Q2 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 second quarter fiscal year 2022 ended on September 32021, all lines have been placed in a listen only mode and there will be a question and answer session. Following.
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 second 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 and filed its quarterly 10-Q report with the Securities and Exchange Commission for the fiscal 2022 second quarter ended September 32021.
We will be referring to slides that can be found on our website under the investor Relations section during the call today.
I want to remind everyone that this conference call contains estimates and forward looking statements representing the company's views as of today November 10th 2021.
Capstone disclaims any obligations to update or revise these statements to reflect future events or circumstances you.
You should not place undue reliance on these forward looking statements because they involve known and unknown risks.
Beyond our control.
Please refer to the safe Harbor provisions set forth on slide two in today's earnings release 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 mentioned EBITDA. They are referring to adjusted EBITDA and the reconciliations in the earnings release and the appendix to the presentation slides.
I would now like to turn the call over to Darren Jamison, President and Chief Executive Officer.
Thank you Colby good afternoon, everyone.
Thank you for joining today for a review of our second quarter of fiscal 2022 results and income to over 32021.
If you now go ahead and please turn to slide four.
On slide four I want to remind everyone of our fiscal 2022 goals and then reinforce some of the things <unk> been doing and will continue to do so it's becoming capstone Green energy back on Earth Day last April.
We remain sharply focused on delivering our strategic business goals, enhancing our competitive advantages and expanding our total addressable markets around the globe.
Capstone is at the epicenter of a significant shift towards distributed energy and micro grids as the primary way to meet our growing demand for cleaner power and the need for energy security.
According to global market insights the Microgrid market size exceeded $6 billion in 2020 and is anticipated to register over 27% compounded annual growth rate or CAGR between 2021 and 2027.
Set in this backdrop, we have positioned ourselves to leverage the sea change in energy to meet the needs of our customers are the clean reliable solutions encompassing micro grids hydrogen energy systems and.
An improving customers' overall energy efficiency.
A perfect example, capstone in Microgrid solutions can meet these needs is our recent announcement, where we are providing our technology for a cutting edge micro grid with integrated electric vehicle or EV charging stations in Italy.
Capstone distributor ABTS systems partnered with S. Four E system, a national ESCO provider to develop a combined cooling heat and power CHP Microgrid solution one of the first of its kind in Italy.
Our strategic initiatives are built around driving growth.
But equally important if not more so is the type and quality of growth we.
We are intensely focused on increasing our recurring revenue as part of our energy as a service or <unk> strategy.
We are focused on achieving our goals here because it translates into meaningfully improving our cash flow and also the predictability of our cash flows.
Yeah.
Our fiscal 'twenty two goals are to continue to leverage the global shift and include the following items.
First broadening our diverse energy products and service offerings I'll discuss this in more detail later in the presentation.
Second is our new direct solution sales team focus on growing top line revenue, we continue to add head count into the direct solution sales team and continue to be pleased with the pipeline being generated by the team both with traditional micro term products long term rentals and the newer green energy product offerings as well.
Third is expanding the long term rental fleet 21 megawatts, we grew the fleet to $13 one megawatts during the second quarter.
And subsequently announced in October that we expect to grow the fleet to $17 $17. One megawatts by December 31 2021.
Next is increasing our aftermarket margins and escalating parts availability to drive customer satisfaction and repeat orders in the quarter ended March 31, 2021, we set up a reserve for $4 $9 million true.
Affected.
Player parts.
<unk> parts in the field, we expect to have this program completed in our third quarter and we've already seen the impact in the business with significantly reduced failure rates on our power heads, which has lower warranty expense.
Obviously lower failure rates lead to happier customers happier customers lead to repeat orders.
Folks who are managing working capital inventory turns is next on our list.
<unk> used in operating activities is specifically for working capital inventory has been heavier than expected.
Partially due to ramping up parts to build the rental fleet and also to ensure we can continue to manufacture product in these extremely challenging COVID-19 supply chain environment.
Next is growing our distributor support system or DSS subscription pre program, which is driving marketing and customer acquisition efforts. As a reminder, we charge our global distributors a fee of 3% equal to the 3% of their prior year's revenue and also helps us grow our reoccurring revenue.
We then take that deviate DSS fee that we collect and put it back into the business to help promote our overall capstone story, which benefits all capstone partners in the value chain because the fee is tied to revenue as our overall revenue goes the DSS fee will grow with it.
Now, let's turn to slide five.
There is no doubt that the world is moving towards Decarbonization and Greener energy solutions.
This is one of the drivers around our repositioning to Capstone Green Energy Corporation.
This slide highlights the types of solutions, we can now provide to address the end customer's needs as the world moves towards those greener solutions.
First we can provide a complete microgrid solution that can run standalone or connected to the grid.
In addition to our traditional micro turbines, we now offer solar and battery storage solutions in partnership with New network partners. Combining these products with our capstone micro turbine technology Kinker play can create a complete custom tailored on or off grid micro grid solutions.
We continue to develop our offerings in the hydrogen space as the hydrogen economy is here and a key pillar in the future of Green energy.
Micro German based systems getting commercially run on 10% hydrogen 90% natural gas blend today.
We've publicly said we have goal for our systems to be able to operate on 30% blend by March 31, 2022, and then beyond that we intend to spend money on development towards 100% hydrogen as the market dictates.
The key point here is that we want the products, we offer to be fuel flexible and not just meet the needs of where the market is today, but where the market will be in the future when it comes to de Carbonization solutions.
We also now offer solutions that can help commercial and industrial or C&I customers with their energy efficiency and resiliency needs, both saving them money and providing energy security, whether it's with a combined heat and power of our <unk> 65 to five megawatt microgrid solutions or the new Baker Hughes five megawatts of 16 <unk>.
A lot of turbines.
Or the custom heat recovery solutions through new partner Alfa Laval or.
Food waste management and recycling solutions through new partner waste to Es.
Now, let's turn our attention to slide six.
Slide six offers some images of both our traditional microwave products as well as some of the new product offerings. This slide shows our micro turbine systems are hybrid DC energy Microgrid solution, which is very similar to the polar power product.
The core power battery storage solutions, and Alfa Laval heat recovery system.
One of the Baker Hughes industrial turbine products.
Catherine Green energy continues to expand its green energy suite of innovative products to provide customers with a custom tailored energy solution that will meet their individual card production needs cost reduction targets and resiliency requirements.
Now, let's turn to slide seven.
As I mentioned on Earth day in 2021, we expanded our portfolio of products and services and transitioned from Capstone turbine Corporation to Capstone Green Energy, we now view our business in four key strategic business lines.
This is important because it goes hand in hand, with our strategic goal of growing our offerings to expand the revenue opportunity in each end use customer and meaningfully accelerate topline growth and reoccurring revenue.
Let's begin with the first column, which the energy as a service or Eas.
This business line is built on the base of reoccurring revenue and includes a long term rental contracts long term service contracts or our factory protection plan or FPP installation services.
Customer service spare parts leasing Ppas and project financing. It also includes our aforementioned DSS distributor subscription fees the.
The common elements among all of these business lines are steadier cash flows visibility higher margin rates. This is critical to continuing our transition to be a more predictable cash flow and higher margin business.
The next business line is energy generation technologies or <unk>.
Lower customers emissions and create resilient microgrid systems that meet customers specific resiliency needs.
Laughing, our leases or hydrogen and sustainable product business line or H. Two S. 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 solution business line is leveraging the recently released commercially available hydrogen base combined heat and power product.
Microturbine, which can run safely on 10% hydrogen and nitrogen natural gas.
Most importantly, we now have a target for commercial release of 30% hydrogen 70% natural gas mix by March 31, 2022. We are also working with our network partner is like Baker Hughes in B plus K to advance are headed and solutions. We're also actively working with 24 seven solar to help commercialize their concentrated.
Solar and thermal storage solutions and soon moved to enter into a contract manufacturing services and global marketing agreement.
Now, let's turn our attention the most recently recorded results for the quarter and slide nine.
I'll give you just a quick overview of the second quarter financial highlights as I assume only focus on top line highlights here and Eric or provide a more complete financial detail in just a minute.
Total revenue the second quarter is $17 $2 million up 15% compared to $14 $9 million in the second quarter last year as orders and shipments continue to rebound. Despite the ongoing continued negative impacts from COVID-19 global pandemic.
The book to a ratio was good at 1.3 to one for the quarter and new gross product orders for 10.8 million up from $8 $2 million in the first quarter.
As a reminder review anything over one to one as a favorable book to bill ratio as anything over one to one can be an indicator of future revenue growth.
Long term microtome rental fleet increased one megawatt to $13 one megawatts from $12 one megawatts during the quarter as the company continues to execute against this plan to increase the rental fleet to $21 one megawatts by the end of our fiscal year or March 31 2022.
However, more recently in October we announced new contracts for an additional 3.2 megawatts of long term rentals and our plan to take the rental fleet up to $17 one megawatts by December 31 2021.
With that in mind, we do not expect to have any issues getting to the $21. One megawatts by the end of our fiscal year, which Eric will highlight whether it's so critical.
If you will now turn to slide 10.
On slide 10, we want to show you the last four quarters of revenue and an easy to understand chart I'll point out two things one over the last four quarters each quarter has been better than the previous year quarter and two if you look at the last 12 months of revenue, we are up 24% compared to the same period in the previous year, which.
Which is not good enough, but a good step in the right direction.
Based on these results we think the revenue growth strategy is starting to take hold and if he moved on to slide 11, I'll quickly remind investors on the six key growth factors that are helping grow our top line revenue.
First is our new capstone direct sales team led by Jim Crouse, which is one of our strategic goals for the year, we are targeting new microgrid projects long term rental growth large customer rollouts all part of this initiative their tests and securing partnerships with large national and even global customers we have.
Have a better opportunity to win larger scale deployments.
Second into new parts supplier. This is about better build quality, leading to improved reliability lower warranty costs and higher FPP margin rates simply put drive more repeat customers.
Third on a growth list is new target pricing programs. This is a focus on national and key accounts, who developed a new gold key account program that is targeted customers that can deploy at least four megawatts per year.
Next is adding new distributors in new geographies, particularly in Eastern Europe Africa, and the Middle East. These are large markets and are prime for our Microgrid services, and we need the fire more shots on goal, which means more and better trained distributors.
Fifth is our new hydrogen product release with the ultimate goal of operating on 100% hydrogen as we continue to see ever increasing interest and hydrogen base CHP and CHP solutions.
Six is expanding our digital marketing to reach more potential customers that might be may not be familiar with our products and services. We are accompanying this through our website updates cut.
Customize marketing campaigns.
Unique Indy car branding strategy and by building awareness of caps on Green energy and what we do which cannot be overlooked in today's energy markets.
With these growth factors I believe capstone will be positioned as a green energy later in fiscal 2022 and beyond by exiting puting against the six goals.
I will now turn the call over to Eric to discuss the details of our financial results for the second quarter Eric.
Thanks.
A review in more detail our financial results for the second quarter of fiscal 2022.
Turning to slide 13.
You will see the financial results for the second quarter of fiscal 2022, which had revenue at $17 $2 million up 15% compared to $14.9 million in the second quarter of fiscal 2021.
As the prior year quarter was more heavily impacted by Coca 19 project land.
Product and accessories revenue eight.
Eight $5 million up 18% from $7.2 million, a second quarter of fiscal 2021.
While parts and service revenue, which includes our FPP longterm service contracts rentals and distribute support subscription fee was eight 7 million up 13% seven $7 million in the second quarter of fiscal 2021.
Gross margin as a percentage of revenue with 16% down.
Down from 17% in the year ago period, primarily due to expenses being lower in 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.
It was partially offset by a higher volume of product and parks.
Total operating expenses increased 1.9 million to $7.4 million from five $5 million a year ago period.
Again costs were lower than the prior year due to our COVID-19 business continuity plan.
Actually we had a non-recurring employment related legal settlement.
$8 million in fiscal 2022 second quarter.
Net loss was $6 million for the quarter compared to a net loss of $4 $2 million in the second quarter of fiscal 2021.
The increase in net losses, primarily due to the increase in operating expenses just discussed.
Adjusted EBITDA was negative $2.7 million compared to adjusted EBITDA negative $1.9 million in the second quarter of fiscal 2021.
The second quarter of fiscal 2020.
Fiscal 2021 benefited from expense reductions from the COVID-19 business continuity plan.
The gross margin benefits discussed above.
The employment related legal settlements expensive point $8 million was removed from adjusted EBITDA.
Turning to slide 14.
You'll see the financial results for the six months ended September 30th 2021, which had revenue at $33.3 million up 14%.
Compared to $29 $1 million in the first six months of fiscal 2021.
As the prior year period was more heavily impacted by COVID-19 project delays.
Private and accessories revenue was 16.9 million up 22% from $13.8 million in the first six months of fiscal 2021.
While parts and service revenue was $16.4 million up 7% from $15.3 million in the first six months of fiscal 2021.
Gross margin as a percentage of revenue was 16% down from 20% in the year ago period.
Primarily due to lower expenses in the prior year.
Due to the COVID-19 business continuity plan.
Total operating expenses increased $4.2 million $13.6 million from $9.4 million a year ago period.
Again costs were lower than the prior year due to business continuity plan.
Additionally, we had the point $8 million employment related legal settlements in the second quarter.
That loss was $8.2 million for the six months ended September 30th 2021.
Compared to a net loss of $6 million in the prior year period.
The increase in net losses, primarily due to the increase in operating expenses, just discuss partially offset by $2.6 million of income related to the forgiveness of our PPP alone.
Last quarter.
Adjusted EBITDA was negative $5 million compared to adjusted EBITDA of negative $1.8 million in the prior year period.
Once again the prior year period benefited from expense reductions from the COVID-19 business continuity plan and that was partially offset by higher revenue.
Turning to slide 15.
You'll see select balance sheet capital items.
Cash decreased $11.2 million to $38 $3 million compared to $49.5 million Mark 31 2021.
Cashews and operating activities was 9.2 million for the quarter.
The cashier 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 and we continued our.
Remediation plan to replace it effective vendor part in the field.
Which was accrued in the fourth quarter of fiscal 2021.
Slide 16.
Darren mentioned the rental fleet earlier, we want to continue to highlight the financial impact of the rental fleet.
This slide shows both revenue and margin over a five year period for a C 1000 product sale with spare parts sales C 1000 product sale with an FPP contract and a C 1000 rental.
Over that five year period C 1000 product sale with spare parts can generate approximately $1 million of revenue.
Proximately $200000, a margin with a 20% margin as a percentage of revenue.
Let's see 1000 product sale with an FPP contract can generate approximately 1.2 million of revenue.
With a 25% margin.
Let's see 1000 rental can generate approximately 1.8 million of revenue.
Approximately $1.1 million margin with a 61% margin as a percentage of revenue we think the numbers speak for themselves here to illustrate why we've been building a rental fleet.
Why is one of our key strategic goals for the year.
On slide 17.
We wanted to show the impact of growing the rental fleet to $21 one megawatts on a recent P&L.
And the right call and we took the actual from fiscal 2021 Q3 quarter ending December 31 2020.
In the left column, we assume that we have a 21.1 megawatt rental fleet with all units on rent.
Can see and the various column.
We would have generated an additional $1.5 million of revenue and $1.4 million a EBITA.
We were negative $1.3 million adjusted EBITDA in the quarter, but the asset model shows positive EBITDA within 21.1 megawatt rental fleet.
On slide 18, we wanted to take the illustration one step further and show the same fiscal 2021 Q3 P&L.
And then what the impact of a 50 megawatt rental fleet would have on the result.
Can see in the asset model.
And it would have added for $1 million of revenue in the quarter and would have generated an additional $3.6 million.
Adjusted EBITDA, making adjusted EBITDA in that quarter $2.3 million positive are approximately 9% of revenue.
At this point I will turn the call back today.
Thank you Eric is very helpful.
[noise] at the end of the day the name of the game for Castro Green Energy is top line revenue growth and increased profitability from our energy is a service business model and recurring revenue.
As we continue our transformation to cancel and Green energy, we expect to realize higher growth levels.
As discussed previously where laser focus on higher growth rates.
As it's essential to leveraging our fixed costs and driving recurring quarterly profitability. When we think about future revenue growth, we need to look at it for each part of our business segments and evaluate the future growth potential.
Based on that let's turn to slide 20.
First image highlights are traditional global distributor business that is a relatively mature business at this point and we expect to grow at a lower rated other newer portions of our business.
We expect our energy that service business to expand quickly as we build up the long term rental fleet and as Eric pointed out we are targeting this as a key driver for sustained profitability and positive cash flows.
Our new direct solution sales team that is focused on larger customer rollouts and our new expanded microbrewery product offerings, we view as having high potential growth as well as most countries are similar to the U S. I want to build back green out to the global pandemic.
Lastly, we view our strategic M&A initiatives led by Jeff Foster as having a high growth potential and it could help us grow our portfolio of products and services and leverage are underutilized manufacturing facilities in both the us and the UK.
Let's turn to slide 21.
By 21, we've highlighted some of the 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.
Today younger buyers are increasingly more equal aware and concerned environmental impact of their purchases.
According to Nielsen study agenda, which comprises one third of the world's population is willing to pay up to 50% to 100% more for sustainable product compared to older generations.
73% of consumers said that they would likely change behavior to reduce their impact on the environment and the equal where mindset and behavior adoption have only increased in recent years sustained.
Sustainability also feeds into customer loyalty.
Sustainable unethical business practices are the second highest reasons.
Most consumers returned to a brand this is second only to product quality.
Turn to slide 22.
So I just wanted to wanted to summarize what we hear for most of our C&I customers when it comes to their energy needs today.
Most customers want a reliable in a flexible power supply.
Sufficient plant with higher reliability at a competitive costs, they want to significantly lower their carbon footprint and they want to monitor the plan to be able to analyze the operation remotely.
Today, Catherine Green energy can deliver a green energy solution that meets all of these needs.
Working as an energy solutions provider Kempson will work with end users as a trusted long term partner. This means that we are with our customers every step of the way to the design delivery and then manage the comprehensive energy package for each customer.
For Margaret turbines to Microgrid solutions strategic energy management, Capstone helps customers build and maintain a smarter energy infrastructure.
Not only can we help customers of their green energy needs. We can also save the money.
Determined slide twenty-three.
By 23, you can see it over the last three years, we have saved our end use customers, an estimated $700 million and approximately 1 million tons of carbon.
Let's go to slide 24.
By 24 is our last slide and it sets out some of the business catalysts I expect for caps on Green energy.
I will not run through every line item, but want to highlight some of the key points first of all.
When we transform to cancel and green energy and out of the various new products discussed today in our portfolio. We significantly grew our total addressable market or our Tam we.
We discussed the rental business in detail earlier, but once again I want to stress the importance of the rental business growth.
We're all things being equal rentals are by far the fastest path to consistent positive EBITDA and strong recurring revenue characteristics.
The direct solution sales team has generated a very nice pipeline projects and we are extremely excited to see some of these clothes in the second half of fiscal 2022.
And lastly, we have discussed it before but I want to highlight again that were dedicated.
One of our senior executives, Jeff Foster two strategic M&A and that's all in front of us as well.
With that I'd like to take a few questions for our analysts operator.
[noise]. Thank you.
Thank you ladies and gentlemen, the floor is open for questions. If you have any questions or comments. Please indicate so by pressing star one last thing about posing your question. Please pick up your handset of listening on speakerphone to provide optimum sound quality and the first question is coming from Rob Brown from Lake Street Capital markets. Your line is life.
Hey, Rob.
[noise] good afternoon.
Good progress in the corner nice top line growth.
Just wanted to if you could give us some more detail I'm kind of the the rental opportunities. You you you kind of got in the back half of the year and how you use that leads into confidence for your 2021 megawatt coal.
Yeah, no absolutely as you pointed out on the call me keep stressing over and over rentals are a huge growth opportunity for us from both.
Top line revenue growth and more importantly from an EBITDA margin level in October we announced another 3.2 megawatts of contracts, we've got a very robust pipeline through our distributors as well as our new direct sales organization I want to say the total pipeline today have quoted rentals is over 130 megawatts.
With the expectation of closing a significant portion of those are close rates on rentals is higher than traditional product sales and the length of clothes is much much shorter.
So were highly confident that we can grow that fleet to 17 megawatts by the end of March and then our end of December and then 21 megawatts by the end of March then the question is gonna be how much we want to grow beyond that but I think.
50 megawatts feels like the right answer.
Where we are as a business today and so we'll look to continue to grow it we're seeing growth opportunities across the board from traditional CHP.
From hospitality to CNI customers industrial customers, we're seeing an upswing in sort of oil and gas business and the Permian and elsewhere, where you get oil and gas users starting to put product back to work.
The oil prices maintain or about $80 per barrel and most recently, we've seen cannabis and bitcoin minors is kind of a unique markets is starting to grow for us to very energy intense market verticals and logical opportunity there as well.
Okay, great. Thank you and then in the media and the cost structure do you sort of feel like this cost structure is where things will stabilize here or do you see some kind of direction a direction one way or another.
Yellow Eric jump on that one.
Yeah. If you look specifically at the quarter I mentioned, we had the legal settlements that was point $8 million a quarter and then also.
If you've ever we've got the racing expense.
Which hits R Q1 in our queue too.
So few.
Pull those both out of the quarter you are looking at more around $6 million.
Quarterly Opex.
And one of the reasons, we use Q3 in the in the.
Analysis with the rentals, it's probably the cleanest quarter, we've had over the last several quarters, where we didn't have any big one time expenses in there, but I think in.
In general from an actual tactical standpoint, we continued to add sales resources in the direct sales solution team, but not much else there isn't.
Significant capex, we need we've expanded both facilities here in the U S. In the UK recently.
So I don't see a lot of new cost compared to what we've seen in the last last year.
[noise], Okay. Thank you again.
Thanks, Rob.
Okay. The next question is coming from Samir Jessie from each C. Wainwright your line is life.
Hidden.
For taking my call.
Installations.
Partner.
Going forward should we expect the gross margin pool fine to be.
And then the two what you see.
The amount of market.
<unk>. Thank you send it to play nothing.
526.
Megawatt.
The lines are distorted systems.
So it would be excellent.
No margin.
That'll be it.
Yeah, I think our margins are going to be an interesting.
Conversation as the company grows into its new structure.
See when we're selling the Baker Hughes 512, and 16 megawatt turbines, they're going to have a different margin right then the product's manufacturer ourselves.
Solar module manufacturers were looking at.
That's a very challenging task market. So those will be somewhat tied on margin, but I think when we put it all together was battery storage solar and then bring the energy solution and then obviously controls around that and the FPP.
We can bring a very unique I think product benefits and offering to our customers. So I think we'll we'll get a a positive margin uplift just from that compared to our competitors.
But I think it can depend on mix the faster we go rentals, obviously, that's our highest margin business so as rentals grow.
Faster than other parts of the business that's gonna help.
But I think in general we want to see blended margins in the 20% to 25% range.
But more importantly, we want to grow top line and we want good cash flow and so I think that's going to be key for us.
Our opex is not going to change very significantly we could we could double or triple revenue with very little change our Opex line, which I think is key one of the nice things also with our network providers, we don't have to inventory all this product in most cases.
Decided long lead to some of our stuff. So I think it does give us a unique dynamic.
We're also looking at manufacturing Kirk petting his team and <unk> has done a great job at increasing our capacity at the plants and.
And so we can maybe do some manufacturing for some of our network partners and that'll help absorb some of our overhead today, which is very helpful and our product margins. As you know are very driven on an orb headed Georgia and and how many products, we can put through the quarter.
Yeah, Yeah, no that was kinda.
And you mentioned in Wintry you send back to you have a two a two part question on an entry.
I think both you and then it got a mention.
Some supply chain.
Guarding against 19 nations ethnic also build up for the the rent and feed it.
So have you go into <unk> into 2023.
Three in my hand, with I'll get those Suski may go up at that point in time should we see some cash flow possession, because I saw it and then people.
What will definitely we've already seen cash flow pressure because of inventory buildup.
This year, you've had kind of three three things happening at once we have the $5 million.
Settlement for the defective part, which we got the money last year, but we're spending the money. This year, so that's taking inventory too too.
Place that part of the field. So that's what's happening in this fiscal year and as I mentioned in my prepared remarks, we should finish that in this current third quarter that were in by December 31.
We obviously or building for new product sales, but then simultaneously building the rental fleet up.
We always need to make sure that we have more units built in the rental fleet than we have deployed to make sure that any short term rentals, we can handle not lose any business and so that's happening.
And then this COVID-19 supply chain issue is extremely challenging.
And it's everything from printed circuit boards electronics.
Controls batteries steel stainless steel copper wood, it's shipping costs are through the roof. There's.
There's not many things it is not impacting and so definitely we've had to get creative find second sources of supply go out in the open market and buy whatever materials, we can get our hands on so yeah definitely Kirk and his ops team have been scrambling to.
Grab whatever inventory, we can get you know regardless of inventory turns just to make sure we have it.
As we hit this we think is a fairly significant growth cycle of our business, we'd hate to not be able to fulfill those orders of those rentals because of supply chain issues.
I must have got it and then this one last one for me the <unk> that is targeting login customers.
Is it also targeting nausea.
Those are flooded with customers in terms of the size of the system sending food.
Just wanted to get.
Yeah, and also so that their task was selling to larger customers. We specifically are going after customers, who already have experience with the capstone technology.
So hospitals hotels industrial customers folks that maybe have done a project in one part of the world with one of our distributors. We're now trying to take that relationship to a higher level and see if we can't leverage a larger scale rollout.
We developed a kind of gold key account program specifically for customers. We think they can do at least four megawatts per year.
And multiyear rollout and so that kind of limits some of the folks were looking at.
So I think it's really targeting those folks trying to find the ones that are have set carbon reduction goals, who have ESG pressures.
I already have a capsule microturbine a good experience. So if we find the customer DHL is a great example.
And Indy car relationship we have as well they've got a project in New York, We'd love to help them and are talking about the other sites in North America, but it can be you know a lot of folks from Pepsi to Mohawk brand carpets it can be.
Any of the hotel chains, Mary odds I mean anybody who's Who's got capstone experience Who's got some good ideas as far as ESG and carbon reduction and then we want a flange up with them and help them across that go line. So I think it was for.
The size of the product bigger customers tend toward bigger products and projects, but that doesn't always have to be the case, we're going to help them nor do they want help Ah those another great example of another Indy car partner, we're talking to you about helping them make some of their carbon goals and so I think as we look at customers, we want to be there one stop shop for Green energy.
Microgrid based solutions, whether it's battery storage solar micro turbines Baker Hughes biogas whatever their requirements are we want to put the best solution in place and more importantly, we're not going to just sell a product or a project we want to be there long term partner, we want to put a 10 15 20 year FPP program around the project.
And maintain a close relationship to monitor the equipment to make sure that they get the carbon savings and financial statements are looking for.
Yeah, Yeah that makes sense.
Thanks, Thanks to anything at all.
No problem from here.
Once again, if you have a question or comment. Please indicate so by pressing star won the next question is coming from Sean Sanderson from Watertown Research. Your line is lives.
Hey, Hello, everyone.
Yeah, Yeah, Yeah, I was particularly intrigued about the the E. B win and you know, obviously I think everybody's aware that you're going to a bathroom.
[noise] utility problems with with the Penny if anybody getting close to what the expectations of growth E. B. So I I mean I I is this something that you can really pick up and run with or do you view. This isn't one off or <unk> would you be partnering with people to do this to come in for my Cup.
Charging company like charge coin or a parking garage and that's what I'm trying to understand how this could develop or ethic. If it will develop for you as a as a meaningful application.
Yeah, No I think definitely electric vehicle charging the scenario is seen as a growth area for us.
We play best in Th P. C CHP combined with electric vehicle charging or in remote locations, where there's not enough power and you've got demand. So parts of the infrastructure, where there's there's limited utility and you need additional utility to charge trucks, or you know big rigs or larger consumers.
I don't see us playing on a retail or a residential space, but definitely I think also with campuses you think of large customers, who got a large amount of employees. They want to charge was vehicles. That's a great application to put in a a vehicle charging station and then putting some battery storage some solar and then CHP system.
So definitely I think this is an area of expansion for us.
I think the market is going to change quite a bit if we hit some of the.
Pointed out some of the standards and requirements are gonna need because the local utilities and are not ready for the amount of electric vehicles that could be on the street.
But but for you, it's really going to need the CHP part of it right. So I just didn't campuses or industrial complex and do something like that.
That would be our sweet spot absolutely or remote applications yep.
And if we can run on hydrogen that's great or if we can set up a renewable source and create hydrogen in charge vehicles that that would be a neat solution, but definitely remote applications or biogas applications or campus settings are the perfect fit.
This next question on on rentals. If you were if you had to punch Crystal ball out there and say getting from the 21 50, right, which they just reasonable is it coming to look like the same mix and that and the next tranche here in terms of the size of the rental agreement since they run to go bigger would it be the same mix them costs.
Emergency any trends in terms of industry that would be more likely to conceal that pipeline through next year.
Yeah, I think as we look at it.
We're seeing bigger opportunities in the rental side that we didn't realize were out there.
So I think there's a very high likelihood we ended up with a Baker Hughes L. T five or a bigger machine in a rental fleet. There's some some interesting rental opportunities, especially in the Caribbean or certain parts of the world for larger power.
Or the another area, we've seen as rentals with a.
Purchase later or are they rent the machine for 18 months and put it in a permanent plant. So I think that's very interesting I think the the bitcoin in cannabis markets are still too new for us to really get our arms around how big an opportunity that can be I think the you know.
You know the kind of C&I in the more traditional oil and gas opportunities, we know what those look like a.
Definitely it's expanding it's evolving this is a business that we weren't in 18 months ago, two years ago and so to have.
Pipeline of over 130 megawatts for essentially what's a startup business for us that we're still kind of finding our way.
And we've definitely found you know issues and flat spots. So we need to address them to be more competitive in the market or treat customers better, but very very excited about where this can go and it really fits our product better.
We've got a better mouse trap and traditional internal combustion engines are lifecycle costs are superior to most anything on the market.
Our rental rates are much more competitive with with older Dirtier technologies and our product sales prices are so I think it's a very good growth area for us and obviously has huge.
Barging recurring revenue and cash flow impact for us.
Thank you Sir and my last my last question is around rentals and bigger picture I guess and Michael good deployment. So when you're talking about you know solar and storage and all the things that are wrapped around microgrid and you had been you know one of the power source is power generators, how does the rental.
Business fit into that does it fit into that other opportunities to supply other things in that context, I mean energy in the service in a broader context of somebody basically rent him I called bread.
You know some companies and and using the same principles behind what you're doing and rentals with that does that make any sense or is that just too much too big of a balance sheet strain and and not up your alley yet.
No definitely it's an area. We're looking at I think that a lot of our customers lease their properties and that becomes a hindrance for them and so if they don't own the property and they've only got X amount of years left on their lease so they're not sure, especially with the uncertainty of the world today 30 and stay in that facility.
Facility, but they do want to be green at a low cut their energy costs, it'll definitely looking at leasing them a system of renting the assistant makes a lot of sense and so I think we haven't rented battery storage solution, yet or or peavey solution, yet or complete microgrid, but there's a reason we couldn't and I think we're going to we will see that happen in the next year there will.
C. A customer that says look I need to reduce my carbon footprint and I'm in a high energy costs market, but I've only got a five year lease. So give me a five year rental on a on a micro good solution that meets my carbon reduction in my energy efficiency needs and I think that that is certainly going to happen. We're looking for the right partners for the for those products that are long term <unk>.
Alex that we can move around from customer to customer so I think that.
The more we get into energy to service the more flexible we can become.
But still stand behind our products I think that's what customers want that they want.
Kind of the.
One stop shop of Green energy and somebody who really cares about their business is going to be there at two o'clock in the morning, when they have an issue and.
And that will make sure. They have the right result of the right outcome of the product either rent or buy.
Great. Thanks Darren.
Q.
Okay. The next question is coming from Michael Hein from Noble capital markets, Michael and your line is life.
Hi, Thanks, I was gonna ask about the negative gross margins for the product division, but I think he might have kind of answered that in talking about overhead timing issues or inventory build so let me maybe rephrase. The question. This way when we get past some of the timing issues do you see that division is getting back to gross margins near the double D.
Digits or is should we really view this more as a division that's a low margin business up there to kind of help grow the other the parking service.
No when we were when.
Oil is $130 a barrel and we're cranking out two to three times the level of products a quarter, we're doing today.
We were seeing margins in the low to mid twenties.
It's never going to be 40, or 50% margin business, just because we're building a mercedes and selling it against the Chevy but.
But I think that's definitely we can see positive margins in the mid teens if not.
20%.
But definitely having that product enables our our spare parts are very profitable FPP program, and our rental fleet and so.
Having those products gives us the really does enables you said the second part of your question.
A higher margin parts of our business I think is.
Energy changes and becomes greener when the utility rates go up one internal combustion engines are limited in their ability to run continuously without huge amounts of after treatment or cost competitiveness will improve obviously caterpillar builds more megawatt engines in a day than I do in a year. So the fact that we're.
Competing against these huge scale companies.
Such small batch build is actually pretty impressive but.
But definitely I think.
20% to 25% margin is probably a reasonable expectation when we scaled business again.
Okay, and then Eric would you address the large rise ensure count quarter over quarter.
We didn't.
Use our at the market offering or do any offering during the quarter.
I don't think it went up.
Very much.
Yes, I'm looking at average numbers that were around 15 million versus 13 million.
And the June quarter, and my wrong on those.
I think we were around 15 in the June 12th.
Yeah.
We just didn't and and then maybe finally as we see the cash position goes a little bit lower what level are you start to get a little uncomfortable with your cash position.
Yeah, I think if you look at.
Cash flow for this fiscal year. The first two quarters were heavy cash usage, we plan that in our internal plan again, we got the $5 million last year for the settlements were spending it this year.
Building the rental fleet as a cash out in the beginning and then you'll get the cashback overtime are simple payback on a rental units is depending on the contract is about two years to the shortest in three years the longest.
The 20 plus year asset. So we expected this to be a fairly heavy castle year, obviously working capital with the supply chain issues.
Has been more challenging than we thought as I mentioned, Eric mentioned that.
[noise] has been sluggish because of Covid and.
Obviously Cobra just seems different things, depending where you are in the world, but a lot of our distributors are still fairly heavily impact if you're in India, if you're in Italy, if you're in Australia.
Columbia.
Even Mexico struggling so I think those are smaller shorter term issues I think Q3 will be better for me cash burn perspective in queue for and as we approach. The 21 megawatts, we should be moving into the EBITDA neutral range in cash would be even better in queue for so.
We're not overly concerned about cash going forward, because as we get profitable niebler positive and the rental units are throwing off a fair amount of cash every quarter, we're pretty confident that we're going to be okay for balance sheet perspective.
Okay. Thank you.
I'd now like to turn the call back to Darren Jameson for closing remarks.
Well thanks, guys.
A lot of good questions you kind of hit a lot of things I was gonna I was gonna talk about are closing remarks.
Guess, the simplest thing I would say is the business is performing.
As we have planned I'm very happy with the leadership team that we've assembled in the work we're doing.
Spike still some challenging environments with Covid and killed related supply chain issues still haven't met every one of our direct sales folks in person yet because the limitations on flights, but there should be getting better we're starting to see more customers here at the plant, we're starting to really get on airplanes and go see customers. I think what is interesting is there's a lot of great things we've done.
Over the last two to three quarters that haven't shown themselves yet in our results.
He was where the rental fleet is today a lot of the units are under contract and are still being commissioned are in process of being commission. So you haven't seen the impact on our on our revenue or our EBITDA. Obviously, we're building the rental fleets fairly substantially the next couple of quarters. So the rental revenue in margins are going to pick up you know.
Fairly significant in Q3 Q4 Q1.
A lot of the New network partners you haven't seen a press release on a battery storage project, yet or a large peavey project or a complete microgrid solution, yet and those are all coming.
I think that the Baker Hughes relationship is very strong they're very happy with our pipeline. We've developed we've got some very interesting projects that are coming down the pipe that we hope to have a baker Hughes when.
Give you an idea you know you start selling 12 60 megawatt turbines that could increase our revenue you know 10% year over year with one order right with all these revenue levels. So very excited expand that relationship excited to look at getting one of their products into a rental fleet as I mentioned.
You should see more biogas more hydrogen projects, increasing every quarter and those are areas of strength tourists dawn in our engineering team are doing a great job with getting us prepared for the 30% hydrogen I'm highly confident will be there by March 31st and then we'll have to discuss at the board level. How fast you want developed a 100% hydrogen product, which would really be driven by.
Market factors and frankly, the price of hydrogen as the government spend money to reduce the price of hydrogen that's very important.
We're hearing big numbers.
Looked like will be poured into the U S D O to.
To help reduce hydrogen and hydrogen projects hydrogen blending so that's very interesting.
Haven't seen really any impact of the new administration in the U S. A limited impact on Europe's build back Green program, but I think we're going to see those coming up obviously the.
The framework that Biden is looking to do is build back better has got a lot of stuff that would be very positive for capstone and for our customers and our distributors.
And so I think positive EBITDA is on the horizon, we're very excited to get back there have been there three times, what we want to be there every quarter quarter on quarter out I think that'll be a different result for us and for our shareholders.
And again seemed to build back better program go into place all the Green energy focus worldwide, we think his game changing.
Then the M&A side I think there are some interesting things, we can do to build out our portfolio solutions.
We're just getting started with Jeff and his team to really look at the the right opportunities and so for me. There's a lot of hard work, we're doing right now that we've unfortunately can't see yet in our results, but we will see shortly and I'm very excited to see that if you look at the form for us the last window that opened I bought more stark than I've ever bought in 15 years so that.
Those you how excited I am to to add to my personal position of capstone chairs because I see the future is extraordinarily bright not only for capstone, but for anybody in the green energy space energy efficiency energy resiliency.
That is the where the world is going and we're excited to be part of it.
With that I'll go ahead, and close the call and look forward to talking to everybody in our third quarter. Thank you.
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.
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