Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Capstone Turbine Corporation (NASDAQ:CPST)

Q4 2014 Results Earnings Conference Call

June 12, 2014, 04:45 PM ET

Executives

Darren Jamison - President and CEO

Edward Reich - EVP and CFO

Jayme Brooks - VP, of Finance and Chief Accounting Officer

Analysts

Rob Stone - Cowen & Company

Eric Stine - Craig-Hallum Capital Group

Aditya Satghare - FBR Capital Markets

Philip Shen - ROTH Capital

JinMing Liu - Ardour Capital Investments

Operator

Good day ladies and gentlemen and welcome to the Q4 and Full Fiscal Year 2014 Capstone Turbine Corporation Earnings Conference Call. My name is Whitney and I will be your operator for today. All participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). During today’s call Capstone management will be referencing slides that can be located at www.capstoneturbine.com under the investor relations section. As a reminder this conference call is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Jayme Brooks, Vice President of Finance and Chief Accounting Officer. Please proceed.

Jayme Brooks

Thank you. Good afternoon and welcome to Capstone Turbine Corporation's conference call for the fourth quarter and fiscal year end March 2014. I am Jayme Brooks, your contact for today's conference call.

Capstone filed its Annual Report on Form 10-K with the Securities and Exchange Commission today, June 12, 2014. If you do not have access to this document and would like one, please contact Investor Relations via telephone at (818) 407-3628 or email ir@capstoneturbine.com or you can view all of our public filings on the SEC website at www.sec.gov or on our website at www.capstoneturbine.com.

During the course of this conference call management may make projections or other forward-looking statements regarding future events or financial performance of the company within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to among other things, growth of our end markets; increased production rates; higher average selling prices; ongoing new order flow; reduced cash usage; growth in revenue; gross margin and backlog; attaining profitability; improvement in certain key performance indicators and strategic initiatives; achievement of our EBITDA and cash goals; improved operating leverage; new product development; shift to larger markets for our products; benefits from our cost reduction initiatives and opportunities from our relationship with the Department of Energy and Oak Ridge National Laboratory.

Forward-looking statements may be identified by words such as expects, objective, intend, targeted, plan and similar phrases. These forward-looking statements are subject to numerous assumptions, risks and uncertainties described in Capstone's Form 10-K and Form 10-Q and other recent filings with the Securities and Exchange Commission that may cause Capstone's actual results to be materially different from any future results expressed or implied in such statements. Because of these risks and uncertainties Capstone cautions you not to place undue reliance on these statements, which speak only as of the today. We undertake no obligation and specifically disclaim any obligation to release any revisions to any forward-looking statements to reflect events or circumstances after the date of this conference call or to reflect the occurrence of unanticipated events.

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

Darren Jamison

Thank you, Jayme. Good afternoon and welcome everyone to Capstone’s fourth quarter and fiscal year-end 2014 earnings call. With me today is also Ed Reich, our Executive Vice President and Chief Financial Officer. I will start the call with a recap of our fiscal 2014 highlights and then turn the call over to Ed who will review our detailed financial results for the fourth quarter and the full year. After Ed’s remarks I will talk about product development and key orders and we will take questions from our analysts. As Jayme said during our remarks we will be referring to presentation slides that can be found on the Capstone website under investor relations.

Let’s go ahead and start with slide two. I am very proud to report that Capstone achieved another banner year of business development and margin expansion in fiscal 2014. This type of maturity of our operations refers to the comprehensive internal improvements made in recent years. We have also added significantly in the existing markets and made inroads into promising new markets.

We've been successful in bringing down costs and increasing revenues, while holding production, labor and manufacturing costs inline as we continue on our path to profitability. We set new annual records for revenue, new annual records for gross margin. Annual revenue growth was 4% which is slower than recent years but still reflects a strong compounded annual growth rate of 30% since fiscal 2007. But more importantly we achieved substantial gross margin expansion of 500 basis points to 16% despite this modest revenue growth. Operating results decreased 30% and net loss decreased 28%. We had new product orders of $131.5 million resulting in a healthy book-to-bill ratio of 1.2 to 1. And we shipped 110 megawatts of product. This healthy new order flow pushed our backlog to a record $171.6 million at the end of the fiscal year.

On a megawatt basis we had a 188 megawatt in total backlog compared to 163 megawatts at the end of last year. Cash at year-end was $28 million but with the offering we completed in May we added net proceeds of approximately $30 million to that balance.

As a result we are in very good position in terms of our financial flexibility and needed fuel for our continued revenue growth.

Let’s go ahead and turn to slide three. Slide three shows our global market segment mix for fiscal 2014 by product shipments. 60% are using oil and gas and other natural resources, 25% in energy efficiency, 6% in renewable energy and 9% in other applications including critical power supply and mobile which includes transportation and marine. Overall the oil and gas market continues to be our fastest growing and largest market worldwide. Natural gas production has experienced a significant boom in recent years with no apparent slowdown in sight. The global shale gas development is expected to continue to grow for years to come. We are ideally positioned to serve all facets of this market including exploration, production, compression and transmission.

Geographically after several years of volatility in our markets across Europe, revenue this past year has finally rebounded to fiscal 2012 levels. The change in total revenue for fiscal 2014 compared to fiscal 2013 included increases in revenue of $15.2 million from the European market, $6.1 million from the African market and $2.3 million from the Asian market. The total mix was 51% North America, 31% Europe, 8% Asia, 4% Australia and 6% other, which is primarily Africa. The increase in European market was 59% over fiscal 2013. This is primarily driven from increased sales in the Russian natural gas and oil industry. It's very important to note we have not seen a slowdown in our Russian business. Our Russian distributor in the region BPC Energy has sold only 2 megawatts or roughly $2 million in the Ukraine, so overall sales have not been affected by the political unrest and it's more or less business as usual.

Elsewhere in Europe we experienced 48% year-over-year growth which came largely from Austria, Slovenia and Switzerland with some more recent strength in Germany, Italy and Poland.

Go ahead and turn to slide four. Looking at slide four, which shows our Microturbine shipments by megawatt for fiscal 2014. Globally our geographic reach is extending further into a number of markets where rapidly rising power needs requires added distributed energy resources. In North America for example the industrial CHP and CCHP market in Mexico was strong and our solutions operated attractive payback as a replacement for less efficient onsite equipments and reliance on the electric grid.

Our leading distributor in Mexico was among the top 10 in overall sales in fiscal 2014 and we are very pleased with the ongoing order flow from that country. We also made headway into the energy efficiency, renewable energy, natural resources markets in South America and parts of Africa throughout the year.

Turning to slide five, slide five shows our megawatt and unit shipment by products for fiscal 2014. The increased shipments over fiscal 2013 was result of higher sales volume of our C65 market turbines and change in product mix in C1000 series systems offset by lower sales volume in C30, C100 and C200 microturbines. During fiscal 2014 we were really focused on getting more aggressive and refining our distribution channels to address our specific targeted markets and speed the maturation process of our distribution base. We kept back territories in some places and merged them in another places and in two places we actually taken Capstone sales assets, actual personnel and set them up as distributors, one in Europe and one in the U. S. Today we have a total of approximately 90 distributors and OEMs worldwide with approximately 400 customer service technicians and 742 certified authorized personnel.

I’ll talk more about products and major orders in a few moments, but first I’ll pause and turn the call over to Ed for the fourth quarter and full year financial review.

Edward Reich

Thanks Darren. Good afternoon everyone. Let’s begin our slide six with a review of the fourth quarter. Revenue for the fourth quarter of fiscal 2014 was $36.4 million compared to $37 million for the third quarter and $35.4 million for the same period last year. Product revenue was $30 million compared to $29.9 million for the third quarter and $29.1 million for the year ago quarter. The fourth quarter of fiscal 2014 revenue from accessories products and service was $6.4 million compared to 7.1 million in prior quarter and $0.3 million for the fourth quarter of last year. Gross margin for the fourth quarter was $6.1 million or 17% of revenue compared to $7.3 million or 20% of revenue for the third quarter and 5% or 14% of revenue for the same period in last year.

It's not unusual for us to see a sequential margin dip from the third quarter to the fourth quarter due to the year-end adjustments. However the 300 basis points year-over-year increase in gross margins primarily reflect the shift in mix to larger units and lower royalties and royalty expense. Fourth quarter R&D expenses were $2.5 million compared to $2.3 million last year and $2.2 million for the fourth quarter of last year. SG&A expenses were $6.8 million for the fourth quarter of fiscal ’14 compared to $7 million for the third quarter and $6.7 million for the same period last year.

Net loss of $3.4 million or $0.01 loss per share for the fourth quarter of fiscal ’14 compared to a net loss of $2.2 million or $0.01 last quarter and a net loss of $4.1 million or $0.01 for the fourth quarter of last year. The loss from operations for the fourth quarter of fiscal 2014 was $3.1 million compared to $1.9 million for the third quarter and $3.9 million for the fourth quarter last year.

Now I’ll turn to a discussion about performance for the full fiscal year 2014. On slide seven, you can see a graph of our consistent revenue growth over the last seven years under our current management team. Annual revenue growth of 4% in fiscal 2014 was slower than in recent years but still reflects an impressive compounded annual growth rate of 30% since fiscal 2007. Total revenue for fiscal ’14 set a new record at $133.1 million and product revenue was up 6% to $108.8 million. We are cautiously optimistic that we will return to higher revenue growth rates in fiscal ’15 given the positive momentum that we are seeing in Europe and the broad traction we’re getting in a number of our other markets.

Slide eight shows our annual gross margin improvements. Gross margin was $21.7 million or 16% of revenue for fiscal ’14 compared to $14.4 million or 11% of revenue for fiscal ’13. We continue to move forward along our path to higher margins through a combination of higher sales volume, lower direct material cost and decreasing warranty expense. Warranty expense for the year was down in absolute dollars while our revenues were up. This decrease in warranty is attributable to C200 and C1000 series products and reflects a similar trend to what the company has experienced with the introductions of the C30 and C65. Our experience has been that roughly four years after commercial introduction warranty has peaked and begins to trend down. Overall we expect to achieve similar gains in our gross margin percentage in fiscal 2015 based on many of the same drivers that occurred in fiscal ’14.

Turning to slide nine, this slide demonstrates the operating leverage that we have in our business model. While revenues have increased by over $110 million in the last seven years our operating costs have remained relatively consistent over that same time frame. This not only demonstrates the operating leverage that we have in our business model but also the ongoing focus that we have in implementing cost reductions and control in our overall cost structure.

Manufacturing labor and overhead expenses were $14.7 million for fiscal ’14 compared to $14.6 million a year before. Research and development expenses were $9 million for both fiscal ’14 and fiscal ’13. Selling general and administrative expenses were $28 million for fiscal 2014 compared to $27.4 million in the prior year. The net increase in net SG&A expenses was prior to the increases in salaries, facilities, consulting and supplies expense that were partially offset by a decrease in marketing. Net loss decreased 28% to $16.3 million or $0.05 loss per share for fiscal 2014 compared to a net loss of $22.6 million or $0.07 loss per share for fiscal '13. The loss from operations for fiscal 2014 was $15.3 million down 30% from the prior year.

I'll now provide some comments on balance sheet cash flow activity, please turn to slide 10. Cash and cash equivalents totaled $27.9 million at March 31, 2014 as compared to $31.6 million at the end of the prior quarter and $38.8 million one year ago. After year-end we closed public offering for 18.8 million shares of common stock which were sold to a single institutional investor. Net proceeds after deducting fees and other operating expenses were approximately $30 million. So our pro-forma year-end cash balance if you were to add the proceeds from the offering would have been approximately $58 million.

In addition on June 9th we extended the maturity of our credit facility with Wells Fargo Bank and increased the maximum borrowing capacity by $5 million to $20 million. We also amended the financial covenants and extended the maturity date to September 30, 2017. So between our cash on hand and our expanded credit facility we believe we have ample liquidity to fund our growth plans and to meet our increasing working capital requirements that would be required with larger orders.

We continue to focus on reducing our cash requirements. We used $15.4 million of cash in operating activities, [inaudible] $1.2 million in capital expenditures in fiscal '14. This compares to cash used in operating activities of $17.1 million and $1.2 million in CapEx during fiscal '13. We expect to make additional progress in operations in fiscal '15.

Receivables were $28 million at March 31st compared to $22 million at the end of the prior quarter and $18 million a year ago. DSO was 70 days for Q4 compared to 54 days in Q3, 46 days for the same period of last year. The increase in DSO for the fourth quarter of fiscal '14 was primarily due to the timing issues and we expect to return to more typical levels in Q1 of fiscal '15.

Inventories were $21 million at March 31st, down from $25.1 million at December 31st and $21.8 million a year ago. Inventory turns were 5.3 times compared to 4.9 in Q3 and 5.4 times at the end of fiscal '13. Finally slide 11 shows the growth in backlog since the beginning of fiscal 2007. Backlog increased to a record $171.6 million as of March 31, 2014 compared to $160.4 million at December 31st and $148.9 million at the end of the prior fiscal year, representing a 15% year-over-year increase. Ending backlog is a leading indicator of our future revenue growth and current trends bode well for our revenue and margin expansion opportunity in fiscal 2015 and beyond.

As customers continue to migrate toward larger units and larger projects we anticipate margin expansion to continue at the similar pace for fiscal 2015 and to cross over to positive EBITDA during the year. That concludes my comments now back to Darren.

Darren Jamison

Great, thank you Ed. Let's go ahead and turn to slide 12. In research and development we have begun the second phase of our C250 program with the U.S. Department of Energy. We have successfully demonstrated the [world class role] of C250 in the lab while achieving the California Air Resources Board or CARB level emissions without any after treatment. I am proud to say that C250 will soon enter beta fuel testing later this year. Phase 2 of the program is expected to incorporate further engine efficiency improvement resulting in product with a projected electrical efficiency of 42% and a targeted power output of 370 kilowatts for the C370.

In partnership with the Oak Ridge National Laboratory we have successfully built a new C65 recuperator with an advanced AFA steel material. AFA offers superior oxidation and creep resistance to the commercial heat resistance steel alloys. The C65 is currently in an accelerated thermal and cyclic life testing in the lab. This new alloy could be used for several high temperature applications within the Capstone Microturbine products at a significantly reduced cost.

In addition we are working diligently on upgrading all Capstone product lines to be compliant with the new low and medium voltage grid interconnect requirements in Europe. These improvements require both hardware and software changes to our inverters to allow power that can be fed seamlessly into the grid smoothly and efficiently. These enhancements further the smart grid capability of our product and position us well for future regulatory changes in both Europe, U.S. and in the other emerging markets.

Now turning to slide 13, 13 there is some comments on key projects. Among our vertical markets we’re particularly enthusiastic about our opportunities in transportation market, especially the HEV buses and trucks as well as our dual repower for marine applications. We are very proud of our participation in the Wall-Mart advanced vehicle experience or WAVE concept truck, the latest from Wall-Mart’s fleet efficiency program. The microturbine acts as a range extender in the series hybrid power train and features the latest in green truck technology.

In the marine market we’ve expanded our product offering with microturbines that run on cleaner and less costly liquid natural gas or LNG or traditional diesel fuel that can provide all onboard electrical power. We have seven different Capstone distributors targeting the small and midsize commercial ships in boat fleet category where Capstone innovative product is needed most. As evidenced by project like these in transportation our technology advantages and vertical market strategies have enabled Capstone to further strengthen our position as a global leader in clean and green distributed power generation technology.

Go ahead and turn to slide 14. Throughout fiscal 2014 we talked about five key performance indicators or KPIs to measure investor to track the progress of Capstone. I’ll wrap up my remarks today with a recap of where we stand up at each of these measures. First we entered the year on a strong note in terms of ASPs. In the fourth quarter average revenue per year increase 15% to approximately $135,000 compared to approximately %151,000 a year ago. The pricing reflects the change of mix at C1003 systems and more C65 market turbines shipped during fiscal 2014 compared to the prior year. The second KPI was to measure the C200 engine production rates. Our production for C200 engines increased to 398 in fiscal 2014 up from 384 last fiscal year which do not include engines for the service organization; obviously with plenty of additional capacity remaining in our factory for future growth.

Third direct material cost has continued to improve steadily as reflected in our annual margin improvements. Fourth KPI, as of March 31st we had 820 units or a 188 megawatts which represents a 15% increase in our total backlog on a megawatt basis compared to 816 units or 106 unit megawatts at the same time last year. And finally reduced cash usage, cash used for operating activities was down 10% year-over-year and further reducing cash burn remains a major area of focus for the leadership team.

Overall we are very pleased with our execution and financial results for fiscal 2014 which positions us well for continuing success in fiscal 2015. Thanks for your attention and operator we are now ready to open the call up to questions from our analysts.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Rob Stone with Cowen & Company. Please proceed.

Rob Stone - Cowen & Company

Hi guys. I had two questions if I may. The first one is related to growth Darren, sales really kind of slowing down, backlog increase in the fourth quarter was nice to see but the shipments were a little bit disappointing. What factors might allow growth to accelerate this year as alluded to in the script?

Darren Jamison

Sure. So let me comment first about your comments about your comments on the backlogs and shipments, as obviously Q4 was a little lower on shipments then we anticipate but again as we said many times shipments are really driven by the pull from our customers. So as customer requirements go so does our shipment to customers. So with the second highest revenue in company history obviously we are hoping for the highest revenue to celebrate a good quarter. As you said backlog did go up, we had a nice booking quarter. We close the year with a highest backlog in company history. I think more importantly backlog is up 15% year-over-year which sets us up nicely for hopefully double-digit growth and strong double-digit growth going into fiscal ’15.

Rob Stone - Cowen & Company

Okay. Then my second question relates to gross margins which also we’ve like to see trending in the other direction and as mentioned the year-end adjustments, but how much of the 300 basis points or so sequential decline was related to year-end factors and does that mean we should be looking for a bounce back in the first quarter of fiscal '15?

Edward Reich

Yeah I mean again our margin rates can bounce around quarter-to-quarter depending on revenue levels and mix. Obviously Q4 is typically not our best margin quarter because of year-end activities. Of the 300 basis points this year I would say approximately half were related to year-end adjustments mostly inventory but the other half of that was just mix. We had no C1D2 offshore units in this quarter, we did in Q3; we had some higher margin C200 and C65 business in Q3 and Q4. So some of this was natural mix and a little bit of it was some end of year adjustments mostly in the inventory area.

Rob Stone - Cowen & Company

So as you look at the backlog what is the margin composition of backlog generally better than I think you talked about achieving let's say another 300 basis points of expansion this year?

Edward Reich

Yeah, if you look back to fiscal '10, fiscal '10 we're a negative 14%, ‘11 was negative 12%, we picked up 10 points which were negative due to positive 500 to 700 basis points in fiscal '12, picked up another 600 basis points in fiscal '13 then another 500 basis points this year. So I think we’d love to see 10% growth or 800 or 900 basis points, I don't think that's reasonable. We should see 400 to 500 basis points a year for the next couple of years which should get us close to that 30 to low 30 range of margin.

Obviously we are doing everything we can to do it quicker, we're doing price increases, we are attacking direct material costs, we're looking at logistics expenses, still trying to lean out the plant. But I think a reasonable expectation for the year would be another 500 to 600 basis points per month.

Darren Jamison

So we should exit the year at a 20% or 21% gross margin full year.

Edward Reich

Full year, obviously much higher than that on a quarterly run rate.

Rob Stone - Cowen & Company

Okay, do you think at some point price increases are working against the objective of faster revenue growth?

Darren Jamison

I don't think so today. Obviously that's a question we ask a lot. We are a premium price product. Our competitors every January raise their price, we raise them in March after we see their price increase. So we are matching kind of their heart rate. We are seeing discounts more frequently, where on a competitive basis we're looking to maybe discount the products a little bit. But I think the reality is people are buying our technology because they believe in the technology, the emissions, the reliability and the total cost of ownership not first cost. So I think low end of first cost with only lower margin rates at this point.

Rob Stone - Cowen & Company

Okay, thank you.

Darren Jamison

Thanks, Rob.

Operator

Your next question comes from the line of Eric Stine with Craig-Hallum. Please proceed.

Eric Stine - Craig-Hallum Capital Group

Hi, Darren and Ed.

Darren Jamison

Hi,

Eric Stine - Craig-Hallum Capital Group

I wondered if you could just talk just about some of the larger projects that are in your pipeline, the 10 megawatt plus, may be just characterize those by application or geography and then any thoughts, I mean as much as you can, but also any thoughts on potential timing when we could start to see some of that?

Darren Jamison

Yeah, no, great point and I think that ties into our recent equity raise that lot of folks I think misunderstood. We finished the year at $28 million in cash which puts us if you look at $13 million bank line balance at very low cash levels. We are seeing as you said look to larger leveraging, sourcing a lot of projects that are 10 megawatts, 20 megawatts, we have a couple 40 megawatt to 50 megawatts and I believe even an 80 megawatt.

So to think that our customers will give us a $40 million PO when we have $13 million of free cash on the balance sheet is probably fool’s gold. So I think for us to get a larger balance sheet as we look to move into these larger load regimes was very key. We're seeing U.S. projects, we're seeing South America mostly, we're seeing a lot of oil and gas opportunities and also merchant plant applications where grids are looking for power on a distributed basis, on a time of use, very flexible larger load regimes.

So I think as we move into these areas, are we going to book one of these next quarter, probably unlikely. Are we going to book one the next year, I would say that's fairly likely. I think which one we book will depend on how many opportunities we get our balance sheet and our sales ability to close those projects.

Eric Stine - Craig-Hallum Capital Group

Got, it all right, that's helpful. Maybe just turning to the distributors I see that you took that number down by 10, I think sequentially. And so just wondering kind of an early verdict there, heard that you are trying to align or get distributors not just focused on one application but focused on oil and gas CHP and everything else. So just kind of what you are seeing early on in the process?

Darren Jamison

I think when I came to Capstone in December ‘06 we had 20 distributors which were in litigation with the company. We’ve done a lot to grow the distribution channels, I think was 99 recently and as we got to the point now where we are reading and feeding and trying to speed up the maturation process of the distribution channel. I think Capstone’s reached a point where our product is strong enough, our brand is good enough, but we can be a little stronger with the distributors. We can take away territory, we can eliminate contracts or just require that they invest or reinvest more of the profits in the business on Capstone’s behalf. So I think what you’ve seen is some distributors getting bigger, some getting smaller, some going away and in couple of cases we are actually putting some of our own assets into the field to try that as well.

At the end of the day our best distributors are ones that wake up every day trying to sell our microturbine and service customers. They are selling other products even if they are non-competing, they are not careful and the intention is not there and the intention of detail and the work effort then we have a problem. It's pretty easy for us, you see our growth rate, our 30% compounded annual growth rate. If our distributors are growing at a similar rate with Capstone business we are happy. If they are growing faster we are thrilled, but if they are growing slower than we are going to question their ability to grow the business and what’s going on in their market.

We’ve done some things, it's a mixed geography to where most of our key markets have some oil and gas or some very good CHP markets, we realize distributors have to make money and it needs to be win-win. But I think you are going to see over the next year to 18 months us be a little more prescriptive, a little more forceful with our distribution base even though there are our partners we need to move forward. The economy has returned globally and we need to take advantage of the macro factors that are out there.

Eric Stine - Craig-Hallum Capital Group

Got it, okay. Last one for me, may be just based on the backlog or the timing of what you see in the backlog. Just any thoughts on directionally how we should think about revenues in Q1 sequentially? Thanks.

Darren Jamison

Yeah I mean I try to hesitate giving short term guidance. We haven’t fared it very well doing that. We’d much rather give you annual guidance. But I will say you could look at historical trends, Q1 is normally not our best quarter, Q2 usually build, Q3 is our strongest and Q4 is close to Q3 but margin rates usually slip a little bit. So I wouldn’t expect a gain for us for Q1 but I do think our goal is going to be again year-over-year improvement on revenue, year-over-year improvement on margin and hold our expenses flat. For a total year our backlog’s up 15%. We’d like to grow much faster than the 4% last year. So our goal to be solidly into double-digit growth for the year and again as I said put 400 to 500 basis points of margin improvement and keep our operating expenses flat.

So I think if we can keep doing that year-in, year-out if we can keep growing revenue and double digit top line growth in adding 400 or 500 basis points of margin and control our expenses we are going to have a very good business here in a few years.

Eric Stine - Craig-Hallum Capital Group

Okay. Thanks a lot.

Operator

Your next question comes from the line of Aditya Satghare with FBR Capital Markets. Please proceed.

Aditya Satghare - FBR Capital Markets

Well thank, you this is Aditya Satghare from FBR. Good afternoon all.

Darren Jamison

Hi, good afternoon.

Aditya Satghare - FBR Capital Markets

I had two questions. Firstly how should we think about the contribution from some of the key international markets this year and may be if you could touch on sort of the Middle East as well as Europe? And is there any difference in terms of order sizes or shipment mix which potentially benefits margins for these markets.

Darren Jamison

Yeah. I think what we are seeing is North America has been a very strong market for us. Europe and Russia has traditionally been a strong market. This year we are back to where we were in 2012. So it's taken us a couple of years just to get back to where we were but we are very happy to be back to that level of revenue. We are expecting further growth in Europe this year. We’ve seen very strong orders recently in Q1 and Q4 out of Germany. We are seeing nice orders out of Italy, Slovenia, Austria; Poland is picking up. Russia has not slowed down despite some of the recent unsubstantiated articles put out there. We see no change in our Russian business.

So we are very excited that Europe is going to finally grow again past 2012 levels. We’ve made some changes in our distributor in Australia. We are expecting some nice growth there. Asia is a slowly growing for us. I think eventually we’ll see a tipping point in Asia where emissions and their quality finally become such a problem that they do something real as opposed to small incremental changes. Africa is all virgin territory for us Middle East is all upside for us. I think there is lots of opportunity there. As you can see in South America we’ve done very little in last couple of years but we have huge opportunities in South America whether that's Brazil, Columbia, Ecuador, Chile, even Central America we have opportunities.

So I think the number of markets that we are just scratching the surface and have done one or two projects is huge. I was recently in Haiti with our first opportunity there. You look at Dominican Republic, Jamaica, Haiti all great opportunities for our technology and desperately need it frankly. So I think you are going to see more global expansion, more sales in markets that we’ve traditionally not played big roles in as well as continued growth in our current markets. From a margin standpoint, the only real difference is some of the offshore stuff that we do. So the offshore class one division two oil and gas product has higher margin but the rest of our business is very similar in contribution margin perspective.

Aditya Satghare - FBR Capital Markets

Got it. And just I had a follow up question on the margins. So if we were to sort of strip out the year-end adjustments would we and then if we think about the positive benefit from attributable cost what would sort of the margin look like in the current quarter?

Darren Jamison

Yeah I think again as I said before if you look at the 300 basis points difference from Q3 to Q4, 3% about half of that was year-end adjustment or 1.5% or 150 basis, points the other half was mix difference. So you really are not going to see a difference in VMC you are going to see a difference in mix and some end of year physical inventory adjustments and some other adjustments. So again I think that's not uncommon for us. In Q2 we're 14%, so we've gone from 14% to 20% and slipped back a little bit to 17%. But again you look at year-over-year basis we've gone from 11% to 16% and definitely trending in the right direction.

So again I caution people to not put too much energy into the quarterly results and look at annual results.

Aditya Satghare - FBR Capital Markets

Well thank you. That's all I had.

Operator

Your next question comes from the line of [Chris McDowell with First Light] Securities. Please proceed.

Unidentified Analyst

Hi, this is [Mohnish] on for Chris. I just had really one question could you spread some light on what's happening in Russia you spoke a little bit about it. But I am trying to see like where this -- how the revenue is doing this quarter and what the demand is looking like going forward?

Darren Jamison

Yeah as I said on my prepared comments, our business in Russia hasn't changed. Our megawatt shipment per quarter had been fairly flat the last two or three quarters, which gave been good, the numbers have been up, payments have been typically Russian which can be a little bit late but obviously we're seeing really no change. And talking to Russian distributor, he feels this is a much more an American issue than a Russian issue. The sanctions that have been put in place have not impacted our business and even as they did put further sanctions in place it could take a long time before it impacted our business even if it did.

So we're monitoring this situation, obviously we're monitor any kind of geopolitical situation around the world and how it impacts our business. But today as I said in my prepared remarks our Russian business is business as usual, no changes we've seen over the last several years.

Unidentified Analyst

All right, thank you.

Darren Jamison

Thank you.

Operator

Your next question comes from the line of Philip Shen with ROTH Capital. Please proceed.

Philip Shen - ROTH Capital

Darren and Ed thank you for taking my questions.

Darren Jamison

Hi, Phil how are you doing?

Philip Shen - ROTH Capital

Good thanks. Just as a follow up on the gross margin thinking you guys talked about 500, 600 basis points of margin improvement year-on-year can you breakdown what the sources of the improvement might be?

Darren Jamison

Yeah we talked about before in the waterfall chart I'll let Ed kind of go over that a little bit.

Edward Reich

Yeah Phil, it's the same sources that we've been talking about for quarter also, expect to see increasing average selling prices as we moved throughout the year because as we've said we have about four points roughly in backlog with improved pricing, expect to see improvements related to direct material cost reductions that will flow through and as you recall last time we updated that chart that was worth about another 10 points margin going forward. And then finally expect to see the warranty from that as I had commented earlier as the C200 and C1000 series product continues to mature. We should see at least a couple of points better benefit of flow through from that.

Philip Shen - ROTH Capital

Yes, more specifically what I was looking forward is what's the contribution by source, so let's say 500 basis points of improvement in fiscal '15 of the 500 what do you see from pricing and from materials and from warranty for '15 specifically?

Darren Jamison

Yeah we don't break it down by level but I would say at least half of that's going to be direct material related. As you know recently we hired Richard Lewis to come on board to booster up our operations group and the main reason for hiring this gentleman was his supply chain background. So as we look as reducing direct material cost, aggregating suppliers, putting long term agreements in place trying to rationalize shipping expenses and those kind of expenses, I think that’s the kind of stuff we have to do. We have targeted, as you know, specific direct material cost reductions but executing those has been challenging for us in the past to do in the time frame we want. So I think we made the right changes from a leadership standpoint to get there but as Ed said it's going to be direct material cost, warranty continuing to come down and then some impact on the recent price increases.

Philip Shen - ROTH Capital

Great and thanks Darren. You know with some of the other companies that we follow, we’ve noticed that as megawatts and projects sizes get larger, turnaround times and lead times get longer, resulting in lumpier revenues. As you guys migrate to larger systems could we see some lumpier revenues for you guys on a quarterly basis, what’s the risk there?

Darren Jamison

So I absolutely mean I think we use production slot so that will limit, some level of lumps but if we got a 30 or 40 megawatts order going through the pipeline that’s going to add lumps [inaudible]. I mean again I know lumps is a bad word on Wall Street but the reality is we are a project based business and we sell product to customers for their projects and as projects go so do our shipments. So it's hard to tell us Chevron or [inaudible] or LUKOIL or Pemex that they are taking product before they need it. It's just not going to happen in today’s world. So when you are a Caterpillar GE those months aren’t so bad. When you are smaller company like us that’s purely distributed generation, power generation you are going to see those lumps. But again I encourage you to look year-over-year and you are not going to see nearly the impact of the lumps as you go quarter-to-quarter.

Philip Shen - ROTH Capital

Great. One last one and I’ll jump back in queue. So when you look at your backlog $171 million what is the mix by megawatts or megawatt categories if you will, less than 500 kilowatts and may be or less than one megawatt, one to five, five to ten and then greater than 10?

Darren Jamison

So it’s laid out in the K, but both in a megawatts right, a 127 of the 188 are sitting in the C1000 product and then from there it's little bit here and there second biggest one is C655 at about 34 megawatts. But they are stable and you can go see them.

Philip Shen - ROTH Capital

Yeah I have seen it before we just haven’t gotten a chance to check it out yet. Thanks guys.

Darren Jamison

I mean that your point as we sell more C1000 thus we have bigger part of our business than we are selling million dollar blocks versus 40,000 dollar blocks. So having a C1000 slipping in out of the quarter is much more significant than a C30 obviously.

Philip Shen - ROTH Capital

Great. Thank you Darren. I’ll jump back in queue.

Darren Jamison

Okay, thanks Phil.

Operator

Your next question comes from the line of JinMing Liu of Ardour Capital.

JinMing Liu - Ardour Capital Investments

Thanks for taking my question. Yeah, I just would like to know have you changed any terms, credit terms you have with your distributors, especially with what happened last year?

Darren Jamison

We always are evaluating credit worthiness of our respective distributors and making decisions based on those evaluations. So I would say have there been any significant changes to any of the large distribution partners, no but there is always some ongoing churning going on. Yeah as certain distributors grow obviously we look to evaluate their line, look at their payment history, their balance sheet and hopefully grant them more credit to support their growth. If they are slow in their growth if they are having challenges in their business then we’ll tighten credit, or make it and put them on cash upfront. But that’s with 90 distributors it's 90 different special cases that we review on a one off basis but I’ll say no macro level changes in our credit terms.

JinMing Liu - Ardour Capital Investments

Okay. Regarding the increase in the accounts receivables at the quarter-end or year end, how much of those increase was related to your price increase, and was there any the pull forward effect?

Darren Jamison

None, I would -- obviously there can be some portion related to price increase but it would be minimal. The change was really based on the mix of credit versus cash upfront payments. So there was one distributor this particular quarter that took over $5 million on credit and that’s what drove the difference. But that will be collected, expect to collect it off this June ending quarter.

Edward Reich

Yeah. So said another way if we have a large shipments to a distributor with open credit versus distributors on cash upfront that’s going to have an impact short term on our receivable balance. But again those things will slight go back and forth through the working capital process.

JinMing Liu - Ardour Capital Investments

Okay got that. Thanks a lot.

Operator

There are no further questions in the queue. I would now like to turn the conference over to Darren Jamison for closing remarks.

Darren Jamison

Hey, thanks everybody, good list of questions as usual. I know everybody wants to see strong sequential growth quarter-over-quarter in a perfect world. But as we just talked about we are project-based business and we are really driven by the timing of our customers, especially larger oil and gas customers that are driving 60% of our revenue. As I continue to say and I'll say every quarter probably for the rest of my career please look at us on a year-over-year basis I think you will see the real substantial changes in our business and the improvements we've had. When you do that when you see the record revenue growth, you see the record margin improvements, record product revenue, gross margin improvements 24% and only a 4% revenue increase.

So stop and think about that. We managed to improve our gross margins 500 basis points or 24% with a minor increase in revenue so shows you the underlying improvements we make into our business. As revenue grows you will see more benefit from those, the hard work we achieved. Operating loss down 30% on a net basis 28%; record backlog, healthy book-to-bill 1.2 to 1, anything over 1 to 1 with growing revenue we are happy with; backlog up 15%. If you look at backlog a year ago you could see it was fairly flat over the previous year. We can see -- we saw that come out in revenue this year. Now with backlog being up 15% we hope to see the benefit of that increase.

Record FPP revenue and we’ve talked a lot about the service business. Paul Campbell and his team have done a tremendous job of building an international service organization. We got a record FPP revenue, record FPP backlog. FPP backlog is up 35% year-over-year. So even though revenue was only up 4% on a shipped basis or 15% on a book basis, FPP backlog’s up 35%. So that’s we are booking FPP revenue faster than they are selling product which is excellent.

If you look at our balance sheet which I think is so critical we are competing with Caterpillar and GE and other large multi international customers or competitors we have to have a balance sheet. I know a lot of folks are concerned about dilution but today we ended the quarter with 28 million we now outperformed at 58 million as I had said. That's the largest balance sheet we've had I think for most of my career at Capstone. But that also allowed us to go back to Wells Fargo and renegotiate our credit line with them from a position of strength not a position of weakness.

So today we have $20 million credit line up from the 15 than we had in the past. So that credit facility gives us a more flexibility when it comes to larger load regimes, larger projects and larger customers. So we think we are well positioned with record backlog, a healthy balance sheet, a great leadership team and an improving maturing distribution channel so we're well positioned for an excellent 2015.

So with that I'll end my remarks and look forward to talking to everybody next quarter. Thank you.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Capstone Turbine's (CPST) CEO Darren Jamison on Q4 2014 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts