Business is thriving. Capstone Turbine Management expanded across all of its high-growth market segments. It had strong growth in revenue, margins and backlog.
Geographic regions
The Asian and Australian markets are picking up and Capstone Turbine Management is continuing to expand into the Asia-Pacific market. It recently sold the Capstone C1000 package to a high-tech chicken egg farm in Singapore. The unit is fueled by biomass generated from animal waste. The unit will power 8 chicken houses on the 32 acres of property, and the heat from the exhaust will dry spent grain that is used for chicken feed.
Revenue in Europe, which includes Russia, increased year-over-year, despite softness in the economy. Europe (excluding Russia) constitutes about 16 percent of Capstone Turbine Management's business and it expects growth in that segment to be flat. A couple of distributors in Europe are on credit hold and Capstone is monitoring them closely. Germany, France and the U.K. are performing relatively well. The company is more concerned about Spain, Greece and Italy.
In Russia, Capstone shipped at least 5 megawatts of power to Tatneft. Tatneft has committed to a majority of the 16 megawatts set forth in the memorandum of understanding. So far, it has committed to around $10 million in orders. Tatneft has another $20 million option that can be exercised by December 31, 2012.
Capstone Turbine Management is also starting to penetrate South America, Mexico and Africa.
In the United States, Capstone
received orders of approximately 10 megawatts from 2 oil and gas
producers in the Eagle Ford Shale play. One customer ordered 5 C1000
power packages for 5 different sites. The second was a follow-on
order was from a current customer, which included 7 C600s and 1 C800
package. Shipments for that order will begin in Q1 of fiscal year
2013.
Capstone's micro turbines are becoming the preferred power system in the Eagle Shale play. Capstone recent sold 30 more C65 micro turbines to Eagle Shale. The total number of units in the Eagle Shale play is now 200.
Business segments.
The oil and gas market is the fasting growing market for Capstone Turbine Management worldwide and will be a key driver of its business going forward. Oil and gas represented 58 percent of Capstone's revenue in fiscal year 2012 versus 39 percent in fiscal year 2011. Most of the company's revenue increases were in the U.S. shale market and the Russian oil and gas market. Micro turbines are installed at these sites because there typically is no electric grid to which they can connect. Given low natural gas prices, the micro turbines can produce energy at a cost of $.03 to $.04 per kilowatt hour. Capstone Turbine Management still has a small market share in the oil and gas segment. However, it has received orders from Anadarko, Chesapeake, Marathon Oil, Talisman, and Shell, and most of those customers have made repeat orders.
Energy efficiency represented 25 percent of Capstone's market in fiscal year 2012. This market also presents a lot of opportunity. A U.S. Department of Energy study calculated potential energy efficiency in the CHP market in the United States to be over 35.5 gigawatts through 2020. California's self-generation incentive is starting to have an impact on orders. Capstone also received a couple of hospital orders in Q4.
Renewable energy was 16 percent of Capstone's revenues in fiscal year 2012. Capstone provides the world's only micro turbine-powered, uninterruptible power source solution that offers clean IT-grade power. The need for uninterruptible power in businesses is resulting in rapid growth in the UPS market, which is expected to reach $15 billion in revenues by 2020. Capstone is now offering a new C1000 hybrid UPS in addition to its current C65 offering.
Other applications, such as critical power and mobile products constitute 1 percent of Capstone's market. Capstone is planning to develop micro turbine-based hybrid heavy-duty truck and transit bus solutions over the next several years. This market also has potential for Capstone, since hybrid-electric vehicle use and sales is setting new records.
Future prospects.
Capstone Turbine Management believes it is well positioned for future growth. The global market opportunity for micro turbine-based solutions is projected at approximately $14.6 billion annually and Capstone believes it can take $1.5 of this amount in market share.
Capstone is continuing to invest in new product development. It is developing a more efficient micro turbine combined heat and power system solution to improve its C200 engine. In the first phase of this development, it is projecting a power output of 250 kilowatts and 35 percent electrical efficiency. In the second phase, it is projecting a power output of 370 kilowatts and 42 percent energy efficiency. The Department of Energy has given Capstone a $5 million grant in support of this program. These changes are not likely to be seen in the P&L until fiscal year 2014.
Capstone Turbine Management is also developing a fuel-flexible micro turbine that can operate on a synthetic fuel mixture that contains varying amounts of hydrogen. The Department of Energy has given Capstone a $2.5 million grant in support of this program.
Capstone is focusing on increasing its sales mix to the C200 and C1000 units, which are larger. It also plans to further expand into new and existing markets. Its sales team is focusing on building brand awareness. It plans to engage in global marketing efforts, such as attending the Rio+20 event. It is focusing on areas that will repeatable business.
Capstone now has 93 distributors worldwide and will be looking to trim that number by consolidating the distributors. Its goal is to get $3 million in orders from each distributor.
Capstone has ample room for expansion as its manufacturing is only at 35 percent capacity.
Evaluation of markets
Shale gas production is soaring. According to a report from EIC Consult, production will reach 30 cubic feet by 2020. Low natural gas prices may slow down some production, but crude oil prices are still relatively high and therefore a lot of liquid is being drilled. Capstone Turbine Management expects tremendous growth in shale gas in the United States and globally.
Financials.
Revenue increased 34 percent over fiscal year 2011 and Capstone has had 20 consecutive quarters of revenue growth for a compounded rate of 37 percent. Revenue for Q4 increased 32 percent from Q1/2011. Capstone expects 30 percent growth in revenue for fiscal year 2013.
Gross margins for fiscal year
2012 was 5 percent, an increase of 6 percentage points from 2011.
The margin increase was due to higher volume, increased
selling prices, and lower direct material costs. These positives
offset higher production and service center expenses, warranty,
royalty and inventory charges.
Capstone Turbine Management had positive margins in all four quarters
for the first time in its history. It is expecting some nice margin
improvements in the next 3 to 4 quarters. It is ultimately
targeting a 35 percent gross margin, but it can be profitable with a
lower margin.
Gross margins in Q4 were 3 percent versus a negative 5 percent in Q4/2011 due to increased volume, higher pricing and lower materials costs. Gross margins decreased from 8 percent in Q3/2012 due mostly to year end inventory adjustments, manufacturing overhead and material adjustments, and a shift in product mix. Material costs were flat from Q3/2012.
In terms of lowering expenses, Capstone has targeted a 30 percent cost reduction. It has some parts that are engineered to have lower costs. It will be able to get volume discounts with some of its vendors. It is working on a 5 percent cost reduction on the C1000 package, which is its fastest growing product. It will be able to reduce costs on the C250 package as it goes from 5 units in a box to 4 units in a box. Capstone has targeted a 14 percent DMC cost reduction in fiscal year 2013.
The company's backlog at the end of fiscal year 2012 (which is a 12 month backlog) was $139 million, an increase of 31 percent. The backlog is the result of accelerating orders. New orders in fiscal year 2012 increased 42 percent. Total shipments were 96.1 megawatts versus 69.7 megawatts in 2011.
In fiscal year 2012, Capstone
shipped 627 units, or 96.1 megawatts compared to 611 units or 69.7
megawatts in fiscal year 2011. The average selling price was
143,000 in fiscal year 2012 versus $109,000 in fiscal year 2011. The
increase in average selling price was the result of increased pricing
and the shift to the larger capacity C200 and C1000
micro turbines.
In Q4, the number of products shipped declined 11 percent from Q4/2011. However, on a megawatt basis, shipments increased 32 percent as a result of Capstone shipping more large capacity micro turbines in Q4 2012. Average selling price increased 46 percent from Q4/2011, which was due to higher pricing and shipping more large capacity micro turbines. So far in the current quarter, Capstone is not seeing any slowing in orders.
In fiscal year 2012, Capstone's
net loss was $.07/share compared to a loss of $.16/share in fiscal
year 2011. In Q4, Capstone's net loss was $.03 per share versus a
net loss of $.12/share in Q4/2011. The net loss for both
fiscal years was affected by the adoption of Accounting Standards
Codification 815, derivatives and hedging, which affects its
accounting for warrants with anti-dilution provisions.
At the end of fiscal year 2012, Capstone Turbine Management had $50 million in cash. Its cash level increased from $22.9 million in Q3, primarily as a result of direct placement of securities in March, which raised $23.1 million.
Capstone's receivables decreased to $18.6 million from $23.6 million in Q3/2012 as a result of strong collections of $37 million during the quarter.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
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