Operator: Good day ladies and gentlemen and welcome to your Capstone Turbine Corporation Earnings Conference Call and Webcast for the financial results for the Third Quarter Fiscal Year 2021 ending on December 31, 2020. As a reminder, today's program will be recorded. At this time, it is my pleasure to turn the floor over to host Mr. Colby Petersen, Corporate Counsel. Sir, the floor is yours.
Colby Petersen: Thank you very much. Good afternoon and thank you for joining today's fiscal 2021 third quarter conference call. On the On the call with me today is Darren Jamison, Capstone's President and Chief Executive Officer and Eric Hencken, Capstone's Chief Financial Officer.
Darren Jamison: Thank you, Colby. Good afternoon, everyone. Thank you for joining us today to review our third quarter fiscal 2021 results ending December 31, 2020. Before getting into specific financial results, I'd like to review recent business highlights and provide an update on our adjusted EBITDA improvement initiative. Go ahead and turn to Slide 4. On Slide 4, we've outlined some of the key events from the last couple of months. I will now run through each item, but I would like to draw your attention to a couple of the more crucial events, beginning with the first . As most of you know we have been moving aggressively ahead through a turn to solid revenue growth following our successful cost cutting initiative over the past couple of years. Revenue for the quarter increased $3.3 million or 19% to $20.7 million from $17.4 million for the three months ended December 31, 2019 and increased $5.8 million or 39% sequentially from $14.9 million for the three months ended September 30, 2020. With nearly 20% revenue growth year-over-year and 40% sequentially our efforts are now showing up in our results. Additionally, in the third quarter, new gross product bookings were $10.5 million up 7% from $9.8 million in the second quarter and up a whopping 91% from $5.5 million in the first quarter showing a solid sequential performance. The other key metric is adjusted EBITDA, this improved $0.6 million or 32% to negative adjusted EBITDA of $1.3 million for the three months ended December 31, 2020 compared to negative adjusted EBITDA of $1.9 million for the three months ended September 30, 2020.
Eric Hencken: Thanks, Darren. I will now review in detail our financial highlights of the third quarter of fiscal 2021 which can be found on slide 7 through 10. As a reminder, the company issued preliminary select third quarter results on January 6 2021. And the results released today are consistent with those preliminary results. Starting on slide 8, I want to highlight the significant sequential improvement in nearly every line item of our P&L. I'm not going to run through each line but I want to point out the total operating expenses line. Despite our total revenue growing from $14.9 million in the second quarter to $20.7 million in the third, operating expenses were essentially flat. This shows that we can grow this business and keep tight controls and operating expenses. Slide 9 is even more impactful. This shows a substantial year-over-year progress. Revenue for the three months ended December 31 2020 increased $3.3 million or 19% to $20.7 million from $17.4 million for the three months ended December 31 2019. Gross margin was $3.5 million, or 17% of revenue, compared to gross margin of $2.6 million, or 15% of revenue for the three months ended December 31 2019. This increase was primarily due to more volume as well as improved accessories parts and service margins.
Darren Jamison: Thanks, Eric. Let's go and focus on slide 12. According to Frost & Sullivan’s recent analysis, global hydrogen production is forecasted to more than double reaching 168 million tonnes by 2030, up from 71 million tons in 2020, with revenue expected to reach $420 billion in 2030, up from $177 billion in 2020. Part of Capstone’s long term success is being able to react quickly to changes in the industry. And that includes our customers desire to use hydrogen as a fuel. The hydrogen economy is coming and we need to be there with it.
Operator: Absolutely And your first question is coming from Rob Brown. Rob, your line is live.
Rob Brown: First question on the energy as a service business. How is the kind of rental market at this point? Where are you seeing activity? And how many units are you? Are you thinking at this point in terms of rolling out?
Darren Jamison: Yes, our goal was to Rob, the goal is to get to 10 megawatts rolled out by the end of the year. So by March 31, we're still looking to be somewhere around that number. Obviously, COVID impacted the rollout of the rental program, especially the oil and gas space route. We're now seeing oil prices back over $50 a barrel. We're seeing new opportunities in the oil and gas industry. We also have several CHP rentals out there and continue to see good, good traction there as well. We are looking to expand outside the U.S. we'll probably have our first rentals in Mexico, Latin America and the U.K. in probably the next quarter. So definitely aggressively looking to grow it as fast as possible. But we do want to make sure we -- price them accordingly. We get the right rates of return that we're looking for. And most importantly, we're trying to at least sign minimum one year rentals. We don't want to sign short term rentals, just from a logistics standpoint; it's very challenging to move these units around constantly, especially for us kind of being somewhat new to the rental business. But it's overall its going okay. But I think the next quarter; we're going to see an acceleration of the rental fleets in both in our building of units as well as deploying units.
Rob Brown: Okay, great. Thank you. And then on the hydrogen development in the market, where do you see the customer interest at this point in? How do you see that market developing over the next couple of years?
Darren Jamison: Yes, it's a great, great question. I think we were skeptical, I'll be honest on the hydrogen economy, and I look through it the first time was Schwarzenegger Schwarzenegger and hydrogen highway here in California. But this feels different. We are hearing about it and seeing it from customers. We're seeing it from legislatures, obviously, with the new Biden administration's we a big piece of the green energy push that they have. Our first units that we sold were in Australia, we've got quotes going right now actively in Japan, in Korea, several in Europe as well as the U.S. When we announced the fact that we can run a hydrogen blend the amount of opportunities and kind of incoming inbound calls has gone up substantially. So there's definitely a large amount of customers that want to at least run on a small blend. More importantly, we've seen some customers that were quoting natural gas CHP projects to that are asking us about our hydrogen, kind of future path. And so they don't want to install a CHP solution today. That's a 20-year asset that can't run on hydrogen 10 years from now or five years from now even on a blend. And so I think the ability to have a hydrogen footprint, at least from a blend standpoint will be critical near term. And the long term as you see more green hydrogen get deployed 100% hydrogen opportunities will be there. I think one of the limiting factors for hydrogen is infrastructure. But because we are behind the meter, we're distributed assets. We don't necessarily have to run off a hydrogen pipeline, we could run off hydrogen is developed at the source. And I think that's going to allow us to put some units on the ground before some other folks.
Rob Brown: Okay, great. Thank you. I'll turn it over to you.
Operator: Okay, your next question is coming from Amit Dayal from H. C. Wainwright. Amit, your line is live.
Amit Dayal: Thank you, Hi Darren, hi Eric, congrats on the strong revenue performance. Okay, can you talk a little bit about the distributor pipeline, and sort of any engagement changes boosts sort of the Biden win?
Darren Jamison: Yes, the sort of pipeline is, as I'll tell you ebbed and flowed during COVID, as we see closures of economies and cover led shut down. So obviously, we thought in the U.S., and then it got better than the holidays, it got worse. Mexico, I think this week is coming off another closure. We had the U.K., Europe, Italy; all go on shut down for the second time. And so we're definitely seeing impacts from COVID, which I think is really why we're so excited with the revenue numbers we're putting up. To put up the highest revenue quarter in over a year in this COVID environment is really impressive for us. And it makes us very confident that as COVID subsides, the work we've done is really going to provide a lot of great opportunity for us. Obviously, the Biden administration, by rejoining the Paris accord is good for us anything related to green energy, hydrogen, green, building, energy efficiency, all of those initiatives and measures are going to be good for us. So we're excited about the new administration, what they're going to do for us. And just the more we talk about green energy, the more customers are reaching out to us looking for green solutions, the more valuable the reduction in carbon becomes, as you know, in the last two years, we save customers seven or 18,000 tons of carbon, we'll announce shortly what the last year is done. But obviously, they'll get us over a million tonnes of carbon saved in the last three years. And we're probably, closing in on a billion in savings. And so the more we can get to customers to help them save the planet and save money, and provide resiliency, I think is a win win situation. And so the new administration is going to put new measures in place to accelerate the green economy, but also just help educate customers and get them excited about doing the right thing.
Amit Dayal: Darren, has the ITC extension benefitted you yet? Or do you expect to see some benefits maybe down the line, maybe in the year?
Darren Jamison: Yes, I mean, the ITC extension definitely is positive. We get 10% versus the 30%. And so those technologies do. So it's not as big a mover for us as it is for the fuel cell companies. But we're a lot less expensive than the fuel cell companies, and frankly, a lot closer from an EBITDA positive perspective. And like our business model better. I could think we're a fuel cell company, but with a profitable business plan. So I think the ITC is good for all of us. And I think the longer gets extended, obviously, the better. But we're really looking for ways to reduce customer’s energy bills and get a five year payback with or without the ITC.
Amit Dayal: Got it. Just one last one on the gross margin side, where margins are suppressed in the third fiscal quarter, compared to given the stronger revenue performance, I guess?
Darren Jamison: Well, I think I think when you look at our margins; you have to look at mix. And so at these product levels, Kirk Petty and his operations team are barely sweating. We can run single shift five days a week, and put out the quarter. And so when you start looking at we could be doing three times the product levels in the shop that we have today, if not, if not more. So we're running at 20% capacity. At that level, it's hard to absorb our overheads and drive real strong margins. And so our product margins are kind of low single digit compared to our service and aftermarket margins that are much, much higher, obviously, as you know. So for a blended standpoint, we had a great product quarter. But that does depress our margins a little bit from a mix standpoint. However, we have to sell tickets to the movie to sell popcorn. So getting more units out there drives more FPP contracts and high margin revenue, or spare parts. And so definitely, it's great to get more product out there both from a booking standpoint and a shipping standpoint. And we continue to see the growth of the energy, energy efficiency business. If you remember back in Circa 2015, we were 80% oil and gas today we're 67% energy efficiency. So that transition has been huge. And that's a much bigger market and frankly, much more exciting market for us.
Amit Dayal: Understood Darren. Thank you so much.
Darren Jamison: Thank you.
Operator: Okay, the next question is coming from Shawn Severson from Water Tower Research. Sean, your line is live.
Shawn Severson: Hey, thanks. And I wanted to focus a little bit on the internal salesforce, the international salesforce. I mean, you've had some time, sort of left that develop here. I know obviously, it's probably been impacted by COVID. But what, how is it going I guess as a general update, and are you seeing larger? You know, bidding come in? Or are you looking at, kind of a number of live things in the pipeline or really is still kind of in the early stages, let's say and then a follow on question of that would be, what type size of projects do expect to see? I mean, you're talking about two megawatts, 10 megawatts? And what is that market look like now that you’ve had a chance to digest that a little bit?
Darren Jamison: Yes, great, great question, Shawn. You're referring to our internal sales or direct sales organizations, we launched back in January, led by Jim Kraus internally. Fortunately, we by the time we staffed up that direct sales force, COVID hit. And so of the I think, six new hires, we haven't had direct sales organization, I've met one of the of the six in person, the rest have all been virtual. The fact they can't get on their plan and go see customers is challenging. But we had an internal goal for the year that we shared earlier with generating 15% of our product sales from that new direct sales organization, we are essentially hitting those numbers through three quarters. And so we're achieving 15% product revenue growth from the direct sales organization, with a brand new team who hasn't been to the factory for training, but we can't interface with imperson and can't get on an airplane. So I think that tells you what that team can do when they can actually get some more training, some better interaction with the factory and able to go see customers in person. So very happy with that. What we're seeing is sea level conversations with customers, and an opportunity to talk about doing multiple projects. And so what excites me is being able to talk to a CFO and a CEO of a business developer or a hotel chain, or a plastics company, somebody who's got dozens of locations, so we can have a conversation about how to make all of them more resilience and lower their carbon footprint and reduce their costs. And then really understanding what the drivers are. In some cases, if it's a hotel chain that operates in the Caribbean resiliency is the most important followed by cost reduction, and then carbon footprint. Other folks in there in New York base or east coast based or California based, it's all about carbon reduction, and then cost reduction and resiliency. So really understanding the customer needs and then trying to find out how can we partner with them to be more more helpful to them and educate them on what the opportunities are, what our product does, and really kind of become their partner and their energy expert going forward. And so that's the goal, that team, we're not looking to cut out our distributors. In fact, in many of these high level meetings, our distributors are on the call. We've had one recently with infinity top distributors here in the U.S. and Jeff . And I think the goal is to show customers we can be your partner at a sea level, but also give you that boots on the ground local support, to understand the building codes, understand the local air boards understand how to work with the natural gas company, and everything needs to be successful to make sure you have a good project. And at the end of the day, after getting installed, start distributors that monitor the machines do the maintenance to make sure they get the kind of performance uptime cost savings that they've we've signed up for. So very excited about the program. I’ve been much more excited when you start getting on airplanes. But I think early returns in the first nine months based on all the headwinds have been exceptional.
Shawn Severson: When you get into the C suite to make that pitch, this is this new idea or new concept for these potential customers. Are you they're competing with other companies that are trying to provide you know solutions as well for their power needs. Just try and understand if you're on there with other people, this is an idea that you're creating for these for these customers?
Darren Jamison: Shawn it's a little bit of both in many cases, we get in the door because we have some sort of relationship and it can be Rob Paulson one of our Board of Directors may know this, the C level person and maybe somebody that we sold a project to and or even a couple projects through our distribution base globally. A lot of times we'll talk to the C level folks. And they have no idea that they have Capstone is running some other installations. In fact, we talked to folks at Kaiser Hospital. We've done 11 Kaiser hospitals here in California, and they were unaware that they even had a single Capstone. So a lot of it is just telling them, what's going on in their own business explaining to them that the product that they have, and then having a dialogue on what are their goals? Are their goals to reduce their carbon footprint to improve resiliency to save money? Is it a mix of those goals, and every CEO today, whether it's a small plastic company, or the CEO of DHL that we're interfacing with, they all have different goals, different mindsets, and they're all kind of different places. But all of them are leaning toward wanting to save money and save, save the environment and just question how fast they want to get there. And so I think it's a little bit of explaining our technology, it's education. A lot of the projects we're doing are with solar or battery storage, and so we can help them with those relationships as well. We can help design the micro grid and really optimize their savings and optimize their performance. And so I'm a big believer, our technology is amazing. But it's not a single bullet, it's a silver shotgun. So we need to have our product mixed with the right amount of solar, the right of a battery storage, and the energy conservation, energy efficiency, lighting, whatever makes the most sense for the customer to drive the best results. And there's many cases where we go to a large building and say, because of the way your buildings metered, or other factors, it may be a pretty small installation, that makes sense. But even if it's two C-65 kilowatt micro turbines, if that's the best result for their site. And that's the goal. We're not trying to oversell them. And we want to have a long term relationship. And the goal is to make sure these projects perform exactly for the savings, both carbon and financial, that we promise.
Shawn Severson: And that's my last part of that question is I assume the EAS portion of that is a very high attachment rate with these types of projects, given its kind of providing an energy solution versus just a product.
Darren Jamison: Yes, I think at the end of the day, people want to have comfort that they've got a business partner, and that it's a win win relationship. And so there's a lot of kind of local developers or people that will sell your product or even a project, but then they're gone. And then you may never see him again. And so, for us, we signed our long term service agreements, as part of our energy, that service business model. If we find a 15 or 20 year agreement, we're partners for that period of time we're married. And so as that project goes, so does my margin on that contract as the performance of their of their project and their savings, both economically and environmentally. And so we pray to every failure of every system we have under contract worldwide. If there is a issue with the site that's not performing well, we have a troubled sites group of engineers that and service technicians that dig into that site and figure out why it's not performing up to snuff. We fix it. I mean, even if it's a customer issue, we fix it, because that site needs to perform well for both the customer and for Capstone. And so our goal is to build deep customer relationships with reoccurring revenue and a partnership, though it's win win, and that our margins go up over the years as the product performs well. And their savings just increases as utility rates inevitably keep going up.
Shawn Severson: Okay, thank you.
Darren Jamison: Thank you, Shawn.
Operator: Okay, your next question is coming from Tate Sullivan from Maxim. Tate, your line is live.
Tate Sullivan: Hi, thank you. Good afternoon, Darren. You mentioned renewable, not your renewable natural gas separate earlier, as well as your I mean, you went into more detail on hydrogen with RNG. I think if some of your units are already at landfills, but can you just provide an update on where you are and getting trickier units to use 100% RNG and a timeline for getting there to please?
Darren Jamison: Yes, it really depends on what type of renewable natural gas we're talking about. We operate and have had for years operate on landfills and wastewater treatment plants, cow manure, chicken manure, pig manure, agricultural waste, and so we can take any kind of bio gas we do a lot of breweries, we just did a couple more sites for AmBev. Sierra Nevada is a great customer with a couple sites. So we can run on any kind of bio gas. And so renewable natural gas for us is just a different gas to run on, but it's something very that we can very easily do. We have multiple sites running on blended back bio gas and renewable natural gas. So for us that's already doing it type of operation. That's not any new development for us. We do need to understand what the constituencies are in the gas to make sure we tune the equipment accordingly. But from a technology standpoint, we've done it, we've got hundreds of units running on renewable natural gas or 100% bio gas. And that's not a not a big leap for us. So the more renewable natural gas becomes popular, the better off we are, because we're already they're already doing it. From a hydrogen standpoint, that that's a little bit more new engineering and new Greenfield for us. But again, with the hydrogen injector we've developed, we're very confident that we can run successfully on 100% hydrogen, our development effort is really more around the fuel system containment, packaging, safety, all those sort of issues and containing hydrogen, which is a very challenging molecule to not leak.
Tate Sullivan: …that effort and I apologize if I missed earlier involves having a partner on the hydrogen side or how is it a five year development effort or shorter? Can you try to quantify the timeline?
Darren Jamison: Yes, no, I mean, I'll be real blunt. It's about $5 million to $7 million. So it's really how fast we want to develop the hydrogen product. So we're monitoring the market. If a customer came to us and wanted to give us a big order for 100% hydrogen, we'd accelerate the hydrogen development effort. Most everything we're seeing right now from an opportunity standpoint is hydrogen blend in the 10% to 20% range. And so that's our initial target. So we'll spend money to make sure we are ahead of the hydrogen development kind of efforts. But if we had to go to 100% hydrogen, we could probably do it in 18 months. But if the market rolled out slowly, it may be three or four years. It's just you know, it doesn't really pay us much to get there first if there's no market, so we'll develop it as quickly as the market develops. But it's not the expense that Eric mentioned. Outside the Goldman know what we did with the ATM during the quarter cash is not an issue for us, we could we could spend that $5 million to $7 million very quickly and develop hydrogen in 18 months to 24 months, if necessary. It's just really monitoring the market and figuring out how quickly we need to spend those dollars.
Tate Sullivan: Thank you very much.
Darren Jamison: Thank you, Tate.
Operator: Okay. The next question is coming from Eric Stein. Eric, your line is live.
Unidentified Analyst: Yes, hi, it's Aaron on for Eric, thanks for taking the questions. Hello, can you give us an update on the remanufactured unit initiative? What's the impact there been? And kind of what's the outlook there for this fiscal year?
Darren Jamison: No, great, great question Aaron, and one that we've probably haven't talked enough about. As we brought up in the past, one of our keys to improving the margins in our in our FPP or our factory service contracts, is remanufactured content. And so today, we put a lot of new parts into our service agreements during maintenance intervals. As we get the fleet to age and to get bigger, we'll have more cores to bring back or use spark to bring back to inspect to clean up three manufacturing. So today, we do all that work essentially, in the U.S., we set up our hub in Europe in the U.K. to do that work as well. They are probably 98% of the way there. And they're already doing partial remands today, and we're co-operators and they're close to doing full engines and systems. The biggest holdup has been interconnecting with local utilities, so we can test and that interconnection has been impacted by COVID. But we're very excited that the next kind of 30 to 60 days, we will finish that utility, interconnect and be fully operational for remanufacturing up to complete systems at the U.K. hub. So that's exciting. That'll double our remanufacturing capacity that will help us in future margins. That'll keep us from shipping cores from Europe back to the U.S. just to tear them down and scrap them if they're no good. So it really helps us in both lead time and cost. And so that was exciting. Definitely it was impacted by COVID. But we're excited by the hopefully by March 31. That's fully operational.
Unidentified Analyst: Understood. And then, maybe on the supply chain, are you seeing any issues there today?
Darren Jamison: I've looked from COVID. Standpoint, absolutely. We've had suppliers that have had COVID rates as high as 20% of their workforce; we've had suppliers shut down for periods of time because of COVID definitely has impacted us. We have suppliers that we need to go visit that we can't because of corporate restrictions, specifically in Mexico, one of our key suppliers, we'll have to quarantine for two weeks if we if we went over the border to visit them. So that's definitely more challenging. I will say our supply chain for -- is obscene is an area of continued focus. Our payables today are probably the best that they've been in over four years. Our cash position is great. Our terms are over five, which is great, probably the best that's been over four years. And so from that perspective, I think we're becoming more attracted to our vendors. Revenue growth is going to make us more attractive. And so I think the next 12 months will be kind of a interesting time with our supply chain as we are much more stable from a cash and balance sheet standpoint, are much more desirable with higher revenue growth. And we're going to see more suppliers get more competitive, and we're going to have more competition, our supply chain, which will be good for us and good for our shareholders.
Unidentified Analyst: Alright, thanks for taking the questions.
Darren Jamison: No problem. Thanks, Aaron.
Operator: Okay, the next question is coming from Michael Heim from Noble Capital Markets. Michael, your line is live.
Michael Heim: Thanks. My questions have pretty much been answered. Thank you.
Darren Jamison: Thanks, Michael.
Operator: Okay, we have no remaining questions. I'd like to turn the floor back over to Darren Jamison.
Darren Jamison: Great. Well, you guys covered a lot of things I wanted to say. But let me just kind of say in closing, Capstone is a proud green energy company. We've been focused for a long time on transforming the way businesses think about energy production and consumption. Our solutions are really designed to reduce energy costs and ensure power availability, and lower carbon footprint. And really that's the goal of Capstone essentially before. We reduce 7 to 18,000 tons of carbon in the last two years and half a billion in financial savings for our customers. Today, we're even more excited to be able to offer our customers the energy and service business model that Shawn was talking about. It's really strengthens our commitment to creating a cleaner energy and a smarter future as well carbon reduction and increasing the value of our both public and private sectors. And more importantly, it really allows us to partner with our customers. And I think that's something that the aha moment a lot of our customers need to have is that we're here to be a partner and to win together not sell you a project and go on down the road. And we're small enough to care about your project that we're big enough to make sure we can execute. And that's not the same as some of these larger conglomerates that are out there. We definitely expect the new U.S. administration will create even more positive momentum toward green energy initiatives. As I mentioned before, Biden recently signed an executive order to rejoin the U.S. into the Paris Climate accord. This is the first of many actions to help tackle global warming. As a reminder is Eric mentioned, Capstone Energy efficiency market vertical has grown to 67%. And that's a huge sea change from where we were several years ago, and it were 65% year-to-date. I really couldn't be more pleased with our third quarter financial results. We continue to achieve our stated goals, including growing revenue and improving liquidity. And more importantly, we're just executing on the plan we laid out two years ago. So if you've been following us, if you've been listening to the earnings calls or talking to us at a leadership team level, everything we're doing is everything we told you would do nothing more, nothing less. And when it comes to revenue, liquidity, those are very, very key. They are key to part of our business continuity plan we put in place. These are our key objectives that really allow the successful results in our business, despite COVID. And so we put up three of the best quarters in company history in a COVID environment, all because of our plan that we put in place prior to COVID. We are now laser focused on driving revenue growth through our several initiatives, which includes leveraging our capsule and direct sales organization, our broadening of our geographic distribution coverage, expanding our digital marketing campaign, which I think is really second to none. Maria internally and her team has done an amazing job. We continue to I think to perform exceptionally well on the on the digital branding side and doing a lot of unique things like IndyCar and marketing campaigns and just really punching above our weight class. And so, all that on top of our continued low efficient cost structure. If you compare our operating costs we need the fuel cell companies are in the people in the FinTech space, we are half to a quarter of the OpEx of these folks. And so we are very lean, we're very mean and now we're going to drive top line revenue on top of that, so very excited to finish off this great year in Q4 and really looking forward to a new year where we don't mention COVID on every earnings call. Thank you.
Operator: Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.