Acorn Energy Inc (ACFN) 2010 Q4 法說會逐字稿

Good morning and welcome to the fourth-quarter 2010 results conference call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded.

Please take note that certain of the matters discussed in this presentation contains statements that are forward-looking, such as statements relating to results of operations, financial condition, 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 statements made on or behalf of Acorn Energy or its subsidiaries.

All statements other than statements of historical fact in this presentation regarding Acorn Energy's or any of its subsidiaries' future performance, revenues, margins, market share, and any future events or prospects are forward-looking statements. For more information regarding risks and uncertainties that could affect Acorn Energy or any of its subsidiaries' results of operations or financial condition, review Acorn Energy's filings with the Security 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 in 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 the inherent uncertainties of estimates, forecasts, and projections and may be better or worse than projected; and such differences could 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. Mr. Moore, please go ahead.

Thank you. Welcome, friends and fellow investors, to the Acorn Energy year-end conference call. I appreciate the opportunity to discuss our results and give you some perspective on the big opportunities that we're uncovering.

First I will discuss our financial results. Our Q4 revenue increased 35% to $10.9 million versus $8.1 million in 2009. Our fiscal-year revenue increased 31% to $35.7 million compared to $27.3 million in 2009.

We have four companies. DSIT is a profitable company; CoaLogix is EBITDA positive; and GridSense and USSI are losing small amounts of money, but are anticipating reduced losses in 2011 and targeting profitability in 2012.

Near the end of 2010 we focused on reducing corporate overhead, which increased to over $4 million in 2010 due to increased professional fees and salary costs. We have already taken steps to reduce costs, targeting a $1 million reduction in late 2010; and we are seeing the effects already in Q1 2011. We sold Coreworx in an MBO and turned our major source of cash burn into a potential source of cash generation in 2012.

Now I would like to proceed by a company by company analysis of our businesses. CoaLogix continued to build its position as the world's largest and most advanced regenerator of coal and gas catalyst. We had a record Q4 and full-year revenue of $6.6 million and $21.5 million for the full year.

Due to new plant startup, margins were impacted, falling from 35% to 33%. Our EBITDA was $1.4 million.

CoaLogix has experienced [57]% compounded annual revenue growth from 2007 to 2010. We and our coinvestors invested $11.5 million to build the most modern state-of-the-art production plant in the industry.

Management executed and delivered 40% of the industry's installed base of catalysts under long-term contracts, including a key win at American Electric Power. Management also inked two major OEM partnerships, and improved our access to the market, and reinforced the growth prospects of our industry.

Management identified a major opportunity in China, as their five-year plan mandates NOx reduction at all coal-fired power plants. This is probably the world's largest environmental remediation program ever undertaken.

We believe that China's market will eclipsed the US market, as they will ultimately install over $6 billion of catalyst over the next five years, which is over 4 times the US capacity. We believe this is a huge opportunity for CoaLogix to be a first mover in this market. We are establishing a company in China, and opening an office to take advantage of the market.

As the US economy recovers and, correspondingly, the demand for electricity increases, we expect a pickup in demand for catalyst regeneration. We expect 2011 will be another record year. We have continued making key management additions such as our CTO, Li Zhang; and the company now has over 100 employees.

DSIT has continued to build on our leading position in the underwater infrastructure security market. The company is profitable and growing.

It grew sales 24% to $11.5 million in 2010. Gross margins were virtually unchanged, declining slightly from 43% to 42%.

We introduced and sold our first PointShield unit. The PointShield is a medium-range diver detection sonar aimed at protecting vessels at anchorage and covers restricted areas such as water canals and intakes. We expanded our customer base for sonar systems to include a leading Asian country.

DSIT's sales from outside Israel have increased from 15% of sales in 2008 to 43% in 2009 and 55% in 2010. We expect that the expansion of our sales will continue to emphasize rest-of-world growth as a percentage of sales.

We have a very big pipeline of sales opportunities and recently expanded our sales team. We also made important additions to our technical team.

We have a small projects business, which didn't provide much gross margin, but it absorbed a lot of fixed cost. It is an important source of new product development. This is, in fact, how we developed the diver detection system.

In fact one development project that we have could result in substantial production contract and long-term revenues for the company. In addition cooperation with US Sensor's -- on combining DSIT's active sonar and USSI's passive sonar product -- could be a source of growth and competitive advantage in the marketplace.

At DSIT we have a very cost-conscious management team. SG&A costs over the past three years have held steady at 26% of revenue.

In the past DSIT has had to rely on Acorn deposits and restricted cash for guarantees for their projects. DSIT's financial independence has improved so much that in the past year they paid us back a $400,000 loan, and we currently have no deposits restricted for the benefit of DSIT guarantees.

During the year they have developed a second banking relationship, further enhancing their financing options. We still, however, in the future may need to provide some guarantees for the benefit of DSIT, depending on the size of new projects that they receive; and this is something we happily do.

GridSense. We completed the acquisition of the company on May 12, 2010. We acquired the company because we believe that 2011 to 2015 is going to represent a major switch in spending from advanced meters and communications systems by utilities for the Smart Grid to really big and potentially high-impact investments for utilities in sensors for distribution assets like powerlines and transformers.

GridSense has a great product line that has been evolving and building as a platform, and increasing its industry credibility and visibility for the past 15 years. We have learned that longevity is critical to success in selling to utilities.

We expect the distribution optimization trend will be driven by new performance-based incentives in the utility rate bases, primarily around their customer reliability numbers. Thought leaders like Jesse Berst of Smart Grid News has declared that 2011 will be the Year of Distribution Optimization. The research firm Newton-Evans has estimated that spending on distribution automation will increase by 20X in the next several years. This of course is not going unnoticed by the major smart-meter firms that are looking for the next leg of their growth.

Our capital is invested in GridSense to update their productline, expand their sales force, and acquire the complementary assets of OMI. I would like to talk just a little bit more about their productline.

Management made important enhancements to make our products more valuable and easier for our customers, the utilities, to integrate our sensors into their business processes. This is important because we are able to provide key components to their Smart Grid deployments as they seek to create a new self-healing grid.

Our investments, for example, are changing the value proposition from utilities needing to send line crews to read our devices in the field to now being able to remotely monitor the real-time health of their network, and detect disturbances, and respond more swiftly. This matters to the utilities because it increases their reliability, it reduces fines from regulators, and improves their revenue rate cases.

Our devices also help the utility manage their assets better by providing analytics like loss of life at transformers in the field. This helps them avoid unplanned outages.

Our analysis of the rate-limiting step for our products to be deployed in large amounts is their cost and interoperability and, in the past, their communications limitations. The LineIQ, which will be launched in July will represent a major reduction in cost, while adding important new communication features and maintaining attractive margins. The TransformerIQ was launched at DistribuTECH and is being evaluated by several major pilots in the US, Australia, and South Africa.

We increased the sales force from two to five people in the US in the middle of 2010, following our acquisition and the cash infusion into the company. We acquired OMI and added the BushingIQ, and manufacturing quality assurance expertise of their management team. This added further credibility to GridSense in the transformer monitoring market.

We have a very large pipeline of sales opportunities with unfortunately very long lead times. Australia, the US and -- are the major sources of growth.

We have very limited future cash injection requirements, which we believe will be around $500,000 for 2011. We believe that the company will achieve better than a breakeven performance in the second half of 2011.

So moving on to our last company, USSI. A new drilling technique, horizontal drilling, and fracking is opening up vast fields of previously out-of-reach gas and oil. This is having a huge impact on the US's available domestic reserves. The impact is huge and far-reaching; it is resulting in over 10,000 wells a year to be drilled in the United States.

Our USSI business has developed a seismic sensor, which we believe is going to be critical to the safe environmental exploitation of these wells. We have increased our stake from 10% last year to over 80% of the company.

We did a successful trial at Lawrence Berkeley National Lab of the superiority of our -- what we call a new class of ultra-high-sensitivity fiber-optic sensors over conventional geophones and were hoping for a dramatic improvement. For example, we were anticipating about a 10X improved sensitivity in our devices over conventional geophones. An independent third-party test from Stanford University confirmed an over 300% -- 300X improvement in frequency response versus the best commercial geophones.

Another big event for US Sensors was we exhibited at the world's largest seismic industry conference. We had a very large booth, and we introduced the product to the whole value chain in the geophysical market from the major players, the oil and gas companies, to the service companies, to the largest equipment providers. This has provided a very large business development pipeline for Jim and his team.

Further validation of the importance of this company and its seismic monitoring was that Frost & Sullivan awarded US Sensors -- their Fiber Optic -- Oil and Gas Innovation of the Year award. Further, a successful commercial demonstration in the Fayetteville Shale several weeks ago with a major gas producer has further confirmed our confidence in this technology and the promise of US Sensors.

So driven by the expectations of new products, USSI is looking to significantly expand its operating premises. It is going to expand from about a 4,400-square-foot facility to a 17,000-square-foot facility to be able to handle the expected growth. Jim has grown the team from four employees to 10 full-time employees and five part-time employees.

We have two products, both our seismic monitoring and our pipeline monitoring, which we believe are going to have a big -- are going to be big beneficiaries of the boom in unconventional resources and the pipelines that are necessary to bring that product from places like the Bakken and the Marcellus Shale to markets where the products are refined or sold. Further, we believe that the aging of the US pipeline infrastructure is going to create a major opportunity for US Sensors.

So stay tuned for news of developments. The company has a tremendous fountain of innovation, and they have applied for 10 patents. External events are driving our business.

China and the US's -- field pipeline opportunities are available also to us in China. We have a pipeline trial with Sinopec, the largest Chinese oil and gas company. And we believe that the conflict in the Middle East is going to continue to drive the demand for domestic development of our oil and gas resources.

So lastly I am going to focus a little bit on reducing our overhead costs. We have got reduced professional fees as a result of less transaction expenses. We have reduced our corporate overhead.

We eliminated several positions. Now I am the only full-time employee at the operating company. I reduced my salary by 25%.

We have got a very strong balance sheet. The Company has $5 million in cash at the parent level at the end of February. We believe that is more than enough capital to last us through for the next 12 months. We have minimal capital requirements from our existing operations.

And I've, as everyone knows, increased my ownership by over 250,000 shares in the past 12 months. So I have tremendous faith in the Company going forward, and we have the capital to carry out our plans and to execute on what is our very exciting future.

In summary, despite the fact that we grew revenues by 31% in 2010, we fell short of our own goals and expectations. Providing enabling technologies to make our vast energy infrastructure smarter is fraught with non-linear growth, because our giant customers move at a pace that we can't control and even they sometimes can't accurately predict to us.

It is frustrating for small companies and our investors to ramp up and then experience delays; but it is the nature of our business. The reason Acorn exists is to help our companies withstand these bumps until they can stand on their own.

Our portfolio today is neither labor- nor capital-intensive, but it is very scalable. Acorn has ample cash and resources to take advantage of this great opportunity.

Our current level of proposals and pipeline of business for our other -- for our four businesses are much higher than ever going into 2011, and therefore we expect another year of record revenue as well as improved operating performance. Thank you very much, and I would like to now entertain any questions.

(Operator Instructions) Michael Osterer, UE Systems.

Good morning, John.

Welcome, Michael.

First, I want to wish you a happy St. Patrick's Day and tell you that you seem to have the luck of the Irish. So here is my observation and then my question.

Because of the unfortunate events in Japan, it appears that your decision to divest Coreworx was an excellent one. I want you to know that I am glad we don't own it. I know how difficult it was to make that decision, and I certainly -- having a company in Westchester that deals with large companies all over the world -- know that when times slow up you really can get battered around. And to make that decision is a tough one, so I acknowledge you; and again, I am glad we don't own it.

Go ahead, Michael. I'm sorry.

My two questions are this. We have looked at US Sensors, and we think they -- with specific emphasis on the oil fields. Do you have a number that you have looked at, as to what you see the market to be? Or is there a partner or a joint venture that you might want to enter that with, given the potential size of that market as we see it? But we are not the experts.

Great. Is that the question you want me to answer?

I have two questions. That is the first. The second is -- at the annual meeting I believe a year ago, you had referenced that the Company had at one time taken one of their divisions, Comverge, to the public market; and you did not know whether or not you would be doing that in the future with CoaLogix. I don't know if there has been additional thought process in that area.

Great. Okay, good. Well, first of all thank you, Michael. I appreciate your -- in light of the tragedy, and all of our hearts go out to all the people that are suffering in Japan. Certainly nobody could have predicted a disaster like that, but Coreworx certainly made a big bet on nuclear, and we wish them the best as well.

We sold Coreworx because they violated one of our key operating principles, which is -- don't get too far out ahead of your demand curve. They built an expensive platform, in anticipation of the nuclear renaissance, which appears to have been slowed by lack of demand and resources in the US. And perhaps it is in a permanent freeze now because of the current tragedy in Japan. But -- so thank you and we thank God we have moved past that.

On US Sensors -- perhaps Jim Anderson, you would like to answer that question that Michael has about the market opportunity.

Yes, there are two market opportunities on the seismic side and then talking about the pipeline. On the seismic side we have -- our target is the oil and gas -- I mean the gas shale market.

Where we see the very, very explosive growth is that right now they are drilling on the order of 10,000 wells a year; they are only monitoring about 2% of those. That is primarily driven by the cost of the monitoring process. We are introducing a product that is about one-fifth the cost that should dramatically impact that.

But if you were to look at the 10,000 wells being drilled a year and multiply it by the cost per system, depending upon how much you are able to capture, but the monitoring system is on the order of $0.5 million per installation.

Then there is the 4D monitoring, and that is really an established market and growing. Currently that is about a $1.2 billion market just for the equipment.

Then the pipeline monitoring, this one is another very sizable market. There's over 100,000 kilometers of pipeline around the world that people are looking at monitoring, and we are just trying to capture as much of that as we can.

Thank you.

On the Comverge question, the spin-out question, we -- our policy is not to comment on corporate development issues like that and making any forward-looking statements. But you know it is always on our minds.

Fair enough. Thank you.

Thank you, Michael.

[Les Schultz], Schultz Capital Management.

Good morning, John and Jim. How's things going?

Welcome, Les.

My question is basically directed towards Jim, and that is -- could you --? I assume that the new location is a different location; or is it the same?

It's a different location. It is about 2 miles away.

Okay, fine. Could you tell me about the difficulty or ease, the ability to ramp up? Also are there any other markets that you would be able to address, like the gas pipelines with that explosion they had in California? And security and so forth, are there any of those areas that you are taking a look at?

Thank you. That's a good question. I will answer that second question first. There have been a lot of inquiries coming in to us from companies associated with natural gas pipelines. We have a major gas pipeline company here in Southern California that we are scheduled to do a 50-kilometer demonstration with them, installing that this summer. We have a system that was sent over to China that is being installed with a major oil and gas company in China for monitoring their pipeline.

So we are getting into that market. We are familiar with the competing technologies, and ours is more cost effective and higher performance. So we predict it is just a matter of time where we become the leader in that market.

I think you asked about the expansion?

And the difficulty and/or ease of ramping to significantly higher numbers.

Yes, that's another good question. One of the things we set up the company was that we do all the design work at our facility, and prototype -- building of prototypes for customers at our facility. But when we shift over to the large projects, we have outside manufacturers that are already lined up to pick up and do the mass production.

So we don't really have to invest in a lot of capital equipment in our facility. The most important part is making sure we have the intellectual property in place such that our technology could be protected once it becomes mainstream.

Okay, thank you. John, one other question. Did you mention the cost savings on your transformers vis-a-vis what is out there today?

That's a good point and I will turn that one over to Lindon Shiao. Lindon, would you mind talking about your unique market strategy there?

Yes, sure. Our platform for addressing transformers is called TransformerIQ. In the past, monitoring of transformers was really limited to very large transformers; and that is primarily due to cost.

Our TransformerIQ breaks that adoption barrier by offering a very comprehensive, very cost-effective solution. At the price point that we are able to offer TransformerIQ, we really expand the size of the target market to address even small transformers at the distribution level.

So maybe -- go ahead, Les. I'm sorry.

No, go ahead.

I was just going to say that the prices that we have seen of conventional transformer monitors are on the low end $20,000 to $30,000. Lindon and his team have developed a productline that goes from -- Lindon, do you want to mention the prices that you are?

Yes, I mean at the low end of the range we have a sub-$1,000 product. As a general rule of thumb, utilities will typically install a monitoring system that is less than 10% of the value of the asset that they are trying to monitor. So at that price point, we think that we can position ourselves for the vast number of distribution transformers that are embedded in the distribution network.

So the reason this is so important is because there is a whole new level of congestion and power-quality issues that are coming at the grid because of the rise of distributed generation from renewables that doesn't have the -- that is intermittent power; the quality of the power isn't as good as conventional dispatched power from central coal-fired power plants, for example. And the coming proliferation of electric cars, which is going to add a lot to the complexity and potentially really change the dynamics on the grid.

So the utilities are going to need to push their monitoring and control to the very edge of the network. That is what is really special about what Lindon and his team are doing, and so far we are alone in the marketplace at those price points and that functionality.

Thank you very much.

Thank you, Les.

Liam Burke, Janney Capital Markets.

Thank you. Good morning, John.

Welcome, Liam.

On the CoaLogix, you have opened the plant. Obviously you are going to have some near-term hit on margins because of capacity utilization. Do you expect that to reverse itself 2011, or is it to take a little more time to absorb that capacity?

Mr. McMahon?

Good morning, Liam. This is Bill McMahon, and happy St. Paddy's day.

Thanks, Bill. You too.

We certainly hope it reverses itself, but it is a game you play between building enough capacity and building overcapacity. So what we have done is we have built this plant out with the opportunity to add two more lines and basically triple what we already done.

So we expect towards the end of this year we will be operating pretty close to capacity or just shy of capacity, and then build out further as we need it. We can put a line on in 6 months or less. So that has been our strategy in going forward with this.

Okay, thanks, Bill. John, on GridSense, it looks like the distribution business on the construction side is starting to stabilize, get maybe slightly better. Transmission -- there seems to be a lot of activity both on the rehab and newbuild side. You have talked -- touched on renewable energy.

In the near term, is that going to help the GridSense business? Or are we looking at GridSense being much more strategic for the utilities?

I will take a shot at that; and then, Lindon, I would like you to chime in. But we believe that we really don't benefit very much from transmission. This is really purely a distribution play.

But 80% of the commerce on the grid happens in the distribution network, and that is why we think that it is so compelling. Because you don't -- when you're going to build a transmission line, every mile is a different lawsuit.

I asked a utility commissioner, I said -- what is the number-one thing --? This is a Vermont utility commissioner. I said -- what is the number-one thing we could do to improve the grid? He said we could improve the situational awareness of our overhead power lines and our transformers; and that by doing that we could reduce the reserve margins from 20% of our capacity to more like 10%. That would basically defer $100 billion of CapEx.

So we think that the trend in the next 12 to 18 months among public utility commissioners is going to be to move increasingly towards performance-based rate cases, based upon what are called the SADI and the SAFI numbers, which will give utilities a major benefit for improving their distribution reliability.

So we think that is one of the big drivers for the GridSense business. Lindon, do you have anything you would like to add to that?

No, I agree with your comments. I think that there is going to be significant investment at the transmission level. But there will also be significant investment at the distribution level, primarily because that's the part of the infrastructure that is susceptible to a lot of destructions and outages today. There are a lot of gains that can be achieved by the utilities by simply deploying smart sensors and integrating that data right into their business processes through remote (technical difficulty), IT, and analytical tools.

Again I think that we are starting to see a shift in attention -- metering technology which (technical difficulty) addresses consumption on the demand side. And we are starting to see utilities spend money on the infrastructure and on Smart Grid deployments and distribution automation applications.

Great, thanks, John.

(Operator Instructions) Steve Goodman, HFP Capital.

Keith Goodman?

Yes, hi. How are you, John? First of all, I want to applaud you for your investment over the last year in your Company. Obviously, you wear your heart on your sleeve and believe in what you're doing here.

Secondly, I see that obviously China has, with what is going on in Japan, suspended new nuclear projects. I guess that would be good for CoaLogix ultimately. Can you elaborate a little bit on what your strategy is for China?

Mr. McMahon, I am going to hand that one over to you.

Good morning. We are currently putting together our strategy for China. Really, if you look at the installed base of electricity generation in China about 75% of it is coal. I don't expect that to change a whole lot, and the Chinese government doesn't expect that to change a whole lot, over the next five years.

So given that all of these units have to have NOx reduction, and the larger ones will obviously opt for SCR just because of the economics and the scale requires that. So given that, it is really not a future market that we are shooting for, although it is going to be huge.

The present market is very, very large. The final rulings -- the preliminary rulings have been out; the final rulings are supposed to come out between now and May. As a matter of fact they actually mention in their rulings that regeneration is a priority.

The other thing just hitchhiking hiking on that, Bill, is that I think Keith might be interested that the way that the Chinese are incentivizing the utilities to install SCRs is by actually allowing them to charge a premium on the electricity that they sell that is de-NOxed. So that is providing a very clear signal, both politically and economically, that this is something that needs to happen.

It is being modeled -- you are exactly right, John -- it is being modeled after the sulfur market that was in the last five-year plan. So we have a pretty good idea of how this is playing out.

In the last five-year plan FGDs, flue gas desulfurization systems, were installed. They went from about 6% or 7% of the installed base at the beginning of the five-year plan to about 80% at the end of the five-year plan. Billions and billions of dollars were invested.

And an incentive was given to per-megawatt-hour of use of the FGD systems. The new ruling is that the same stipend would be in place for the per-megawatt-hour for running the NOx systems.

Thank you, Bill. But as far as GridSense, last year I noticed that in the Southern Company's annual report there was literally a picture of the LineTracker in the annual report, but we haven't seen any news flow out of them.

Have they given orders for the product? Are we anticipating orders? Where do we stand with that?

Do you want me to address that, John?

That is for you. You would think they would have bought a million devices with a picture like that.

We are working -- we continue to work very closely with the Southern Company. We have some projects which are ongoing which are dependent on the Smart Grid grants that were issued by the Department of Energy over a year ago.

I'm sorry, Lindon; did you say they were or were not?

I'm sorry?

Did you say they are or they are not dependent upon the money?

They are. Are dependent on some of these government funds, and there have been some delays in deploying that capital.

So we continue to support them. There are ongoing projects where they continue to buy quantities of both the LineTracker and our other products, but in much smaller quantities than we had anticipated. We do believe that once the grant money gets deployed that some of our projects will move forward in much greater quantities.

Keith, the statistic we have heard is that even though there is only about 9 months left for the utilities to spend the money before it goes away, that only about 50% of the money that the government has awarded has actually been spent. So we think there is going to be a mad dash here at the end, and we are cautiously optimistic.

Okay, great. Thank you, guys.

(Operator Instructions) At this time I am showing no further questions in the queue and would like to turn the call back over to management for closing remarks.

Great, yes. So the closing remarks are that we are grateful to have such a thoughtful and patient shareholder base. We are focused on the coming year in business development and growth of what we think are some spectacular opportunities. We are also focused at the parent Company of keeping a lid on costs and deploying the capital that we have to support the business growth of the companies, the four companies that we have.

So thank you everyone so much, and we think that 2011 is going to be a terrific year for Acorn and its shareholders. That concludes my remarks.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.