Capstone Turbine (CPST) Q3 2015 Results - Earnings Call Transcript

Capstone Turbine (CPST) Q3 2015 Earnings Call February 5, 2015 4:45 PM ET

Executives

Jayme L. Brooks - Chief Accounting Officer and Vice President of Finance
Darren R. Jamison - Chief Executive Officer, President and Director
Edward I. Reich - Chief Financial Officer, Executive Vice President and Secretary

Analysts

Eric Stine - Craig-Hallum Capital Group LLC, Research Division
Matt Koranda - Roth Capital Partners, LLC, Research Division
JinMing Liu - Ardour Capital Investments, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Capstone Turbine Corporation Earnings Conference Call for the Third Quarter Fiscal Year 2015 Financial Results ended on December 31, 2014. My name is Tia, and I'll be your operator for today. [Operator Instructions]

During today's call, Capstone management will be referring slides that could be located at www.capstoneturbine.com under Investor Relations section. [Operator Instructions]

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

Jayme L. Brooks

Thank you. Good afternoon, and welcome to Capstone Turbine Corporation's Conference Call for the Third Quarter of Fiscal Year 2015. I am Jayme Brooks, your contact for today's conference call. Capstone filed its quarterly report on Form 10-Q with the Securities and Exchange Commission today, February 5, 2015. If you do not have access to this document and would like one, please contact Investor Relations via telephone at [phone] or email [e-mail], 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 in spite of current macroeconomic forces; strengthened distribution channels and aftermarket service; compliance with our credit facility; ongoing new order flow; reduced cash usage; growth in revenue, gross margin and backlog; attaining profitability; achievement of our EBITDA and cash goals; adequacy and liquidity in capital resources; new product development; shift to larger markets for our products; benefits from cost-reduction initiatives; continued opportunities in Russia, Mexico and other key regions; growth of key markets; advantages of recent political developments; and compliance with government regulations. 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, 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 the risks and uncertainties, Capstone cautions you not to place undue reliance on these statements, which speak only as of 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 R. Jamison

Thank you, Jayme. Good afternoon, and welcome, everyone, to Capstone's Third Quarter of Fiscal 2015 Earnings Call. With me today is Ed Reich, our Executive Vice President and Chief Financial Officer.

Today I'll start the call with the general overview of the third quarter, then Ed will review the financial results, and then I'll close with some comments about the geographic and vertical markets. And as the operator said, during our call, we will be referring to presentation slides that can be found on Capstone's website under Investor Relations.

Let's go ahead and start with Slide 2. Slide 2 shows our third quarter highlights. I'm very pleased to report a record gross margin percentage for the quarter of 20.3%, up from 19.8% a year ago, despite a 19% decline in year-over-year revenue. This milestone on lower revenue shows the benefits of the operational transformation we have taken Capstone through over the past several years and the effect of our underlying cost structure improvements.

Let's turn to Slide 3. Slide 3 highlights this consistent margin growth improvement, despite slowing revenue as you go back to the last 3 quarters -- third quarters since 2011. We are now have 9 consecutive quarters of double-digit gross margin. Revenue for the third quarter came in at $30.1 million, which was impacted by the strong U.S. dollar, as well as macroeconomic headwinds in some of our key markets, particularly the continuing challenges in Russia with the very soft ruble and the slowdown in the oil and gas sector. However, our Russian distributor continues to diversify his business and remains one of our top 10 performing distributors. We are making good progress in other geographies and vertical end markets as we continually strengthen our distribution network and win new business.

Speaking of our distribution network, let's move to Slide 4. Slide 4 shows Capstone continues to build and strengthen its global distribution channel. Capstone today has 94 distributors and OEM partners, which represents 740 employees in 152 different locations, selling, applying, servicing our product worldwide. Many of our more established competitors have developed their distribution channels over the last century. I'm very pleased with the progress we have made in such a short period of time on our distribution channel. This channel, as it continues to grow and mature, will pay dividends for years and years to come. Product backlog peaked again this quarter at $175.5 million at December 31. However, this number does not include the record level of service contracts or Factory Protection Plan, FPPs, as we call them. That backlog is up to $61 million, which is the new record for the company.

As you can see on Slide 5, our aftermarket service is contributing to our overall gross margin improvement through growth in our Factory Protection Plans and also as we leverage our operating model. We have bolstered our customer service resources and global network to provide the most value possible for our customers. Our FPP makes Capstone solutions highly competitive on maintenance costs and service over the product life cycle. Total cost of ownership of our products is more attractive and predictable and having a market-leading FPP is an excellent sales feature that better aligns our service offering with the customer requirements for value. Overall, the maturation of our flagship C200 and C1000 Series product, combined with the efficiencies we have made in our aftermarket service business, have led to reduced warranty expenses and higher FPP margins.

Let's turn to Slide 6. New product orders were up 8% in dollars compared to the second quarter, despite the headwinds, and we shipped 161 units with an aggregate of 22.6 megawatts. Another highlight of the third quarter was our strong cash management. I'm proud to say we have $40.9 million in cash at the end of the quarter, up $100,000 from $40.8 million to start the quarter. So we continue to maintain a healthy balance sheet from which to grow our business.

I'll pause there and turn the call over to Ed and let him go through the specific financial results. Ed?

Edward I. Reich

Thanks, Darren. Good afternoon, everyone. I'll begin on Slide 7 with a review of the third quarter results.

As Darren mentioned, revenue for the third quarter of fiscal 2015 was $30.1 million compared to $32.2 million for the second quarter and $37 million for the same period last year. Product revenue was $22.5 million compared to $26.7 million for the second quarter and $29.9 million for the same period last year. Revenue from accessories, parts and service was a record $7.6 million compared to $5.5 million in the prior quarter and $7.1 million for the third quarter of last year.

Gross margin for the third quarter was $6.1 million or 20.3% of revenue compared to $5.2 million or 16.3% of revenue for the second quarter and $7.3 million or 19.8% of revenue for the same period last year. Our gross margin percentage improved by 50 basis points from last year's third quarter, despite a 19% drop in revenue and 400 basis points from the second quarter of fiscal 2015. And as Darren pointed out, our gross margin percentage is at its highest level in company history. The year-over-year increase in gross margin percentage was driven by multiple factors, including lower production service center costs and lower warranty expenses, which were partially offset by a lower average selling price and a change in product mix.

Third quarter R&D expenses were $2.4 million compared to $2.1 million last quarter and $2.3 million for the third quarter last year. SG&A expenses were $7.5 million for the third quarter of fiscal 2015 compared to $9.5 million for the second quarter and $7 million for the same period last year. The year-over-year increase is primarily due to higher marketing and professional service expenses, offset by a decrease in salaries expense.

Net loss was $3.9 million or $0.01 loss per share for the third quarter of fiscal 2015 compared to a net loss of $6.5 million or $0.02 per share last quarter and a net loss of $2.2 million or $0.01 per share for the third quarter of last year. The loss from operations for the third quarter of fiscal 2015 was $3.8 million compared to $6.4 million for the second quarter and $1.9 million for the third quarter of last year.

I'll now provide comments on balance sheet and cash flow activity. Please turn to Slide 8. Cash and cash equivalents totaled $40.9 million at December 31, 2014 compared to $40.8 million at the end of the last quarter and $31.6 million 1 year ago. As of December 31, we were in compliance with the financial covenants of our credit facility with Wells Fargo and expect to remain so through the end of fiscal 2015. With our cash on hand, combined with our credit facility, we believe we have ample liquidity to fund our growth plans and to meet our ongoing working capital requirements.

We continue to maintain our focus on reducing our cash requirements. And in the third quarter of fiscal 2015, we used $1.8 million of cash in operating activities and $200,000 in capital expenditures. This compares to cash used in operating activities of $3.8 million and $200,000 in CapEx during the third quarter of fiscal 2014. Receivables were $21.6 million at December 31 compared to $23.2 million at the end of the prior quarter and $22 million a year ago. The DSO was 65 days for both Q3 and Q2 of fiscal 2015 and 54 days for the same period last year. Inventories were $27.4 million at the end of the third quarter, up from $22 million last quarter and $25.1 million a year ago, primarily on higher finished goods, which are expected to be fully shipped by the end of the fourth quarter. Inventory turns were 3.9x compared to 4.6x in Q2 and 4.9x in Q3 2014.

Please turn to Slide 9, which shows our growth in backlog since the beginning of fiscal 2007. Product backlog increased to $175.5 million at quarter end compared to $172.3 million last quarter and $160.4 million a year ago. The book-to-bill ratio for the third quarter was 1.1 to 1. While we are frustrated by the continued timing of product shipments, we are encouraged by our backlog of product and service contracts.

As Darren mentioned, the service contract backlog is at a record level of $61 million. Consistent growth in service backlog is a reflection of our growing installed base around the world and an affirmation of the market's acceptance of our Factory Protection Plan offering.

Finally, with respect to the remainder of fiscal 2015, we are anticipating a sequential increase in revenue and continued margin expansion in the fourth quarter based on our backlog and the progress we've made on our cost-saving initiatives. We also have maintained our expectation of reaching EBITDA positive minus [ph] stock comp during the fourth quarter.

That concludes my comments. Now back to Darren.

Darren R. Jamison

Excellent. Thank you, Ed. Now I'll talk about our sales activity during the quarter. Please turn to Slide 10.

[indiscernible] for third quarter, 51% of shipments were used in energy efficiency or CHP or CCHP as we call it. 39% for natural resource applications, including oil and gas, shale gas and other resources, and 10% used for renewable energy or biogas. You can see how we are continuing to capitalize in a large market of opportunity we have in energy efficiency and CHP, CCHP.

On the right-hand side of the slide, you can see our geographic markets by revenue for the third quarter. North America led the way with 52%, followed by Europe with 21%, Asia and Australia tied at 13% and the rest of the world was 1%. Obviously, with more than half of our sales outside the U.S., the strengthening of the U.S. dollar is a concern and we are giving careful consideration to pricing increases that we typically implement across the board every April.

Turning to Slide 11. Slide 11 you can see the microturbine shipments by megawatts for the third quarter. The top distributors from total revenue perspective in the third quarter of our U.S. distribution was Horizon Powers Systems at 17%, DTC in Mexico at 12% and our new distributor in Australia, Optimal at 11%.

Let's turn to Slide 12 and look at North American sales activity. In Mexico, our distributor Industrias Energeticas secured one of the largest orders in Capstone history. The order was for 6 C800 microturbines and 16 C30 microturbines for the second phase of the Los Ramones pipeline project in Eastern Mexico. Our participation on this project is indicative of how big the opportunity is in the Mexican energy reform, which was established as a way to reduce electricity prices and gas prices in the country over the short span of just 2 years. The entire project cost in U.S. dollars is $2.5 billion and carries natural gas over the distance of more than 1,000 kilometers. It will supply 1/3 of Mexico's natural gas needs at a much lower cost than the shipments in liquefied form currently coming from the Middle East, Africa and South America.

Experts say the energy reform in Mexico will increase natural gas production from 5.7 billion cubic feet a day in 2013 to a projected 8 billion cubic feet a day in 2018 to over 10 billion in 2025. Capstone microturbines can be used in all facets of natural gas market, including exploration, production, compression and transmission. And our products were chosen by Los Ramones because of their low-maintenance, high-reliability and proven track record in the oil and gas industry worldwide. The third phase of this project will be rewarded shortly, and we are hopeful that our win in Phase II will position us in the full position for the following phases of the project.

Just a few weeks after this large order, we received another significant order from Mexico through DTC Ecoenergia for 14 C1000s to be used in multiple CHP projects. 2 of the C1000s already shipped in late December and the balance are expected to be shipped and commissioned throughout 2015. Combined, these 2 orders totaled approximately $17 million and should make Mexico a top 5, maybe even top 3 market for Capstone in calendar year 2015. These orders also demonstrate the large project opportunities that we've been pursuing and the overall shift that we have been seeing to larger megawatt orders, on average, over the past couple years.

One of our featured products in the U.S. during the third quarter was another order from the healthcare industry for a C1000 unit to upgrade the Memorial Sloan Kettering Cancer Center in New York. Our distributor, RSP Systems, secured the order, which is expected to ship in mid-2015 and be commissioned in early 2016.

Earlier in 2014, as you may recall, we received orders for 2 C800s and a C1000 to be installed in 2 California area hospitals. And just last week, we announced an order for 8 C65 microturbines to upgrade Syracuse VA Medical Center. We continue to see a growing level of demand from the healthcare industry as hospitals look for creative ways to become more energy efficient, while also securing their critical backup power needs. Our systems' higher electrical efficiency and thermal efficiency helps lower energy consumption, which in turn reduces operating costs, freeing up much-needed capital for healthcare for better patient care. In addition, during the quarter, we received orders from the Utica and Eagle Ford shale plays and several other U.S. industrial customers.

Let's move to Slide 13. Slide 13 shows our European sales activity. We'll start with Italy, where our distributor, IBT Group, secured an order for a C1000 to upgrade a food manufacturing facility for a pasta maker based in Sicily. This is a great example of a customized solution for combined heat and power application. The Tomasello pasta factory produces up to 5,000 tons of pasta annually and exports over 60% of their products. They wanted to reduce production-related costs, including producing hot water for pasta, and become more energy-efficient. The Capstone installation is expected to achieve primary energy efficiency of 30% savings. The initial reduction from the C1000 is equivalent to removing 700 cars off the Italian roads. This gives Tomasello not only a competitive advantage, but for Capstone, it's further evidence that we are becoming the leading clean technology for the food industry, especially in Italy.

In Germany, we sold 3 C200s and 6 C65s for multiple hot water CHP projects. In Austria, we sold 1 C200 and 3 C30s for similar projects. And our new distributor in France sold their first C65 to replace a failed Turbec microturbine, which we hope is one of many such applications. Russia is still a challenge with sanctions and the weak ruble, however, BPC Engineering continues to diversify its business both geographically and in multiple market verticals, and we're frankly really impressed with their tenacity given the market conditions. They are continuing their focus on growing their business, not only in oil and gas, but also in the manufacturing sector. During the third quarter, BPC installed 10 C65s at the Yakutsk Poultry Farm, the largest supplier of poultry products in the Russian region of Yakutia. In addition, they recently installed a C600 at Dune AST, a manufacturer of rubber footwear, and 7 C65s for a public swimming pool in St. Petersburg.

Let's turn to Australia, Asia and Africa. In these regions, they also bought higher volumes of our C1000 Series product during the third quarter. Optimal Group received an order for 3 C1000 microturbines to upgrade an over 65-acre glass house located in Southern Australia. This state-of-the-art facility is operated by one of the largest producers of glasshouse grown tomatoes in the country. Optimal also received an order for a C600 and a C800 to upgrade a major building in the Sydney central business district. This is the first of many similar installations Optimal plans to install in the central business district.

Electricity price in Australia have nearly doubled over the past 2 years with power costs continuing to rise. We are pleased to see an increasing number of Australian businesses taking advantage of Capstone microturbines to reduce their cost of power and emission profile via cogeneration and trigeneration. Adding these 2 new projects, the total amount of Capstone microturbine power in Australia is now 20 megawatts. We are penetrating the Malaysian market as well through our first installations of palm oil producing plants where our C1000 units run on palm oil milling effluent that creates a biogas in an off-grid application. This application dramatically lowers the emission footprint of the palm oil plants. In South Africa, we received orders, 2 separate orders total for 5 C65s for CHP in agricultural biogas projects.

Let's go ahead and turn to Slide 15. Like Australia, South America and the Caribbean are potentially huge growth markets for Capstone as local businesses start exploring the economic and environmental advantages of our microturbines over the conventional reciprocating diesel generator sets. Year-to-date, we have not penetrated the South American market as much as we hoped, but we are still seeing huge potential in countries like Ecuador, Colombia, Brazil, Bolivia and even Chile and Peru. During the quarter in Colombia, we did receive an order for 2 C200s for CHP and a biogas project to Bogotá. And in Bolivia, the National Oil company added another C65 to their already large and growing fleet. In Jamaica, our new distributor, CDEC, sold a C600 for an industrial boiler application and a C1000 for CHP at an exclusive resort.

Go ahead and turn to Slide 16. In closing, as Ed mentioned, our backlog in the products we have made and our cost-savings initiatives have put us in great position to deliver a sequential increase in revenue and continued margin expansion in the fourth quarter in support of our long-term goals outlined on this slide.

As I mentioned, our distribution channels are getting stronger every quarter. We are now at 73 countries with 94 distributors and OEMs. Our aftermarket service is stronger than ever and is making a meaningful contribution to the health of our overall business. Our gross margin percentage is the highest that it's ever been, which positions us well as we, again, regain revenue momentum. We are experiencing pockets of strength in key geographic areas and vertical markets even with and despite the macroeconomic headwinds we are facing. These company-specific trends bode well for our performance in the current quarter and beyond.

Our long-term growth will be supported by our penetration into new markets and the introduction of new Capstone products. With our current low market share, we still have a lot of runway left ahead of us. There are several geographies that we haven't even tapped into and newer verticals that we've yet to significantly penetrate. So management firmly believes we still have a terrific opportunity for long-term growth. As a company, Capstone, its business partners, are the strongest they've ever been and we are better positioned than any time for the future.

Operator, at this time, we'll go ahead and open up for some calls from our analysts.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Eric Stine with Craig-Hallum.

Eric Stine - Craig-Hallum Capital Group LLC, Research Division

Yes, I'm just wondering, can we dig in a little bit there? I'm just wondering record high, anything onetime or mix-related or I mean do you feel that you've kind of turned the corner that this 20% level, you obviously talked about next quarter, you expect expansion there. But as we look into fiscal year '16, is 20%-plus the way we should think about that?

Darren R. Jamison

Yes, let me start with the first part of your question. There is nothing abnormal about the quarter that would drive any kind of higher revenue. We did get a little bit of pickup with finished goods. Some of that should reverse in the fourth quarter. That's only a couple of hundred thousand dollars in the gross margin. So not overly significant. I think we're seeing very good margins across the product line. We did have record service revenue, parts, service and accessories and FPP. Obviously, we've talked about the service business' higher margins than our product business. So as the service business continues to grow as a percentage of the overall business, that's going to help us on the margin standpoint. So I guess to answer your question another way, if we have a huge product quarter that may pull down that margin a little bit just because of mix, but we're still very confident that we have broken the 20% barrier and hopefully never look back.

Eric Stine - Craig-Hallum Capital Group LLC, Research Division

Okay. That's good color. Maybe can we just turn to the -- you mentioned the $5 million in finished goods. Just a little more color there, maybe what's it comprised of. It looks like it's probably in the C200 family based on where your shipments came in, in 3Q. So just what happened? And then also the visibility that you've got, I think you said you expected to ship those in this current quarter.

Darren R. Jamison

Yes, we had about 5 C1000s, as well as multiple C200s. We built about a $37 million or $38 million quarter from a product revenue standpoint but didn't ship it all. Our biggest miss for the quarter was in our Russian distributors BPC. Their business dropped more than half during the quarter as far as -- from Q2 levels. And so several of those units were for them. Obviously, with the drop in the ruble, they've seen some delays in projects, and obviously, the sanctions are slowing down everything. We can't sell them a part without getting proper clearance as to who within these [ph] customer is in the application. So the business in Russia has slowed down. That did impact us in the quarter. And in general, the strength of the dollar hurt us a little bit. But I'd say that definitely the biggest miss was the drop in business with BPC. That being said, they were in our offices yesterday and today. They are diversifying their business. They're moving more into Belarus and Kazakhstan. They're moving more into CHP and CCHP as you've seen in some of the recent releases. They still have a good associated gas business, but definitely the oil and gas business in Russia and the impact on the ruble in Russia proper is challenging. We expect them to recover a little bit in Q4 and then the back half of next year they should get stronger again as they kind of reposition the business. They're not laying off people. They're very confident that they can weather the storm and in their mind, it's just another Russian crisis they have to deal with.

Eric Stine - Craig-Hallum Capital Group LLC, Research Division

But just to confirm, I'm not sure if I heard it right, but you do think that you'll ship -- I mean what's there for BPC in this quarter? I mean is that something where it would be for the same project or they might repurpose some of these [indiscernible]?

Darren R. Jamison

Yes. As Ed said in his comments, we're expecting to see still kind of EBITDA breakeven for the quarter minus stock comp. That would be shipping those finished goods, plus another good Q quarter on top of that. So I think some of those units would go to BPC or we'll repurpose them for other customers. The models aren't so different that we can't do that. So we look in Q4 to hopefully ship everything we have built for the quarter, and then have a very good finish to the year.

Eric Stine - Craig-Hallum Capital Group LLC, Research Division

Got it. Okay maybe last one for me just turning to the backlog and I guess it's all related to the push out of timing. But you mean that was something that was causing -- you were having to deal with that really before oil prices really dropped off and the ruble weakened significantly. So how do you now think about backlog? I know it's been a 12-month time frame. That's been pushed out. How do you think about that going forward?

Darren R. Jamison

Well, I think we said in the last couple of calls that it's probably closer to 15 months. That may, with the slowdown now, be closer to 18. More than half of our backlog, as you know, is in oil and gas. And oil and gas projects are moving slower, not faster today with the drop in oil prices. And we've seen that start the last couple of quarters. But we're always a project-based business and I know everybody hates it when I use the term lumpy, but there are going to be shifts in projects from quarter to quarter. But I do think, the most important thing, as you pointed out, our backlog is going to take longer to turn with the current state of the macroeconomic environment.

Operator

The next question comes from the line of Matt Koranda with Roth Capital Partners.

Matt Koranda - Roth Capital Partners, LLC, Research Division

So I just wanted to start off with the CHP mix. It looks like you guys have made a lot of really good progress there with increasing the mix. So could you just talk about going forward how you see CHP trending as a mix of your revenue? Maybe talk about where it is in your backlog right now. What can we expect it to represent over the next 12 months? And then what are you doing differently with distributors to drive that increase in CHP orders?

Darren R. Jamison

Yes. Definitely I would say CHP, in the U.S., in Mexico, in Australia and a little bit in Europe is strengthening. Our distributors are getting better at applying and finding the right customers and we're also making some changes to the product line to make it even better for CHP applications. I think what's important is our backlog, as I mentioned, is over half oil and gas. I think you're going to see that shift over the next 12 months. Twofold oil and gas will slow down a little bit, but we'll see a pickup in the CHP side, and we'll see a shift in our business. Our California distributor, New York, Mid-Atlantic, all doing a great job in CHP. I mentioned in my prepared comments, we're seeing hospitals. All of a sudden, we did our first hospital in 2003 with Kaiser. We'll do more over the last 6 months than probably we've done in our entire history. So hospitals under a lot of pressure for reducing their operating expenses, getting leaner and meaner and they're huge energy users, both thermally and electrically, so that's a great opportunity for us. Related Properties is doing 6 sites with us. We're seeing more and more opportunities in New York. There are several new buildings in New York coming out of the ground with microturbine spec'd in, which is really, for us, that's the holy grail, is to have architects and engineers spec the product in from the beginning. It's cheaper, it's easier, it's a lot faster adoption rate if you can get an architect and engineer to think about microturbines in every building that he designs.

Matt Koranda - Roth Capital Partners, LLC, Research Division

Okay, great, that's helpful. I noticed in your last slide, Slide 16, in your long-term goals, you had a 10% in the greater than 3 years under the mobile power markets. So maybe just an update on mobile for you guys. Where do things stand? Maybe an update on the relationship with Wrightspeed. Just some color there would be helpful.

Darren R. Jamison

Yes, I would say we haven't seen a lot of improvements in that market. Everything is still in the demonstration phase. We're working with Ebus now here in California. It's some opportunities as well. But I would still categorize that as a 2- to 3-year opportunity. We're still planting seeds, doing demonstrations. We've got the Peterbilt truck that should be in the Costco here shortly for demonstration. But again, these are all preproduction demonstrations. So we are getting into customers like FedEx, like say, Costco, other good indies [ph] customers so they can see the technology. But I wouldn't put a lot of near-term revenue growth there. As you can see in the slide, 3-plus years out, 10% of our business. That's a reasonable expectation. I would think, on the marine side, we may go a little quicker. We've got a new installation going in the Hornblower in New York. That's a high-profile customer for us. We're seeing yachts being specified with our technology. We're seeing yacht owners calling and asking about our technology. So I think the marine market may move a little quicker, but then probably bus and truck will be last would be my guess.

Matt Koranda - Roth Capital Partners, LLC, Research Division

Okay, great. And then finally, for me, BPC looks like, in your Q, is about 40% of AR right now. Can you just help us understand how you're working with them in light of the currency situation?

Darren R. Jamison

Yes. The answer is we're working very closely with them. As I mentioned, they were here in the offices yesterday and today. We're trying to make sure in any crucial situation that you communicate more and more. We are managing their receivable. It's always been a challenging receivable for us at some level. They do have some extended payment terms which make them look like they're a larger piece of our overall receivable. And that's what you're seeing there. But they've been a #1 customer for us for years. And so I think we need to work with them and this is a time of being understanding and being respectful and helping them manage through the crisis they're faced with.

Edward I. Reich

If I can just add to that. I met with their CFO yesterday, who's their corporate level CFO in charge of all their businesses, and I'm very comfortable with that receivable and its collectibility going forward, and don't expect any change in behavior or in the way they pay their bills.

Darren R. Jamison

Yes. I think that the other important thing is BPC as a company is not just a Capstone distributor. They also have a banking side of their business, software side of their business. They do some gas compression work as well as some chemicals. So they're north of 120 million. They're similar in size to Capstone, they're profitable. They've got audited financial statements from BDO, I mean. So they're a pretty sophisticated company. And again, we've got a long-term history with them and they've got over 1,300 machines. They've done over 250 projects. They're a major player for us.

Operator

[Operator Instructions] The next question comes from the line of JinMing Liu with Ardour Capital.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

First off, regarding your backlog. It looks like your C1000 has a big chunk of that $175 million backlog. Did I heard you the age of, let's say, 1,000 backlog is about 18 months or 15 months?

Darren R. Jamison

The backlog, in general, really depends, the smaller product turns quicker. Typically our C30 and C65 flow through backlog faster. The C1000 Series tends to move slower. So we're talking in generalities. In general, though, we say if you look at our backlog, it should completely turn over in 12 to 15 months. With some of the economic conditions and headwinds we have, maybe 18 months is a better way to look at that. And we'll give more update in the Q4 call. I think we'll see -- oil prices have come back and stabilized. If the ruble would stabilize, that would be helpful. And some of the other currencies against the dollar have also improved. So I think let's see what Q4 looks like, and then have more of a conversation about next year and how fast backlog's going to turn.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Okay. Did you mention you're going to suspend the price increase in the calendar first quarter?

Darren R. Jamison

You sound like one of our distributors. I'm sure that's all I'm going to get. We're -- as you know, we do an annual price increase every April 1. We typically look at what Caterpillar and GE does at the end of -- in January 1, and then we try to match their heart rate. This year, though, with the price of the dollar increasing so substantially. It's not just against the ruble. It's against the euro. It's against the peso. Most basket of currencies are going the other way against the dollar. So we may look at postponing it or making it very modest. We're evaluating that now. We may still do a price increase in the U.S. So we're currently evaluating it. But I think to do a fairly sizable price increase into a market that's already struggling with the strength of the dollar wouldn't make a lot of sense. And again, we see our distributors, our business partners, and we want to do the right thing for all of us and making their life harder right now is not our goal.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Okay. I look at your new bookings, it looks like the C200 bookings has been slowing down year-to-date compared to the same period last year. So is there anything special about the C200 model?

Darren R. Jamison

No. We had a large order for a prison island Mexico last year, which was, I think, 30 C200s so that was -- if you take that out, that would help normalize it. Also we tend to sell more 200s in Europe, in Germany, in Italy and the like have been a little bit soft this year. So I think it's a combination of one big order that moved the numbers last year and then Europe still being a little bit soft from an economic standpoint.

JinMing Liu - Ardour Capital Investments, LLC, Research Division

Okay. Lastly, on the last slide, you mentioned that in the future you may -- Capstone may do the financing for some models. So what kind of mechanism you are looking at that?

Darren R. Jamison

Yes, we're talking to our bankers and several folks trying to figure out the right way to do it. We're also talking to third-party financial solutions providers. We're looking for the right mix of both our involvement, as well as some third-party involvement. And that's something that if you look at who we're competing with, with Caterpillar, with Cap finance], GE finance. Most of our larger customers, we're trying to take market share away from, have some sort of in-house financial solution. So we'd look to do something similar to that. How we structure it and how much involvement we have will depend. Obviously, we're not going to do anything until we're cash flow positive, EBITDA breakeven. So we're really preparing for the future when we start being a cash generator. And that's one of the things we can do with our cash is to help provide Capstone financing for customers. But that could be everything from traditional leasing through complete owner-operator selling the electrons and thermal energy.

Operator

There are no more questions in queue at this time. I would now like to turn the call back over to Darren Jamison for closing remarks.

Darren R. Jamison

Excellent. Thank you, guys. Great group of questions. As Capstone's CEO, I sit and look back at the third quarter. It's really obvious to see the slowdown in revenue and product shipments because of the macroeconomic and geopolitical headwinds. But I think if you dig a little deeper, you're going to see a lot more, a lot more positives. You're going to see the quarter that delivered record gross margin and broke through the 20% margin barrier. And frankly, on lower revenue, almost 20% lower than last year, and we had higher margin. So that's excellent. You're going to see an improving cost structure. It's not only very leverageable, but we continue to get more efficient and do more with less. So I think which is only going to make us stronger as the revenue comes back, and we get the growth that we're looking for. I'm very happy, and you're going to see the good working capital vantage that we have for the quarter. We've utilized our bank line a little bit more, and we actually generated a small amount of cash for the quarter. Importantly, we preserved our balance sheet and our balanced didn't go down. A strong balance sheet is very important to our customers, our vendors, our employees, everybody. So to have that balance sheet not change quarter to quarter is excellent. You're going to see the record backlog, it didn't go up a whole bunch, but the reality is that's our fuel for future growth. And that backlog, no matter how fast it turns is orders from our distribution channel that are going to flow through and, more importantly, hopefully become FPP service contracts. As you're going to see, the growing FPP service contracts are becoming a bigger part of our overall business. And we have really fixed overheads in our service organization. So as we put more contracts in, we're going to make more margin. Plus as we engineer the product to be better, warranty costs and costs of executing those contracts go down. So that's excellent for long term. And FPP contracts should go up every quarter regardless of revenue as we ship more product because these are 5- and 9-year contracts, and so typically they're not rolling off or being canceled. So any new contracts is adding to the annuity that we have out there. You're going to see the strengthening distribution channel. If you look back when I joined the company in 2006, we had 20 distributors, mostly in the U.S., very little coverage from a geography standpoint or even verticals. Today, we have 94 distributors and OEM partners and we have a huge amount of employees out there. People question me a lot on Wall Street why we don't sell direct. But I think if you look at similar companies like ours, Fuel Cell Energy, they sell direct in 3 markets, not 73, and they have 450 employees. We have 225 employees and we're selling into 73 countries. We can only do that because we are a distribution channel, but there's 740 dedicated Capstone employees that we don't pay for that are out there carrying the flag. They're out there day in, day out making our disruptive technology into mainstream society. So that's a huge asset for us. And I think when people value our stock, they don't put enough value, enough attention to that distribution channel that we've grown over the last 8 years. Obviously, it's only going to continue to grow, mature and get better.

You're going to see -- if you dig, you're going to see the company has found new ways to continue to grow and thrive despite the macroeconomic and geopolitical headwinds. I don't know how many companies could have their largest customer revenue drop in half 1 quarter to the next or have their price get so much more expensive and still manage to book orders and improve margins and grow the business, which we plan on doing. You see it's a company that's poised to really reach the next milestone and that's EBITDA breakeven plus stock comp and never look back, and so that's our goal for Q4. Whether we achieve it or not, we're going to work really hard to get there, and I'm sure we'll be closer than we've ever been. And once we get there, we don't plan on turning back. And so as I kind of said in my prepared remarks, the company is the strongest it's ever been, regardless of stock price or macroeconomic environment, our distributors are doing more than they've ever done, they're getting better, our products are getting better, our management team is getting better, our employees are very dedicated, and we're going to just keep doing the right things and work through this situation. We look forward to a great Q4. And with that, I'll end my comments.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. That concludes the presentation. You may now disconnect. Have a great day.