Capstone Green Energy Corporation (NASDAQ:CGRN) Q3 2023 Earnings Call Transcript

Capstone Green Energy Corporation (NASDAQ:CGRN) Q3 2023 Earnings Call Transcript February 13, 2023

Operator: 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. As a reminder, today’s program will be recorded. 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.

Don Ayers: 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 Jamison, Capstone Green Energy’s President and Chief Executive Officer; and Scott Robinson, Interim Chief Financial Officer. Today, Capstone Green Energy issued its earnings release for its fiscal 2023 third quarter ended December 31, 2022. We will be referring to slides that can be found on our website under the Investor Relations section during the call today. This conference call contains estimates and forward-looking statements representing the company’s views as of today, February 13, 2023. 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 of the slides accompanying this presentation in today’s earnings release 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 Scott go through the discussion today, when they mention EBITDA, they are referring to adjusted EBITDA and the reconciliations in the earnings release and the appendix to the presentation slides.

I would like to now turn the call over to Darren Jamison, President and Chief Executive Officer.

Darren Jamison: Thank you, Don, and good afternoon, everyone. Thank you for joining today for a review of our third quarter fiscal 2023 results ending December 31, 2022. If you go ahead and now turn to Slide 3. 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-as-a-Service, our EaaS business remains the foundation upon which we are building a stronger Capstone. 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 of today’s presentation providing more details and additional information on our products and the new IRA bill. Let’s go ahead and jump to Slide 5. Slide 5 shows our current business environment that we’re in today. Third quarter revenue was off $1 million compared to the same period last year, but to date, revenue was up 9.5%. This revenue growth can be attributed to our Energy-as-a-Service or EaaS business, which has grown approximately 18% and continue to outperform the rest of the business. As you know, the Energy 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 million and an FPP maintenance contracts 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 that we’ve seen to start our fiscal fourth quarter and what I expect for the rest of calendar 2023. For the first nine months of fiscal ’23, 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 play I guess more than we anticipated. Now let’s move on to Slide 6. On Slide 6, you can see that on December 31, 2022, there was about 40 megawatts of Energy-as-a-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.

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. I’ll now turn the call over to Scott, our interim CFO, to go through some of the specific financial results. Scott?

Scott Robinson: Thank you, Darren, and good afternoon, everyone. I will now review in more detail our financial results for the third quarter of fiscal 2023. Moving to Slide 8. You can see our Q3 ’23 results compared to Q2 ’23, 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. Product and accessory revenues were $10 million down from $10.6 million in the second quarter of fiscal ’23. Parts, services and rental revenue, which includes the rental, FPP long-term service contracts and distributor support subscription fees were $9.2 million, down from $10.2 million — excuse me, $9.6 million, down from $10.2 million in the second quarter of fiscal ’23.

And this was primarily due to a decrease in our spare parts revenue due to Russian sanctions. Gross margin as a percentage of revenue was 14% in Q3 ’23, up from 11% in Q2 ’23, primarily due to the easing of supply chain challenges. Total operating expenses increased slightly to $2.6 million from $5.7 million in the previous quarter. Net loss was $5.2 million for the quarter compared to a net loss of $4.9 million in the second quarter of fiscal ’23. Adjusted EBITDA was a negative $1.7 million compared to adjusted EBITDA of a negative $2.2 million in the second quarter of fiscal ’23. 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.

Product and accessory revenue was $10 million, down from $12.3 million last year. Parts services and rental revenue was $9.6 million, up from $8.3 million in the same period last year. Gross margin as a percentage of revenue was 14%, up from 11% in the year ago period, primarily due to greater contribution from our higher-margin rental business. Total operating expenses were staggering at $6 million from $6 million in the year ago period. The current year expenses include costs for investment banking and other fees relating to our debt refinancing activities. Net loss was $5.2 million for the three months ended December 31 compared to a net loss of $5.1 million in the prior period. Adjusted EBITDA was a loss of $1.7 million compared to adjusted EBITDA of a negative $3 million in the prior year period.

Slide 10 shows the year-to-date fiscal ’23 versus the year-to-date fiscal year ’22 financial results. Top line revenue increased from $53.9 million to $59 million due to growth in our Energy-as-a-Service business. 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. Operating expenses decreased from $19.7 million to $17.2 million due to cost reduction efforts and adjusted EBITDA improved from $8.1 million loss to a $3.4 million loss. Turning to Slide 11. You will see selected balance sheet and cash flow items. 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. The variation was largely due to net loss funding and inventory purchases. Accounts receivable declined nearly from $19.3 million to $15.2 million as our DSO dropped from 85 days to 66 days during the quarter. 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. 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.

In addition, we do need more inventory as we ramp production of both new products and focus on growing the rental fleet to 50 megawatts by March 31. I will turn it back over to you, Darren.

Darren Jamison: Thank you, Scott. As part of our quarterly update, let’s take a few minutes to remind investors of our overall strategy and how we’re working to achieve our profitability goals. Let’s go ahead and turn to Slide 13. 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 especially EV charging where we’re seeing new demand for both stationary and portable EV charging solutions. Let’s go to move on to Slide 14.

Slide 14 displays the projected revenues for our global EV for the global EV infrastructure market, and our plan is to be there to take advantage of much of that market as we can. 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 for the local utility. Slide 15 shows you a key new solution we are developing to meet the needs, and we’re starting to see some 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 biogas to power the EV charging infrastructure.

This gives users the option to charge a bus or a truck fleet without the need for extra great infrastructure, grid payments and enables fleets to provide electric vehicles and deploy them much quicker. 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 Capstone EaaS allows for the rental of these units, so the costly capital expenditures can be avoided. 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 are able to survive an extremely challenging supply chain climate. I’m enthusiastic about what I’ve observed in the beginning of our fiscal fourth quarter and what I anticipate 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 to return to more normal levels we saw in Q1 and hopefully in the fourth quarter and the first quarter and beyond. 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. As we move away from being solely a manufacturing firm, our energy to service rental business will continue to be our main focus and should deliver us benefits like profitability, predictable revenue, predictable revenues and strong cash flows.

As we get closer to our target of 50 megawatts under contract, our results show that we have made progress to making the 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 analysts. Operator?

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Q&A Session

Operator: Your first question is coming from Rob Brown from Lake Street Capital Markets. Your line is live.

Rob Brown: Hi, Darren. Hi, Scott. Just wanted to talk a little bit about your confidence in your rental trajectory there to the 50 megawatts. How does 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 a year ago.

Darren Jamison: Yes. No, it’s a great question. We’ve got a 100-plus 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 U.S. oil and gas space I would expect that we’ll be at 45 megawatts under contract by the end of this month, and then we will need to fill five megawatts between into February and into March. So 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. And 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, that most of the opportunities we’re seeing right now are in the oil and gas space, especially since January.

Rob Brown: Okay. Great. And then have you seen any of the IRA driven demand yet, I assume it’s still coming. But if you haven’t yet, how does that play out in the next few months?

Darren Jamison: Yes. We had great bookings in January. In fact, we actually booked more product sales in January than 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 going to be very significant. If you look at the U.S. market is well more than half of our business and the biggest piece of that has been CHP in renewables. So that’s definitely hitting our biggest market with a huge incentive. So taking that IRA tax incentive from 10% to 40% is very significant. But 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 U.S. market also being strong. We’ve also got products — projects going on in Latin America. Australia and parts of Asia.

Rob Brown: Okay. Great. And my last question is on pricing that you took at the end of January. What’s sort of the magnitude of that? And does that happen pretty quickly? Or does that take time to roll out?

Darren Jamison: No, it definitely happens — I mean, we implement it quickly, and we update sales force, but there is a lag, obviously, because we typically book products one quarter and ship them a couple of quarters later. So there’s going to be a lag between new orders and higher pricing when those will go through our P&L. So January 31 was a new price increase. In the U.S. market, it was 10%. Overseas, it was more like 7% just because the IRA bill being the U.S. influence and then obviously, the dollar is be fairly strong as well. So a fairly significant price increase. We did one last year as well. We’re still working on the other side of the equation, which is getting costs down from our vendors. We are seeing freight costs and freight shipping times come down nicely.

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, the costs need to come back down. So it’s — I would say we’re on the backside of the bell curve when it comes to supply chain issues, but we still have some work to do to get there.

Rob Brown: Okay. Thank you. I’ll turn over.

Darren Jamison: Thanks Rob. Great questions.

Operator: Thank you. Your next question is coming from Shawn Severson from Water Tower Research. Your line is live. Once again Shawn, your line is live.

Shawn Severson: Thank you. Just a couple of questions, Darren. 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 mean I know you said you started a strong calendar year. But I’m trying to understand what we look out and modeling the year, where do you see the bulk of this coming in? And do we have any big sort of big surges that we would look for later in the year as this really starts to develop?

Darren Jamison: Yes. I think you definitely have to look at our normal project life cycle, which for product sales where it’s capital purchase, these projects can be 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 Salesforce at a better clip. And so I think we’re starting to see the leading indicator of it, but it should really strengthen this summer and 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 product sales pipeline, especially in the U.S. this year as well as trying to get to 50 megawatts. So we’re pulling pretty hard on our supply chain.

And defense of our supply chain, our purchases are up dramatically year-over-year much more than our revenue because of the build on the EaaS side. So definitely look though for the back half of the year going to be very strong. 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.