Acorn Energy Inc (ACFN) 2010 Q2 法說會逐字稿

Good morning and welcome to the Acorn Energy second-quarter 2010 results conference call. (Operator Instructions).

Please take note that certain of the matters discussed on the presentation contains statements that are forward-looking such as statements relating to results of operations, financial conditions, business development activities and market dynamics. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly such results may differ materially from those expressed in any forward-looking statement made on or on behalf of Acorn Energy or its subsidiaries. All statements other than statements of historical fact in this presentation regarding Acorn Energy or any of its subsidiaries' future performance, revenues, margins, marketshare and any future events or prospects are forward-looking statements. For more information regarding risks and uncertainties that could affect Acorn Energy's or any of its subsidiaries results of operation or financial conditions, review Acorn Energy's filings with the Securities and Exchange Commission, in particular its most recently filed Form 10-K and Form 10-Q.

Acorn Energy's forward-looking statements are not guarantees of future performance, and the actual results or developments may differ materially from the expectations expressed on the forward-looking statements. As for the forward-looking statements that relate to future financial results and other projections, actual results will be different due to inherent uncertainties of estimates, forecasts and projections that may be better or worse than projected, and such differences can be material. Acorn Energy undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

I will now turn the presentation over to John Moore, CEO and Chairman of Acorn Energy.

Great. Thank you very much for participating in the Acorn Energy Q2 conference call. I appreciate the opportunity to speak with you about the status of our portfolio and to give you some perspective on the very large opportunities which we are uncovering.

The macro environment is tough. This is an unsettling time for investors. I want to step back, take a moment to give you some perspective on our customers, the energy companies, that will hopefully help you understand why Acorn's portfolio of companies is very, very well positioned to create some very large industries where none existed before.

In the near term, our customers are going to spend, and they are going to spend big. Our customers, the energy companies, both oil and gas and utilities, are forced to invest on a 40-year cycle. Now this is a hard fact to grasp given an equity market that's operating under the shortest time horizons that most of us on this call have ever experienced. The fog of policy uncertainty from Washington is hiding the biggest opportunity of most of our lifetimes.

[Dan] (sic - see release) Eggers, a Credit Suisse utility analyst, said in his recent Aspen Institute address, "Brother, Can You Spare $1 Trillion", states that, "The utility industry is entering a period of investment spending unseen in 30 years." Expect your electric bills to increase substantially as we are now paying the lowest percentage of disposable income for electricity in 50 years, according to Eggers.

What does this mean for our companies? Over the next 20 years, utilities are going to have to invest to double the current $1 trillion invested in the US grid. An investment to meet environmental regulations, including installing SCRs on coal-fired power plants, is expected to be about $200 billion. Distribution automation, including automation of substations and monitoring of overhead lines such as GridSense products is estimated to be about a $50 billion opportunity. And rebuilding and replacing older coal-fired power plants, 60% of which are over 30 years into their 40-year depreciable lives, is expected to be both about $550 billion, and about $200 billion is going to be needed to replace the aging nuclear power plants, which will all be good for Coreworx.

Overseas investments makes the US opportunity seem small in comparison. 55% of our customer floors current backlog is in Australian mining and oil and gas projects. China is spending $150 billion in stimulus funding for its grid expansion versus $3.4 billion of US government spend. We are a global company, and we are going to benefit from this surge in investment in the near term at CoaLogix, GridSense and Coreworx.

Likewise, the oil and gas sector is facing another boom. Coreworx is seeing around the world the largest engineering companies are gearing up for more major projects. And the owner/operators and their supply chain memories are still fresh from the huge waste, cost overruns and litigation from the last boom and are anxious to improve their execution and drive more efficiency in their construction projects. Now is the time for Coreworx to make major inroads in both utilities and oil and gas companies during the brief lull before the storm because during the boom nobody has time to change their business processes.

I would now like to spend a moment briefly discussing each company in the portfolio. CoaLogix reported sales of $4.8 million in Q2 2010 versus $4.5 million in Q2 2009, a 7% increase. Our Mt. Holly plant operated at or near capacity, and management demonstrated both its competence and depth by both bringing the new Steele Creek plant online and by executing a number of strategic initiatives, the first of which was the alliance of Cormetech, the world's largest catalyst producers. Phase 1 of the plant expansion will be a driver for near-term growth. Phase 2 and 3 will enable us to quickly and affordably add capacity as the market continues to grow.

I have heard several thought leaders in the emissions control industry describe this alliance as a game-changer for our company and for the regeneration market. The alliance brings enhanced credibility, visibility and market reach for CoaLogix and a fertile opportunity to grow the business. Look for more announcements for CoaLogix where we will be expanding our high profile customer relationships, adding channel partners and expanding our global reach.

The Chinese market, for example, is expected to be as much as 2X the size of the US market at maturity. This is a function of their growing coal usage and the quality of their coal, which reduces the expected life of their catalyst to approximately two years versus three years in the US. We expect that NOx emissions controls and catalyst regeneration will be an important part of the Chinese 2011 five-year plan as they seek to reduce smog and improve air quality, while at the same time continuing the torrid pace of coal-fired power production.

CoaLogix is the world's largest catalyst regeneration company. Management is putting in place plans to expand our global leadership. Coreworx is exactly where I would said it would be in the first-quarter conference call. I said at the time, "Coreworx will be this and next quarter's challenge, but some exciting things are going on that will make the third and fourth quarters a big success for this business." Even still, we were disappointed by Coreworx sales in Q2. We made some sales management changes.

The addition of Justin Zinke, the former CEO of Decision Dynamics, at Coreworx in June has made a big impact on our pipeline, growing it from 34 opportunities to over 115 in two and a half short months. That is an increase of 340%.

What Justin is not is a heroic tactical salesperson. What he is is an extremely disciplined sales manager focused on the process of managing the sales team giving the tools and the processes they need to help the customers understand that 10% to 15% waste in cost overruns on multibillion-dollar projects, change orders and litigation is hell, and the change in the construction management to Coreworx that we can take them out of hell.

We made a big bet on nuclear with the first and only commercial program designed to enable the audit, construction and license of a nuclear power plant. We landed B&W as our first customer and have a very big traction with every OEM, UPC and owner/operator of new builds in the United States. We just presented yesterday with Babcock & Wilcox at the American Nuclear Society on our ITAAC solution, and while much of this business looks to be Q1 2011, we believe the size and the scope of the projects could surprise us.

In addition, wins in nuclear will bring us the fossil part of the customer's business as well. That is both on the OEM side and on the utility side.

One subtle but important change at Coreworx has been a move in the product value from a powerful document management company for major capital projects to a lifecycle management solution. New product that will be launched in the next 30 days is FEED, Front End Engineering Design package, that will be unique in the industry. Every major capital project needs a FEED package before it is funded. Our strategy is to sell this product very inexpensively between $50,000 and $150,000, including services, as a way to get designed into each product. Selling other Coreworx modules once we have been used in the initial phase should be dramatically easier.

Another promising Q4 event will be forward branding its project's online product, Powered by Coreworx. We hope to co-market our co-hosted version of Coreworx in the near future. This would open our product up initially to 150 of their largest contractors and suppliers and eventually all 18,000.

Our ability to meet our $48 million revenue target is squarely in the hands of Coreworx. We believe that it is still achievable, but the majority of Coreworx sales are targeted in the fourth quarter.

DSIT continues to grow and improve on its results. Its operating income was $1 million on sales of $5.4 million. The Company continues to expand its leadership in the underwater security market and is expanding both its product line with the addition of the PointShield product and its geographic presence with its first successful customer demonstration at a US energy facility.

Recent incidents in Israel where divers were intercepted and attacked on a Japanese tanker in the Gulf of Hormuz underlined the vulnerability of energy infrastructure to terrorist attack. We have a robust pipeline and are looking to continued growth and profitability from this business.

GridSense is our play on the distribution automation aspect of the Smart Grid. We have a line of very affordable monitors for overhead lines and transformers. We acquired the Company on May 12, and Lindon Shiao, the CEO, has set about a very capital efficiently expanding the business.

Two weeks after we closed on GridSense they acquired On-Line Monitoring, a transformer bushing monitoring business for the assumption of trade payables. We doubled GridSense's manufacturing space, and GridSense has expanded sales force by adding experience people from ABB and Siemens.

GridSense is going to be a big beneficiary of both the US market stimulus in the fourth quarter, as well as ongoing international opportunities. We are featured in Southern Company's Annual Report in a full-page spread, and we have visibility into near-term orders that will represent the largest distribution automation project to date on the US grid as measured by the number of transformers monitored.

USSI, our latest addition to the portfolio, has a growing product line of fiber optic sensors that have applications in energy and security. We are especially enthusiastic about their 4D seismic monitors that have a large potential market in the oil and gas business.

Lastly, I would like to discuss how we are going to be proactive to challenges in the capital market.

Number one, we are not buying any more platform companies. We are 100% focused on making our existing businesses grow and achieve profitabilities that can be self-financing. Two, we will only go out to the markets to raise additional capital if it is to fund further expansion of our existing businesses like CoaLogix.

We are very focused on the issue of dilution. We know our job is to be outstanding allocators of capital. We feel our shares currently trade at a substantial discount to the net present value of CoaLogix alone, not to mention the potential of our entire portfolio.

Three, we are encouraging our businesses to use OPM, other people's money, with collaborations like CoaLogix recently announced with Cormetech and that Coreworx is working on the floor. These alliances add credibility and speed to our market penetration.

Number four, we are committed to converting our businesses from technology-centric to sales and marketing customer-centric businesses. The most visible example of this is CoaLogix whose customer-centric approach to marketing and sales so effectively drives their growth and market penetration.

So, in conclusion, I would like to reiterate something that Bill McMahon said on a previous call about CoaLogix. We are not going to manage the business on a quarter to quarter basis. Our philosophy at Acorn is the same, and we are making decisions at Acorn and the portfolio of companies that enhance the long-term value for our shareholders and often do not show up on a quarter-to-quarter comparison.

Our goal is to drive net asset values. We believe that in three years any one of our portfolio of companies will be worth more than the entire market capitalization of the entire company today. In 2009 our sales were $31 million. For the year, we have forecast $48 million, and that would represent almost 50% growth. Each of our companies is going to show substantial growth and improvement in shareholder value this year.

This concludes my prepared remarks, and I would now like to open up the floor to questions.

(Operator Instructions). Jim McIlree, Merriman Curhan Ford.

John, in your remarks you talked about the Coreworx number of opportunities going from 34 to 115. Can you put an approximate dollar amount on what that 115 would be if you were lucky enough to get all of them?

Ray Simonson is on the call with me. Do you have a number for that?

Well, I'm trying to remember. I know for sure that the fourth-quarter prospects alone, which is a subset of that 115 is -- am I allowed to say this?

Yes, the pipeline opportunity.

The pipeline opportunity in the fourth quarter is $16 million on its own. And then, of course, a bunch of that 115 falling into the third quarter and the first quarter of next year. So it is a substantial amount.

I believe the number that I heard was $50 million, but, of course, you have to put all kinds of discount factors on these numbers.

Yes, $51 million actually.

Yes, so, Jim, that is one of the things that despite the losses that is extremely encouraging to me is, number one, the number of near-term opportunities with existing customers, and that always gives you confidence when there is just an expansion of an existing relationship such as a company like Chevron or Fluor, as well as really the mind share domination that we have right now in the nuclear new build market, and that was just evidenced by the overwhelming response that we had the American Nuclear Society from our presentation with Babcock & Wilcox that we think we are going to run the tables there.

John, if I could add another comment, the other thing to understand about our pipeline is that the deals we are showing in the near-term pipeline are really what I would call first deals. So we are dealing, for instance, with a large Middle Eastern oil company, and the deal size is currently somewhere north of $0.5 million. But that deal over the next, say, six months after that will be $2 million more and then potentially leading to an enterprise deal, which depending on what they buy could be $5 million to $10 million.

So what John was saying is there is a big wave coming, and what you're seeing now is the pipeline is big. But there is a bubble behind it as those deals ramp from the first couple of projects to an enterprise application.

And again, I don't want to -- I'm not trying to imply that you are promising a $51 million number, (multiple speakers) I just want to use that as an example. So, again, assume that you got -- that you were fortunate enough to get all of that, it seems to suggest the Middle Eastern oil and gas company that you refer to, if you applied that to the $51 million, then it would be small numbers going to very large numbers. Is that generally how that opportunity pipeline is structured, or is it (multiple speakers) even more back-end loaded or front-end loaded, or can you characterize that pipeline (multiple speakers) of how it would play out?

For this year it is heavily loaded into the fourth quarter and the first quarter of next year. And, of course, it will grow after that.

In that $51 million are a couple of what we would call enterprise class deals, and I guess there is one which is $5 million to $9 million. Most of the rest of them are somewhere in the $0.5 million to $1 million sort of first project stage.

Okay. All right. Thank you very much. I will re-queue. Thanks.

Liam Burke, Janney Montgomery Scott.

John, there was an acquisition at Coreworx, Decision Dynamics, and as you went through your prepared comments, you talked about the pipeline growing, getting back to the first question. But are there any other acquisitions that you need to make in there, or do you have the assets in place to continue to grow the pipeline and then execute on the opportunities?

I believe that we have about as much as we can say grace over right now between just selling the products that we have right now, rolling out the FEED product. One of the curses I think of a software business is that there is always functionality that you can add. But right now what we need to do is we need to execute, bring the company to profitability in the near-term before we bite anything else off.

Great. And on the CoaLogix, it looks like your gross margin stepped up pretty nicely. Could you give us a little color on that?

Eric, would you mind -- Eric Dana, the CFO of CoaLogix, is on the call. Eric, would you like to give some more color on the margin -- gross margin increase?

Yes, certainly. Is it Liam? Is that correct? Again, welcome to the call. Basically we have been focused pretty heavily at CoaLogix since the latest expansion, which we completed in 2008 and focused primarily on squeezing out more efficiencies in the plant. We did that again at the end of 2008, which we went to a 24-hour operation. We had also eliminated some of the bottlenecks.

During this period, as we were developing our strategy for the next plant, which is coming on line operationally, currently we did focus a lot of our folks, engineers to look really at the bottom line, as well as all the components from chemical procurement to headcount efficiencies, etc. So that is basically the prime reason behind that. So I don't think we can continue pretty significant growth in that margin. But we feel 40% is primarily where we believe we should have been, and that is where we are at right now.

Great. Thanks, Eric. Thank you, John.

Jim McIlree, Merriman Curhan Ford.

Can you talk a little bit about the new plant at CoaLogix? I know you said that it was brought online on time, but the Phase 1, Phase 2 and Phase 3 expansions, what is entailed in that?

Basically what we are looking at is an expansion that currently sets up some new ways or new technologies to do regeneration, and that again is to make things more efficient in the plant. We are able to build in capacity and some of the infrastructure items in the plant. So going to Phase 2 and Phase 3 are pretty straightforward and pretty easy for us, and that was the whole intent behind it, to kind of build another infrastructure capacity so we can continue to do this much more quicker as the demand comes.

But does that mean adding another few thousand square feet to the building, or is it more in terms of adding another I'm going to call it a dipping bat, although I'm sure it has a different name?

The answer is B. It's really the square footage of the building is roughly 145,000 square feet of space, and most of that space is unused right now for capacity for storage and things like that. But it does give us the opportunity with this amount of square feet to add a line or add a dipping bat, as you call it, pretty easily and pretty efficiently as well.

And what we have invested in, Jim, is the critical and expensive and long lead time infrastructure, which is mostly around wastewater management, so that additional lines can very quickly be added and that we can -- what we are really doing is making a commitment to the marketplace that we are going to add capacity ahead of market demand and that we are going to continue to maintain our market leadership in this space.

Is that plant -- you say it is operational. Has it regenerated catalysts already?

Jim, when we say operational, we mean it has got pretty much all the permitting aspects in place. We are working -- we are running regen right now, but we are running the plants to get all the bugs and optimize what we have turned on. Literally we just came online within the last few days, so it is -- it does need to have some of the items related to just getting the bugs out and making sure that we were able to look at optimizing the supply of items coming into the plant, movement within the plant. So all that stuff has been well planned. It is just basically to make sure that we're testing it.

We are going to have revenue in this current month, as well as the quarter from the plant, so we feel pretty good about that, and we are excited basically. We are very excited that we were able to meet the milestones, as well as the challenges of bringing anything online is pretty difficult, but we have a lot of people within the company here, as well as support from the local authorities and the state to make sure that we got what we needed, and we are very pleased with that.

Okay. Well, that sounds terrific. It seems then reasonable to expect that since the plant is just coming on and you are working out bugs, that your gross margin would dip in Q3 versus Q2 simply because you have this new plant up and running, and it is not running at its greatest efficiency. Is that a fair characterization?

Jim, very fair. As you know, anything that is starting up is going to have some of the fixed costs that will be absorbed through all the process. But you're right, as things become more optimized and more efficient, you will see that the margins will improve.

Right. Have you received any orders from Cormetech yet? And if not, when would be a reasonable expectation that you would get something from them?

I probably should not speak about the orders yet, but we expect -- let me back up a little bit -- the excitement on our team, as well as Cormetech team, is pretty high, and we are spending a great deal of time with them currently. As soon as the agreement was signed, we were pretty much working on the market strategy.

So there are items that we are currently reviewing from a proposal standpoint with Cormetech that we expect to have in the short-term, a good collaboration and some items that were going to come out of those proposals.

So I don't want to speak exactly to what that is at this point, but I can tell you that the market is very excited about this. We have heard pretty good comments from not only our current customers, but some of the customers that we have not had deep relationships with that Cormetech has, and we are starting to have those conversations as well. So it's a good thing for both parties, very good thing.

Okay. Terrific. And at the risk of hogging the call, if my math is right, the Coreworx operating expenses, excluding D&A stock comp, increased about $1 million quarter to quarter. Is that number flat from here on out, or is -- are there more spending increases to take place in order to bag some of these pipeline opportunities that you have spoken of?

So we are watching the expense line like a hawk at Coreworx, and what we are trying to do is work smarter. And so I can guarantee you that the expense line is going to be staying around the current levels and that we are going to get more out of what we got.

Okay. And I think lastly on that, can you give us an idea about how much Decision Dynamics contributed in revenue in Q2?

Greg, do you have that number, or Michael?

I think it was about $0.5 million, John.

$0.5 million out of the sales of -- (multiple speakers)? So that was acquired in May you said?

That is -- yes, we concluded -- (multiple speakers). We closed the transaction April 27 was my recollection when we concluded the Decision Dynamics deal.

We announced it. We announced it May 3, John, but yes, legally it was done on the 27th.

So is that the kind of business where most of like many software businesses where most of the sales are made in the file month or so of the quarter?

Yes, unfortunately. Yes, the software --

So I should not think that the Decision Dynamics run-rate was more like $1 million a quarter? That $0.5 million is probably -- most of the quarterly sales in June were going to take place after you completed the purchase?

And the other thing to understand is there is some disruption in an acquisition, and much as we try to minimize that, there were some loss of focus on the management team, and we lost a couple of salespeople through the process. So that impacted our ability. We have now fixed that.

Okay. And I lied; I am going to ask one more. So what is Plan B with Coreworx? Let's say that the pipeline opportunities get pushed to the right -- I don't know, make it up, six months, nine months -- then what? How do you go about managing in an environment where that pot of gold keeps getting pushed to the right?

Well, we have a plan in place to -- if we don't see revenue traction in the third and fourth quarter to reduce our costs, to bring them into line. We need to get -- Coreworx has to get on a breakeven basis.

Well, that is certainly straightforward. Thank you, John. Appreciate it.

Thank you, Jim. Appreciate your questions.

(Operator Instructions). Sam Healey, Lammassu Holdings.

It looks like things are right where you said there would be, so that is always encouraging. Just a quick tidying up question. The SG&A as a percent of revenue was up a fair amount this quarter. Is that a function -- is the delta between the two, if you will, a function of transactions costs, or can you break down the $2 million increase in it in terms of new hires or just transaction costs with all that you had going on this quarter, just for modeling going forward?

Michael, I would like to turn that question over to you.

Okay. That is a pretty complex thing to answer because there is a lot of moving parts that is going on in the business. I mean some of the increase obviously is a result of the acquisitions we just did, and we had the added G&A costs on the acquisition. CoaLogix increased their overhead costs and their base number of people. DSIT also has had some increases. Acorn also has had increases. We have increased personnel. We have had increased professional fees. I mean there is no one simple answer for this. This is a very dynamic number. Like I said certain, certain of these costs -- let me just see just going back to the Q -- have $300,000 related to USSI, $0.5 million related to GridSense, and another $300,000 related to Decision Dynamics. Those $1.1 million of additional SG&A costs -- and I'm talking half to half. I don't have the breakdown right now by quarter.

Okay. I mean I appreciate the in depth color, but I'm just trying to understand how much of this was one-offs to the transactions and how much is ongoing. And it sounds from what you just said it is sort of 50-50. If there is about $2 million more this quarter, half was for the transactions and half I can model in going forward.

Off the top, yes, just round it out, I would have to say, okay, that is a reasonable assessment. It would take some work to actually nail it down.

Well, I know, but, as the companies grow, it will probably -- the run-rate will be changing throughout -- obviously no one's model is going to be that good, right, because certain business will be hiring, and certain will be trimming back. So, as I said, I'm just trying to get a sense of the one-time. So other than that, I don't think I have anything. Thanks a lot, guys.

(Operator Instructions). As there are no questions, this concludes our question and answer session. I would like to turn the conference back over to Mr. Moore for any closing remarks.

Good. Well, thank you, everyone, for tuning in. These are challenging times, but I and the team are completely energized by our strategy of looking for low-cost, low-risk, extremely high return on investment solutions for the energy industry. And I think as we get that message across that that is going to be -- it is going to get traction in the financial market. It is going to get traction in the markets that our companies serve, and that we are going to continue to maintain our torrid pace of growth.

Thank you very much, and have a good day.

Thank you. This concludes today's teleconference. You may now disconnect your phone lines.