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Edited Transcript of CPST.OQ earnings conference call or presentation 9-Feb-21 9:45pm GMT

·38 min read

Q3 2021 Capstone Turbine Corp Earnings Call CHATSWORTH Feb 9, 2021 (Thomson StreetEvents) -- Edited Transcript of Capstone Turbine Corp earnings conference call or presentation Tuesday, February 9, 2021 at 9:45:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Colby Petersen Capstone Turbine Corporation - Secretary & Corporate Counsel * Darren R. Jamison Capstone Turbine Corporation - President, CEO & Director * Frederick S. Hencken Capstone Turbine Corporation - CFO ================================================================================ Conference Call Participants ================================================================================ * Aaron Michael Spychalla Craig-Hallum Capital Group LLC, Research Division - Research Analyst * Amit Dayal H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst * Michael Carl Heim NOBLE Capital Markets, Inc., Research Division - Senior Utilities Analyst * Robert Duncan Brown Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst * Shawn Severson * Tate H. Sullivan Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to your Capstone Turbine Corporation earnings conference call and webcast for the financial results for the third quarter fiscal year 2021 ended on December 31, 2020. (Operator Instructions) As a reminder, today's program will be recorded. At this time, it's my pleasure to turn the floor over to Mr. Colby Petersen, Corporate Counsel. Sir, the floor is yours. -------------------------------------------------------------------------------- Colby Petersen, Capstone Turbine Corporation - Secretary & Corporate Counsel [2] -------------------------------------------------------------------------------- Thank you very much. Good afternoon, and thank you for joining today's fiscal 2021 third quarter conference call. On the call with me today is Darren Jamison, Capstone's President and Chief Executive Officer; and Eric Hencken, Capstone's Chief Financial Officer. Today, Capstone issued its earnings release for the third quarter of fiscal 2021. We will be referring to slides that can be found on our website under the Investor Relations section during the call today. I want to remind everyone that this conference call contains estimates and forward-looking statements representing the company's views as of today, February 9, 2021. Capstone disclaims any obligations to update or revise these statements to reflect events or circumstances. You should not place undue reliance on these forward-looking statements because they involve known and unknown risks, uncertainties and other factors that are, in some cases, beyond our control. Please refer to the safe harbor provisions set forth on Slide 2 and in Capstone's filings with the Securities and Exchange Commission for information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements. Please note that as Darren and Eric go through the discussion today, when they mention EBITDA, they are referring to adjusted EBITDA and the reconciliations in our presentation's appendix. I would now like to turn the call over to Darren Jamison, President and Chief Executive Officer. -------------------------------------------------------------------------------- Darren R. Jamison, Capstone Turbine Corporation - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Colby. Good afternoon, everyone. Thank you for joining us today to review our third quarter fiscal 2021 results ending December 31, 2020. Before getting into the specific financial results, I'd like to review recent business highlights and provide an update on our adjusted EBITDA improvement initiative. Go ahead and turn to Slide 4. On Slide 4, we've outlined some of the key events from the last couple of months. I will now run through each item, but I'd like to draw your attention to a couple of the more crucial events, beginning with the first bullet. As most of you know, we have been moving aggressively ahead to return to solid revenue growth following our successful cost-cutting initiative over the past couple of years. Revenue for the quarter increased $3.3 million or 19% to $20.7 million from $17.4 million for the 3 months ended December 31, 2019, and increased $5.8 million or 39% sequentially from $14.9 million for the 3 months ended September 30, 2020. With nearly 20% revenue growth year-over-year and 40% sequentially, our efforts are now showing up in our results. Additionally, in the third quarter, new gross product bookings were $10.5 million, up 7% from $9.8 million in the second quarter and up a whopping 91% from $5.5 million in the first quarter, showing the solid sequential performance. The other key metric is the adjusted EBITDA. This improved $0.6 million or 32% to negative adjusted EBITDA of $1.3 million for the 3 months ended December 31, 2020 compared to negative adjusted EBITDA of $1.9 million for 3 months ended September 30, 2020. Year-over-year was even more impressive, and improved $1.4 million or a 52% improvement when compared to negative adjusted EBITDA of $2.7 million for the 3 months ended December 31, 2019. I believe this shows we can drive towards profitable revenue growth as we continue our march towards adjusted EBITDA breakeven and beyond. The third bullet I point to would be the highlight that shows our significantly improved liquidity position. Cash increased to $32 million at December 31, 2020, up from $16.8 million at September 30, 2020. The increase was primarily due to favorable amendment of the Goldman Sachs Note Purchase Agreement on October 1, 2020, that upsized Capstone's note to $50 million from the original $30 million with a reduced interest rate and a new 3-year term. As a reminder, liquidity is critical to our evolving Energy as a Service strategy, and the expanded Goldman note shows a vote of confidence in our Energy as a Service strategy. Let's go and turn to Slide 5. On Slide 5, I want to highlight graphically our revenue growth over the past few quarters. As I noted at the beginning of the call, driving revenue growth is the next stage in our pathway to adjusted EBITDA breakeven and profitability. I am happy to say that we achieved our highest quarterly revenue in more than a year, up 39% sequentially and 19% year-over-year, as I mentioned. This is despite continued business headwinds related to COVID-19 globally. On Slide 6, we have set out the strategic drivers we have put in place to accelerate revenue growth. First is the new direct sales team. One of the keys to accelerating revenue is to increase the size of our orders and greater integration with our large national and global customers. Using our new internal sales team, we expect to become a trusted partner with these customers, where historically, we might win a single location at a hotel or industrial company, we now want to drive that customer for multiple deployments throughout their properties. The second is our target pricing programs with national and key accounts. This is an effort to price our products to meet key or national account company internal hurdle rates. Said another way, we want large customers to give us multiple site locations and a required simple payback, and we will work hard to put all the projects blended together to meet those internal rates. Third. Third is expanding the technology platform to include fuel sources such as hydrogen and renewable natural gas. Both fuels offer a substantially reduced carbon footprint on top of our already compelling emissions profile. Our goal is to be able to operate on 100% hydrogen fuel, effectively creating a near zero-emission energy solution, at least when using green hydrogen. Both renewable natural gas, or RNG, and the hydrogen economy are experiencing substantial progress in expanding their respective infrastructures and resources. By offering greater fuel flexibility, we will remain at the tip of the spear in helping customers reduce their carbon footprint as well as our cost of energy. Fourth. Fourth is customer retention through improved customer satisfaction. We have actively engaged our -- improved our supply chain, including a critical new part supplier to ensure the quality of our product. With higher customer CAT satisfaction, we will give more shots on goal to increase our market share with these key customers. Fifth is our new digital marketing strategy. Although we are a supplier of excellent green energy solutions, branding and awareness is still challenging. Some of the improvements include website updates, customized campaigns and our shift to green IndyCar branding strategy. Last, but by no means least, we are engaging new distributors around the globe to expand our geographic footprint. I would specifically point to Eastern Europe, Africa and the Middle East. We have added several new distributors over the past year, and we are in the process of continuing to expand our global distribution footprint. I will now turn the call over to Eric to provide more details on what was an excellent third quarter financial results. Eric? -------------------------------------------------------------------------------- Frederick S. Hencken, Capstone Turbine Corporation - CFO [4] -------------------------------------------------------------------------------- Thanks, Darren. I will now review in detail our financial highlights for the third quarter of fiscal 2021, which can be found on Slide 7 through 10. As a reminder, the company issued preliminary select third quarter results on January 6, 2021, and the results released today are consistent with those preliminary results. Starting on Slide 8, I want to highlight the significant sequential improvement in nearly every line item of our P&L. I'm not going to run through each line, but I want to point out the total operating expenses line. Despite our total revenue growing from $14.9 million in the second quarter to $20.7 million in the third, operating expenses were essentially flat. This shows that we can grow this business and keep tight controls on operating expenses. Slide 9 is even more impactful as this shows the substantial year-over-year progress. Revenue for the 3 months ended December 31, 2020 increased $3.3 million or 19% to $20.7 million from $17.4 million for the 3 months ended December 31, 2019. Gross margin was $3.5 million or 17% of revenue compared to gross margin of $2.6 million or 15% of revenue for the 3 months ended December 31, 2019. This increase was primarily due to more volume as well as improved accessories, parts and service margins. Operating expenses for the third quarter decreased $0.7 million or 11% to $5.6 million from $6.3 million over the same period last year despite a $3.3 million increase in revenue, primarily due to our cost savings efforts as we continue to manage through the impacts of the COVID-19 pandemic. Net loss increased to $7.6 million for the 3 months ended December 31, 2020 compared to a net loss of $4.9 million for the 3 months ended December 31, 2019, primarily due to the loss on extinguishment of debt resulting from the upsize of our Goldman Sachs note, which includes loan origination fees, value of warrants and the write-off of unamortized costs from the original note. The revenue growth, combined with the cost reductions, led to a significant adjusted EBITDA improvement of approximately $1.4 million, the negative adjusted EBITDA of $1.3 million for the 3 months ended December 31, 2020 versus negative adjusted EBITDA of $2.7 million in the same period last year. I will conclude with Slide 10 with an update on our balance sheet. Cash increased to $32 million at December 31, 2020, up from $16.8 million at September 30, 2020, primarily due to the amendment of the Goldman Sachs Note Purchase Agreement on October 1, 2020, that upsized the company's note to $50 million from $30 million, with a reduced interest rate and a new 3-year term. I would also point out that we have seen a sequential improvement in cash since the March quarter of 2020, helped by our working capital management with a reduction in inventory to $13.1 million compared to $22.7 million at March 31, 2020. Additionally, since January 1, 2021 through today, we issued approximately 1.2 million shares of our common stock under our at-the-market offering, and the net proceeds to us were approximately $14.5 million. With this improved liquidity, we have much greater flexibility to execute on our growth strategy, in addition to increasing customer confidence in our company to become a long-term partner. I will now turn the call back to Darren for an update on our hydrogen initiatives. -------------------------------------------------------------------------------- Darren R. Jamison, Capstone Turbine Corporation - President, CEO & Director [5] -------------------------------------------------------------------------------- Thanks, Eric. Let's go ahead and focus on Slide 12. According to Frost & Sullivan's recent analysis, global hydrogen production is forecasted to more than double, reaching 168 million tons by 2030, up from 71 million tons in 2020, with revenue expected to reach $420 billion in 2030, up from $177 billion in 2020. Part of Capstone's long-term success is being able to react quickly to changes in the industry, and that includes our customers' desire to use hydrogen as a fuel. The hydrogen economy is coming and we need to be there with it. We currently offer a solution from 10% to 20% hydrogen blend in our current product line of microturbines as well as fuel source and having successfully operated up to 70% blend of hydrogen natural gas at Argonne National Labs, that is using our new hydrogen patent injector shown on the slide. One of the keys for reaching a near 0 carbon footprint is the production of green hydrogen. Slide 13 shows the system architecture and how the hydrogen economy can use stranded electrons produced for renewable energy to produce hydrogen. Green hydrogen is still not widely available, but is expected to rapidly grow in the coming years, making it an important fuel option for our customers. The roadmap to a U.S. hydrogen economy report recently forecasted that hydrogen from low-carbon sources could supply roughly 14% of the country's energy needs by 2050. Customers using our power solutions fueled by green hydrogen would be a critical piece to the puzzle in reaching net 0 carbon objectives. This is very exciting for us, our customers and our shareholders. Operator, at this time, I'd like to open the call up for calls from the analyst community. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And your first question is coming from Rob Brown. -------------------------------------------------------------------------------- Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [2] -------------------------------------------------------------------------------- First question is on the Energy as a Service business. How is the kind of rental market at this point where you're seeing activity? And sort of how many units are you thinking at this point in terms of rolling out? -------------------------------------------------------------------------------- Darren R. Jamison, Capstone Turbine Corporation - President, CEO & Director [3] -------------------------------------------------------------------------------- Yes. No, our goal is to -- Rob, our goal is to get to 10 megawatts rolled out by the end of the year. So by March 31, we're still looking to be somewhere around that number. Obviously, COVID impacted the rollout of the rental program, especially in the oil and gas space. We're now seeing oil prices back over $50 a barrel. We're seeing new opportunities in the oil and gas industry. We've also got several CHP rentals out there and continue to see good traction there as well. We are looking to expand outside the U.S. We'll probably have our first rentals in Mexico, Latin America and the U.K. in probably the next quarter. So definitely, aggressively looking to grow it as fast as possible. But we do want to make sure we price them accordingly. We get the right rates of return that we're looking for. And most importantly, we're trying to lease sign minimum 1-year rentals. We don't want to sign short-term rentals just from a logistics standpoint. It's very challenging to move these units around constantly, especially for us kind of being somewhat new to the rental business. But I'd say, overall, it's going okay. But I think the next quarter, we're going to see an acceleration of the rental fleets in -- both in our building of units as well as deploying units. -------------------------------------------------------------------------------- Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [4] -------------------------------------------------------------------------------- Okay. Great. And then on the hydrogen development in the market, where do you see the customer interest at this point? And how do you see that market developing over the next couple of years? -------------------------------------------------------------------------------- Darren R. Jamison, Capstone Turbine Corporation - President, CEO & Director [5] -------------------------------------------------------------------------------- Yes. No, it's a great question. I think we were skeptical, I'll be honest, on the hydrogen economy. And I lived through it the first time with Schwarzenegger and hydrogen highway here in California. But this feels different. We are hearing about it and seeing it from customers. We're seeing it from legislatures. Obviously, with the new Biden administration, it's going to be a big piece of the green energy push that they have. Our first units that we sold were in Australia. We've got quotes going right now actively in Japan, in Korea, several in Europe as well as the U.S. When we announced the fact that we can run on a hydrogen blend, the amount of opportunities and kind of incoming inbound calls has gone up substantially. So there's definitely a large amount of customers that want to, at least, run on a small blend. But more importantly, we've seen some customers that were quoting natural gas CHP projects, too, that are asking us about our hydrogen, kind of, future path. And so they don't want to install a CHP solution today, that's a 20-year asset that can't run on hydrogen 10 years from now or 5 years from now, even on a blend. And so I think the ability to have a hydrogen footprint, at least from a blend standpoint, it will be critical near term. I think long term, as you see more green hydrogen get deployed, the 100% hydrogen opportunities will be there. I think one of the limiting factors for hydrogen is infrastructure. But because we are behind the meter, we're distributed assets, we don't necessarily have to run off a hydrogen pipeline. We could run off hydrogen that's developed at the source. And I think that's going to allow us to put some units on the ground before some other folks. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Your next question is coming from Amit Dayal from H.C. Wainwright. -------------------------------------------------------------------------------- Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [7] -------------------------------------------------------------------------------- Congrats on the strong revenue performance. Can you talk a little bit about the distributor pipeline and sort of any engagement changes post sort of the Biden win? -------------------------------------------------------------------------------- Darren R. Jamison, Capstone Turbine Corporation - President, CEO & Director [8] -------------------------------------------------------------------------------- Yes. Distributor pipeline is, I'll say, ebbed and flowed during COVID as we see closures of economies and COVID-related shutdowns. So obviously, we saw it in the U.S. and then it got better. And then in the holidays, it got worse. Mexico, I think this week is coming off another closure. We had the U.K., Europe, Italy, all go on, shut down for, I think, the second time. And so we're definitely seeing impacts from COVID, which I think is really why we're so excited with the revenue numbers we're putting up. To put up the highest revenue quarter in over a year in this COVID environment is really impressive for us. And it makes us very confident that as COVID subsides, the work we've done is really going to provide a lot of great opportunity for us. Obviously, the Biden administration by rejoining the Paris Accord is good for us. Anything related to green energy, hydrogen, green building, energy efficiency, all of those initiatives and measures are going to be good for us. So we're excited about the new administration, what they're going to do for us. And just the more we talk about green energy, the more customers are reaching out to us, looking for green solutions, the more valuable the reduction in carbon becomes. As you know, in the last 2 years, we've saved customers 718,000 tons of carbon. We'll announce shortly what the last year has done. But obviously, that will get us over 1 million tons of carbon saved in the last 3 years, and we'll probably be closing in on $1 billion in savings. And so the more we can get to customers to help them save the planet and save money and provide resiliency, I think, is a win-win situation. And so the new administration is going to put new measures in place to accelerate the green economy, but also just help educate customers and get them excited about doing the right thing. -------------------------------------------------------------------------------- Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [9] -------------------------------------------------------------------------------- Darren, has the ITC extension benefited you yet? Or do you expect to see some benefits maybe down the line later in the year? -------------------------------------------------------------------------------- Darren R. Jamison, Capstone Turbine Corporation - President, CEO & Director [10] -------------------------------------------------------------------------------- Yes, I mean the ITC extension definitely is positive. We get 10% versus the 30%, some of the other technologies do. So it's not as big a mover for us as it is for the fuel cell companies. But we're a lot less expensive than the fuel cell companies. And frankly, a lot closer from an EBITDA positive perspective and I like our business model better. I like to think we're a fuel cell company but with a profitable business plan. So I think the ITC is good for all of us. And I think the longer it gets extended, obviously, the better. But we're really looking for ways to reduce customers' energy bills and get a 5-year payback with or without the ITC. -------------------------------------------------------------------------------- Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [11] -------------------------------------------------------------------------------- Got it. Just one last one. On the gross margin side. Were margins a little suppressed in the third fiscal quarter compared to -- given the stronger revenue performance, I guess? -------------------------------------------------------------------------------- Darren R. Jamison, Capstone Turbine Corporation - President, CEO & Director [12] -------------------------------------------------------------------------------- Well, I think -- I mean, when you look at our margins, you have to look at mix. And so at these product levels, Kirk Petty and his operations team are barely sweating. We can run single shift 5 days a week and put out the quarter. And so when you start looking at -- we could be doing 3x the product levels in the shop that we have today, if not more. And so we're running at 20% capacity. At that level, it's hard to absorb our overhead and drive real strong margins. And so our product margins are kind of low single digit compared to our service and aftermarket margins that are much, much higher, obviously, as you know. So from a blended standpoint, we had a great product quarter, but that does depress our margins a little bit from a mix standpoint. However, we have to sell tickets to the movie to sell popcorn. So getting more units out there drives more FPP contracts and higher-margin revenue or spare parts. And so definitely, it's great to get more product out there, both from a booking standpoint and a shipping standpoint. And we continue to see the growth of the energy efficiency business. If you remember back in circa 2015, we were 80% oil and gas. Today, we're 67% energy efficiency. So that transition has been huge. And that's a much bigger market and frankly, a much more exciting market for us. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- The next question is coming from Shawn Severson from Water Tower Research. -------------------------------------------------------------------------------- Shawn Severson, [14] -------------------------------------------------------------------------------- Darren, I wanted to focus a little bit on the internal sales force, the international sales force. I mean, you've had some time sort of let that develop here. I know, obviously, it's probably been impacted by COVID. But what -- how is it going, I guess, as a general update? And are you seeing larger contracts bidding come in? Or are you looking at kind of a number of live things in the pipeline? Or really is it still kind of in the early stages, let's say? And then a follow-on question to that would be, what type, size of projects do you expect to see? I mean, you're talking about 2 megawatts, 10 megawatts? I mean what does that market look like now that you've had a chance to digest it a little bit? -------------------------------------------------------------------------------- Darren R. Jamison, Capstone Turbine Corporation - President, CEO & Director [15] -------------------------------------------------------------------------------- Yes. No, great question, Shawn. You're referring to our internal sales or direct sales organization we launched back in January, led by Jim Crouse internally. Unfortunately, we -- by the time we staffed up that direct sales force, COVID hit. And so of the, I think, 6 new hires we have in that direct sales organization, I've met 1 of the 6 in person. The rest have all been virtual. The fact they can't get on airplane and go see customers is challenging. But we had an internal goal for the year that we shared earlier of generating 15% of our product sales from that new direct sales organization. We are essentially hitting those numbers through 3 quarters. And so we're achieving 15% product revenue growth from the direct sales organization with a brand-new team who hasn't been to the factory for training that we can't interface with in person and can't get on an airplane. So I think that tells you what that team can do when they can actually get some more training, some better interaction with the factory and able to go see customers in person. So very happy with that. What we're seeing is C-level conversations with customers and an opportunity to talk about doing multiple projects. And so what excites me is being able to talk to a CFO and a CEO of a business developer or a hotel chain or a plastics company, somebody who's got dozens of locations that we can have a conversation about how to make all of them more resilient and lower their carbon footprint to reduce their costs. And then really understanding what the drivers are. In some cases, if it's a hotel chain that operates in the Caribbean, resiliency is the most important, followed by cost reduction and then carbon footprint. Other folks in the New York-based or East Coast-based or California-based, it's all about carbon reduction and then cost reduction, then resiliency. So really understanding the customer needs and then trying to find out how can we partner with them to be more helpful to them and educate them on what the opportunities are, what our product does. And really kind of become their partner and their energy expert going forward. And so that's the goal of that team. We're not looking to cut out our distributors. In fact, in many of these high-level meetings, our distributors are on the call. We've had one recently with E-Finity, one of our top distributors here in the U.S., and Jeff Beiter. And I think the goal is to show customers, we can be your partner at a C-level, but also give you that boots on the ground, local support to understand the building code, to understand the local air boards, understand how to work with the natural gas company. And everything needs to be successful to make sure you have a good project. And at the end of the day, after we get them installed, our distributors, that monitor the machines, do the maintenance and make sure they get the kind of performance uptime, cost savings that they've -- we signed up for. So very excited about the program. I'd be much more excited when we start getting on airplanes. But I think early returns in the first 9 months based on all the headwinds have been exceptional. -------------------------------------------------------------------------------- Shawn Severson, [16] -------------------------------------------------------------------------------- When you get into the C-suite to make that pitch, is this a new idea or a new concept for these potential customers? Or are you there competing with other companies that are trying to provide solutions as well for their power needs? Just trying to understand a bit. You're in there with other people or this is an idea that you're creating for these customers? -------------------------------------------------------------------------------- Darren R. Jamison, Capstone Turbine Corporation - President, CEO & Director [17] -------------------------------------------------------------------------------- Shawn, it's a little bit of both. In many cases, we get in the door because we have some sort of relationship. And it can be Rob Powelson, one of our Board of Directors, may know this -- the C-level person and maybe somebody that we've sold the project to or even a couple of projects through our distribution base globally. A lot of times, we'll talk to the C-level folks, and they have no idea that they have Capstone's running on other installations. In fact, we've talked to folks at Kaiser hospital. We've done 11 Kaiser Hospitals here in California, and they're unaware that they even had a single Capstone. So a lot of it is just telling them what's going on in their own business, explaining to them the product that they have. And then having a dialogue on what are their goals. Are their goals to reduce their carbon footprint? To improve resiliency? To save money? Is it a mix of those goals? And every CEO today, whether it's a small plastic company or it's the CEO of DHL that we're interfacing with, they all have different goals, different mindsets and they're all kind of different places. But all of them are leaning toward wanting to save money and save the environment and just a question of how fast they want to get there. And so I think it's a little bit of explaining our technology, it's education. A lot of the projects we're doing are with solar or battery storage. And so we can help them with those relationships as well. We can help design the microgrid and really optimize our savings and optimize their performance. And so I'm a big believer. Our technology is amazing, but it's not a single bullet. It's a silver shotgun. And so we need to have our product mixed with the right amount of solar, the right amount of battery storage. And obviously, energy conservation, energy efficiency, lighting, whatever makes the most sense for the customer to drive the best results. And there's many cases where we go to a large building and say, because of the way your building's metered or other factors, it may be a pretty small installation that makes sense, but even if it's 2 C65-kilowatt microturbines, if that's the best result for their site, then that's the goal, we're not trying to oversell them and we want to have a long-term relationship. And the goal is to make sure these projects perform exactly per the savings, both carbon and financial that we promise. -------------------------------------------------------------------------------- Shawn Severson, [18] -------------------------------------------------------------------------------- And that's -- my last part of that question is, I assume the EaaS portion of that has a very high attachment rate with these types of projects, given it's kind of providing an energy solution versus just a product? -------------------------------------------------------------------------------- Darren R. Jamison, Capstone Turbine Corporation - President, CEO & Director [19] -------------------------------------------------------------------------------- Yes. I think at the end of the day, people want to have comfort that they've got a business partner and that it's a win-win relationship. And so there's a lot of kind of local developers or people that will sell you product or even a project, but then they're gone. And then you may never see them again. And so for us, we sign our long-term service agreements as part of our Energy as a Service business model. And if we sign a 15- or 20-year agreement, we're partners for that period of time. We're married. And so as that project goes, so does my margin on that contract, as does the performance of their project and their savings, both economically and environmentally. And so we pray to every failure of every system we have under contract worldwide. If there is an issue with the site that's not performing well, we have a troubled sites group of engineers that -- and service technicians that dig into that site and figure out why it's not performing up to snuff. We fix it. I mean even if it's a customer issue, we fix it because that site needs to perform well for both the customer and for Capstone. And so our goal is to build deep customer relationships with reoccurring revenue and a partnership that's win-win, and that our margins go up over the years as the product performs well and their savings just increases as utility rates inevitably keep going up. -------------------------------------------------------------------------------- Operator [20] -------------------------------------------------------------------------------- Your next question is coming from Tate Sullivan from Maxim. -------------------------------------------------------------------------------- Tate H. Sullivan, Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst [21] -------------------------------------------------------------------------------- You mentioned renewable -- your renewable natural gas effort earlier as well as -- I mean, you went into more detail on hydrogen with RNG, and I think some of your units are already at landfills, but can you just provide an update on where you are in getting your units to use 100% RNG in a timeline for getting there too, please? -------------------------------------------------------------------------------- Darren R. Jamison, Capstone Turbine Corporation - President, CEO & Director [22] -------------------------------------------------------------------------------- Yes. It really depends on what type of renewable natural gas we're talking about. We operate, and have had for years, operate on landfills and wastewater treatment plants, cow manure, chicken manure, pig manure, ag cultural waste. And so we can take any kind of biogas. We do a lot of breweries. We just did a couple more sites for AmBev. Sierra Nevada is a great customer with a couple of sites. So we can run on any kind of biogas. And so renewable natural gas for us is just a different gas to run on, but it's something that we can very easily do. We got multiple sites running on blended biogas and renewable natural gas. So for us, that's a already doing-it type of operation. That's not any new development for us. We do need to understand what the constituencies are in the gas to make sure we tune the equipment accordingly. But from a technology standpoint, we've done it. We've got hundreds of units running on renewable natural gas or as you call it, 100% biogas, and that's not a big leap for us. So the more renewable natural gas becomes popular, the better off we are because we're already there, already doing it. From a hydrogen standpoint, that's a little bit more new engineering and new greenfield for us. But again, with the hydrogen injector that we've developed, we're very confident that we can run successfully on 100% hydrogen. Our development effort is really more around the fuel system, containment, packaging, safety, those sort of issues and containing hydrogen, which is a very challenging molecule to not have leak. -------------------------------------------------------------------------------- Tate H. Sullivan, Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst [23] -------------------------------------------------------------------------------- Might that effort -- and I apologize if I missed it earlier, involved having a partner on the hydrogen side or is it a 5-year development effort or shorter? Can you try to quantify the timeline? -------------------------------------------------------------------------------- Darren R. Jamison, Capstone Turbine Corporation - President, CEO & Director [24] -------------------------------------------------------------------------------- Yes. No, I mean, I'll be real blunt. It's about $5 million to $7 million. So it's really how fast do we want to develop the hydrogen product. So we're monitoring the market. If a customer came to us and wanted to give us a big order for 100% hydrogen, we'd accelerate the hydrogen development effort. Most everything we're seeing right now from an opportunity standpoint is hydrogen blend in the 10% to 20% range, and so that's our initial target. So we'll spend money to make sure we are ahead of the hydrogen development kind of efforts. But if we had to go to 100% hydrogen, we could probably do it in 18 months. But if the market rolled out slowly, it may be 3 or 4 years. Just -- it doesn't really pay us much to get there first if there's no market, so we'll develop it as quickly as the market develops. But it's not a big spend. As Eric mentioned, upsize in the Goldman note, what we did with the ATM during the quarter. Cash is not an issue for us. We could spend that $5 million to $7 million very quickly and develop hydrogen in 18 to 24 months, if necessary. It's just really monitoring the market and figuring out how quickly we need to spend those dollars. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- The next question is coming from Eric Stine. -------------------------------------------------------------------------------- Aaron Michael Spychalla, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [26] -------------------------------------------------------------------------------- It's Aaron Spychalla on for Eric. Can you give us an update on the remanufactured unit initiative? What's the impact there been? And kind of what's the outlook there for this fiscal year? -------------------------------------------------------------------------------- Darren R. Jamison, Capstone Turbine Corporation - President, CEO & Director [27] -------------------------------------------------------------------------------- No, great question, Aaron. And one we've probably haven't talked enough about. As we brought up in the past, one of our keys to improving the margins in our FPP or our factory service contracts is remanufactured content. So today, we put a lot of new parts into our service agreements during maintenance intervals. As we get the fleet to age and to get bigger, we'll have more cores to bring back or used parts to bring back to inspect to clean up remanufacturing. And so today, we do all that work essentially in the U.S. We set up our hub in Europe and the U.K. to do that work as well. They are probably 98% of the way there. They're already doing partial remans today on recuperators and they're close to doing full engines and systems. The biggest holdup has been interconnecting with the local utility, so we can test and that interconnection has been impacted by COVID. But we're very excited that the next kind of 30 to 60 days, we will finish that utility interconnect and be fully operational for remanufacturing up to complete systems at the U.K. hub. So that's exciting. That will double our remanufacturing capacity that will help us in future margins, that will keep us from shipping cores from Europe back to the U.S. just to tear them down and scrap them if they're no good. So it really helps us in both lead time and cost. And so that's exciting. Definitely, it was impacted by COVID, but we're excited that hopefully by March 31, that's fully operational. -------------------------------------------------------------------------------- Aaron Michael Spychalla, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [28] -------------------------------------------------------------------------------- Understood. And then maybe on the supply chain, are you seeing any issues there today? -------------------------------------------------------------------------------- Darren R. Jamison, Capstone Turbine Corporation - President, CEO & Director [29] -------------------------------------------------------------------------------- From a COVID standpoint, absolutely. We've had suppliers that have had COVID rates as high as 20% of their workforce. We've had suppliers shut down for periods of time because of COVID, definitely it has impacted us. We have suppliers that we need to go visit that we can't because of COVID restrictions, specifically in Mexico, one of our key suppliers. We would have to quarantine for 2 weeks if we went over the border to visit them. So that's definitely more challenging. I will say our supply chain for Kirk and his ops team is an area of continued focus. Our payables today are probably the best that they've been in over 4 years. Our cash position is great. Our turns are over 5, which is great. Probably the best that's been over 4 years. And so from that perspective, I think we're becoming more attractive to our vendors. Revenue growth is going to make us more attractive. And so I think the next 12 months will be kind of an interesting time with our supply chain as we are much more stable from a cash and balance sheet standpoint. We're much more desirable with higher revenue growth, and we're going to see more suppliers get more competitive and we're going to have more competition in our supply chain, which will be good for us and good for our shareholders. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- The next question is coming from Michael Heim from NOBLE Capital Markets. -------------------------------------------------------------------------------- Michael Carl Heim, NOBLE Capital Markets, Inc., Research Division - Senior Utilities Analyst [31] -------------------------------------------------------------------------------- My questions have pretty much been answered. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- We have no remaining questions. I'd like to turn the floor back over to Darren Jamison. -------------------------------------------------------------------------------- Darren R. Jamison, Capstone Turbine Corporation - President, CEO & Director [33] -------------------------------------------------------------------------------- Great. Well, you guys covered a lot of things I wanted to say. But let me just kind of say in closing, Capstone is a proud green energy company. We've been focused for a long time on transforming the way businesses think about energy production and consumption. Our solutions are really designed to reduce energy costs and ensure power availability and a lower carbon footprint. And really, that's the goal of Capstone. As I mentioned before, we've reduced 718,000 tons of carbon in the last 2 years and $0.5 billion in financial savings for our customers. Today, we're even more excited to be able to offer our customers the Energy as a Service business model that Shawn was talking about. This really strengthens our commitment to creating a cleaner energy and a smarter future, as both carbon reduction and increasing the value of our both public and private sectors. And more importantly, it really allows us to partner with our customers. And I think that's something the aha moment, a lot of our customers need to have is that we're here to be a partner and to win together, not sell you a project and going down the road. And we're small enough to care about your project, but we're big enough to make sure we can execute. And that's not the same with some of these larger conglomerates that are out there. We definitely expect the new U.S. administration will create even more positive momentum for green energy initiatives. As I mentioned before, Biden recently signed an executive order to rejoin the U.S. into the Paris Climate Accord. This is the first of many actions to help tackle global warming. As a reminder, as Eric mentioned, Capstone energy efficiency market vertical has grown to 67%. And that's a huge sea change from where we were several years ago. I think we're 65% year-to-date. I really couldn't be more pleased with our third quarter financial results. We continue to achieve our stated goals, including growing revenue and improving liquidity. And more importantly, we're just executing on the plan we laid out 2 years ago. So if you've been following us, if you've been listening to the earnings calls or talking to us at a leadership team level, everything we're doing is everything we told you we would do, nothing more, nothing less. And when it comes to revenue and liquidity, those are very, very key. They're key to part of our business continuity plan we put in place. These are our key objectives that really allow the successful results in our business despite COVID. And so we put up 3 of the best quarters in company history in the COVID environment, all because of our plan that we put in place prior to COVID. We are now laser-focused on driving revenue growth through our several initiatives, which includes leveraging our Capstone direct sales organization, our broadening of our geographic distribution coverage, expanding our digital marketing campaign, which I think is really second to none. Maria, internally, and her team have done an amazing job. We continue, I think, to perform exceptionally well on the digital branding side and doing a lot of unique things like IndyCar and marketing campaigns and just really punching above our weight class. So all that on top of our continued low efficient cost structure. If you compare our operating costs to any of the fuel cell companies or in the people in the cleantech space, we are half to 1/4 of the OpEx of these folks. And so we are very lean, we're very mean and now we're going to drive top line revenue on top of that. So very excited to finish off this great year in Q4 and really looking forward to a new year where we don't mention COVID on every earnings call. Thank you. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.