Capstone Green Energy Corporation (CGRN) on Q1 2022 Results - Earnings Call Transcript
Operator: Good day, ladies and gentlemen. And welcome to your Capstone Green Energy Earnings Conference Call and Webcast for the Financial Results for the First Quarter Fiscal Year 2022 ended on June 30, 2021. All lines have been placed in a listen-only mode, and there will be a question-and-session following the presentation. As a reminder, today’s program will be recorded. At this time, it’s my pleasure to turn the floor over to, Mr. Colby Petersen, Corporate Counsel. Sir, the floor is yours.
Colby Petersen: Thank you very much. Good afternoon, and thank you for joining today’s fiscal 2022 first quarter conference call. On the call with me today is Darren Jamison, Capstone Green Energy’s President and Chief Executive Officer; and Eric Hencken, 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 first quarter ending on June 30, 2021. We will be referring to slides today that can be found on our website under the Investor Relations section during the call. I want to remind everyone that this call contains estimates and forward-looking statements representing the company’s views as of today, August 11, 2021. Capstone disclaims any obligations to update or revise these statements 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 2 and in Capstone’s filings with the Securities and Exchange Commission for information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements. Please note that as Darren and Eric go through the discussion today, when they mention EBITDA, they are referring to adjusted EBITDA and the reconciliations in our presentations appendix. I would now like to turn the call over to Darren Jamison, President and Chief Executive Officer.
Darren Jamison: Thank you, Colby. Good afternoon, everyone. Thank you for joining today for a review of our first quarter fiscal 2022 results, ending June 30, 2021. If you turn to Slide 4, I will quickly run through the financial highlights before giving an overview of our fiscal 2022 goals. Total revenue for the quarter was $16.1 million up 13% compared to $14.2 million in the first quarter last year, as orders and shipments have gradually started to rebound by continued negative impacts from the ongoing COVID-19 pandemic. Book to bill ratio was 1.1 for the quarter and new gross product orders was $8.2 million despite the continued impacts from the pandemic, in key markets like Europe, Latin America, Asia and Australia, not to mention the U.S. The long-term microturbine rental fleet increased 1.5 megawatts to 12.1 megawatts from 10.6 megawatts during the quarter, as the company continues to execute against this plan to increase the fleet to 21 megawatts by the end of the fiscal year, March 31, 2022. Turning to the balance sheet, total cash and cash equivalents as of June 30, 2021, were $49.2 million, a slight decrease of $0.3 million compared to $49.5 million at the end of the last quarter. Cash provided by finance activities was $11 million during the quarter, as the company continued to focus on strengthening liquidity as it ramps up the remediation of the defective vendor part in the field, and accelerates the expansion of the long-term rental fleet. Let's go and turn to Slide 5, as a reminder, we’ve recently laid out our goals for fiscal 2022. We remain sharply focused to deliver on our strategic business goals, enhance our competitive advantages, and expand our total addressable market or TAM around the globe. Our strategy is set out and I believe by executing on the goals Capstone will be positioned as a green energy leader in fiscal 2022 and beyond. Let's quickly run through our goals, first is broadening our diverse energy products and services which we started to do and we'll continue to do through the fiscal year. New direct solution sales team focus on growing the top-line revenue, as we continue to add more headcount in that space for that strategic goal. Expanding your long-term rental fleet as discussed to 21 megawatts, increasing aftermarket margins and escalating parts availability to drive improved customer satisfaction and more repeat orders, focusing on managing working capital and improving inventory terms. Lastly, growing the Distributor Support System or DSS subscription program to drive marketing, branding and customer acquisition efforts. Now let's go ahead and turn to Slide 6, in April 2021, we 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 goals of growing our offerings to expand our revenue opportunity with each customer, and accelerate top-line growth. Let's begin with energy as a service or EAS. This is critical to continuing our transition to a more predictable cash flows and higher margin rates. This business line includes long-term rental contracts, long-term service contracts or FPPs, installation services, service, spare parts, leasing, PPAs, and project financing, in addition to our DSS distributor subscription fee. The one common denominator among all these businesses is steady cash flows, increased visibility and higher margin rates. Next is our Energy Conversion Technologies or ECT, this is the foundation on which Capstone was built, and is based on Capstone’s core microturbine technology which you're all familiar with, and can operate on a wide range of fuels. These products produce high efficiency CHP and CCHP, generating electricity in multiple forms of thermal energy. We recently added two key products to our offering. First is a bigger huge turbine lineup, ranging from 5 megawatts to 16 megawatts. This gives us a solution for much higher power needs were needed. This is important as many of our target customers loads are under 5 megawatt, but target customers also have loads of over 5 megawatts, which we've been unable to address before now. The second is B+K, B+K is an OEM partner in Europe, which is now moving into commercial production other innovative decentralized CHP systems that convert wood residues into electricity and heat from an externally fired Capstone microturbine. Moving on to Energy Storage Solutions or ESS, energy storage is one of the first and most important additions to a micro grid or even a nano grid. We'll be using a custom tailored combination of multiple technologies, energy storage, and monitoring software to maximize energy efficiencies, lower emissions, and create resilient systems that meet clients' specific needs. I'll talk about the fourth business line hydrogen sustainable products in a few minutes. But now let’s go ahead and turn to Slide 7. Many of you've seen Slide 7 before, as we previously set out are six key growth factors. I know that we've mentioned them earlier, but I want shareholders to see them again and understand exactly what we're doing. First is the new direct sales team which we started approximately a year ago, which is one of our strategic goals for the year. As mentioned earlier, we are targeting new micro grid products, long-term rentals and large repeat customers. Second is our new parts supplier, this is simply about better building part quality to improving reliability, lower warranty which I think you've seen in the quarter, higher FPP margins, which we'll see going forward, and simply put, getting repeat more customers. Third, new target pricing programs, this is focused on national and key accounts and our new Gold Key account program, which is targeted at customers that can deploy at least 4 megawatts per year. Fourth initiative is adding new distributors in new geographies, particularly in Eastern Europe, Africa and Middle East. These large markets are prime for our micro grid services. And we need to fire more shots on goal which means more and better distributors. Fifth is a new hydrogen product released with a goal of operating on 100% hydrogen. The hydrogen economy is coming and we will be here to run with it in greater detail in a moment. Particularly expanding our digital marketing to our website update, customized campaigns, unique IndyCar branding strategy, and building awareness of Capstone Green Energy and what we can do cannot be overlooked. On Slide 8, we wanted to try and find a way of illustrating the significant business impacts of expanding the long-term rental fleet. This slide shows both revenue and contribution margin over a five year period for the C-1000 product line with spare parts sales, and C-1000 product with an FPP contract, and a C-1000 long-term rental. Over the five year period, the C-1000 product with spare parts can generate approximately a $1 million of revenue with approximately $200,000 of margin or a 20% margin as a percentage of revenue. C-1000 product sale with a Capstone FPP contract can generate approximately $1.2 million of revenue, with approximately $300,000 in margin, with 25% margin as a percentage of revenue, which is good. But the C-1000 rental can generate approximately $1.8 million of revenue and approximately $1.1 million of margin with a 61% margin as a percentage of revenue. We think the numbers speak for themselves. And here is the clear illustration of why we've been building a long-term rental fleet, and why is one of our key strategic goals for the year and beyond. I'll now turn the call over to Eric, to discuss the details of our financial results for the first quarter. Eric?
Eric Hencken: Thanks, Darren. I’ll now review in detail our financial highlights for the first quarter fiscal 2022. Turning to Slide 10, you'll see the financial results for the first quarter of fiscal 2022, which had revenue at $16.1 million up 13% compared to $14.2 million in the first quarter of fiscal 2021, as the prior year quarter was more heavily impacted by COVID-19 project delays. Product and accessories revenue was $8.4 million up 27% from $6.6 million in the first quarter of fiscal 2021. Our parts and service revenue which includes our FPP long-term service contracts, rentals, distributor support subscription fee was $7.7 million, up 1% from $7.6 million in the first quarter of fiscal 2021. Gross margin as a percentage of revenue was 16%, down from 24% in the year ago period, primarily due to expenses being lower 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. Additionally, FPP margins in the fiscal 2022 first quarter were lower because of the timing of part shipments, where we have fewer parts shipments in the prior year quarter due to restrictions from the COVID-19 pandemic. Total operating expenses increased $2.3 million to $6.2 million from $3.9 million in the year ago period. Costs were lower in the prior year due to our COVID-19 business continuity plan. Additionally, we have $0.7 million of IndyCar expense in the quarter of which $0.5 million of that was stock expense. IndyCar’s expense was immaterial on the prior year quarter, with the majority of last year's expense hitting in the second quarter. Net loss of $2.2 million for the quarter compared to a net loss of $1.8 million in the first quarter of fiscal 2021. First quarter of fiscal 2021 benefited from expense reductions from the COVID-19 business continuity plan, were partially offset by the gain recognized for the forgiveness of our PPP loans in Q1 of fiscal 2022. Adjusted EBITDA was negative $2.3 million compared to adjusted EBITDA of $0.1 million in the first quarter of fiscal 2021. Again, the first quarter fiscal 2021 benefited from expense reductions from the COVID-19 business continuity plan, plus the gross margin benefits discussed above. Turning to Slide 11, you'll see select balance sheet and cash flow items. Darren mentioned earlier cash remained relatively flat at $49.2 million compared to $49.5 million at March 31, 2021. Cash used in operating activities was $10.1 million for the quarter. The cash use 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 build up for the anticipated growth of product sales and building the rental fleet in the coming quarters. Initially we experienced delayed accounts receivable collections due to the COVID-19 pandemic, and we continued our remediation plan to replace the defective vendor part in the field, which was accrued in the fourth quarter of fiscal 2021. Also this cash used in the quarter we raised $10.5 million net in June through a public offering. We continue to focus on liquidity and are mindful of our net cash position. Turning to Slide 12, we have another slide demonstrating the impact the rental business can have on our P&L. Here, we took fiscal ’21 Q3 actuals, where we felt the product revenue in that quarter didn't have much of a COVID-19 impact on the results, and create an as if scenario where our rental fleet would be built to 21.1 megawatts with all units on rent. All other numbers stay exactly the same. You see in the as this column in that scenario where all we're doing is increasing the rental fleet, we would be positive adjusted EBITDA for the quarter, an improvement of $1.4 million over the actuals. At this time I’ll turn the call back to Darren. Darren?
Darren Jamison: Thank you, Eric. With the various macroeconomic and ESG trends that we're currently experiencing, we feel the Capstone Green Energy is uniquely positioned to take full advantage. Turn to Slide 14, slide 14 sets out some of the business catalysts except for Capstone Green Energy. I'll not run through every detail line item, but we want to highlight some of the key points. First of all, we're beginning with a strong industry backdrop. According to Navigant Research, total microgrid capacity is expected to grow multifold over the next decade, reaching 20 gigawatts by 2028, up from 3.5 gigawatts in 2019. A big market with significant growth as you can also see represented on Slide 15. Turning to Slide 16, we've highlighted some key consumer statistics, keeping in mind that helping our customers reach carbon reduction goals is what we do, and this enables our customers to align with their customers. Younger buyers are increasingly more eco-aware and concerned with the environment impact of their purchases, Gen Z, which now comprises one-third of the world's population is willing to pay 50% to 100% more for sustainable products compared to older generations. According to Nielsen study, 73% of consumers say they would likely change the behavior to reduce their impact on the environment. And the eco-aware mindset and behavior adoption have only increased in recent years, and should continue to accelerate. Sustainability also feeds into customer loyalty. Sustainable and ethical business practices are the second highest reason most consumers return to a brand. This is second only to product quality. Not only can we help our customers with their ESG initiatives, we can also help them save money. If you turn to Slide 17, you can see that over the last three years, we've saved our customers an estimated $700 million or three quarters of a billion and approximately 1 million tons of carbon. So we're saving them money and we're saving the environment. Moving to Slide 18, I want to spend a moment on hydrogen and our sustainable product businesses and strategy. Fuel flexibility has always been a critical element to Capstone, and so hydrogen is the next big fuel source we need to address. Our new hydrogen solutions business line is leveraging the recently released first commercially available hydrogen base, combined heat and power microturbine, which can safely run on 10% hydrogen, and 90% natural gas mix. Importantly, we now have a target for commercial release of a 30% hydrogen, 70% natural gas mix product by March 31, 2022, or the end of our fiscal year. We're also working with our partners like Baker Hughes to advance our hydrogen solutions. At the same time, we continue to actively work with 24/7 Solar to help commercialize their concentrated solar and thermal storage solutions, using our contract manufacturing services and global channels to market. With that, I'd like to open the call to questions for analysts. Operator?
Operator: Thank you. Ladies and gentlemen, the floor is now open for questions. And the first question is coming from Rob Brown from Lake Street Capital Markets. Rob, your line is live.
Rob Brown: Good afternoon. First question is kind of the order book and order activity, it was pretty good in the quarter had I think a one to one book to bill. But how is the activity levels are you seeing that being driven by a COVID kind of recovery? Or, are you seeing these specific macro drivers starting to drive order activity?
Darren Jamison: Yeah, I would say order activity was definitely good for the quarter. Anytime we're one to one or better, we're happy about that. We're happy the revenue was up year-over-year and that's our goal every quarter for this fiscal year. But I'd say COVID, such as delta strain is still making visibility difficult. The U.S. is in one place when it comes to vaccinations. But we're seeing other countries behind us. Specifically Italy struggled, Brazil struggled, India struggled; Australia has struggled a little bit. So as these markets kind of comeback online, I think twofold. One, they need to get back to business, and then two, as businesses come back it seems like folks are going on vacation. And so there's a lot of pent-up demand for vacations and personal time and so we're having to work through that. I think that the second-half of this year is going to be very exciting. I think the last quarter this quarter are going to be more impacted by COVID. But I think as we get into the fall and the spring next year, I think our business initiatives are really going to take hold. A lot of the things we're talking about today, you haven't seen the impact of right? We’re taking about Baker Hughes, where we haven't sold our first Baker Hughes turbine yet, when we do you're going to see a significant impact in our revenue. Our hybrid solution products, we've quoted hundreds of them and we haven't shown shipped one yet. So there's just a lot of things. Our hydrogen product hasn't couple orders, but nothing significant yet. So there's a lot of things we're doing right now, in the background that you'll see in the foreground once we start delivering some revenue later this year. But I'd say visibility is still challenging, supply chain is still very challenging. COVID is still very much with us, especially as a global company.
Rob Brown: Okay. Good. Thanks for that overview. In the rental business, you've got a great goal here of increasing your rental units. How is that pipeline looking? Are you -- sort of to get to that number is it a function of kind of getting you as build? Or do you need to assign customers or what really drives that growth? And how's the visibility on the rentals in particular?
Darren Jamison: Yeah, no, that's a great question. I think again, hopefully, the slides we added to the deck, help people understand that the criticality of the rental units. We had a recent 2 megawatt five year rental and the stock market investors hardly reacted to it. That's equivalent to a 10 megawatt product sale. So I think people need to realize the margin differences and the reoccurring revenue impact of the rental fleet, and how much superior it is to sell a product. Outstanding quotes are over 80 megawatts. So again, we're at a 12 megawatt fleet trying to get to 21. I've got 80 megawatts quoted. If you break that into kind of a go-get estimate, that's around half that about 40 megawatts. So again, I need to collect reclose 10-ish megawatts out of my 40 megawatt go-get out of my 80 megawatts of gross rental quotes. And so we're pretty bullish on getting the rentals done. We'll continue to build them. Part of the increased inventories over the quarter was inventory coming in anticipation of building those rental units. And you'll see that again in Q2, but then those inventory will be converted to rental units and go out on rent. Another thing people don't realize a lot of times, depending on what the customer is doing at the rental, we may sign the rental one quarter and not put the unit on rental the next quarter, the customer signs the rental agreement and gives us a deposit to reserve that unit. There is a lag of at least 30 days and sometimes 90 or 120 days between signing the rental contract and getting it out of rent.
Rob Brown: Okay. Good. Understood. And then the last question is really on the hydrogen development getting to 30% hydrogen from an -- end of day. How does – or sort of what has to happen there kind of in broad strokes? Is it redesigning things? Or, is it tweaks? Is it engineering work? Or, maybe how do you get to that 30% hydrogen product by the end of the year?
Darren Jamison: Yeah, I think it's a great question. I think in getting that 30% hydrogen is one of our key strategic goals for the year. Don Ayers, who runs our engineering group is sitting here at the table. So I'm going to throw him under the bus and let him answer that question for you, Rob.
Don Ayers: Yeah, hi, Rob. This is Don Ayers. So we're working very closely with our university National Lab partners. To get to 30%, we're looking at just our standard microturbine product line, with no changes to hardware, and likely no changes in the software. So to get to 30% is challenging to get to 100% is a lot more challenging, I think, as everyone knows, but what we're trying to do is minimize the impact on our hardware and software, as well as enable our customers to be able to achieve 30% hydrogen without making any significant investments.
Darren Jamison: The key thing with that, Rob, is if that's the case, if we can do it with off the shelf hardware with just minor tweaks, then retrofitting existing units in the field is very easy. So our 10,000 units have been shipped to 83 countries, all of which could be operated on 30% hydrogen once we get that figured out, or only minor modifications. So I think that's important. I think in the hydrogen market, we're going to see blending hydrogen with natural gas is the first wave of just for two reasons. One, hydrogen is not as readily available as it needs to be. There's a lot of money and effort being put in to make it more available. And two, it’s still expensive. And so to run 100% hydrogen is not economic today for any kind of reasonable payback, but if you blended it with natural gas, the economic impact is not nearly as bad and you get the upside on the environmental side. So I think it's the right approach. Again, we'll move to 100% hydrogen after we complete our goal of 30% hydrogen that will be different hardware, different software and it's in different packages. But I think the 100% hydrogen market is still a ways off at least from a kind of beyond a demonstration project standpoint.
Rob Brown: Great. Thank you for the every alternative.
Operator: Okay. Your next question is coming from Amit Dayal from H. C. Wainwright. Amit, your line is live.
Amit Dayal: Thank you. Good afternoon, everyone. Darren, on the gross margin side it's good to see the gross margins bounce back this quarter. Should we expect these gross margins to now sort of stabilize at these levels for the rest of the year?
Darren Jamison: I think the gross margins should continue to improve through the rest of the year as the rental fleet rolls out, again, at that 61% margin rate, the more rentals we have in the mix will help the overall margin mix. And then obviously, on the on the FPP side, once we finish replacing all the bad parts in the field, we're going to see improved FPP margin rates. You're already seeing in the quarter improved warranty margin rates. And we typically plant about 1% warranty to normal business, I think will actually end up running below that. The product is running really well out in the field. We've got Tracy Chidbachian, who's running our service organization now. I think she's very bullish on the fleet and the amount of uptime we're going to see in the next 12 to 18-months.
Amit Dayal: Okay. Thank you for that. And then regarding the bad parts or the replacements that you need to undertake, are we still incurring some costs associated with that? Or, have we already recognized those costs, and they no longer sort of impact the financials?
Darren Jamison: Yeah. So I think we incurred the costs for the program, and we got the funding for the program in Q4. And so we got a $5 million settlement from the vendor and we put about a $4.9 million reserve on the books. So both the pickup and the offset, were both taken in Q4. What you're seeing in Q1 and Q2 is the cash impact. And so we got the cash last fiscal year, and we're spending the cash replace the parts this year. So there's no P&L impact, but there's a balance sheet impact. I think one of the things investors were confused about was the recent equity raise we did. I think they see the $50 million in cash on our balance sheet and thought we had more cash than we needed. But with building the rental fleet, every megawatts about $750,000 to $800,000, depending on the accessories and things that go into that rental. So it'd be building that from 7 or 8 megawatts to 200 megawatts is a cash use for the year. And then that $5 million we got from the settlement is great, but we have to spend that $5 million replacing into the field. So you look at those two items plus servicing our Goldman note, we definitely have some cash requirements for the year. As we chase larger customers, we're pretty open about our goal with the direct sales organization to find larger reoccurring customers, we need to have a significant balance sheet, as well as we took one of our most senior executives Jeff Foster, and put him in a strategic role to look for potential acquisitions. Obviously, that could be another use of cash as well. So we want to keep a healthy balance sheet. We didn't mean to surprise investors with that equity raise, but I think we want to stay around that $50 million levels as close as possible. And make sure we spend the money on the rental fleet, which is a huge return, get the bad part out of the field, which is great for customer satisfaction, repeat orders, and have some dry powder for Jeff and his group when he looks for some strategic M&A opportunities.
Amit Dayal: Understood. Thank you. And then, with respect to the rental fleet efforts, are we mostly targeting the energy sector? Or, is this across the board in terms of all the end markets you are already catering to?
Darren Jamison: It's a great question, I'm glad you asked that. When we first started that we thought it was mostly the energy markets, Shell was kind of our launch customer down in the Permian. They're still one of our biggest users today of the rental fleet. But we've seen a lot of other interests in CHP. We’ve seen a lot of customers who maybe are leasing or renting a building for five years and don't want to do the capital purchase for a CHP system. So if they can do a five year rental, maybe have an option to buy it later on, if they end up renewing that lease without a niche market there. We just recently did a brewery. We've done other CHP applications working on a hotel in the Caribbean right now. So a lot of CHP applications as well. We've also seen an uptick in grow houses. They're huge energy consumers. So we've got several rentals out to the grow house industry here in California as well as Colorado. I think you're going to see more opportunities there as that market continues to expand. And then we're close on some Bitcoin miners. As you know, Bitcoin mining is trying to be greener, they're a tremendous energy consumer. You also have the impact of China coming out with their own digital currency, which is forcing many Bitcoin miners to move to the U.S. And so we're close on a couple orders and rentals to the Bitcoin industry, and that'll be an interesting new market for us to address. And so, definitely, I think the rentals are much wider market than anticipated. To-date, everything we've done has been U.S.-based, but we're starting to look at stuff in Latin America, Europe and Canada. We'll probably end up with some stuff in Australia as well. So again, I think getting to the 21 megawatts is not, the challenge is how quickly we can get there, make sure Kirk and his team gets built in time. We don't want to over build the fleet or lose an order because we don't have enough units. So 21 megawatts, as Eric pointed out, with any rebounds in our product business like we had in Q3 last year, we're essentially EBITDA positive. Our goal is to be EBITDA positive every quarter going forward. We've done it three times in our corporate history. We do it every quarter every year. I think that'll open up a lot more opportunities for our business.
Amit Dayal: Thank you. And then just last one, with respect to sort of these inflationary trends right now, are you seeing any of that impact your operating costs and your overheads?
Darren Jamison: Yeah, I think if Kirk could grow some hair back, he would have pulled it out by now. Definitely, every vendor is looking for price increases, the supply chains are a mess right now. Getting electronic components VFDs, copper, wood, just shipments, container from China cost 5x what it used to cost in just a few months ago, as well as lengthening delivery time. So definitely, the supply chain is challenging. We're working really hard, though, to work with our vendors and say, look, this is a short-term issue, not a long-term issue. Kirk and his team are trying to put in LTAs. We've done a lot to upgrade our purchasing strategic sourcing group over the last year that's paying dividends in situation like this. We're going to do a large vendor fair at the Long Beach Grand Prix coming up in September, around the IndyCar race. And so we're hopefully going to move vendors away from price increases and into LTAs and try to build longer-term relationships with them. But I will say it is definitely challenging right now. Everything you're hearing about supply chain issues is absolutely true.
Amit Dayal: Okay. That's all I have, Darren. Thank you so much.
Darren Jamison: Thanks, Amit.
Operator: Our next question is coming from Shawn Severson from Water Tower Research. Shawn, your line is live.
Shawn Severson: Great. Thank you. I'm going to go back to Slide 8, looking at the contribution for EBITDA and revenue for the rental business. So just from a modeling standpoint, on the back of the envelope, that's roughly about $9 million -- excuse me 9 megawatts in bookings between now and your target in March. And if you do the math, it's like 16, 16.2 in terms of revenue per over that five year period, right and about $10 million EBITDA. So as we break that down by year is it safe to say that if you achieve your goal, that's going to translate into approximately $2 million in the annual EBITDA going forward, from that incremental 9 megawatts of rentals?
Darren Jamison: Correct, assuming the rentals are fully rented, or 90% rented, that is correct.
Shawn Severson: Okay. And that model kind of holds going forward, there's anything unique about this or different. And as we look at modeling this each time you announce a megawatt in sales. We carry rental business, we can use this as the sort of the formula for projections.
Darren Jamison: Correct.
Eric Hencken: Shawn this is Eric. When we show the margin percentage here, a lot of that is depreciation. So if you want to know the contribution to EBITDA, it’s actually going to be higher than these percentages you see here.
Shawn Severson: Okay. So the cash flow is going to be what because that's – is it like, 80%, something like that, roughly?
Eric Hencken: Yep, that will get you closer.
Shawn Severson: Okay. And then the timing of this, you said usually it's within a quarter or two is the start time, correct? And then the life of these rental contracts are typically what?
Darren Jamison: So our shortest we've been doing have been one year. I think the longest we have called is 10. We have a couple of five year. But I think in general, they're going to average around three years, because a lot of folks are doing one year rentals and keeping them for two or three years. We've already seen some original shell units that went out for a year haven't come back yet and they're well into the second year. And so it just depends. I think the other thing is, again, as it comes back, we'll freshen the unit up and then turn around and put it back on rent again. It also allows us as the rental fleet grows and ages to take units out of the rental fleet and resell them much like you do in the car rental business. And so I think that'll give us more opportunities for some used equipment sales, again, probably better margins and new equipment sales. We're not there yet, but I think again, there's a huge benefit as this business evolves and matures, becomes an annuity and a cash cow and it kind of drives other secondary businesses like used equipment sales.
Shawn Severson: Why would an energy customer for example, only use it for a year? I mean, I'm just trying to understand why this -- these are obviously long-term products right.
Darren Jamison: So, we continue to use shell as an example, when COVID hit, they had about 4.5 megawatts on rental and they ended up sending two of them back, they'd been over a year. And they were going to shut the site in because oil prices actually went negative for a little bit with COVID. And so again, if you have a huge change in the market, or you change the business, and you had the opportunity to send it back, if they sell that asset or that lease, then they'll send the equipment back, potentially, unless the new owner wants to rent the equipment. But I would say in general, minus the COVID one-time impact we've seen little to no returns on the units, usually when they go out, they stay out. And that's fine. I think, nothing will happen, I think people get to a point where they want to buy the equipment, or they may buy a new one and return the rental one again, which is fine. A lot of customers are evaluating three to five year rentals versus buying the equipment just from a CapEx utilization standpoints and what they want to do with their CapEx dollars.
Shawn Severson: That's the time came out, if that made more sense, like three to five years and it is sort of a decision process, right?
Darren Jamison: I think if we weren't in build mode, we could probably be a little more stringent with customers and push them into longer-term. But in order to get the fleet built as quickly as possible, we're allowing customers to do one year rentals. But again, they're kind of evergreen, if they don't return them, those keep rolling over.
Shawn Severson: And just as a rough approximation, let's say we take that average modeling purposes and say, three years out, what's that unit worth if you sell it for $1 million a little less than that? I guess, if you sell a new product sale just under $1 million for a megawatt. Is that 50% that value, 30% that value? What’s the used market that we should look at?
Darren Jamison: Yeah. I think all the units go out with essentially an FPP and so our own service organization is tracking them, remotely monitoring them, making sure the service is done to them. So they should be -- if they come back in three years, it's good. It’s 20-year asset, it should have at least 17-years of life left in it, as long as been well maintained, should be 60% to 70% the value of new. So I think there's definitely – we will be depreciating the units and so we'll have our book value, we'll have to make sure we have good margin between our book value and the sell price, we should have plenty of room.
Shawn Severson: Yeah, I was going to say, because it probably depreciates a lot more than what the value is. So be carried on the books in pretty low asset value but have resale value.
Darren Jamison: Yeah. So it's a 20-year asset but we’re depreciating it over 10-years.
Shawn Severson: Okay. Next question is on the installed base that was obviously a great pool deficient pond deficient in terms of going back to some of those customers that you've already sold, microturbine systems to and looking to expand the storage or whatever. Can you just kind of give an update on that? And have you had any success there? Where we are in the progress report?
Darren Jamison: We're very close. We've been having to do training on all the new microgrid solutions and products and battery storage stuff we have, it's challenging. We still could only get half of the direct sales organization back here to the factory, mostly international folks couldn't get a flight because of COVID. And so we're having to do zoom training. But it's getting better. We've added two more sales people to the direct sales solution organization. We've got the building across the street that we're utilizing to set them up in. So I think the direct solution sales team is about 13 people, we hired two more salespeople in the last 60 days. And so they're well over $100 million of quoted new products besides microturbine products. And so I think you'll see the first battery storage, micro grid sales here in hopefully fill this quarter. And I think Baker Hughes will see an order, hopefully by Q3. It gives a kind of said a few minutes ago, we've put all these initiatives in place that you haven't seen a large battery storage order yet, you haven't seen a Baker Hughes order yet, you haven't seen a hybrid system order yet. The rentals, you've seen some of the impact, but the difference between 7, 8 megawatts on rent versus 21 is pretty significant.
Shawn Severson: And those sales are likely to be to a prior customer, if I understand that correctly?
Darren Jamison: Yeah, I mean, the first goal is to go to the existing folks. I think the one we're expecting first is a hospital that has a CHP system. And we're looking to add some battery storage to that existing system and some PV. So we're going to existing CHP customers and seeing if we're taking care of all their loads that they could benefit from some stranded loads where the battery storage makes no sense, or the battery storage and some PV. And then I think on the hybrid system, those machines really work well for telecom and remote applications. So we're very excited about applications in the Caribbean, applications up in Alaska, telecom around the world, Africa, Middle East, lots of areas, we're going to put that hybrid system. It's very similar to the polar power product for folks that don't know what the hybrid system is, it's a small DC generator, can run on multiple different fuels with battery storage or battery storage onboard, frankly, in the box with PV and a controller.
Shawn Severson: Okay. And then I know it's early, but I have to ask. Anything in the infrastructure bill that jumps out at you? Obviously, there is reaction in EV space with some others, but have you found anything yet? Again, I know, it's very early, but anything that jumps out.
Darren Jamison: It's very early. I think, if you look at it in general, I kind of want to wait until everything's done before we make a lot of comments. But I would say from a macro level between the infrastructure bill between the $3.5 trillion budget framework that was approved by the Senate Democrats today, with a blueprint for investing in families, climate, healthcare and infrastructure. The EU is working on huge kind of next generation EU bill. They're going to come out with their own $2 trillion program for a greener, more digital and more resilient Europe. I think you're going to see very similar spending around the globe, where countries are going to look to recover from COVID in a green and resilient manner. And so I think we're well-positioned as those programs roll out to benefit from. But I would say, as you know, we get through the IndyCar season and be able to go to some of the races, talking to DHL, talking to Firestone, Genesis, a lot of these larger companies all have green initiatives, and they're coming from the boardroom to meet ESG and those standards, and a lot of them are really struggling to figure out how to hit those carbon reduction goals. It's great to pass them down from the Board room . We talked to Honda, they want to be carbon-neutral by 2030. That's a huge undertaking, right. And so I think, as we talk to these folks, we're working through with them what they can and can't do, and frankly with the price, right. I think getting carbon-neutral is expensive for a lot of folks. But first thing to do is to use less energy, energy efficiency, whether it's lighting, whether it's CHP system, and then battery storage, PV, smart controls, smart metering all those good things. And so I think I'm excited for the next few years and look like we spent a lot of our last 10-years trying to educate customers on energy efficiency, and the benefits of green energy and carbon reduction, now that I feel like the market is coming to us, and that customers truly have a problem they need to solve, and that the Board of Directors are putting out hardware reduction goals that they and the management and what we’ll have to execute against.
Shawn Severson: And then my last question is regarding hydrogen, and kind of it's more a question about going to market strategy. Obviously, suppliers of hydrogen want to find ways to have it consumed, right, and fuel cells are not always a source maybe companies like Westport who use spark-ignited, direct injection with hydrogen and some other things like that. Are you considering? Or, have you talked with any of the large hydrogen suppliers that are emerging out there, particularly in Europe, where it's very well developed? Because obviously, if they as ways to sell hydrogen capable turbines to their customers again, not everybody's going to be running on fuel cells.
Darren Jamison: Yeah, we're having some of those conversations. Our first hydrogen blended system has been sold in Australia and in Europe, which makes sense. I think that's where they've got more infrastructure and more focus. And frankly, they're ahead of U.S. on the hydrogen front. Japan also is very focused in that area, as well as Korea. So I think we'll look to talk to the hydrogen producers. We’re also looking from a technology standpoint to see if there's something we can couple with our product. And that's one of the directives I've given Jeff and his new role to see if there's a hydrogen technology that we can couple with ours, to have more of a complete one-stop solution for our customers. I think a lot of customers are interested in hydrogen, but how to generate it, especially green hydrogen, and how to have a cost effective solution that's not overly complicated for them, or overly risky is key. So, I think there's some exciting things I think we can do in the hydrogen space. I think, a lot is going to happen in hydrogen across the board in the next five to 10-years. I think the DoE as well is extremely interested in hydrogen, so I think I would be surprised if we don't do some development work with the DoE in the next few years, as we've been pretty vocal with them on some of our hydrogen initiatives and goals.
Shawn Severson: Right. Thanks, guys.
Darren Jamison: Thanks, Shawn.
Operator: Okay. We have no further questions in queue. I'd now like to turn the floor back to Darren Jamison for closing remarks.
Darren Jamison: Great questions, guys. I think most of the things I want to say like closing remarks we really stepped into. I'm very excited about what the next couple quarters are going to look like. As I mentioned, we still have challenges with supply chain, we still have challenges with COVID. We're still working to get our direct sales organization up to speed with the impacts of COVID plus just staffing it out. But I think as we bring the direct sales organization online, and you start seeing the top-line growth that they're going to generate, and additional business they're going to generate, our distributors rebound from COVID and get back up to more normal product sales levels, that's going to be exciting for us. And then, I couldn't be more excited about the rental fleet. As we build that rental fleet up and you see the impact of those higher margins, that reoccurring revenue, it's going to transform our business. And there's a lot of folks in our space, they've very sexy revenue numbers, but there are huge cash hogs, huge negative EBITDA, and huge net losses. I think we can be a company that maybe doesn't have quite the top-line growth, but has very solid double digit top-line growth with positive EBITDA and generated cash. And I think long-term will be a better play for a lot of our customers and our shareholders. So excited about it. I think there's a lot of good things to happen, a lot of initiatives, we started in the last six to 12-months that we'll see the benefit of that work in the next six to 12-months. So good quarter in Q1. Q2, hopefully will be better than Q1. But I think Q3 and Q4 should be really exciting. And next year, should be a game changer for us. Again, the Biden administration as they move forward with their infrastructure bill, the new $3.5 trillion budget as Europe put together their programs, all of that should be wind in our sails as more of the planet moves for green energy, sustainability, energy independence and reliability. So it's all moving in the right direction and will continue to. And I think it's not just government subsidies I mentioned, you got the Gen Z, you've got the consumers wanting to buy green products, live in green buildings, rent green hotel rooms, have sustainable products. And so I think that's all moving in the right direction, as those big folks become bigger consumers and bigger voters, and a bigger part of the population, it's only going to make growth of our business easier, not harder. So, with that, I'll go ahead and close the call and look forward to talking to you next quarter. Thank you.
Operator: Thank you. Ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
