Q2 2023 Capstone Green Energy Corp Earnings Call
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 of fiscal year 2022 ended on September 30th.
22, all lines have been placed in a listen only mode and there will be a question and answer session. Following the presentation.
Today's program will be recorded at this time, it's my pleasure to turn the floor over to Mr. Don <unk>, Vice President of technology, Sir the floor is yours.
Thank you very much.
Good afternoon, and thank you for joining today's fiscal 2023 second quarter conference call on.
On the call with me today are Darren Jamison, Capstone Green Energy's, President and Chief Executive Officer, and Scott Robinson interim Chief Financial Officer.
Today Capstone Green energy issued its earnings release and filed its quarterly 10-Q report with the security and Exchange Commission for its fiscal 2023 second quarter ended September 32022.
We will be referring to slides that can be found on our website under the investor Relations section during the call today.
This conference call contains estimates and forward looking statements representing the company's views as of today November 14th 2022.
Capstone disclaims any obligations to update or revise these statements to reflect future events or circumstances, you should not place undue reliance on these forward looking statements because they involve known and unknown risks uncertainties and other factors that are in some cases beyond our control.
Please refer to the safe Harbor provisions set forth on slide two in today's earnings release and in Capstone 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 Scott go through the discussion today when they mentioned EBITDA. They are referring to adjusted EBITDA and 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 Donna and good afternoon, everyone. Thank you for joining today for a review of our second quarter of fiscal 2023 results ending September 32022.
If you turn to slide three I'd like to run through today's agenda.
We will start with the quarters financial highlights and then review our positive EBITDA plan, followed by an overview of our energy as a service or Eas business I would like to then provide a brief overview of our financial results and a review of the company.
And then the recent U S policy changes, including the inflation reduction Act, our IRI Act and then conclude with a business summary.
We will then be open to take questions from our analysts.
Let's go ahead and jump to slide five.
Slide five shows revenues of $20 8 million for the quarter, an increase of 11% sequentially from $18 7 million in the first quarter and up 21% from the second quarter and the year ago quarter.
I remain extremely encouraged by our team's ability to grow revenue in a tough macro and supply chain backdrop revenues for the first half of fiscal 2023 totaled $39 4 million up 18% from $33 3 million for the first half of fiscal 2022.
This revenue growth is being led by our energy as a service growth strategy.
However, gross margins for the quarter fell to 11% compared to 25% in the first quarter due to increased supply chain costs, specifically related to the C 1000, enclosures and the need to source alternative recuperated materials to meet customer delivery requirements during the quarter.
Our net loss was $4 9 million, an 18% improvement from a net loss of $6 million last year sequentially. The net loss increased from $2 1 million in the first quarter, which was impacted by approximately $1 6 million of additional supply chain expenses quarter to quarter.
Adjusted EBITDA improved 19% to negative $2 2 million from negative $2 7 million versus last year, but sequentially again was down for a positive 400000 in the first quarter.
Again this is due to the approximately $1 6 million of additional supply chain expenses freight and expediting charges.
On a first half basis, though EBITDA improved 66% to negative $1 7 million for the first half of fiscal 'twenty three compared to negative $5 million last year. The improvement was driven by growth in the high margin energy as a service or Eas business offset by increased supply chain costs freight and expediting.
Carter's has discussed lastly, and perhaps most importantly, the total energy to service long term rental fleet under contract on September 32022 was approximately 34 megawatts versus $12 seven megawatts on September 32021. This represents a 168% growth year over.
Year.
Today, the Eas long term rental fleet under contract is approximately 39 megawatts and as a reminder, as we've been saying for several quarters. Our goal is to get to 50 megawatts under contract by March 31 2023.
Let's continue on slide six.
You can see the Eas rental revenue was $1 8 million for the second quarter up $1 2 million or 200% from $6 million or 600000, a year ago. Also importantly, bts rental gross margin was extremely strong during the quarter at 72%.
Gross new product bookings for the second quarter were solid at $15 4 million up from $12 4 million sequentially and product book to Bill ratio improved to one six to one.
Ending product backlog at September 32022 was $28 9 million up $4 1 million or 16, 5% from $24 8 million in the June quarter.
Also extremely important is cash total cash as of September 32022 was $23 8 million up from $16 9 million as of June 30, due primarily to net proceeds of $7 3 million from the Lake Street public offering on August 23, 2022, this was offset by working capital.
Needs to manufacture new rental assets for the quarter.
As a result net cash provided by operating activities was positive 900000 compared to a loss of $3 4 million in the June quarter.
As I mentioned earlier the supply chain has presented some challenging headwinds this quarter to mitigate this we are implementing a new price increase for all of our products spare parts and factory protection plan or FPP service contracts that price increase will go into effect January 32023.
Let's move to slide eight.
I want to review our fiscal year 2023 positive adjusted EBITDA plan we.
We have outlined four key pillars in our strategy and have fully executed on three of them with significant progress in the fourth.
The first pillar was to reduce operating expenses by $4 3 million for the full fiscal year led by restructuring the business around our energy as a service model.
This was spread across the board from reductions to executive personnel Board of directors moving assets to our distribution partners and active Labor Force management.
The second pillar was a price increase as we need to keep pace with inflation effective may one we did a price increase in the range of 7% to 10%. We also increase existing FPP contracts by 5% for CPI increase and the pricing on new FPP contracts has also increased by 5% as well as spare parts to offset the inflation factors in to focus.
On the slot supply chain integrity.
So noted earlier, we are implementing a second round of price.
Price increases in January 23.
Third pillar was the increase of the distributor DSS DSS fee from 3% to 5%, which is an annual fee we charge our global distributors for training marketing branding customer acquisition and Tradeshows.
In the fourth and last pillar is the more significant strategy change to include additional energy as a service business and our business mix. The number show progress from seven megawatts under contract to 39 megawatts under contract today, well on our way to our target of 50 megawatts by March.
Twin <unk> turn to slide nine.
Slide nine shows the details of our adjusted EBITDA first half.
Through the second quarter of fiscal 'twenty three versus the first half of fiscal 'twenty to showing our improvements and negative $5 million last year to negative $1 $7 million this year in adjusted EBITDA.
And it shows the components from which we expect will lead us to successfully achieving our 2003 goal of positive adjusted EBITDA for the full year.
Next I'll provide you with an EAA is update I'm sure you've seen slide 11 before in previous presentations, but it's worth reviewing again as it is the cornerstone to our positive EBITDA strategy.
As the economics, it heavily favor the EAM business versus traditional product sales for our type of technology.
In case, one on the left of the graph as a traditional product sales model, which had been the.
<unk> way of doing things for many years, the middle Bar show, what that model looks like with our capstone long term service offering or FPP, which was our first strong move to drive long term predictable income and cash flow and the last third set of bars to the far right of this slide illustrates what the model can do and how powerful it is and can be.
For us for the same C 1000 unit, we can generate $1 8 million of revenues at a 60% gross margin over five years and this compares to a product sale with spare parts for five years at $1 million or 20%.
Let's move to slide 12.
Slide 12 sets out the growth picture for US on March 2021, we had seven megawatts under contract in our rental fleet and as of October 31, 22, we had 39 megawatts under contract in our rental fleet. We believe we are well on our way on track to reach our 50 megawatt goal by the end of March 2023.
It is important to note that supply chain constraints are working capital limitations require the 15 megawatts of the rentals to date have been re rented equipment, which does negatively impact our margins, but we had to do this to meet customer demand to the extent, we can achieve some more working capital improvements and supply chain relief. Our goal is to return to shipping primarily new units for rental.
And an even higher margin rates I'll now turn the call over to Scott our CFO to go through some of the specific financial results Scott. Thank you Darren and good afternoon, everyone.
I will now review in more detail our financial results for the second quarter of fiscal 2023.
Moving to slide 14, you can see our Q2 'twenty three results compared to Q1 'twenty three.
Financial results for the second quarter of fiscal 'twenty, three had revenue of $20 8 million compared to $18 7 million in the first quarter of fiscal 'twenty three.
Product and accessory revenues were $10 6 million up from $9 2 million in the first quarter of fiscal 'twenty three.
Parts service and rental revenue, which includes rentals FPP long term service contracts and distributor support subscription fees were $10 2 million up from $9 5 million in the first quarter of fiscal 2003.
Primarily due to an increase in our rental revenue.
Gross margin as a percentage of revenue was 11% in Q2 'twenty three down from 25% in Q1, 'twenty three primarily due to the aforementioned supply chain challenges.
Total operating expenses increased slightly to $5 7 million from $5 4 million in the previous quarter.
Net loss was $4 9 million for the quarter compared to a net loss of $2 1 million in the first quarter of fiscal 'twenty three.
Adjusted EBITDA was a negative $2 2 million compared to adjusted EBITDA of a positive 400000 in the first quarter of fiscal 'twenty three.
Turning to slide 15, you will see the financial results for the second quarter of the fiscal year 'twenty three compared to the prior year period, which had revenue at $20 8 million compared to $17 2 million in the second quarter of fiscal 'twenty.
This was driven by higher product sales activity across all product lines.
Product and accessory revenue was $10 6 million up from $8 5 million last year.
While parts service and rental revenue was $10 2 million up from $8 7 million in the same period last year.
Gross margin as a percentage of revenue was 11% down from 16% in the year ago period.
Primarily due to the previously cited supply chain issues, which were partially offset by selling price increases from earlier in the year.
Total operating expenses decreased to $5 7 million from $7 4 million in the year ago period benefiting from cost reduction activities.
Net loss was $4 9 million for the three months ended September 30.
Compared to a net loss of $6 million in the prior year period.
Adjusted EBITDA was a loss of $2 2 million compared to adjusted EBITDA of a negative $2 7 million in the prior year period.
Slide 16, so year to date in fiscal year 'twenty three versus year to date fiscal year 2018 financial result.
Top line revenue has increased from $33 3 million to $39 4 million due to growth in all product lines.
And selling price increases.
Gross margin has increased from 16% to 17% due to contributions from the energy as a service product line offset by the direct material price increases previously mentioned.
Operating expenses reduced from $13 6 million to $11 1 million due to cost reduction activities.
And adjusted EBITDA improved from a $5 million loss to a $1 7 million lives.
Turning to slide 17, you will see selected balance sheet and cash flow items.
Cash increased significantly to $23 8 million from $16 9 million at June 32022, driven primarily by the recent capital raise.
Cash provided in operating activities in the September quarter was approximately 900000 compared to a negative $3 $4 million in the June quarter.
The variation was largely due to improved accounts receivable collections.
Accounts receivable declined nearly $6 million to $16 3 million has our DSO dropped from 123 days to 85 days during the quarter.
Total inventory levels increased by $3 5 million due to the previously mentioned price increases from vendors and due to the necessity to purchase inventory in advance of forecasted demand due to continued shortages and other supply chain challenges.
Despite the increase in inventory values inventory turns improved from two nine times to three four times.
In addition, we do need more inventory as we ramp up production of both new products and focus on growing the rental rental fleet to 50 megawatts by March 31 23.
I will turn it back over to you Darren.
Thank you Scott.
Part of our quarterly update I'd like to take a few minutes to remind investors of our overall strategy and how we are working to achieve our profitability goals.
Let's go to slide 19 to set out those goals.
First is the direct sales force, we continue to adjust our direct sales force to maximize our EAA is rental growth and the sale of our new network partner products as a direct salesforce continues to grow and mature I anticipate a couple more quarters until we reach our desired efficiency and output with his team.
Next is our distributor partner network now that the worldwide impact of COVID-19 are beginning to subside and relax we are pushing hard our global distributors to add additional sales resources drive EAA is rental growth and continue to increase the attachment rate of our industry, leading FPP service contract business.
Next is to grow the mix of our Eas in our business. We have been focused on this transformation for quite a while we'll continue to do so it is key to our profitability, it's key to our growth and it will drive higher valuation of our business. The near term goal for the rental fleet. It's 50 megawatts, but we are only limited by our balance sheet and the ability to get <unk>.
Capital regarding how fast we can grow this business.
Next we need to be flexible and diversify our energy products and service offerings to provide custom solutions to our customers. We operate in a dynamic market and with a wide range of solutions and we are expanding our business to ensure that we can be flexible and be a problem solver for our customers, that's being telling customers of energy efficiency resiliency.
Carbon reduction and integrating multiple clean energy products into smart micro grids.
We also need to increase the aftermarket margins and escalate parts availability to drive customer satisfaction and repeat orders we need to continue the growth of our powertrain manufacturing program in the U S and our recently upgraded facility in the UK remanufactured parts are not only good for the environment, but they are also typically 40% less.
Expensive in a new part.
We continue looking for additional ways to manufacture parts of drive margins and make more parts available to our customers in this somewhat challenging supply chain environment.
Next we are focusing on managing working capital and inventory turns as Scott mentioned, our DSO dropped in the quarter to 85 days, which is excellent, but we still have several million dollars of past due receivables we need to collect our target is to reduce DSO back to approximately 65 days, which is where it was pre COVID-19 reducing.
Reducing our DSO and tight inventory management would free up additional cash from our balance sheet to build more high margin rental units.
Lastly is the growth of the distributor support system or DSS program. The subscription program is to drive marketing and customer acquisition efforts. We have increased the distributor support system annual fee from 3% to 5% this year, which affords us more dollars for marketing dollars for branding customer acquisition efforts as we look to grow both the eas.
As well as our traditional product business.
Now, let's turn to slide 20.
Slide 20 shows the markets we operate in I put this slide in as I want to remind our investors of how our solutions are being used across several industries and several applications I won't go through each detail, but I do want to highlight renewable energy smart micro grids EV charging as our next.
Potential growth markets on top of our traditional energy efficiency in oil and gas markets as the push towards electrification in the move to lower carbon world. These new markets should continue to grow for capstone.
Moving on to slide 21.
Slide 21, I have set out an example of the smart micro grid micro grids are seeing unprecedented growth as the broader trend towards distributed energy resources or <unk> takes hold and are beginning a critical part of the becomes a critical part of the global energy infrastructure going forward. As you can see we can provide a complete microgrid energy system to a customer through.
Capstone and our network partners. This is important as we want to make customers our partners and we want to help develop their short term and long term energy needs. We can do this by adding a new dimension to how we can sell and engage with their end use customers.
A cornerstone of the proliferation of <unk> will be the electricity demand created by the EV industry.
If you move on to slide 22.
Slide 20 shows the forecast for the global EV infrastructure revenues. This will create substantial demand for <unk> and smart micro grids, and we will be there to leverage this demand. In fact, we are seeing demand today, both in the U S and Europe for EV charging solutions and we are currently working on a portable EV charging solution for the largest industrial.
Real estate company in the World.
Slide 24 summarizes key elements of the infrastructure investment and jobs Act, which touches on several of our applications as you tie them together from the previous slides micro grids EV charging renewables and critical power supply should all be bolstered by this bill providing tailwind for our solutions and our business.
Moving on to slide 25.
But 25 is the inflation reduction act.
This should be a significant tailwind for us as it expected to raise 739 billion of which 369 billion would be dedicated to climate and energy programs. The most significant impact for US is related to tax credits section 45 production tax credit and section 48 investment tax credit you can see the details on this slide.
Simplest form.
In conclusion, I would like to spend a couple of minutes reviewing our business and what I believe are the key factors to focus on as an investor, Let's turn to slide 27.
Slide 27 shows what we believe are the key catalysts impacting our business today.
First are the new U S policy that I just reviewed with you. These are significant and can be meaningful to enhance our economics of our products and can be truly transfer transformational, especially for our U S businesses U S customers. The second is to create a larger total addressable market. This is done by adding technology to our platform, including storage to a micro grid.
Solutions for customers. This would increase our revenue per project and allow us to be true partners with our end use customers.
Third is our growing Eas strategy. This is important on many levels as a critical tool to reaching profitability and consistent profitable and cash flow.
Fourth as part of our strategy is our rental business, which is growing and has become the cornerstone of the free cash flow and margins theyre extremely accretive and attractive for us.
This is the development of our direct sales team. This is strategic as it enables us to target larger customers and more importantly, larger customer rollouts.
Six is the recent seven 3 million net equity offering with Lake Street. This strengthens the balance sheet and reduces customers' perception of risk of doing business with capstone and buying and renting our products.
Lastly is leveraging our network partners and by leveraging our partners I mean, working with them to jointly develop projects and coordinating our various business development efforts for maximum success in the marketplace.
Now with that I'd like to open the call up for questions from our analysts operator.
Thank you ladies and gentlemen, if you have a question or comment. Please press star one on your Touchtone phone at this time pressing star two were removed from the queue should your question to be answered and lastly, while posing your question. Please pickup your handset listening on speaker phone to provide optimum sound quality. Please hold while we poll for questions.
First question is coming from Sameer Joshi with each.
Your line is live.
Hey, good afternoon, guys. Thanks for taking my question.
The price increases.
Eight 7% that got implemented in Mi.
Can you remind us how.
Customers.
Received that and.
In that context, what is the expected close in age of a range of price increases in the January .
Your vision.
But what do you expect how long do you expect customers to react to that.
Yes, no great quick question Sameer I think the first price increase we did back in May was actually very well received I think.
Everybody is reading the newspapers and online and seeing the 8% inflation theyre feeling at the grocery store and at the gas pump and so I don't think it was a big surprise to folks.
We've seen about a 4% increase from March to now across the board just in all of our commodities that we purchase.
From 130 vendors worldwide. So definitely inflation is real I think people were anticipating something like that.
The price increase we put in place.
Last week, we just announced the new price increase.
I think distributors are being.
Understanding obviously doing two price increases in less than 12 months is not optimal.
But the new IRS Act will substantially improve the economics of our projects here in the U S and so we did our price increase in two phases, we Didnt International version in the U S version and so the U S version was as high as 10% and the International version was a little more subdued in the 4% to 5% range and so I think we tried to make the the price increase targeted to the customer.
Where the economics would still support the price, but we do need to offset the higher cost of our materials.
The two major components, we had the C 1000 enclosures and the recuperated mature we had to buy those are kind of one time anomalies, we've already got the enclosure price back down to more reasonable levels. We saw some work to do but that was really a result of changing vendors.
Midstream and so the new vendor at higher costs as they came online to manufacture the products. So.
We're already going to see in Q3, lower and closer prices and hopefully Q4 will see another drop the.
Recuperated material, we had to buy was really an issue of customer demand versus ability to get material. As you can see our book to Bill is one six to one our revenues up year over year quarter over quarter, and so we're seeing higher demands for our products plus we're trying to build the rental fleet simultaneously. So we're pulling on the supply chain harder than we have in years.
And the supply chain is global challenges and so we had to buy some more expensive material than our traditional HR, one 'twenty material, we buy from Haynes.
So that was a onetime purchase to fill the gap and make sure we still met the customers' demands for the quarter is.
Challenging as the supply chain is we still haven't Mister customer delivery, yet and Thats, our goal to keep that trend going and keep growing the business. Despite the global supply chain issues.
Yeah, No it's certainly things.
It comes across from the commentary that.
Good interest.
Customers and continued interest from customers.
That's good to see.
Just a question on.
The.
The.
Martin.
Just 39 megawatts I think around 15 megawatts.
Yeah.
One of the more recent five megawatts.
Okay.
Jump from 34 megawatts.
Yes, so we're.
Fairly dynamic.
As we have over 100 megawatts quoted I.
I think were close about 130 megawatts right now pending and so I'm trying to close another 11 megawatts by March out of 130 megawatt pipeline.
It shouldnt be that challenging it's just a matter of figuring out, which 11 megawatts are going to close and which customers configurations models and.
Timing and so base.
Based on parts availability and re rent ability we decide how.
How much is going to be new versus re rent. We're also looking at buying used units older. We call them, our packages, which is the older version before our current version and then upgrading those packages to our more current signature series and so it's definitely a mix and I would say, it's definitely fluid, but our goal is to build as many new units as we possibly can but still man.
Our cash as you saw we had a really good receivables quarter.
Dropped our DSO from 123 days to 85 days.
Elevated from where we want to be so how much we can build new will depend on how much cash we get out of our balance sheet I was very happy with the 900000.
Positive cash from operations for the quarter that was well timed as we continue to build the energy service rental fleet generating cash from operations is very helpful. And if you look at our cash balance for the quarter essentially we've kept all the money that we raised during the quarter through the equity raise so that was also beneficial.
Yeah.
Thanks for that color last.
Last one from me.
Yeah.
Give a little bit more in cycle the gains on the portable EV charging solutions that youre working on.
Yes.
What is the scale of that.
Multiple charges at the location.
Yes, no that's great. That's a great question Sameer. So it is a 200 kilowatt portable EV fast charging station and so its trailer mounted and so the ability to move from place to place to to do vehicle charging in.
Supercharger.
I think we're going to we've seen other stationary opportunities for EV charging both in the U S and in Europe .
So I think Thats a market, we see is definitely a growth area for us and as I mentioned in my prepared remarks, it's one of the largest.
Companies in the.
Sector. That's doing this so definitely we're playing with the right kind of folks.
But a huge opportunity and I think if you'd look at.
Electrification of both vehicles and buildings.
Mounts of energy Thats going to need to be produced is going to far outstrip with the grid can do in fact as you all know here in California about a month ago, we announced.
It will be illegal to sell internal combustion engine vehicles in 2035. The next day, we had flex alerts being tested everybody in southern California, saying don't charge your car so.
I think that just graphically highlights the challenge you're going to have from the infrastructure and the grids as more and more vehicles more of our buildings get electrified youre going to need more power generation charging solutions and so Fortunately there is abundance of natural gas in the U S and other fuels like renewable fuels and biogas.
Or even hydrogen where capstone machine to be put in place to support that infrastructure and quickly scale, both vehicle charging and building electrification.
Yes that looks like.
Right.
Good point.
All sectors.
That will be a future growth opportunity this being one of them good luck on that.
Thanks for taking my questions. Thank.
Thank you Samir.
Okay up next we have Rob Brown with Lake Street Capital. Please proceed.
Good afternoon.
Bob.
Nice progress in getting the rental fleet built out I guess 50 megawatt.
What's sort of the revenue level that you can generate there and.
How does the margins looking at that at that point in time.
Yes.
Target margins I'll take that first is 60% you saw for the quarter, We announced we're at 72% of that is obviously got re rents in the mix.
We think as we add more re rents and as the fleet ages, 60% is a reasonable number but we have been running above that since inception of the rental fleet, but again as we as the mix changes between re rents or remanufactured product versus a 100% new and as the fleet ages, a little bit we should see 60% is a reasonable expectation, but still.
Much better than anything else, we have than we have in our business.
I'd say on the expectations on revenue growth I would expect a half million dollars kind of growth per quarter, each quarter, as we kind of move up towards that 50 megawatts.
Is that what it looks like internally for US right now and so we will continue to report those numbers are the most important thing is at 50 megawatts, we should be throwing off positive EBITDA every quarter quarter on quarter out and positive cash flow from ops. So.
That's really kind of the golden ticket for us is to be.
EBITDA positive cash flow positive quarter in quarter out and the only question is how much product we can sell on top of that so.
As I look at the quarter.
Lots of highlights, but I think to your point growing that rental fleet is the most strategic and important part of our business and everything else is a little bit secondary right now for us.
Okay. Okay, great. Thank you for that color and then the margins I think you said much of the margin hit in the quarter was one time.
How do you see the margins recovering throughout the year and I guess.
Are those issues take a little time to play through or does that snap back pretty quickly yes. It should.
Snap back fairly quickly I think.
I don't see it as a 25% margin again in this current quarter. We're in I think it will probably be Q4 before we get back to the Q1 levels. So.
So I think youre going to see some bleed into Q3.
The good news is it's.
The vast majority of that supply chain hit an increase was in two parts.
So it's very easy for the team and myself to jump on it and remediate it as I said being closer to manufacturer the new and closer manufacturers already lowered their price substantially and we've got some more work to do there, but we'll be much better and then the additional material we had to buy because of.
Lead times in growth in the business was a onetime purchase and so we'll see some more costs for that material. This quarter, but then by Q4 it'll be gone.
So I think Q3 will be better than Q2, but probably not as good as Q1, and Q4 should be back to kind of Q1 levels and obviously the more rental units, we can build into more rental units that are 100% new.
And those margins will even go beyond the 25% we saw in Q1 as we continue to grow that business.
Okay, Great and then and then on the demand environment, it's quite strong right now and I presume you have not seen much from the IRA yet, but how do you think about the IRA impact.
Helping demand and the timing when.
When you should start to see that yes, no gets a really good question. The IRA Bill should improve our paybacks are close to two years in the U S for CHP projects and so if you had a six year payback projects that should be closer to four year payback or five would be three.
We see that as a dramatic shift in transformational for the economics of our machines and the biggest incentive we've ever had in the <unk>.
History of the company.
So for U S. CHP projects, we should see substantial growth.
We've analyzed it looks like it's truly it's a two year improvement we should see close rates go from roughly 13% in the U S about 20% in the U S.
And so that would be.
40% to $50 million of improved business results on an annual basis. So it's significant.
It is U S only at as CHP, its not oil and gas that we are seeing an uptick in the oil and gas business in the U S as well so.
So we're very bullish on what next year would look like from a product revenue U S standpoint from a timing perspective, typically our projects can be anywhere from six months to 14 15 months from quote to close.
So this definitely will be a next year phenomenon.
But again book to Bill was one six to one this quarter are.
Our product backlog is already up quarter over quarter year over year. So I think that's just going to give us more tailwind for next year I think as I look at demand environment. The U S and still be very strong next year across the board.
Both rental than products Europe is struggling obviously the groundwater in Ukraine is kind of royall the energy markets.
Seen renewable projects, continuing but a lot of CHP projects had been hampered because of the spark spread issues in natural gas issues over there.
Doing good Australia is doing good Latin America is starting to pick up Mexico's is pretty sound.
So the biggest issues we have right now is definitely Europe in the <unk>.
Long dollar doesn't help either.
But in general I'd say most of our markets, we're seeing strong demand and we're looking for continued growth year over year.
Okay. Thank you I'll turn it over.
Yes.
Thanks, Rob.
Up next we have Shawn Severson with Watertown Research. Please proceed.
Hi, Hello, everyone.
Karen I'm curious, how a higher rate environment affects the eas business, because obviously, it's a return rate of return business right. So as we get into this environment, but it wants to predict how long interest rates are going to stay high but just curious how does this.
Impact and how do you manage through the economics of that business as rates change like this.
Yes, no definitely I think as the energy as a service business grows our biggest factor is going to be cost of capital and so.
We can generate our own capital that's great. If we you have to go out for capital and the capital is more expensive because of the interest rate environment, that's going to be more impactful, but I think the good news is when you're looking at a business with over 30% IRR and over 60% margins you can withstand a little bit of rate increase.
But that being said I think a lot of folks know, we've got a $50 million note with Goldman Sachs that expires.
A year from October So next October .
We've hired Greenhill <unk> company to go out and refinance that note for us.
That note was at LIBOR, plus eight three quarters, which seemed expensive a year ago now it doesn't seem quite so expensive.
I think that will be very important in the next quarter or two as we refinance and know what that.
Cost of capital is going to look like and then the ability to get additional debt on top of that.
So that's something we're keenly focused on and not just refinancing Goldman but what that cost of capital is going to be as we kind of grow that relationship.
Thanks for that my next question is on the direct sales effort.
When you approach the larger customers, obviously being a goal to get a big international rollout national Rollouts and large customers.
Are you approaching them with that.
Our strategy with energy as a service products I assume everything, but I'm trying to understand where is their appetite do you think coming in on what we should expect so you make a big announcement with a hotel chain. For example would we expect to see that as as product and equipment rollouts or when do you expect to see that in the Eas rap.
Yes, that's great question, Shawn So obviously we offer.
<unk> suite of products and services and solutions to the customers.
Our goal is accustomed tailor a solution that meets their needs most of our bigger customers, obviously have access to capital and so the energy service business may not make as much sense for them.
Standpoint.
That being said, we are working with the hotel chain in the Caribbean, which we've done our first megawatt.
<unk> energy service agreement with and working on several more so it just depends I think for a very large customer like a.
Marriott that may be one answer if it's a smaller regional hotel with 30 properties throughout the Caribbean and Mexico that may be a more of an energy as a service play.
So it really depends on what the customers looking for.
But our goal is to really go in and say look we can be a one stop shop solution provider.
Whatever we sell you the products will rapid and a 20 year factory protection plan will guarantee lifecycle costs will be your partner and be really married to you for 20 years and the performance of your fleet.
Or if you want to add energy as a service solution, we can do that as well.
So I think flexibility is key and I think markets change obviously, the hospitality industry was really damaged during COVID-19 and so theyre very limited with capital spend.
Some other industrial customers are the same hospitals, obviously, you had a lot on their plate during COVID-19, but other customers did better during COVID-19 and have plenty of capital dollars are spend so.
We want to be flexible and more importantly, we want to make sure that we tailor a solution that meets their needs and makes them realize this is the only business. We're in we don't make the nine earth moving equipment.
We're not in the other products, we are an energy as a service had distributed generation micro grids and we're here to give you a great product and stand behind it.
And my last question is the plan to get from 39 to 50, what do you need.
Is there going to be a mix in there of reruns.
Again too in order to fulfill the demand and then lastly, as part of that how much cash can you get out of those targeted receivables that you still have.
Yes, no you heard Scott numbers, and how we brought down the AUR for the quarter and generated cash from operations. So that was great. We still have probably another $4 million to $5 million, we can get out of the receivables just to get to about 65 days, which would build almost half of what we need to build for the <unk>.
To 50 megawatts inventories.
Inventories are up as Scott mentioned.
Some of that is just the price increase we got from those two vendors some of it is.
Obviously and to Cytori purchasing to keep drilling products and rental at the same time, but inventory turns or over three which is good but we have been over five before so I think if we can really focus on inventory turns going into next year that will free up another three or $4 million of cash. So I think all of that is is helpful. But I think the number of re rents we do well.
Really be driven more by availability.
As we're trying to grow both the product side and the rental side.
It's pulling on supply chain harder than we have in the past and so the availability of components may drive more more re rents, but I think it's important to say that each re rent we do with the exception I think of one.
Got a purchase option after three years and so even if we re rent the product for for three years. We can then buy it at the and put it on our balance sheet and see those kind of margins we get from from new equipment also as we bring back re rent equipment or used equipment.
Refurbishing it putting it to like new type conditions.
So the customer sees virtually a new machine, whether it's a re rent or a used piece of equipment that we purchased and refurbished or built new so from a customer perspective, they're getting a great result, regardless of what the product is.
<unk> strategy is one and I know that confuses people a little bit but the reality is as we grow this rental business. We don't know how many contracts were going to get win.
So when you've got parts that are a year lead time, when you're trying to grow both the product business and the rental business.
Got to build in some flexibility in the re rents have allowed us to do that and in some cases these are projects where the.
The project was canceled because of COVID-19 or equipment, maybe was older than the.
The business changed with the customer they don't have a need for it anymore. So theres actually.
We are a silver lining to getting some of these products out of the market and put back into revenue generation and creating value for us and our customers.
Great. Thanks, I'll get back in the queue.
Thanks, Sean.
Okay, we have new further questions in queue I'd like to turn the floor back to Darren Jamison for any closing remarks.
Well I had some really great closing remarks, but the questions were really excellent and really touched on most of them I guess, what I'll say is.
As I look at the quarter I'm, obviously very critical of our performance.
High standards for myself and the team.
Disappointed with the gross margins for the quarter down from 25% in Q1, which has been our target.
But really it was to vendors and tube issues that we see as short term and can be mitigated.
Global supply chain challenges are real and are facing those but I think our team is doing a good job to work through those.
Really confident we will see margin improvement back in Q3, and hopefully get back to our target levels in Q4 and beyond.
Inventory is up a little bit, but I think that's also understandable with some of the price increases we saw as well as needing to build both the rental units and products.
If I look at the rest of the quarter revenues up quarter over quarter and year over year Opex is down quarter over quarter year over year, we're seeing adjusted EBITDA improved year over year, we're seeing.
The growth in the Eas business as well as the rental business hitting that 50 megawatts I think we're very well positioned to 30 39 megawatts today and a lot of pending orders very happy with the gross product bookings of one six to one book to bill on top of a growth quarter.
Product backlog being up $4 1 million as great cash cash is important, especially when you're trying to grow this energy services business, which is a capital intensive business. So.
Keeping all the money that we did for the quarter that we had during the equity raise.
$900000 from operations and positive you know it was a big improvement quarter over quarter.
We're seeing.
The DSO come down from <unk> hundred 23 days to 85, if you go back a quarter was 150 days and so we've got we've gone from 150 days 123 days to 85 days and if you can get back to 65 days that will free up more cash to build more rental units and that's where we really want to be.
I can't overstate, how transformational the new U S government incentives are going to be the tax incentives, especially that are a bill should be a very big improvement to our business next year and we're very excited about that and what that does for our customers and the viability of our product and profitability will drive for our customers.
I think DSS, increasing that feed from 3% to 5% is always not always.
Thrilled by our distributors.
But it really allows us to get back to doing trade shows <unk> events really getting aggressive to get customer acquisition. We just finished at a pack in Abu Dhabi had a great booth, there and really great show traffic.
Got MJ Biz Con, which is Canada show in Vegas. This week as well so we're back to doing heavy marketing heavy branding.
You know tradeshows and media events and so that's obviously good timing as we come out of Covid and sort of continuing to grow the business.
Couldn't be happier with the job of Greenhill and company is doing for us.
We looked at 12 different investment banks, Scott and I did the interview to see who can refinance Goldman for us.
And they definitely came out on top and have not disappointed and so look forward to them launching shortly and see what kind of.
Pricing, we can get for some additional debt and refinance at Goldman note, that's up a little under a year continue.
Continue to work Don and his team on hydrogen development, where 30% commercial hydrogen today heading to a 100% theres going be a lot of money that's going to come through the department of energy and other government resources for hydrogen development in hydrogen hubs.
We will make sure we're part of that as well. So that's also very exciting.
[noise] be heading over to R. R.
UK facility here with <unk>.
Tracy and Jan and team here shortly and see the great work they've done in the last year the U K hub.
Building Remanufacturing capacity doesn't sound very exciting, but 40% cheaper components is exciting.
And more of them as exciting and so as we bring that hub online and it gets more.
Ability to be more of a full service organization and those folks have done an amazing job and look forward to seeing them again.
And then really just next couple a couple of quarters, we're refocusing on strength strengthening our supply chain supply chain integrity.
Mitigating cost increases and more importantly make sure we can get the parts, we need to to keep our customers happy and not miss any deliveries and so we want to keep growing the business keep growing the rental fleet.
Despite the global supply chain challenges that every manufacturer in the world facing and so.
Overall balanced deal a very good quarter, especially coming out of Q1, which was an excellent quarter, we want to keep that momentum going in the back half of the year and look forward to talking to everybody. After the 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.
Okay.