Capstone Green Energy Corporation (CGRN) on Q4 2021 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 Fourth Quarter and Full Fiscal Year 2021 ending on March 31, 2021. All lines have been placed in a listen-only 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 your host, 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 2021 fourth quarter and full year 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.
Darren Jamison: Thank you, Colby. Good afternoon, everyone. Thank you for joining us today to review our fourth quarter and full year fiscal 2021 results ending March 31, 2021. Before getting into specific financial results, I’d like to review recent financial highlights from the fourth quarter and provide an update on our adjusted EBITDA improvement initiative. Let’s go ahead and start with slide four. On slide four, we’ve outlined some of the financial highlights from the fourth quarter. I will not run through each item, but I would like to draw your attention to a couple of the more important events beginning with revenue. Revenue was up nicely compared to last year’s fourth quarter. Although last year was very tough with COVID related issues, the growth is still significant with revenue of $17.9 million for the quarter, up from $11.6 million year-over-year. Our key metric of adjusted EBITDA excluding executive bonus was negative $1.9 million for the quarter, compared to a negative $5 million in the same period of the previous year and we posted positive cash from operations of $5.1 million, including a $5 million legal settlement, compared to cash used in operations of $4 million in the fourth quarter last year. So that’s a $9.1 million improvement year-over-year. So even without this settlement, we crossed over into positive cash from operations for the quarter.
Eric Hencken: Thanks, Darren. I will now review in detail our financials for the fourth quarter of fiscal 2021, which can be found on slides nine through 11. As a reminder, the company issued select preliminary fourth quarter results on April 12, 2021, and the results released today are consistent with those preliminary results. Starting on slide nine, you will see our fiscal fourth quarter 2021 results compared to the fourth quarter of fiscal 2020. Quarter-over-quarter we improved in every line item starting with revenue increasing $6.3 million or 54% up to $17.9 million from $11.6 million last year. Product and accessories, which is also our Energy Conversion Product revenue increased $5.9 million to $10 million, compared to $4.1 million in the prior year quarter. Parts and service revenue which is also our Energy as a Service revenue increased $0.4 million to $7.9 million, compared to $7.5 million in the prior year quarter. Revenue was up primarily due to the prior year quarter being heavily impacted at the start of the COVID-19 pandemic with project delays and site shutdowns. Gross margin was negative $2.6 million or negative 14% of revenue, compared to $0.5 million or 4% of revenue in the prior year quarter. Our gross margin was negative in the quarter because of a $4.9 million reliability repair accrual for the replacement of remaining high risk failure parts in some of our fielded units due to a former supplier part defect. Non-GAAP gross margin, which excludes depreciation and amortization, stock-based compensation expense and the reliability repair accrual was $2.7 million or 15% of revenue, compared to $0.7 million or 6% of revenue in the prior year quarter. The increase in non-GAAP gross margin was primarily due to improvement in our Factory Protection Plan margins. Operating expenses were flat at $5.9 million, compared to $6 million in the prior year quarter. However, they were down to $1 million, if you exclude one-time legal costs and executive bonus expense that existed in the fourth quarter of fiscal 2021 but not in fiscal 2020. That decrease was primarily due to continued savings extending from our COVID-19 Business Continuity Plan. That loss was $4.8 million, compared to $6.9 million in the prior year quarter and adjusted EBITDA excluding executive bonus was negative $1.9 million, compared to negative $5 million in the fourth quarter of fiscal 2020, an improvement of $3.1 million. Turning to slide 10. Slide 10 summarizes our full year fiscal 2021 results over fiscal 2020. 2021 was significantly impacted by COVID as you know. It was a very tough year on every level. Despite this, we nearly cut full year revenue flat coming in at $67.6 million versus $68.9 million last year. We feel this was quite an accomplishment given the environment.
Darren Jamison: Thank you, Eric. Let’s go and focus on slide 13. Here we’ll discuss the transition to Capstone Green Energy and what that means. I know we review this recently in our virtual press release on Earth Day April 22nd, but I want to run through the highlights again. We now view our business in four key strategic business lines. Let’s begin with Energy as a Service or EaaS. This is critical to continuing our transition to more predictable cash flows and higher margin rates. This segment includes long-term rental contracts, long-term service contracts or our Factory Protection Plan, FPP, installation services, traditional service, spare parts, leasing, power purchase agreements and project financing. It also includes our innovative distributor DSS subscription fee program. The common denominators among this business are steady cash flows, high visibility and improve margin rates. Next is our Energy Conversion Technologies or ECT. This is the backbone on which Capstone was built and it’s based on Capstone’s core microturbine technology that you’re all familiar with and can operate on a wide range of fuels. These products produce high efficiency CHP, CCHP, generating electricity in multiple forms of thermal energy.
Operator: Thank you. And we have a question coming from Rob Brown from Lake Street Capital Markets. Rob, your line is live.
Rob Brown: Hi. Good afternoon.
Darren Jamison: Hi, Rob.
Rob Brown: Hi. Just pulling up on your hydrogen strategy, I know you’re early into it and hiring people. But what are some of the kind of verticals or areas that you think that make sense to add on to what you’re doing in terms of expanding your core technology to work in hydrogen?
Darren Jamison: Well, definitely hydrogen is an area we see growth and we’re already seeing a lot of interest for both blended hydrogen, renewable natural gas and then 100% hydrogen. I think if we look from a strategic standpoint, the ability to generate hydrogen, as well as utilize that hydrogen make sense. So companies that have hydrogen technologies would be something we’d probably take a look at. But definitely, I mean, hydrogen, I think is an area we’re actually surprised at how fast we’re seeing new opportunities. This is something that has really picked up a lot of momentum in the probably the last 18 months and we’re seeing new developments, new opportunities and a real dedication to hydrogen, not just in the U.S., but Europe. We started to see it in Japan about a year ago, Australia. So we’re seeing lots of governments and lots of customers very, very interested in hydrogen. And even customers today that we put in natural gas solutions for are actually talking to us about hydrogen, the ability to convert our product to hydrogen or blended hydrogen in the future.
Rob Brown: Yeah. Thank you. And then on the rental business, how is that demand environment changed? Have you seen it improved sort of a normalization or how we should characterize the rental demand environment?
Darren Jamison: Yeah. The rental demand is been picking up nicely. I think we’re up to about 60 megawatts of pending opportunities. Obviously, with a target fleet size of 20 megawatts, we’re currently at 10.6 megawatts. We’ll update the fleet size here in the next few weeks, as we get through the end of the quarter. We continue to sign contracts and negotiate contracts. I would say that the oil and gas is coming back online. Shell is our biggest customer for rentals in oil and gas space. But I think the reason stabilization of oil prices and the increase in oil prices has helped. We’re definitely seeing some CHP applications and opportunities. We’re seeing a lot of grow houses opportunities, as well as some Bitcoin opportunities. So definitely a robust kind of diverse pipeline of opportunities, but we think we’ll usually get to our 20-megawatt goal by the end of the year.
Rob Brown: Okay. And then last questions on that reliability repair accrual? Could you just clarify the -- what the scope of that and what that covers, and just maybe some clarification on what that is?
Darren Jamison: Yeah. As we move through the legal process, when we finally got, complete the due diligence, we saw that the scope of the defective parts was larger than we thought. And so we thought that we were mostly through that issue. So we went ahead and put that accrual in place to take care of all the remaining units that are still in the field, with the assumption that the vast majority will fail at some point we’ll need to replace them. Coincidentally, the accrual amount and the recovery we got from the vendor are very similar. So the accrual is roughly $4.9 million and we recovered about $5 million in legal settlement through the process. So the good news is what failure rates were one per day, the last, call it, a year ago, 18 months ago, we’re down to one every 10 days. We are seeing the end of that issue and so we’ll work to that the next, probably, three quarters, I would say, by December, we should have no more of the old defective part in the field. And that’ll really lead to more happy customers, better margin rates, more repeat customers. Having a critical parts issue in the middle of a pandemic, with a technology like ours is challenging, so we’re very excited to get through both the parts issue and the pandemic and really see what the Capstone Green Energy company can do going forward.
Rob Brown: Okay. Thank you. I’ll turn it over.
Darren Jamison: Thanks, Rob.
Operator: Okay. Your next question is coming from Amit Dayal from H. C. Wainwright. Amit, your line is live.
Darren Jamison: Hey, Amit.
Amit Dayal: Thank you. Hi, guys. Thank you for taking my questions. So, Darren, as you come out of this sort of pandemic COVID environment and looking to the fiscal 2022 timeline, do you feel that the pipeline is strong enough, so you can now get into a position to post (ph) growth?
Darren Jamison: Yeah. No. I think that the next -- this year is going to be a watershed year for us coming out of COVID with the new direct sales team by building the rental fleet out, the new hybrid products, the energy, the battery storage products, different solutions we put in place, rebranding of the company. I think we’ve kind of hitting on all cylinders, not to use a phrase. We’re very excited about it. COVID is still a problem for us, our distributors in Europe are still struggling, we get some issues in Latin America still. I think Australia is shutdown for a week recently. India, still a big mess. And so we’re not through COVID and there’s still some issues here in the U.S. But I think we can see the light at the end of the tunnel. So I think Q1 and Q2 will be okay. But I think, Q3 and Q4 going to be blockbuster for us and we are really going to get rolling in the back half of our fiscal year.
Amit Dayal: Understood. And sort of with the new branding, et cetera, has that been helping the sales team build a pipeline or maybe get a bit more sort of visibility with the customers you are pursuing?
Darren Jamison: Yeah. And I know we’ve got more than $100 million of pipeline of non kind of Capstone core technologies. So, Baker Hughes, battery storage and the hybrid solution products, that will grow exponentially over the next several quarters. We’ve got over $1 billion of traditional pipeline out there with our distributors. So as the direct sales force is now able to get on airplanes, as we learn how to sell and apply the new products and the opportunities I think we are -- you’re going to see a lot more opportunity. And as I said in my prepared remarks, instead of selling just the microturbines in a microgrid, being able to sell the battery storage, the solar, the controls, your total revenue per project goes up. Your ability to provide a turnkey solution for our customer to be able to wrap the whole thing in a 20-year FPP, Factory Protection Plan, is very, very unique. And a lot of customers are anti-natural gas. So to be able to come in with other solutions, talking about hydrogen, talking about battery storage, talking about some of our other technologies, really helps us have a more comprehensive conversation with customers and educate them on all the different pluses and minuses of each technology. So, very much more of a solution sales program, very much more of a custom program (ph) off the rack, so we can custom-tailor solutions. Our balance sheet is key, for the first time I think in the last six months, I haven’t had to talk to a customer about our balance sheet, our viability. So as we continue to grow our balance sheet, generating cash from operating activities for the year is a great milestone for us. I look at some of the fuel cell companies that are burning $10 million to $30 million of cash from operations on a quarter-by-quarter basis or more. The dilution that they’re putting out there. So I think we’re in a unique position to have a business model that will generate cash and we can both generate topline growth as well. I think that will make unique in the space.
Amit Dayal: Makes sense. And with respect to the after month of margins, how much more room do you think, Darren, is there to improve those margins from current levels? And have you already sort of implemented some of these efforts or is this something that is still coming into play for us?
Darren Jamison: No. We got lots more room on the margin side. The product margins right now are close to zero any given quarter, just because our volumes are so low. So as our volumes pick back up again, we’ll see the product margin increase. We’re working hard this year on our vendors and maximizing our direct material costs. Obviously, COVID has impacted our pricing from our vendors, logistics, or mess right now. So supply chain has been challenging over the last 12 months of the COVID. So I think we will have improvements in our supply chain costs. We will have improvements in our topline revenue, which will give us more purchasing power. And then as we get the issues with the bad parts out of the system, we will see our margins rates improve on the service side of the business, because as part fails, it doesn’t take out just the single part, it takes out collateral damage in other parts. And so you’re going to see improvements in our service margins each quarter going forward for the next couple of years and our product margins as well will start to grow. And so I think that definitely, margin expansion with both improvements of the business, the rental fleet as you know is the highest margin business we have. So as we double the size of the rental fleet, that’s going to have a nice impact. So, plenty of room to go on the margin side.
Amit Dayal: Understood. That’s all I have, Darren. I’ll take my other questions offline. Thank you.
Darren Jamison: Thank you, Amit.
Operator: And we have a question coming from Shawn Severson from Water Tower Research. Shawn, you’re live.
Darren Jamison: Hi, Shawn.
Shawn Severson: Thanks. Hey, there. My question is about the gross product bookings and coming out of the quarter exiting the quarter at $12.7 million, how much in all that include, what you mentioned in terms of the rebound in oil. I mean oil is only been recently up and activities only been recently picking up. So, trying to understand, if that was part of it or that’s something to look forward to in the first quarter?
Darren Jamison: No. I think if we started to see the leading edge in the fourth quarter, we should see more in the first quarter. Oil and gas companies will move that quickly. So I think you’ll see more bookings in oil and gas in Q2 and Q3. And probably by Q4, we should be in really good shape. Things continue the way they’re continuing. I think the more people are looking for alternative energy solutions, green energy solutions, greenhouse gas reduction, obviously, the Paris Climate Accord and the Biden Infrastructure Plan, I think will be helpful to us. So I think all that’s heading the right direction. But we’ve seen a growth in our bookings the last four quarters. We hope to keep that going in Q1 and Q2. But again, I’m really excited especially the back half of the year. I think that as we start to getting inputs from all of these revenue sources and some of the new implementations of the new things we’ve done so contributing the back half of the year, as I said, could be really exciting for us.
Shawn Severson: And that’s actually reading my next question is regarding, when you look at technologies and services to expand, right, to expand as part of a microgrid solutions company. Where are the best acquisition candidates, just in terms of driving margin for you? I mean, it doesn’t make sense to buy something in storage, something that as you look at all the different components that you could supply into a microgrids. So trying to tie that back to your acquisition strategy and obviously the new addition there?
Darren Jamison: Yeah. I think first step is, we’ve put 10,000 microturbines all over the world. Most of those are in some form of a microgrid. So the first step for our distributors and direct sales force is to go, try to apply our new products to our existing customer base. And so can we add battery storage to a CHP installation that doesn’t have battery storage today. Now many of our sites like do have battery storage already, but I’d say, more than half of them do not. So I think that’s kind of step one. I think battery storage is definitely interesting from an M&A perspective. I think controls. There is some improvements we can do on the microgrid controller side and some interesting technologies out there. I think there could be something around hydrogen we take a look at. But rentals, I mean, growing the rental business is important. If we could look at an acquisition in the right area of an existing rental company that we could swap out their traditional engine-based technologies to our hydrogen-based solutions that would be an interesting opportunity for us. And then, service wise. If there is something service wise it makes sense for us. And so, I think we’ve got a pretty wide-open field here. We’ve got a balance sheet now. I think, we’ve got businesses are generating cash and we’ve shown that we just did in the last year, putting Jeff Foster, one of our top executives solely focused on this, really shows our commitment and that we’re going to go look for the right thing to do. Now, we don’t want to do an acquisition or strategic partnership just for the sake of doing it. It needs to be accretive. It needs to make us more profitable. It needs to make us more competitive. But I think there’s a lot out there. Some of the green energy stuff, company wise are priced up a little bit right now from a market cap perspective. But I think that -- those things are cyclical. So we’ll look for the right time and the right opportunity.
Shawn Severson: Next question is on the rental business. Obviously the groundwork has been laid there and you’ve done quite well in the oil and gas industry. And can you maybe remind us why that has done so well, but I guess the spear of -- the tip of the spear so to speak in the rental business? And then why aren’t other sectors adopting this, because you still have the same, the value proposition is value proposition. Why not more industrial complexes or universities or hospitals or commercial environments?
Darren Jamison: Yeah. I think the oil and gas is one where they use rentals quite frequently. They kind of, if they don’t have utility, they will bring rental machines in, they are used to renting equipment, whether it’s compressors or generators. So I think it’s one where there is -- they’re already in the process or in the business of renting generators and to matter of just penetrating the market. I think the heavy push in the oil and gas based towards ESG and lower emissions and lowering their carbon footprint is going to drive more rental opportunity. And you’ve seen what’s happened recently with some of the big majors and some of the impacts they’ve had for folks looking for them to be greener quicker. So I think that’s going to be a good focus for us. If you look at some of the industrial applications. If you do CHP in a rental application you’ve got the chiller that you’ve got to deal with. So in some cases, we’re looking at potentially buying the chiller and renting a longer term rental. We are quoting some industrial applications, but in order to make the rental work with the equipment we have to put into the rental, you’re probably looking at a seven-year to 10-year rental to make it work out, which we’ve quoted and I think we’ll do some here. We’ve got a hospitality customer. We may do a 10-year rental for including absorption chillers. So I think definitely those will come. They are a little more complicated rental than your traditional oil and gas rental. I do think the cannabis industry to grow house industry is one we’ve rented several machines into. I think we’ll do several more. They’re growing very quickly and they quickly outpaced the local grid as far as energy demand. And then Bitcoin is one with the changes going on in China with their own digital currency. We’re seeing a lot of Bitcoin farmers move over to the U.S. and so that’s creating a energy demand. It’s -- the utilities are in trouble meeting. So that could also be an opportunity for us.
Shawn Severson: I’m just trying to understand and delineate between rental business of Energy as a Service, right, as by basically providing an offtake agreement or working with a potential customer like that. I mean is there a tipping point or a hurdle that you get to get to sent renting equipment you just sell them Energy?
Darren Jamison: Yeah. No. I think we offer all of it. And so I think it just depends on what the customer’s appetite is. So we can sell them energy. We can do -- kind of power by the hour. We can do a PPA. We can do kind of a hybrid financing solution where they pay like an activation charge upfront, then we do like a seven-year rental. We can offer a buyout option at year five and year seven. So I think that’s part of what we can do, having a balance sheet now and have an ability to kind of custom tailor solutions for customers. And our part is really just trying to find what the customer’s needs. Are they renting their facility. Do they own the facility? Are they expanding their energy needs? Are they going to reducing their energy needs? How important is carbon reduction versus energy savings versus resiliency? So I think it’s more complicated because we’ve got a lot of solutions, but at the end of the day, it allows us to really not be a one size fits all we go in and customer tailored solution for the end-users. And our goal is, again, whether we’re talking to a DHL or a Magna, or a Marriott. We want to -- they’re going to one project, we want to do a large scale rollout and we’re going to be a long-term partner. And if we make less money on one project, so be it, we’re dedicated to the long-term overall relationship.
Shawn Severson: Right. Thanks. I’ll step back in the queue.
Darren Jamison: Okay, Shawn.
Operator: We have no further questions in queue. I’d like to turn the floor back to Darren Jamison for closing remarks.
Darren Jamison: Rob and Amit, Shawn, great questions. You touched on a lot of things I wanted to talk about in my summary. I’ll just say, overall, good quarter, great year, especially considering the COVID situation. Considering the fact we had a longer than we anticipated issue on the parts reliability issue. We’ve built on -- we’ve built the business. We changed the business. We’ve improved the business. If you look at a short-term basis revenue, $17.9 million versus $11.6 million a year ago. Both quarters have had COVID, obviously, it’s better now than it was a year ago. Positive cash from operations of $5.1 million for the quarter. Again, I know everybody loves revenue. I’m old fashion. I think you take cash and profit to the bank, not revenue to the bank. I think investors hopefully will start giving us a little more credit for generating positive cash from operations as opposed to burning cash every quarter like some of the other folks in our space. I think $49.5 million is the largest balance sheet we’ve had in a long, long time. For the full year, generating $1.7 million of positive cash versus a loss of $19.8 million. That’s very, very significant year-over-year in what was a challenging year. Revenue down 2% year-over-year is disappointing. We actually hope to be flat or slightly up. But considering the headwinds, that’s pretty good revenue outcome, and again, a lot of companies would love to be flat year-over-year in a COVID environment. Refinancing Goldman Sachs at almost half and a much lower rates and adding $20 million during the pandemic I think is a great outcome. And Eric and his team did a great job renegotiating that and the folks at Goldman Sachs have nothing but top-shelf and gentlemens to work with. Product bookings again $12.7 million for the fourth quarter is great. Last three quarters we’ve seen increased energy and quotation activity and better bookings. The Baker Hughes arrangement is very exciting to be able to offer a 5-megawatt to 16-megawatt solution with the company’s high caliber as Baker Hughes is exciting. 16-megawatt turbine project turnkey is going to add 15% to our topline revenue for the year, right? I mean these are big machines, these are big projects. New battery storage and hybrid microturbine products, we’ll get into more of that in the next couple of calls. We started selling some of these technologies. We will detail little more. We don’t want to completely tip our hand from a competitive standpoint. These products are going right at some people in our space like Polar Power and other folks that have similar technologies. So we’ll get a little further out along the playing field before we give too much information about what we’re doing. We’re very, very excited to be able to work with customers, give them custom solutions, be their one-stop shop. We really want to make sure that we’re there energy supplier for green energy, for carbon reduction, for resiliency and that we’re not doing a project we’re working on a long-term relationship and that we’re there for them for the next 15 years to 20 years. So, very happy with the year. Very much looking forward to next year. Very excited about Capstone Green Energy and creating smarter energy for cleaner future for all of our customers. And with that, we’ll talk to everybody after the first 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.
