Q1 2022 Capstone Green Energy Corp Earnings Call
[music].
Good day, ladies and gentlemen, and welcome to your Capstone Green Energy earnings Conference call and webcast for the financial results for the first quarter fiscal year 2022 ended on June 32021, all lines have been placed in a listen only mode and there will be.
A question and answer session. Following the presentation. As a reminder, today's program will be recorded at this time, it's my pleasure to turn the floor over to Mr. Colby Petersen corporate counsel, Sir the floor is yours.
Thank you very much.
Good afternoon, and thank you for joining today's fiscal 2022 first quarter conference call on the call with me today is Darren Jamison Capstone Green Energy's, President and Chief Executive Officer, and Eric Hagan, Chief Financial Officer.
Today Capstone Green energy issued its earnings release filed its quarterly 10-Q report with the Securities and Exchange Commission for the fiscal 2022 first quarter ending on June 32021.
We will be referring to slides.
Referring to slides today that can be found on our website under the Investor Relations section during the call.
I want to remind everyone that this call contains estimates and forward looking statements representing the company's views as of today August 11.2021.
Capstone disclaims any obligations to update or revise these statements reflect future events or circumstances.
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.
Please refer to the safe Harbor provisions set forth on slide two and in <unk> 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 in our presentation appendix.
I would now like to turn the call over to Darren Jamison, President and Chief Executive Officer.
Thank you Colby good afternoon, everyone. Thank.
Thank you for joining today for a review of our first quarter fiscal 2022 results ending June 32021.
If you turn to slide four I'll quickly run through the financial highlights before giving an overview of our fiscal 2022 goals.
Total revenue for the quarter was $16.1 million up 13% compared to $14.2 million in the first quarter last year as orders and shipments have gradually started to rebound.
By continued negative impacts from the ongoing COVID-19 pandemic.
Book to Bill ratio was one one for the quarter and new gross product orders was $8.2 million. Despite the continued impacts from the pandemic in key markets like Europe, Latin America, Asia, and Australia not to mention the U S.
The long term magnitude of rental fleet increased one five megawatts to $12 one megawatts from $10 six megawatts during the quarter as the company continues to execute against its plan to increase the fleet to 21 megawatts by the end of the fiscal year March 31.2022.
Turning to the balance sheet total cash and cash equivalents as of June 32021 were $49.2 million a slight decrease of <unk> 3 million compared to $49.5 million at the end of the last quarter.
Cash provided by financing activities was $11 million during the quarter as the company to continue to focus on strengthening liquidity as it ramps up the remediation of the defective vendor part in the field and accelerate the expansion of the long term rental fleet.
Lets go and turn to slide five.
As a reminder, we've recently laid out our goals for fiscal 2022, we remain sharply focused to deliver on our strategic business goals enhance our competitive advantages and expand our total addressable market or Tam around the globe.
Our strategy is set out in I believe by executing on the goals capstone will be positioned as a green energy leader in fiscal 2022 and beyond.
Let's quickly run through our goals.
Versus broadening our diverse energy products and services, which we've started to do we'll continue to do through the fiscal year new.
New direct solution sales team focused on growing the topline revenue as we continue to add more head count in that space with our strategic goal.
Expanding our long term rental fleet as discussed at the 21 megawatts.
Increasing aftermarket margins in escalating parts availability to drive improved customer satisfaction and more repeat orders.
Focusing on managing working capital and improving inventory turns.
And lastly, growing that assured sports system or DSS subscription program drive marketing branding and customer acquisition efforts.
Now, let's go ahead and turn to slide six.
In April 2021, we transitioned from Capstone turbine Corporation to Capstone Green energy.
Now view our business in four key strategic business lines.
This is important because it goes hand in hand, with our strategic goals of growing our offerings to expand our revenue opportunity with each customer and accelerate top line growth.
Let's begin with energy as a service or Eas. This is critical to continuing our transition to a more predictable cash flows and higher margin rates.
This business includes long term rental contracts long term service contracts or FPP is installation services.
Service spare parts leasing Ppas and project financing in addition to our DSS distributor subscription fee.
The one common denominator among all of these businesses is steady cash flows increased visibility and higher margin rates.
Next is our energy conversion technologies or ECT.
This is the foundation on which capsule was built and is based on <unk> core micro turbine technology, which you're all familiar with and can operate on a wide range of fuels. These products produced high efficiency CHP in CHP generating electricity and multiple forms of thermal energy.
We've recently added two key products to our offering first as the Baker Hughes turbine lineup ranging from five megawatts to 60 megawatts.
Gives us a solution for much higher power needs where needed. This is important as many of our target customers loads are under five megawatt megawatt target customers also have loads over five megawatts, which enables addressable for now.
The second is B plus K People's cases, an OEM partner in Europe, which is now moving into commercial production of their innovative decentralized CHP systems that convert wood residues into electricity and heat from an externally fired capstone micro turbine.
Moving on to energy storage solutions are Esf's energy storage is one of the first and most important additions to a micro grid or even a nano grid will be using a custom tailored combination of multiple technologies energy storage and monitoring software that maximize energy efficiencies lower emissions and create resilient sit.
Things that meet client's specific needs.
I'll talk about the fourth business line hydrogen sustainable products in a few minutes.
But now let's go and turn to slide seven.
Many of you have seen slide 10 before as we previously set out our six key growth factors I know that we've mentioned them earlier, but I always want shareholders to see them again and understand exactly what we're doing.
First is the new direct sales team, which we started approximately a year ago, which is one of our strategic goals for the year as mentioned earlier, we are targeting new microgrid products long term rentals and large repeat customers.
Second is our new parts supplier. This is simply about better building part quality to improving reliability, lower warranty, which I think you've seen in the quarter higher FPP margins, which youll see going forward and simply put.
Getting repeat customers.
Third new targeted pricing programs. This is focused on national and key accounts and our new gold key account program, which is targeted at customers that can deploy at least four megawatts per year.
Fourth initiative is adding new distributors in new geographies, particularly in Eastern Europe Africa, and the Middle East. These large markets are prime for a microgrid services and we need to fire more shots on goal, which means more and better distributors.
Fifth is a new hydrogen product released with the goal of operating at 100% hydrogen.
Hydrogen economy is coming and we will be here to run with it in greater detail in a moment.
It takes us expanding our digital marketing through our website update customize campaigns unique unique our branding strategy and building awareness of Capstone Green energy and what we can do cannot be overlooked.
On slide eight.
We wanted to try and find a way of illustrating the significant business impacts of expanding the long term rental fleet. This slide shows both revenue and contribution margin over a five year period for the cone thousand product line with spare parts sales of <unk> product with an FPP contract and see 1000 long term rental.
Over the five year period, see 1000 product with spare parts could generate approximately $1 million of revenue with approximately $200000 of margin or 20% margin as a percentage of revenue.
<unk> thousand product sale with a capstone FPP contract can generate approximately $1.2 million of revenue with approximately $300000 of margin with 25% margin as a percentage of revenue.
Which is good.
But the C 1000, rental and generate approximately $1.8 million of revenue and approximately $1.1 million of margin with a 61% margin as a percentage of revenue.
We think the numbers speak for themselves and here is the clear illustration of why we've been building the long term rental fleet and why is one of our key strategic goals for the year and beyond.
I will now turn the call over to Eric to discuss the details of our financial results for the first quarter Eric.
Thanks Dara.
I'll now review in detail our financial highlights for the first quarter fiscal 2022.
Turning to slide 10.
You'll see the financial results for the first quarter of fiscal 2022, which had revenue at $16.1 million up 13% compared to $14.2 million from the first quarter of fiscal 2021.
As the prior year quarter was more heavily impacted by COVID-19 project delays.
Product and accessories revenue.
With $8.4 million up 27% from $6.6 million in the first quarter of fiscal 2021.
Our parts and service revenue, which includes our FPP long term service contract rentals and distributor support subscription fee was $7.7 million up 1% from $7.6 million in the first quarter of fiscal 2021.
Gross margin as a percentage of revenue was 16%.
Down from 24% in the year ago period.
Primarily due to expenses being lower than the prior year due to our COVID-19 business continuity plan, where we implemented cost saving measures such as furloughs pay cuts and travel restrictions among other things.
Additionally, FPP margins in the fiscal 2022 first quarter were lower because of the timing of <unk> shipments where.
We had fewer parts shipments in the prior year quarter due to restrictions from the COVID-19 pandemic.
Total operating expenses increased $2.3 million to $6.2 million from $3.9 million in the year ago period.
Costs were lower than the prior year due to our COVID-19 business continuity plan.
Additionally, we had $7 million of <unk> expense in the quarter of which five of that was stock expense.
<unk> expenses are immaterial in the prior year quarter with the majority of last year's expense hitting in the second quarter.
Net loss of $2.2 million for the quarter compared to a net loss of $1.8 million in the first quarter of fiscal 2021.
The first quarter of fiscal 2021 benefited from expense reductions from the COVID-19 business continuity plan.
Partially offset by the gain recognized for the forgiveness of a PPP loan.
Q1 of fiscal 2022.
Adjusted EBITDA was negative $2.3 million compared to adjusted EBITDA of $1.1 million in the first quarter of fiscal 2021.
Again, the first quarter of fiscal 2021 benefited from expense reductions from the COVID-19 business continuity plan plus the gross margin benefit as discussed above.
Turning to slide 11.
You'll see select balance sheet and cash flow items.
Gerry mentioned earlier cash remained relatively flat at $49.2 million compared to $49.5 million at March 31.2021.
Cash used in operating activities was $10.1 million for the quarter.
Our cash use was cash used was primarily driven by our net loss as well as working capital changes driven by increases in inventory.
Partially due to lower than planned product sales for the quarter as well as the buildup for the anticipated growth of product sales and building the rental fleet in the coming quarters.
Additionally, we experienced delayed accounts receivable collections.
Due to the COVID-19 pandemic, we continued our remediation plan to replace a effective vendor part in the field, which was accrued in the fourth quarter of fiscal 2021.
Yeah.
So after this cash used in the quarter, we raised $10.5 million net in June through a public offering.
We continue to focus on liquidity and are mindful of our net cash position.
Turning to slide 12.
We have another slide demonstrating the impact the rental business can have on our P&L.
Here, we took a fiscal 'twenty one Q3 actual.
We felt the product revenue in that quarter Didnt have much of a COVID-19 impact on the result.
And created an adverse scenario, where our rental fleet will be built to $21 one megawatts with all units on rent.
All other numbers stay exactly the same.
You can see in the as this column in that scenario, where all we're doing is increasing the rental fleet.
Would be positive adjusted EBITDA for the quarter, an improvement of $1.4 million over the actual.
At this point I'll turn the call back to Darren sure.
Yeah.
Thank you Eric.
With various macroeconomic and ESG trends that we're currently experiencing we.
We feel that capture Green energy is uniquely positioned to take full advantage.
Turning to slide 14.
Slide 14 sets out some of the business catalysts I expect for Capstone Green energy I will not run through every detailed line item, we want to highlight some key points first of all we are beginning with a strong industry backdrop. According to Navigant research total microgrid capacity is expected to grow multi fold over the next decade, reaching 20 gigawatts.
By 2028 up from $3 five Gigawatts in 2019.
A big market for significant growth as you can also see represented on slide 15.
Turning to slide 16.
Highlighted some key consumer statistics, keeping in mind that helping our customers reach carbon reduction goals is what we do and this enables our customers to align with their customers.
<unk> are increasingly more eco aware and concerned with the environment impacting their purchases.
Gen Z, which now comprised one third of the world's population is willing to pay 50% to 100% more for sustainable products compared to older generations.
According to Nielsen study, 73% of consumers say, they would likely change of behavior to reduce their impact on the environment.
And the equal aware mindset and behavior adoption have only increase in recent years and should continue to accelerate.
Sustainability also feeds into customer loyalty sustainable and ethical business practices are the second highest reason most consumers returned to our brand. This is second only to product quality.
Not only can we help our customers with their ESG initiatives. We can also help them save money.
If you turn to slide 17, you can see that over the last three years, we've saved our customers an estimated $700 million or three quarters of $1 billion and approximately 1 million tons of carbon.
So we're saving them money and we're saving the environment.
Moving to slide 18.
I want to spend a moment on hydrogen on a sustainable product businesses and strategy.
Fuel flexibility has always been a critical element to capstone and so hydrogen is the next big fuel source, we need to address.
Our new hydrogen solutions business line is leveraging the recently released first commercially available hydrogen base combined heat and power micro turbine, which can safely Ron on 10% hydrogen and 90% natural gas mix importantly, we now have a target for commercial release of a 30% hydrogen 70% natural gas.
<unk> product by March 31, 2022, or the end of our fiscal year.
We're also working with our partners at Baker Hughes to advance our hydrogen solutions.
At the same time, we continue to actively work with $20 seven solar to help commercialize their concentrated solar thermal storage solutions, using our contract manufacturing services and global channels to market.
With that I'd like to take the open the call up to questions from our analysts operator.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please indicate so by pressing star. One lastly, what posing your question. Please pickup your handset if listening on speaker phone to provide optimal sound quality. Once again Thats star one if you have a question or comment.
And the first question is coming from Rob Brown from Lake Street Capital markets. Your line is live.
Good afternoon.
Hey, Rob.
First question is kind of the order book and order activity.
It was pretty good in the quarter had a had a I think a one to one book to bill, but how is the.
How is the activity levels are you seeing that being driven by our COVID-19 kind of recovery or are you seeing specific specific macro drivers starting to.
Drive order activity.
Yes, I would say order activity was definitely good for the quarter.
Number one to one or better were happy about that we're happy that revenue is up year over year and that's our goal every quarter for this fiscal year, but I'd say.
Covid, especially the deltas train is still making visibility.
Difficult.
The U S as in one place when it comes to vaccinations.
But we are seeing other countries behind us.
Specifically, Italy struggled Brazil struggled India struggled Australia has struggled a little bit.
So as these markets kind of come back online I think twofold, one they need to get back to business and then two as businesses come back. It seems like folks are going on vacation and so a lot of there's a lot of pent up demand.
For vacations and personal time, and so we're having to work through that I think that the second half of this year is going to be very exciting I think the last.
Quarter this quarter.
Are going to be more impacted by COVID-19, but I think as we get into the fall and the spring next year I think our business initiatives are really going to take hold a lot of the things we're talking about today.
Haven't seen the impact of right, we've talked about Baker Hughes, where we haven't sold our first Baker Hughes turbine yet when we do you're going to see a significant impact on our revenue.
Our hybrid solution products, we've quoted a one hundreds of them and we haven't shown shipped one yet.
So theres just a lot of things, even our hydrogen product.
Yeah.
A couple of orders, but nothing to the vignettes. So there's a lot of things we're doing right now in the background that youll see in the foreground. Once we start delivering revenue later in this year, but let's say visibility is still challenging supply chain is still very challenging.
Covid is still very much with us, especially as a global company.
Okay. Okay. Good thanks for that overview.
And then the rental business you've got a great go here of increasing your rental units.
How is that pipeline looking are you are you just sort of to get to that number as a function of kind of getting us build or do you need to sign customers or what really drives that growth.
How's the visibility of the rentals in particular, yes, it's a great question, because I think again hopefully the slides we added to the deck to help people understand the criticality of the rental units.
We had a recent.
Two megawatt five year rental and the stock market investors hardly reacted to it.
That's equivalent to a 10 megawatt product sale.
People need to realize the margin differences in the reoccurring revenue impact of the rental fleet how much superior is facility product outstanding quotes are over 80 megawatts.
So again, we're at a 12 megawatt fleet trying to get to 'twenty. One I've got 80 megawatts quoted if you break that into kind of a go get estimate that's around half that about 40 megawatts.
So again I need to collect.
Clothes 10 ish megawatts out of my 40 megawatt go get out of my 80 megawatts gross rental quotes and.
And so we're pretty bullish on getting the rental is done.
We will continue to build them part of the increased inventory you saw for the quarter was inventory coming in in anticipation of building those rental units and you'll see that again in Q2, but then those.
<unk> will be converted to rental units and go out on rent other thing people don't realize a lot of times, depending on what the customer is doing with the rental we may sign the rental one quarter or not but the unit on rent till the next quarter, but the customer signs the rental agreement and gives us the deposit reserve that unit. So there is a lag of at least 30 days, sometimes 90 or 120 days.
Between signing the retro contracts and getting it out of rent.
Okay, Great understood and then my last question is really on the hydrogen development getting to 30% hydrogen from <unk> 10, a day, how does sort of what has to happen there kind of in broad strokes is it redesigning things or is it.
Is it engineering work or maybe how do you get to that 30%.
Product by the end of the year.
It's a great question I think in getting to the service and hydrogen is one of our key strategic goals for the year, Don Ayres, who runs our engineering group is sitting here at the table, so I'm going to throw them under the bus and let him answer that question for you Rob.
Yes, Hi, Rob this is Don.
So we're working very closely with our University National Lab partners.
To get to 30%, we're looking at just our standard micro turbine product line.
With no changes to hardware.
And likely no changes in the software so.
To get to 30% is challenging.
To get to 100% and lot more challenging I think as everyone knows but what we're trying to do is minimize the impact.
On our on our hardware and software as well as enable our customers to be able to achieve 30% hydrogen without making any significant.
Investments.
The key thing with that Rob is if thats. The case, if we can do it with off the shelf hardware was just minor tweaks than retrofitting existing units in the field is very easy. So our 10000 units have been shipped to 83 countries all of which could be operated on 30% hydrogen once we get that.
Figured out or only minor modifications. So I think that that's important I think in the hydrogen market, we're going to see blending hydrogen and natural gas as the first wave of <unk>.
Two reasons, one hydrogen is not as readily available as it needs to be there is a lot of money and effort being put in to make it more available.
And two is still expensive and so to run 100% hydrogen is not economic today.
Any kind of reasonable payback, but if you blended it with natural gas.
Economic impact is not nearly as bad as you get the upside on the environmental side. So I think it's the right approach again will move to 100% hydrogen after we complete our goal of 30% hydrogen that will be different hardware different software and it's in different packages, but I think the 100% hydrogen market is still a ways off at least for me.
Beyond the demonstration project standpoint.
Great great. Thank you for that overview I'll turn it over.
Okay. Your next question is coming from Amit Dayal from H C. Wainwright.
Line is live.
Good afternoon, everyone.
Darren.
Gross margin side, you know, it's good to see the gross margins bounce back this quarter or should we expect.
Gross margins to now stabilize at these levels for the rest of the year.
Yes, the gross margins should continue to improve through the rest of the year as the rental fleet rollout again at that 61% margin rate. The more rentals, we have in the mix will help the overall margin mix.
Then obviously on the on the FPP side once we finished replacing all of the.
Bad parts in the field, we're going to see improved FPP margin rates, you're already seeing in the quarter improved warranty margin rates and we typically plan about 1% warranty at a normal business I think will actually end up running below that.
<unk> is running really well out in the field, we've got Tracey to Biogen, who is running our service organization now and she's very bullish on the fleet and the amount of uptime, we're going to see in the next 12 to 18 months.
Okay. Thank you for that and then regarding these box.
The bad parts of the replacements that you need to undertake.
We still incurring some costs associated with that or have you already recognized those costs.
No longer sort of.
In fact the financials.
Yes, so I think we incurred the costs for the program and we get the funding for the program in Q4, and so we got a $5 million settlement from the vendor and we put about a $4.9 million reserve on the books. So both the pickup and the offset where both taken in Q4, what you're seeing in Q1, and Q2 was the cash impact and so we got the <unk>.
<unk> last fiscal year, and we're spending the cash replace the parts of this year. So there's no P&L impact impact, but there is a balance sheet impact I think one of the things investors.
Confused about was the recent equity raise we did.
They see the $50 million in cash on our balance sheet and thought we had more cash than we needed but with building the rental fleet every megawatts about 750 data $1000.
Depending on accessories and things that go into that rental.
So it would be building that from seven or eight megawatt megawatt to 200 megawatts is a cash use for the year and then that $5 million you got from the settlement is great, but we have to spend that $5 million replace units in the field. So you look at those two items plus servicing our Goldman note and we definitely have some cash requirements for the year.
As we chase larger customers, we've been pretty open about our goal with the direct sales organization defined larger reoccurring customers, we need to have a significant balance sheet as well as we took one of our most senior executives just Jeff Foster and put them in a strategic role to look for represent potential acquisition, obviously that could be another use of cash as well.
So we want to keep a healthy balance sheet, we didn't mean to surprise investors that equity rates, but I think we want to stay around that $50 million levels as close as possible and make sure we spend the money on the rental fleet, which is a huge return.
The bad part out of the field, which is which is great for customer satisfaction repeat orders and have some dry powder for Jeff and his group when it looks for some strategic M&A opportunities.
Understood. Thank you.
Then.
Expect to the rental fleet.
Thanks.
Are we mostly targeting the energy sector or is this across the board in terms of you know.
All the end markets you are already queued dream too.
No I think when we first it's a great question I'm glad I'm glad you asked that when we first started out we thought it was mostly the energy market's shell was kind of our launch customer down in the Permian.
Still one of our biggest users today of the rental fleet.
But we've seen a lot of other interest in CHP, we've seen a lot of customers, who maybe are leasing or renting a building for five years and don't want to do the capital purchase for a CHP system. So if they can do a five year rental and maybe as an option to buy it later on if they end up renewing that lease.
It is a niche market there we just recently did a brewery.
Done other CHP applications working on a hotel in the Caribbean right now so it's a lot of CHP outpatient as well. We've also seen an uptick in grow houses, they're huge energy consumers and we've got several rentals out to the to the greenhouse industry here in California, as well as Colorado, I think youre going to see more opportunities there as that market continues.
To expand and then we're close on some bitcoin miners.
No bitcoin mining is.
Trying to be greener, there are tremendous energy consumer you also have the impact of China coming out with their own digital currency, which is forcing many bitcoin matters to move to the U S.
And so we're close on a couple of orders and rentals of the bitcoin industry and that'll be interesting new market for us to address and so definitely I think that the rentals are much wider market than we anticipated.
To date everything we've done has been U S based but we're starting to look at stuff in Latin America, Europe and Canada.
Probably end up with some stuff in Australia as well so again I think getting to the 21 megawatts is not challenge is how quickly we can get there.
Sure Kirk and his team <unk> built in time, we don't want to overbuild, the fleet or lose an order because we don't have enough units as soon as we get to 200 megawatts as Eric pointed out.
With any rebound in our product business like we had in Q3 last year, where essentially EBITDA positive our goal to be EBITDA positive every quarter going forward. We've done it three times in our in our corporate history, we need to do it every quarter every year.
It will open up a lot more opportunities for our business.
Thank you and then just last one.
All of these inflationary trends right now.
Are you seeing any of that impact your operating costs and overheads.
Yes, I think if Kirk and grow some hair back you would pull it out by now that definitely.
Every vendors looking for price increases the supply chains are a mess right now.
Youre getting electronic components <unk> copper.
<unk>.
Shipments.
Container from China costs, five X what it used to cost you in just a few months ago as well as lengthening.
Every time, so definitely the supply chain is challenging we're working really hard though too.
Work with our vendors and say look this is a short term issue not a long term issue Kirk and his team are trying to put in LTE as we've done a lot to upgrade our purchasing a strategic sourcing group over the last year, that's paying dividends in situations like this where do a large vendor fair at the long Beach Grand Prix coming up in September around.
The Indycar race, and so we're hopefully going to.
Move vendors.
From price increases and until Lta's and try to build longer term relationships with them, but I will say that it is definitely challenging right now everything youre hearing about supply chain issues is absolutely true.
Okay.
That's all I have.
Thank you so much thanks, Matt.
Once again, if there any remaining questions or comments. Please indicate so by pressing star one. Our next question is coming from Shawn Severson from water Tower Research Sean Your line is live.
Great. Thank you.
I want to go back to slide eight.
Looking at the contribution for EBITDA in <unk>.
Revenue for.
The rental business.
Just from a modeling standpoint on the back of the envelope, that's roughly about 9 million excuse me nine.
Nine megawatts and bookings between now and your target in March and if you do the math. That's like 16.16, two in terms of revenue per over that five year period, right and about 10 million EBITDA. So it has been.
That down by year.
I have to say that if you achieve your goal that's going to translate into approximately $2 million in annual EBITDA.
Going forward from that incremental nine excuse me nine megawatts rentals.
Correct, assuming the rentals are fully rented or 90% rented that is correct.
Okay and that in that model kind of holds going forward. There is anything unique about this are different and as we look at modeling. This each time, we announce a megawatt and sales right. We cannot rental business. We can use this as a sort of a formula warrant projections.
Correct, yes.
Yes, Sean this is Eric.
When we show the margin percentage here.
Lot of that is depreciation.
So if you if you want to know the contribution to EBITDA.
Can be higher than these percentages you see here.
Okay. So the cat in the cash flow is going to be what cause that to me is like 80% something like that roughly yes.
Getting closer.
Okay, and then when you and then the timing of this you said, usually it's within a quarter or two is the start time correct and then they use the life of these rents.
Rental contracts are typically what.
So our shortest we've been doing have been one year I think the longest we have quoted as 10, we have a couple of five year, but I think in general they're going to average around three years.
There's a lot of folks are doing one year rentals, Linda keeping them for two or three years, you've already seen some original show units that went out for a year has haven't come back yet and they're well into the second year and.
And so it just depends I think the other thing is you'll get as it comes back.
Well fresh and you ended up and then turned around and put it back on rent again. It also allows us as the rental fleet grows in ages to take units out of the rental fleet and we sell them much like you do in the car rental business and.
And so I think that would give us more opportunities for some used equipment sales again, probably better margins on new equipment sales.
We're not there yet, but I think again there is a huge benefit as this business evolves and matures it becomes an.
In annuity and a cash cow and it kind of drives other secondary businesses like used equipment sales.
Well why would why origin energy customer for example, only use it for a year I mean, I am just trying to understand why this.
Obviously long term products right.
Actually so.
<unk> shell.
As an example, when we when Covid hit they had about $4 five megawatts on rental and ended up sending two of them back they have been over a year and they were going to shut the site in because oil prices actually I think went negative for a little bit with Covid and so again, if you have a huge change in the market or you change the business and then we've got the opportunity to send it back if they.
<unk> sell that asset or that lease.
They will send the equipment back potentially unless a new owner wants to rent the equipment. So.
But I would say in general.
Minus the Covid onetime impact we've seen little to no returns on the units usually when they go out they stay out.
And that's fine I think.
I think the other thing it will happen I think people will get to a point, where they want to buy the equipment or they may buy a new one and returned the rental one again, which is fine.
A lot of customers are evaluating three to five year rentals versus buying the equipment just from a.
Capex utilization standpoint, and where they want to do with their capex dollars.
That's the time came out of a thought it made more sense like three to five years.
Sort of a decision process right.
I think if we if we werent in build mode, we could probably be a little more stringent with customers and push them into longer term, but in order to get the fleet built as quickly as possible, we're allowing customers to do one year rentals.
But again they are kind of evergreen if in a returnable keep rolling over.
And just as a rough approximation lets say, we take that average modeling purposes, let's say three years.
Three years out what does that unit work resellers, who are $1 million round, a little less than that I guess, if you stopped new product sale, just under $1 million from a megawatt I mean is that 50% that value, 30% that value. What's the used market that we should look at.
I mean, I think all of the units go out with a essentially an FPP and so our own service organization is tracking them remotely monitoring them, making sure that service has done to them.
So they should be if they come back in three years, It's got a 20 year asset. It should have at least 17 years of life left in it as long as been well maintained should be 60% to 70% the value of new.
And so I think theres definitely will be depreciating in the units and so we will have our book value will have to make.
Make sure we have good margin between our book value and the cell price, we should have plenty of room.
Yeah, I was going to say, probably depreciate, so a lot more than what the value is right. So it'd be carried on the box and pretty low asset value, but paths resale value. Yes. So it's a 20 year asset or depreciated depreciated over 10 years.
Okay. Okay.
Next question is on the installed base.
We see a great call deflation pond to fish in terms of.
Going back to some of those customers that you've already sold.
Michael turbine systems, too and looking to expand the storage or whatever can you just kind of give an update on on bad and have you have you had any success there where are you on the progress.
Yeah, No. We're very close we've been having to do training on all the new Microgrid solutions and products and battery storage stuff that we have it's challenging.
Still could only get half of the direct sales organization back here to the factory both the international folks Couldnt get a flight because of Covid.
Having to do zoom training, but it's getting better we've added two more salespeople to the direct sales solution organization. We've got the building across the street that we're utilizing to set them up and so I think the direct solution sales team is about 13 people we hired two more salespeople in the last 60 days.
And so there.
Well over $100 million of quoted new products, Besides micro turbine products.
So I think you'll see the first battery storage microgrid sales here and hopefully still this quarter.
I think Baker Hughes, we will see an order hopefully by Q3.
Again as I kind of said a few minutes ago. We've put all of these initiatives in place that you haven't seen a large battery storage order yet you havent seen a Baker Hughes order yet you haven't seen a hybrid system order yet the rentals, you've seen some of the impact but the difference between seven to eight megawatts on rent versus 'twenty, one is pretty significant.
And those sales are likely to be to apply our customer if I understand that correctly.
The first goal is to go to the existing folks I think the one we're expecting first as a hospital that has a CHP system and we're looking to add some some battery storage that existing system. It's in PV.
And so we are going to existing CHP customers and seeing if we're if we're taking care of all their loans if they could benefit from.
Some stranded loads, where the battery storage it makes some sense or battery storage was in PV.
I think on the hybrid system.
Those machines are really work well for telecom and promote applications. So we're very excited about.
Applications in the Caribbean applications up in Alaska Telecom around the World Africa Middle East.
Lots of areas, where we can put that hybrid system.
It's very similar to the polar power product for folks that don't know what the hybrid system is it's a small DC generator.
From a multiple different fuels with battery storage or battery storage onboard frankly in the box with PV and a controller.
Okay, and then I know, it's early but I have to ask anything in the infrastructure build that jumps out at you obviously those rationing EV state with some others, but have you have you found anything yet again I know, it's very early but anything that jumps out it's very early I think.
I think as you look at it in general.
I kind of want to wait until everything is done before we make a lot of comments, but.
But I would say from a macro level.
The infrastructure Bill between the three five trillion dollar budget framework that was approved by the Senate Democrats today with.
With a blueprint for investing in families climate healthcare and infrastructure. The EU is working on huge.
You know kind of next generation EU Bill.
They're going to come out with their own two trillion dollars.
Graeme for a greener more digital and more resilient in Europe, I think youre going to see very similar spending around the globe where.
Countries are going to look to recover from COVID-19 in a green and resilient manner.
And so I think we're well positioned as those programs rollout to benefit from them, but I would say is as we get through the entire season and be able to go to some of the races talking to DHL talking to Firestone Genesis you know a lot of these larger companies all have.
Green initiatives and they are coming from the boardroom.
To meet ESG standards and lot of them are really struggling to figure out how to hit those carbon.
Carbon reduction goals, it's great to pass them down from the boardroom.
And Facebook.
It's got to be.
We talked a Honda they won't be carbon neutral by 2030.
Huge undertaking right until I think.
As we talk to these folks were working through with them what they can and can't do in fact need the price right I think.
<unk> carbon neutral is expensive for a lot of folks.
But first thing to do is to use less energy energy efficiency.
Whether it's lighting, whether it's CHP system, and then battery storage P V.
Smart controls the smart metering all those good things and so I think.
I am excited for the next few years going to look like.
We spend a lot of our last 10 years trying to educate customers on energy efficiency and the benefits of of Green energy and carbon reduction now I feel like the market's coming to us.
And that customers truly have a problem they need to solve in that.
The board of directors is putting out carbon reduction goals.
Management mobile to execute against.
Alright, and then my last question is regarding hydrogen in Canada or more question about going to market strategy.
You know, obviously suppliers of hydrogen and want to find ways to have it consumed item fuel cells are not always as far as them companies like Westport doing spark ignited.
Direct injection with hydrogen and some other things like that are you.
How are you considering or have you talked with.
Any of the large hydrogen suppliers that are emerging out there, particularly in Europe, where it is very well developed because obviously.
Waves T cell.
Hydrogen capable turbines to their customers and then you get to not everybody.
Yourself.
Yes, we.
We're having some of those conversations are first hydrogen blended system has been sold in Australia and in Europe, which makes sense I think that's where they've got more infrastructure and more focus and frankly, they're ahead of the use of hydrogen front Japan.
Japan also is very focused in that area as well as Korea.
So I think we'll look to talk to the hydrogen producers were also looking from a technology standpoint to see if there is something we can coupled with our product and thats one of the directors have given Jeff in his new role.
To see if theres, a hydrogen technology that we can coupled with ours to have more of a complete one stop solution for our customers and I think a lot of customers are interested in hydrogen, but how to generated especially green hydrogen.
And how to have a cost effective.
<unk> solution, that's not overly complicated for them are overly risky as Keith So I think.
There are some exciting things I think we can do in the hydrogen space I think of what's going to happen in hydrogen.
Across the board in the next five to 10 years I think.
As well as extremely interested in hydrogen so I think I would be surprised if we don't do.
Some development work of the dose in the next few years as we've been.
Pretty vocal with them on some of our hydrogen initiatives and goals.
Alright, thanks, guys.
Thanks, Sean.
Okay. We have no further questions in queue I would now like to turn the floor back to Darren Jamison for closing remarks.
Great.
Great questions guys I think most of the things I wanted to say in my closing remarks.
We stepped into.
I'm very excited about what the next couple of quarters are going to look like.
As I mentioned, we still have challenges with supply chain, we saw challenges of Covid.
We're still working to get our direct sales organization up to speed with the impacts of Covid closer to staffing it out, but I think as we bring the direct sales organization online.
We're seeing the topline growth that theyre going to generate an additional business theyre going to generate our distributors rebound from COVID-19 and get back up to more normal.
Product sales levels.
It's going to be exciting for us and then.
Couldnt be more excited about the rental fleet as we build our rental fleet up and you see the impact of those higher margins at reoccurring revenue.
Good to transform our business and Theres a lot of folks in our space. They are very sexy revenue numbers, but there are huge cash hogs huge negative you. It does.
And huge net losses, and I think we can be a company that.
Maybe doesn't have quite the topline growth, but is very solid double digit topline growth with positive EBITDA and generate cash.
And I think long term will be a better play for a lot of our customers and our shareholders.
So excited about it I think theres a lot of good things to happen a lot of initiatives. We started in the last six to 12 months that we'll see the benefit of that work in the next six to 12 months. So you know.
Good quarter in Q1, Q2, hopefully will be better than Q1, but I think Q3, and Q4 should be really exciting and next year. It should be a game changer for US again divided administration as they move forward with their.
Their infrastructure Bill the new $3 five trillion dollars budget as Europe puts together their programs all of that should be wind in our sails as more of the <unk>.
Planet moves for Green energy sustainability.
Energy independence and reliability. So that's all moving in the right direction and will continue to and I think it's you know it's not just government subsidies as I mentioned, you got the Gen Z or as you've got the the.
Consumers wanting to buy green products live in Green buildings rent Green hotel rooms have.
How sustainable products and so I think that's all moving in the right direction as those big folks become bigger consumers and bigger voters.
And a bigger part of the population, it's only going to make or are the growth of our business easier not harder.
So with that I'll go ahead, and close the call and look forward to talking to every next quarter. Thank you.
Yeah.
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.
Yeah.
Yeah.