Q3 2023 Capstone Green Energy Corp Earnings Call
Speaker 1: What.
Speaker 2: Good day ladies and gentlemen, and welcome to your Capstone Green Energy Earnings Conference call and webcast for the financial results for the third quarter fiscal year 2023 that ended on December 31, 2022.
Speaker 2: All lines have been placed on a listen only mode, and there will be a question and answer session following the presentation.
Speaker 2: As a reminder, today's program will be recorded.
Speaker 2: At this time, it's my pleasure to turn the floor over to Mr. Don Ayers, Vice President of Technology. Sir, the floor is yours.
Speaker 3: Thank you very much. Good afternoon and thank you for joining today's fiscal 2023 third quarter conference call. On the call with me today are Darren Jamieson, Capstone Green Energy's President and Chief Executive Officer and Scott Robinson, Interim Chief Financial Officer.
Speaker 3: Today, Capstone Green Energy issued its earnings release for its fiscal 2023 third quarter ended December 31, 2022.
Speaker 3: We will be referring to slides that can be found on our website under the Investor Relations section during the call today.
Speaker 3: This conference call contains estimates and forward-looking statements representing the company's views as of today, February 13, 2023.
Speaker 3: Capstone disclaims any obligations to update or revise these statements to reflect future events or circumstances. For more information on this adventures program visit www.oll
Speaker 3: 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.
Speaker 3: Please refer to safe harbor provisions set forth on slide two of the slides accompanying this presentation in today's earnings release and in Capstone's filings with the Security and Exchange Commission for information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements.
Speaker 3: Please note that as Darren Scott goes through the discussion today, when they mention EBITDA, they're referring to adjusted EBITDA and the reconciliation in the earnings release and the appendix to the presentation slides.
Speaker 3: I would like to now turn the call over to Darren Jamieson, President and Chief Executive Officer.
Speaker 4: Thank you for joining today for a view of our third quarter fiscal 2023 results, ending December 31, 2022.
Speaker 4: Go ahead and now turn to slide three.
Speaker 4: I'd like to run through today's agenda. I will start with a brief business environment discussion and then update you on our strategic energy as a service rental fleet growth. As a reminder, our energy to service or EAS business remains the foundation upon which we are building a stronger capstone.
Speaker 4: Next, Scott will provide more details on the third quarter financial results, and then I will dive deeper into the electric charging, vehicle charging market, where we're seeing very exciting opportunities for us. We will then conclude with questions from our analysts, and I also want to remind you that there is an appendix to today's presentation providing more details.
Speaker 4: and additional information on our products and the new IRA bill.
Speaker 4: on our products and the new IRA bill. Let's go ahead and jump to slide five.
Speaker 4: Slide five shows our current business environment that we're in today. Third quarter revenue was off 1 million compared to the same period last year.
Speaker 4: But to date, revenue is up 9.5%. This revenue growth can be attributed to our Energy as a Service, or ES business, which has grown approximately 18% and continues to outperform the rest of the business.
Speaker 4: As you know, the Energy to Service Business, which is our FPP long-term service contracts, our spare parts, and long-term rentals, is our critical foundation. And when I am happy to say the revenues are up 18% for the first nine months of fiscal 23, mainly due to higher rental revenues of almost 4 million at 3.9.
Speaker 4: and an FPP maintenance contract of approximately $900,000. In addition, we have navigated a very tough supply chain environment, and we are expecting to see significant improvements in the area this year. Looking ahead, I'm excited about what we've seen to start our fiscal fourth quarter and what I expect for the rest of calendar 2023.
Speaker 4: The first nine months of fiscal 23.
Speaker 4: Gross margins expanded to 16% from 14% for the first nine months of fiscal 22. However, I'll note that this was less than anticipated as ongoing supply chain expenses, freight costs, and expediting charges continue to plague us more than we anticipated.
Speaker 4: Now let's move on to slide six.
Speaker 4: On slide 6, you can see that on December 31, 2022, there is about 40 megawatts of energy to service long-term rentals under contract and re-rental units under contract, which is a substantial increase from 17.7 megawatts on December 31, 2021, which represents a 126% increase year-over-year.
Speaker 4: I'm proud to say that we're still on schedule to meet the company's target of 50 megawatts under contract by March 31, 2023.
Speaker 4: I'll now turn the call over to Scott, our interim 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 third quarter of fiscal 2023.
Speaker 4: Moving to slide 8, you can see our Q3-23 results compared to Q2-23.
Speaker 4: Financial results for the third quarter of fiscal 23 had revenue of $19.6 million, compared to $20.8 million in the second quarter of fiscal 23.
Speaker 4: Product and accessory revenues were $10 million, down from $10.6 million in the second quarter of fiscal 23.
Speaker 4: Parts, services, and rental revenue, which includes the rental, FPP long-term service contracts, and distributed support subscription fees, were $9.2 million, down from $10.2 million, in the second quarter of fiscal 23.
Speaker 4: And this was primarily due to a decrease in our spare parts revenue due to Russian sanctions.
Speaker 4: Gross margin has a percentage of revenue with 14% in Q323, up from 11% in Q223, primarily due to the easing of supply chain challenges.
Speaker 4: Total operating expenses increased slightly to $2.6 million from $5.7 million in the previous quarter.
Speaker 4: Net loss was $5.2 million for the quarter compared to a net loss of $4.9 in the second quarter of fiscal 23.
Speaker 4: adjusted EBITDA was a negative 1.7 compared to adjusted EBITDA of a negative 2.2 in the second corridor of fiscal 23.
Speaker 4: Turning to slide 9, you will see the financial results for the third quarter of the fiscal year 23 compared to the prior year period, which were revenue at $19.6 million compared to $20.6 million in the third quarter of fiscal 22.
Speaker 4: Product and accessory revenue was $10 million, down from $12.3 million last year.
Speaker 4: Parts, services, and rental revenue was $9.6 million, up from $8.3 million in the same period last year.
Speaker 4: Gross margin has a percentage of revenue of 14%, up from 11% in the year-ago period, primarily due to greater contribution from a higher margin rental business.
Speaker 4: Total operating expenses were stagnant at $6 million from $6 million in the year ago period.
Speaker 4: The current year expenses include costs for investment banking and other fees relating to our debt refinancing activities.
Speaker 2: Net loss was $5.2 million for the three months ended December 31st compared to a net loss of $5.1 million in the prior period.
Speaker 4: Adjusted EBITDA was a loss of $1.7 million compared to adjusted EBITDA of a negative $3 million in the prior year period.
Speaker 4: Slide 10 shows the year-to-date fiscal 23 versus the year-to-date fiscal year 22 financial results.
Speaker 4: Top line revenue increased from 53.9 million to 59 million due to growth in our energy as a service business.
Speaker 4: Gross margin increased from 14% to 16% due to contributions from the Energy as a Service product line, offset by the direct material price increases previously mentioned.
Speaker 4: Operating expenses decreased from $19.7 million to $17.2 million due to cost reduction efforts.
Speaker 4: and adjusted EBITDA approved from 8.1 million loss to a 3.4 million loss.
Speaker 4: Turning to slide 11, you will see selected balance sheet and cash flow items.
Speaker 4: Cash decreased to $16.6 million from $23.8 million at September 30, 2022, driven primarily by net loss funding, investments in our rental fleet, and purchase of long lead time inventory. Cash used in operating activities in the December quarter was $4.9 million compared to cash provided of $900,000 in the September quarter.
Speaker 4: This reduction was due to collection efforts and also benefited from offsetting certain accounts receivable accounts against the purchase price of rental units that were additions to our rental fleet.
Speaker 4: Total inventory levels increased by $4.5 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.
Speaker 4: In addition, we do need more inventory as we ramp production of those new products and focus on growing the rental fleet to 5 to 50 megawatts by March 31st.
Speaker 4: I will turn it back over to you, Darren.
Speaker 4: Thank you, Scott. As part of our quarterly update, I'd like to take a few minutes to remind investors our overall strategy and how we're working to achieve our profitability goals.
Speaker 4: Let's go ahead and turn to slide 13.
Speaker 4: Slide 13 is the technology and markets we are now concentrating on and are showing on this slide. I include this because I want to remind our investors of the various diversified industries and applications in which our solutions are currently being deployed. I won't go over every detail in each category, but I do want to draw your attention to smart microgrids, renewable energy, and the
Speaker 4: is to be there to take advantage of much of that market as we can.
Speaker 4: This market will generate opportunity for DERs and for smart microgrids. There is demand for EV charging solutions in both the United States and Europe right now and we look forward to providing energy to customers who cannot readily get a charging solution from the local utility.
Speaker 5: Slide 15 shows you a key new solution we are developing to meet the needs and we are starting to see new changes and we're finding new ways we could meet our needs and we're starting
Speaker 5: from EV charging opportunities around the industry. This solution can substantially reduce stress on the grid and the environment when coupled with intelligent EV charging solutions. Using natural gas, renewable natural gas, or renewable bio gas to power the EV charging infrastructure. This gives users the option to charge a bus or a truck fleet without the need for extra grid infrastructure, grid payments, the flat rate, to buy a ns To helped reduce its supply by over $7 million. With the pick and Go plan and turn A and B customize
Speaker 5: and enables fleets to ride electric vehicles and deploy them much quicker.
Speaker 5: Some key points are that it's scalable and transportable and avoids high utility demand fees. Furthermore, most places have access to natural gas pipelines, or users can use a virtual natural gas pipeline, not to mention, caps on EAS allows further rental of these units so that costly capital expenditures can be avoided.
Speaker 5: Before turning it over for questions from our analysts, I want to leave you with some thoughts. Even though our bottom line was essentially unchanged, we were able to survive an extremely challenging supply chain climate. I am enthusiastic about what I observed in the beginning of our fiscal fourth quarter and what I anticipate... Yes, we've had the worst youth day of fiscal year. And of course, we've had
Speaker 5: for the remainder of the calendar year 2023 as we look ahead. We are still dealing with supply chain problems and rising prices, but I anticipate that our pricing hikes from January will start to balance this out. As input costs stabilize, we continue to anticipate the adjusted EBITDA results will return to more normal levels as we saw in Q1, hopefully in the fourth quarter and the first quarter and beyond.
Speaker 5: We anticipate over the next 12 months there will be a convergence of favorable developments, including our price hikes taking effect, the implementation of the new Inflation Reduction Act and the growth of new markets like EV charging.
Speaker 5: As we move away from being solely a manufacturing firm, our energy and service rental business will continue to be our main focus and should deliver us benefits like profitability, predictable revenues and strong cash flows. As we get closer to our target, 50 megawatts under contract, our results show that we have made progress.
Speaker 5: to making this significant strategy shift. The facts demonstrate that our customers need the solution and that we can deliver it, meeting their needs and generating profits for our shareholders. Now with that, I'd like to open the call up for questions from our analyst operator.
Speaker 2: Certainly. At this time we'll be conducting a question and answer session. If you have any questions or comments please press star 1 on your phone at this time.
Speaker 2: We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality.
Speaker 2: Once again, if you have any questions or comments, please press star 1 on your phone.
Speaker 2: Please hold while we poll for questions.
Speaker 2: Your first question is coming from Rob Brown from Lake Street Capital Markets. Your line is live.
Speaker 2: Your first question is coming from Rob Brown from Lake Street Capital Markets. Your line is live. Hi, Darren.
Speaker 4: Just wanted to talk a little bit about your confidence in your rental trajectory there to the 50 megawatts. How's the pipeline look at this point? And I think you've had some announcements recently that get you close, but just an update on how you get from the 40 at the end of the year to the 50 in your goal.
Speaker 5: Yeah, no, it's a great question. We've got a 100 plus megawatt pipeline of projects. Obviously, we're trying to fill a 10 megawatt gap between 40 and 50. We're in negotiation with several projects right now, mostly in the US oil and gas base. I would expect that we'll be at 45 megawatts under contract by the end of this month.
Speaker 5: Then we'll need to fill five megawatts between the February and into March. Highly confident on the trajectory that we're on. You should expect to see more press releases between now and the end of the quarter. I think that's definitely... We've seen a softening, I would say, of the crypto market, but I would say oil and gas is more than made up for that. Most of the opportunities we're seeing right now are in the oil and gas space.
Speaker 5: product sales in January , we did the entire third quarter in one month. So I would say we're starting to see the leading indicator of some of those opportunities. I think that we've got to rerun numbers for customers and people need to get comfortable with the new bill, but I think it's gonna be very significant. If you look at the US market is well more than half of our business and the biggest piece of that has been CHP.
Speaker 5: renewables. So that's definitely hitting our biggest market with a huge incentive. So taking that IRA tax and...
Speaker 5: The incentive from 10% to 40% is very significant. Again, I'd say oil and gas is very strong. I just got back from Europe . We're seeing actually oil and gas activity in Europe for the first time in years, as well as the US market also being strong. We've also got products, projects going on in Latin America, Australia, and parts of Asia.
Speaker 6: What's sort of the magnitude of that and does that happen pretty quickly or does that take time to roll out? That wasn't even us.
Speaker 5: No, it definitely happens. We implement it quickly and we update Salesforce, but there is a lag, obviously, because we typically book products one quarter and ship them a couple quarters later. There's going to be a lag between new orders at higher pricing when those will go through our P&L. January 31st was a new price increase. In the US market, it was 10%. Overseas, it was more like 7%.
Speaker 5: We still got some work to do though on some of the other commodities, especially printed circuit boards, IGBTs, fans, some high-grade wiring and things like that that cost me to come back down. I would say we're on the backside of the bell curve when it comes to
Speaker 5: supply chain issues, but we still have some work to do to get there. Okay, thank you. I'll turn it over.
Speaker 4: to have some work to do to get there. Okay, thank you. I'll turn it over. Thanks, Rob. Great questions.
Speaker 2: Thank you. Your next question is coming from Shawn Severson from Water Tower Research. Your line is live. Hey Shawn. Hi Shawn.
Speaker 2: Once again, Sean, your line is live.
Speaker 3: Thank you. Just a couple questions, Dan. I wanted to follow up on Rob's question a little bit about the pathway you're seeing from the IRA and how it's been showing up in the orders. I know you said you started a strong calendar year, but I'm trying to understand what I look at in modeling the year. Where do you see the bulk of this coming from?
Speaker 5: 12 to 18 months, in some cases even longer. So it's definitely a longer sales cycle, but we've seen an uptick in inquiries. We're seeing projects move through sales force at a better clip. So I think we're starting to see the leading indicator of it, but it should really strengthen the summer into the fall. And that's exciting for us. And so as Scott mentioned, we're trying to build inventory for what we see as a growing economy.
Speaker 5: product sales pipeline, especially in the US this year, as well as trying to get to 50 megawatts. So we're pulling pretty hard on our supply chain. In defense of our supply chain, our purchases are up dramatically year over year, much more than our revenue because of the build on the EAS side. So definitely I'd look though for the back half of the year to be very strong.
Speaker 5: The first half of this year, we're really focused on getting to that 50 megawatts under contract and then getting all 50 megawatts deployed. I think that's another important point is that there is a lag between signing a rental contract and actually getting the product built, shipped, and commissioned, and that can be anywhere from 45 to 60 days typically.
Speaker 3: My last question is, has there been any bias towards the types of customers that are responding to this? I know, obviously, the push towards the large global customers and national customers with the internal sales force, specifically. Are you seeing any differences in appetite between the types of customers that are engaging on this? Then I'll step back and queue.
Speaker 5: of years rerunning the economics. In general the IRA bill drops the simple payback by two years so it was a six year payback it's not a four year payback or seven years now a five so we've got to reach out to those customers, rerun economics and see if we can get them interested in moving forward in the project and if they're not interested in the capital purchase are they interested in looking at an EAS solution.
Speaker 5: I think it's also interesting that just returned from Europe and they're pretty stunned by the IRA bill. I think it puts the US ahead of Europe as far as developing green energy and energy transformation. I think that's a place that they're not used to being. So I do think you're going to see more come out of Europe as they try to catch up to the US and hopefully.
Speaker 5: to try to get ahead of the US. And so I think there's more opportunities there. And as also mentioned, because of the war in Ukraine, we're seeing oil and gas activity pick back up in Europe as they realize they can't get all their natural gas from Russia and that the cost of other natural gas and supply is very challenging to find other locations. So interesting times in Europe and interesting times in the US, I think, between the...
Speaker 2: IRA bill and the impact of the Ukraine war.
Speaker 7: Your line is live. Hey Dan, Scott. Thanks for taking my questions. So just following up on the EAS discussion, you are on track to get to your target after the Groupus was ever completed.
Speaker 7: Does the IRA and the increased incentives for upfront benefits change your strategy long term and are you increasing your targeted EAS deployment next year in the fiscal 2024 year?
Speaker 5: So it's a great question. I think right now we're really focused on getting to 50 megawatts. If you look at the numbers in the queue, if we were just kind of neutral on margins for our products, we'd be kind of EBITDA neutral for the year. So the negative gross margin on our products because of supply chain issues has drug down our ability to be, you know.
Speaker 5: EBITDA positive or adjusted EBITDA positive. If we get back to just zero gross margin or just slightly positive and we get the 50 megawatts deployed, you know, we're solidly EBITDA positive. So that's really the short-term growth and the short-term goal. We need to really see cost of capital going forward.
Speaker 5: And so how we work on refinancing Goldman and what that looks like, I think will drive what we do going forward beyond 50 megawatts. So I think when we talk again after the fourth quarter, I hope to have a solid plan in place to say we're already at 50 megawatts deployed. We're back into positive eva. territory like we were in Q1 of this year.
Speaker 5: but this is accelerating very quickly. So deploying 50 megawatts, which is closer to 75 or 80 machines around the U.S. and now moving internationally, that's a lot of activity to undertake for us in a short period of time. Understood. Thanks for that. Moving to the EV initiative, are you – well, the first question is, what is the EV initiative
Speaker 5: No, we're working with one of the largest commercial REITs in the US, it's kind of our partner right now. They're providing the chargers, we're providing the micro turbines. We've also generated, you saw a picture in the presentation, a portable version of that, this was a 180 kilowatt charger with a C200 micro turbine.
Speaker 5: We've got a little bit of a battery on board for black starting and some solar PV But the goal is to build to deploy these around the country as people bring in electric fleets We're finding a lot of folks getting busted in trucks and then they turn to the utility and they can't get the additional
Speaker 5: utility feed and power that they need. So they all of a sudden find themselves with a fleet, brand new, but they can't charge it. So we've got opportunities here in California, we're doing stuff in New Jersey, we've got some stuff going on in Chicago right now. So they're a big company, we're kinda riding their coattails a little bit. They've obviously got a.
Speaker 5: Demand for EV charging increases and we electrify more buildings the number of utilities that are unable to keep up with that demand is only Going to grow and so I think that's a great opportunity for us But we'll look you know at the the landscape as it adjusts and grows and figure out if you want to partner somebody or continue to just work with a few key clients. Understood. Should we expect the initial revenue?
Speaker 5: during calendar year 2023 or 2024 from this? Yeah, no, absolutely. We've got seven or eight megawatts out on rent right now on trailers. We've got some permit installations that we've quoted that we think will move forward here this quarter. We've done a couple installations in Europe for permanent EV charging solutions. So yeah, this is something that's.
Speaker 7: and this is gonna be a huge opportunity for us. Understood. Just a few on the parts revenues, which was slightly impacted by these Russian sanctions. What's that impact in like sub-million dollar range or was it like a couple million dollars? How should we think of the scale of this impact?
Speaker 5: I'd say some of the supply chain issues definitely impacted a couple megawatts shipments last quarter so there's probably another couple million dollars in there as well. So those two things are definitely challenging for us. On the supply chain side, we continue to meet with our various vendors. Unfortunately when some vendors can't meet deliveries and others can, we get kind of imbalanced in our inventories.
Speaker 5: where we want to see him not compared to where we are today. Very happy though on the receivable side, we really focused on receivables coming out of COVID. As you recall, we were 65 days going into COVID, kind of DSO, we hit 156 days as a high during COVID.
Speaker 5: We're back down to 66 days today. So that's been a lot of work by the finance team and myself to clean up the receivables and work with the distributors and these customers to make that happen. So good success story there. Now we need to focus on the supply chain side and the balance sheet side and then continue to keep growing that energy service business.
Speaker 2: Thanks for taking my questions and good luck. Thank you. Thank you. That concludes our Q&A session. I will now hand the conference back to Darren Jamieson for closing remarks. Please go ahead.
Speaker 5: Great, well thank you. Great questions by the analysts. I think you touched on a lot of other things I wanted to touch on. I think the most important thing for me as I look at this quarter is that we're still hitting our target to be at 50 megawatts under contract on March 31st. That's the most important thing, the most transformational thing we can do for our business. So as we grow that energy to service business, we need to keep hitting our target.
Speaker 5: and then figure out what we're doing for long-term capital needs to keep growing the energy to service business. Inventory is a bit of a out of whack as we said and supply chain issues have been challenging like many manufacturers around the world but that's not an excuse. We need to do a better job and our vendors need to do a better job and hopefully the fourth quarter and the first quarter of this new year will get that behind us as well. So I'll be looking for more energy service press releases and we look forward to.
Speaker 2: talking to everybody soon at the conclusion of our fourth quarter. Thank you. Thank you everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
Speaker 2: conclusion of our fourth quarter. Thank you. Thank you everyone. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.