the right things.

And so where distributors are reinvesting in their business and growing their business and doing the right things, we're rewarding them with additional territory. Obviously, I think at one point, we were close to 100 distributors. That's very challenging to manage in the business. So now we're at a point where the distributor number is down to a more manageable level, plus it's more mature. And that really has kind of allowed us to make the move of splitting our sales organization in 2 pieces and have a much smaller group managing the distributors we've had historically and allow that other part of the sales organization to develop national accounts, OEMs, rental fleets and some strategic opportunities.

And that does conclude our Q&A session for today. I'll turn it back over to Darren Jamison for any closing remarks.

Great. Thank you, everybody. Great questions, really spot on. I think for us, we're really focused on not necessarily the fourth quarter as we are the first quarter. I think getting the June EBITDA breakeven or positive is really key for us as a business. As I said, it really opens up opportunities for us, whether it's customers, whether it's ability to free cash flow and start reinvesting in the business in some areas we'd like to.

I look at this quarter and I'm really happy with a lot of the progress we made with all the initiatives we have in place. Not happy with the product revenue for the quarter, but book-to-bill was good. We're working through the bad manufacturing part that's really saddled us for the last multiple quarters. FPP continues to grow. DSS, we got nearly $2 million in the calendar year, which is the highest level in 2 years we've had the program. We hope to do even better next year.

If you look at our rental growth, we continue to add rentals every quarter. Again, it takes CapEx, and it takes away from our product revenue, but it really fits our long-term business model and helps us get to that EBITDA positive and more importantly, stay there. And so we're up to 7 megawatts deployed against our initial plan of 10 megawatts. If you look at our product growth and our ability to do reman parts is key. We've got a couple of pictures of our reman center there in the U.K., but we've got a really great team of folks over there in the U.K. hub. They've done an amazing job at getting that facility retooled to be remanufacturing center and have the capability of fully testing completed engines and units in connection with the grid. So that's exciting for us.

Kirk and his team are really working hard on the purchasing side to identify $3 million of cost reduction in our supply chain to lower the DMC. So we're giving you a little more detail in that area than we have in the past. The OpEx, we're running around $6 million. We need to get it down to kind of $5.2 million to $5.7 million range, and we're pretty confident we've got a plan to do that. And so that's key for us as well.

And then really getting new OEM partners, new national accounts, increasing our brand recognition globally, new products, whether it's hydrogen, whether it's different opportunities to use our technology. We just announced recently a marine version of our product, a DC marine version that's going over the Netherlands, the Feadship. Obviously, 247 and B+ K are exciting opportunities. So we really want to make sure that we can cover the waterfront with as many opportunities to use our products but make sure no matter what the opportunities are we're getting good service coverage, good product margins and service margins and get a big energy-as-a-service reoccurring revenue model. So excited to report kind of the progress we make next quarter and most importantly, looking forward to 2 earnings calls from now and hopefully, we can announce adjusted EBITDA positive. Thank you.

And thank you. That does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.