Capstone Green Energy Corporation

Good day, everyone, and welcome to the Capstone Green Energy Third Quarter Fiscal Year 2025 Earnings Conference Call and Webcast. At this time, all participants have been placed on a listen-only mode. If you're listening on webcast, you can submit a question by clicking on the Ask Question button on the left of your screen. Type your question into the box and hit the Send button to submit your question. It is now my pleasure to turn the floor over to your host, Janet Duderstep. Ma'am, the floor is yours.

Thank you very much. Good afternoon and thank you for joining Capstone Green Energy Holdings, Inc. fiscal 2025 third quarter conference call. On the call with me today are Vince Canino, the company's president and chief executive officer, and John Jurek, the company's chief financial officer. On February 14th, Capstone Green Energy Holdings, Inc. issued its earnings release for its fiscal 2025 third quarter. which ended December 31st, 2024. During the call today, we will be referring to slides that can be found on the company's website under the investor relations section. Today's conference call contains forward-looking statements representing the company's views as of today, February 19th, 2025. Other than as required by federal security laws, the company disclaims any obligation to update or revise these statements to reflect future events or circumstances. You should not place undue reliance on these forward-looking statements because they involve known and unknown risks, uncertainties, and other factors that are, in some cases, beyond our control. Please refer to the safe harbor provision set forth in slide two of the slides accompanying this presentation in today's earnings release and in the company'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 Mr. Canino and Mr. Jurek go through the discussion today, when they mention EBITDA, they are referring to adjusted EBITDA, which is a non-GAAP financial measure, and to the reconciliations in the earnings release and the appendix to the presentation slides. I would like to now turn the call over to Vince Canino, the company's president and chief executive officer.

Thank you, Janet. Good afternoon, everyone. Thank you for joining today's earnings call, where in addition to covering our third quarter results, we will discuss some of the strategic initiatives we have in flight for the fiscal year 25 and beyond. If you turn to slide three, I would like to run through today's agenda. Today's call will cover Capstone's business environment, as well as our three-year roadmap, including details around some of the initiatives we have launched in early March of 2024. Then I will turn it over to John Jurek for a detailed review of our Q3 and year-to-date financial results. We will then cover our perspective on what is turning out to be quite an exciting business climate. We will then conclude with questions from our investors and analysts. I do wish to remind you that today's presentation includes an appendix which provides additional information for your purview. Let's now move on to slide five to begin the discussion on Capstone's business environment. Turning to slide five, third quarter revenue was up $5.5 million when compared to same period last year. However, On a year-to-date basis, our revenue was down by $8.3 million. This decline is mainly due to sagging sales in early fiscal year 25. Sales were slow due to what we call a Chapter 11 hangover. This lasted longer than expected. This hangover effect typically happens as customers hold off on making major CapEx decisions for products that were affected by such a restructuring event. I am happy to report orders have bounced back to above normal levels in Q3. In addition to improved order pace for Q3, revenue strength in Q3 was mainly attributed to our energy as a service business unit. Particularly, the rental services segment of EAAS delivered solid revenue performance. This was due to very strong utilization rates and absorption of market-level rental rate price increases. More importantly is our ability to convert revenues into EBITDA. Our year-over-year Q3 and year-to-date results delivered just that. Post non-recurring expenses due to restructuring costs, the company delivered upward trending adjusted EBITDA margin of 2.6% for Q3 and 8.7% for year-to-date. These positive results were attributed to a combination of price increase stickiness and optimizing OPEX spend. We achieved these results all while investing in talent that will help us drive sustainable excellence in future business outcomes. I'd like to turn our focus to slide six. As we exited our restructuring in December of 2023, there was a belief that pent-up demand existed. And once we cleared the hurdles of Chapter 11, we would be off to the races in terms of orders. As I mentioned earlier, as much as we were aware, it would be a slow start due to the hangover effect. We expected the ramp-up of orders to accelerate quickly. Simply put, that did not happen. We did see a gradual improvement of orders over the first two quarters of Fiscal 25, but the third quarter delivered on the pent-up demand. thus putting us at the volumes you see in this slide. North America has provided the largest volume of orders at a pace 10 times that of any other region worldwide. This volume is mainly attributed to the IRA investment tax credits for combined heat and power, as well as the impacts of grid restraints causing resiliency issues across a number of vertical markets. Because of the recent pushback of fossil fuels and the war in Ukraine driving lower natural gas supplies and price volatility, Europe has seen a significant softening of orders. All in all, bookings for year-to-date for fiscal year 25 are 12.5 megawatts above same period fiscal year 24, which is a 54% increase. Moving to slide 8. Before we can sort out where we are going, it is prudent to ground ourselves on why we exist, who we are, and what we do well. At Capstone, we exist to make the impossible possible. When we started out developing microturbines for mobility back in 1988, there were a number of big players doing the same. The likes of GE, Honeywell, Rolls-Royce, Toyota, Ingersoll-Rand, Kawasaki, Elliott, and others were all in the microturbine space in some way. With over 13 different companies chasing the dream of clean, compact, and low-emissions microturbines, today, only a very small handful are still here. Many exited this space because they felt it was impossible to make it viable. 36 years later, and over 10,000 units in the field, Capstone has truly made the impossible possible. As the energy landscape has continued to change, it is becoming more and more evident that the world needs a clean technology that sets the global standard for real, sustainable energy using a wide range of energy sources, such as biogas, natural gas, both pipeline quality and renewable, landfill gas, sour gas, hydrogen, and eventually methanol, plus other waste stream fuels that can be converted into clean, low emissions, sustainable energy. Doing so requires us to dare greatly and think beyond. We must think beyond the challenges in front of us and find solutions that can exist in all shapes and spaces, which may not be as obvious. These beliefs are what grounds us so that we may set a new vision with priorities and business imperatives that pave the way for us to meet our new demands of today's marketplace. On slide nine, I would like to shift the discussion to talk about our three pillar strategy and share some outcomes resulting from this approach. For the next three years, we will be focusing on what we call our three pillars of strength, financial health, sustainable excellence, and building culture and talent. Although we will work on all three pillars each and every year, each year we will place a higher focus on one of the pillars. We call this a focus pillar. This focus pillar will receive, say, 50% of our effort, while the remaining two pillars will receive 25% effort each. For fiscal year 25, our focus pillar is financial health. Since early March 24, we have been working to drive discipline into every element of our business by improving our operating discipline, business discipline, commercial discipline, and financial discipline, we will root out waste, abuse, and non-value-added activities. This will improve our financial results and create value-added outcomes for our customers and clients. For sustainable excellence, we must do the right things well and measure what matters on a holistic business approach. Getting granular on what we do and how we measure is what will deliver exceptional value to our customers and shareholders. Our last and equally important pillar is around our culture and talent. What's amazing about Capstone is that it really has very good business bones. Now we just need to add the muscle, and that muscle is our people. As we took a hard inward look at ourselves, our company's 36-year history of overcoming difficult technical and commercial challenges, we found a bedrock of values. It was like unlocking a treasure chest. We have formalized those values into a set of guiding principles we call our CLIMB core values. C, courage to dare greatly. L, little things matter. I, iterate to success. M, mutual trust amongst all. And B, be the best in all you do. We now measure ourselves and all new hires we bring on to join the Capstone team by these very core values. Each and every one of us must have the courage to dare greatly. Thirty-six years ago, this is what our original founders, James Noe, Robin McKay, and the Rosen Brothers did when they embarked on developing oil-free, clean, low-emissions, high-precision, high-speed microturbine technology. They and their fellow Capstone employees over the last three decades have truly made the impossible possible. But it doesn't end there. You cannot achieve extraordinary results without making sure you get the little things right. Thus, our second core value, little things matter. Even when we excel in the first two core values, life, business, markets, and whatever, will throw us curveballs. Not giving in or giving up, we learn from our mistakes and misses so we may iterate to success. You will notice that there is no T for team in CLIMB. That is not because we don't believe in teams. It's because just saying teamwork is overused and, quite frankly, too broad. Every team that performs at the highest of levels is built on something more important. The cornerstone of every great team is trust. That is why we seek and work hard on building mutual trust amongst all. It's not just trust amongst ourselves here at Capstone. It's trust amongst our customers, our suppliers, our distributors, and our shareholders. Lastly, the foundational element to the four core values I've just mentioned is being the best in all we do. These core values become meaningless unless we relentlessly commit to being the best in all we do. It is with these three pillars of strength that Capstone will not only maintain its world leadership in oil-free, low-emissions, microturbine technology. It is these three pillars of strength that will enable us to deliver exceptional financial results, which will allow us to reinvest in our business. By doing so, we create world-class customer experiences and a sustainable competitive advantage in the marketplace. Now let's move on to slide 10. As part of driving operational, commercial, and financial discipline into our business, we launched two main programs at the beginning of fiscal year 25. The first program is around developing a set of objectives and key results, also known as OKRs. We started with developing a corporate OKR that was keenly focused on delivering the necessary gross profit needed to cover the fixed costs of the business plus adjusted EBITDA. Additional OKRs were then cascaded through a number of key result initiatives we call KRIs. These KRIs were developed in order to accomplish the key results of the corporate OKR. The OKR discipline fosters focus and accountability across the entire organization. It is now our go-to playbook when executing complex or fast-track projects and issues. The second major program was building talent, knowledge, and action around getting costs out of our business by using an approach called Design for Manufacture and Assembly, also known as DFMA. This naturally became an OKR. the DFMA approach and its software tool facilitates a disciplined set of actions into understanding what each component of our product should cost and could cost without just simply squeezing our suppliers' margins. Over the years, we had lost the operational, commercial, and business discipline in how we work with our suppliers. And as our historical financial performance has shown, we have not been receiving the best value-priced outcomes from our supply chain. EFMA is becoming our DNA. With this expertise, we can now collaborate with our suppliers and vendors to ensure we optimize scope, process, and manufacturing capabilities in the right places with the right suppliers at the right times. With that, let's turn to slide 11. where I will share an example of a very impactful and exciting DFMA cost-out project. When we launched the DFMA program, it started with a three-day workshop. In attendance was not just our engineers. We included our service team, our sales team, quality supply chain finance, and most importantly, our manufacturing teams. The outcome of this workshop was the creation of five cost-out teams where each had identified projects with great opportunity to get cost out through changing manufacturing approaches, use of different materials, part count reductions, or all of the above. The example in this slide started with a sub-assembly that is on every microturbine called a dump valve assembly. We had designed this assembly to cover every application, so originally the team was going after the dump valve itself and its supporting hardware. However, the deeper they dug in using DFMA, they realized one of the supporting assemblies, called the dump valve hose assembly, was ripe for cost out. By using less expensive material, they went from an overkill stainless steel pipe to a silicon hose. Further, they were able to reduce part count. In the picture on the left, you can see there were eight parts in total for this assembly. When the team used the DFMA approach, they were able to create the same form, fit, and function of the dump valve hose assembly, but with just three parts. Next, they embarked on understanding what this new dump valve hose assembly should cost. Through this process, they took the cost of the silicon hose down by 65%, and the dump valve assembly by over 90%. And this is just one sub-assembly amongst hundreds of other components. Which now takes us to slide 12. Quite frankly, in the past, Capstone was figuratively taping dollar bills to every unit that left our factory. That was simply unsustainable, as we are not in the razor blade business. Our product is not a commodity product. We are part of a solution solving larger issues on a larger stage with key players known as resiliency, affordability, and sustainability. Sure, high precision, low emissions technology comes at a price, but that doesn't mean every component in our product should be overpriced, forcing us into an unsustainable financial position. This is why DFMA must be in our DNA. This DNA requires a set of principles that drives discipline, respect, trust, ideation, and collaboration. I will now turn the call over to John Jurek for a deeper dive on financial results.