Acorn Energy Inc (ACFN) 2011 Q1 法說會逐字稿

Good day and welcome to the Acorn Energy first-quarter 2011 results conference call. (Operator Instructions). Please note this event is being recorded.

Please take note that certain of the matters discussed at this presentation contain 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 recording Acorn Energy 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's or any of its subsidiaries' results of operations 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 in the forward-looking statements. As for the forward-looking statements that relate to future financial results and other projections, actual results may be different due to the inherent uncertainties of estimates, forecasts, and projections, and may be better or worse than projected. 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.

Thank you and welcome to the first-quarter 2011 Acorn Energy conference call. Today's call is going to be short because, despite a frenetic level of business development activity behind the scenes, we didn't close much in the first quarter.

We are still able to report a flat sales quarter with sales down slightly for the Group from $7.1 million to $6.8 million. Our net loss fell by 50% from 31 -- I'm sorry, $3.1 million in 2010 to $2.2 million in the first quarter of 2011. In addition, we reported a 40% lower level of headquarters costs, or savings of almost $600,000.

While we are monitoring our costs, we believe the reason our management teams and our shareholders own our stock is that each of our companies are strategically positioned in the most dynamic segments of the energy industry. First, I'd like to discuss our largest business, CoaLogix.

As we all know, in the U.S., coal supplies almost 50% of our electric needs. Environmental laws are getting tighter on the emissions from U.S. coal-fired power plants.

Ironically, the Clean Air Transport Rule, a law that will accelerate the demand for CoaLogix catalyst regeneration services when it goes into effect in the second half of the year, was partially responsible for this quarter's sales decline. The transport rule proposes to expand the number of states under federal guidelines for NOx control, and it proposes eliminating interstate trading of NOx credits. Following the price of NOx credits in concert with lower levels of electricity demand in 2010 affected coal-fired power plants' utilization and was responsible for a 16% decline in the first-quarter revenues at CoaLogix.

We believe that increasing domestic utilization of coal-fired power plants and the aging of catalysts in the SCRs will result in a substantial second-quarter pickup, with third and fourth quarter seeing a return to our previously torrid growth rate. The reasons for our optimism is a record level of proposals in both number and in dollar value, as well as the maturity of our pipeline of highly probable orders.

Management took advantage of opportunities to acquire and upgrade used catalysts, and consequently our inventory grew by $1.9 million. This will improve our ability to quickly respond to the anticipated pickup in customer demand.

In addition, CoaLogix is in the process of creating two wholly-owned enterprises in China, one in Hong Kong and another in Shanghai. The purpose is to provide legal entities needed for presence and entry into the Chinese market.

Regeneration opportunities in China are expected to be several-fold larger than the U.S. as China is expected to add $6 billion in SCR catalysts as part of the 2012 five-year plan. We can see from the level of SCR construction in China that they are serious in their effort to mount the world's largest clean air effort.

Test results for applying CoaLogix technology for regenerating existing SCR catalysts in China have been successful, and CoaLogix is actively submitting proposals to potential customers and joint venture partners. The Chinese Thermal Power Research Institute, TPRI, the equivalent of EPRI in the United States, presented a paper that was jointly prepared with CoaLogix on the benefits of regeneration at the largest Chinese environmental conference. We are in a unique position to leverage our experience and leadership in the U.S. to help China meet the economic and technical challenges of generating 75% of their electricity needs from coal.

Next, I'd like to discuss DSIT. Rising oil prices, combined with the Arab Spring, have increased the number of requests for proposals of this unit. DSIT could post record sales and profits in 2011, based upon our levels of proposal activities and advanced contract discussions, but the first quarter, consistent with our other businesses, was flat. DSIT had first-quarter revenue of $2.4 million versus $2.6 million last year.

Turning to GridSense, as public utility commissions around the country grapple with the needs to improve the reliability of our grid and maintain the affordability of electricity, they're beginning to realize that there's an even more compelling killer app of the smart grid, the demand response, and that is distribution optimization. This is a field which our GridSense business is a pioneer.

Distribution optimization means improving the monitoring of electric distribution systems, the lines and transformers that bring power to your home and business, so productivity gains can be made by controlling voltage and better managing the assets. This segment of the smart grid is going to become increasingly important as states like California implement 33% renewable standards and electric cars proliferate, which add complicated factors like intermittency, power quality issues, and new load.

The smart grid industry is waiting for the stimulus money to be spent. Smart Grid News predicts 2011 will be the year that hockey-stick growth occurs in distribution optimization. GridSense expects to participate in an increasingly visible way with our high-profile customers.

In the meantime, we work to raise awareness with utilities and public utility commissions on the low-hanging fruit that we have to offer. We acquired GridSense in May of 2010, so there isn't an applicable organic comparable. They did $600,000 of revenue for the first quarter.

Lastly, we have a very compelling technology in seismic monitoring that benefits, from among other things, the rise in gas and oil production from shale. We performed our first commercial trial of the product in the first quarter with Southwestern Energy in the Fayetteville shale. And while we and our partners, including Octave Reservoir, are still analyzing the data, it looks very promising. Stay tuned to this space.

We increased our ownership of US Sensor Systems to 81% by investing another $1.5 million to support the further commercial development of the system. We intend to further finance the development of our seismic product line by entering into strategic alliances with oil industry consortiums, oil service companies, and other seismic technology companies to provide both a path to market and a source of non-dilutive financing.

We ended the quarter with $4.6 million in cash, and we ended April with $4.2 million in cash after a loan to GridSense of $300,000 in our corporate expenses.

This concludes my prepared remarks. I and our CEOs are happy to entertain any questions.

(Operator Instructions). Steven Ralston, Zacks.

You correctly anticipated the softness in the first quarter for -- CoaLogix. And now you're anticipating some strength. The slowdown -- I assume you're in good contact with your customers, and from an analytical point of view, I'm concerned that this isn't just a slowdown in the industry, but there might be some market-share shifts. Could you reassure us that your customers are just having a slowdown in the production of electricity?

Thank you, Steve, for that question. I'd like to hand that question over to Bill McMahon.

This is Bill. The capacity factors of the units with SCRs, the bigger units, is down about eight or nine points between 2009, 2010. That, coupled with the low NOx credit numbers, allow our customers to operate, quote, closer to the edge because if they go out of compliance, they can buy the NOx credits.

So what we're finding is customers taking a little bit more risk -- and, frankly, we're advising them on that; delaying SCR regenerations a little longer; and on top of that, they are not deactivating as fast because there's about a 10% reduction in usage of the SCRs. Has been for the last two years.

So, that's the macro. On a customer level, yes, we're talking to the same customers all the time. We have about one-third of the market -- one-third of the SCRs, a little over one-third of the SCRs, under long-term agreement that's exclusive. So, we're talking to them every day. We don't believe it's a question of an overall -- we don't believe it's a Company issue. We believe it's a macro issue.

Understood. And it's also good to hear that you're advising them, also, so that gives you a little more intel on the situation in there.

That's right, and as you know and as we've talked before, this is not a quarter-to-quarter business. We're still in a growth stage and we're going to have quarters that are flat or down a little bit. Revenue moving from one quarter to another is not unusual. So, stay tuned.

I have two more questions, if I may.

Please, please, Steve.

I think the other thing, Steve, just to underline the competitive position of CoaLogix that, to our knowledge, no other catalyst regeneration companies have any long-term contracts in the industry. So we really have not only just created this industry, but also have the trust of the biggest utilities in the United States, so it's a compliment to Bill and his team.

Moving on to GridSense, what's your reason for optimism for the hockey-stick growth?

I would say the compelling economics of spending 1% of the cost of a transformer to extend its life by several years.

You know, we have a pending crisis on the grid where the average age of a transformer is about 40 years. The average age of a circuit breaker is about 50 years. And in order to improve the economics and the reliability of the grid, you can either add more generation, which a lot of times adds more congestion; add more transmission lines -- that takes a long time to add; or you can just manage better the network distribution which is closest to the consumers of the electricity; and very simple things like voltage management. If you can just improve voltage management by 1%, it would be about 5X the return of a comparable investment in energy efficiency.

And I just presented yesterday to the Delaware Public Utility Commission a study which showed that the return on investment on distribution automation, in one study in California, was about a 10X return in one year. So, the economics are very, very compelling.

And it really -- really what we're talking about is changing the industry that we created of demand response and saying, well, you don't have to do a shock (multiple speakers) approach to demand response. You don't have to have every household have demand response on their air conditioner. You can actually just target it around certain circuits that are -- that need that -- that have congestion. Lindon, do you have anything further that you'd like to add to that?

Yes, I think you're right on, in terms of the economics. There is a compelling reason to make investment that address the monitoring needs of distribution and transmission assets.

I think a lot of utilities are realizing that replacement of these assets is not practical, and it's just cost prohibitive, and the only way to improve reliability, to improve the efficiency of how electricity is delivered over these lines to the consumer, and the only way to prolong the lives of these assets is through improved monitoring.

So, I think we're starting to see utilities shift their focus on technologies at the consumption point, moving away from meters and more -- showing more interest in addressing the pipes that deliver electricity. I think that's one reason.

And as John said, I think that it's -- I think there are many studies that point out to the effectiveness of improving monitoring intelligence on the grid. I think there's one study that indicated that, through simple things like load balancing, balancing the line, power across lines, and by optimizing voltage levels, utilities can reduce line losses by up to 30%. And that has a tremendous impact on how power is delivered, and there can be significant avoidance of future plant and infrastructure buildouts. (Multiple speakers) all these reasons are contributing.

At DSIT, you mentioned that you're pretty much far down the sales cycle. You have this high level of proposals and advance contract discussions. Are you at that same position there at GridSense?

Yes. Lindon, do you want to give any more clarity around that?

Regarding the (multiple speakers)

In GridSense. When you were discussing DSIT, I got a good feeling that the proposals have been made. The contracts will probably be signed at some time in the future. But you're pretty far down that sales cycle.

But at GridSense, the indication is, yes, they're going to need it. It's economical for the utilities to optimize their distribution systems, but are you -- on the sales cycle side, are you that advanced as you are in DSIT?

Just to address where we are with the sales processes with various customers, I think we're in various stages.

Later this year, we're going to announce a fairly large-sized deployment addressing up to about 1,000 transformers with a large investor-owned utility in the eastern U.S.. That's a project that we've been supporting for the last four to six quarters. And we finally have gotten indication that this project is moving forward, and we expect to fulfill a large portion of that project and recognize revenues in the current fiscal year.

We're working on probably a dozen other pilots with other utilities, and the size of the rollout, the magnitude of the sales potential is comparable or larger than the one, the first one that I mentioned.

But we're at various stages with these utilities, and unfortunately, the pace at which utilities make decisions is often very long and kind of unpredictable, but we're very confident that the pilots that we have planted seeds with will eventually materialize into sizable, large commercial deployments.

One last question. Your R&D spending popped up a little. Could you tell me where you're deploying it?

Really across each one of our businesses. It's -- we're really -- that's one of the things that I hopefully will be sharing with you in the next following weeks.

At GridSense, there is work being done on remote monitoring of their PowerMonic product, which they've got a number of advanced orders for. There's -- I think every product at GridSense has -- they're upgrading right now. US Sensors, most of their expense right now is on research and development. DSIT continues to fund advances in their product, and CoaLogix continues to invest both in innovations and testing, as well as the capability of the regenerating catalyst, the performance parameters.

So, each one of our companies is -- we're all about innovation and we're hoping that those innovations are going to be a substantial driver for our growth.

Jim McIlree, Merriman.

Would you mind taking a stab at what you think the revenues could be for the groups in 2011?

You know, I made the mistake last year of giving our revenue guidance. And this year, I'm going to abstain. I'm just going to sort of show people and not tell them, and so we've not given any revenue guidance.

Okay. On the expense side, then, you had a discussion about R&D in the prior question. So am I correct in thinking that the expense levels are kind of flattish for the rest of the year? Is that reasonable to think?

That is reasonable to think. And what we're hoping is that revenue will be ramping substantially so that you'll be seeing an increased -- increasingly profitable profile of our businesses.

Right, okay. And then, on the gross margin side, I'm trying to understand what you think the gross margin potential is for GridSense when that product ramps. Can you talk a little bit about your manufacturing strategy and what kind of margins you could get there?

And then, on US Sensors, is that going to be a product business this year or is that going to be more of an R&D business this year with products next? And I'll just put you on mute so I can take down notes (multiple speakers)

Okay, great, so I guess I'll ask Lindon to respond first, and then Jim Andersen.

Okay. Regarding the margins that characterize the GridSense business, historically we have been able to command gross margins of around 50% to 55%, and these margins are relatively high relative to other manufacturers in the industry.

And I attribute this to the fact that we have unique offerings in the marketplace that are superior to our competitors, both in terms of price and in terms of functionality. All of our products offer very quantifiable value to our customers. So we're able to maintain such high gross margins.

As part of our strategy to maintain and improve gross margins, we're looking to shift a lot of manufacturing from our Sydney, Australia, office to our U.S. office in Sacramento. Our Australian operation is becoming very costly to maintain the production operations there, primarily because of the fluctuation and the appreciation of the Australian dollar. So, we're looking to shift a substantial amount of production to our U.S. office.

I think that will enable us to continue to enjoy very strong margins and possibly even improved margins as we increase the volume of rollout across all of our products.

Thank you, Lindon.

So I hope that answers your question.

Lindon, you also have a supply chain through Asia, right? You actually have an employee that's --

Yes, that's correct. Yes, we maintain the final assembly and quality assurance procedures in-house because, dealing with utilities, we need to have -- maintain high standards and position with all of our products.

But we source a lot of components and subassemblies from other manufacturers, many of which are based throughout Asia, including China and Taiwan. And we'll continue to source those components from those countries because they're just the most cost-effective source for us.

Thanks, Lindon.

Jim, how about you?

Yes, I think the question was, are we looking at a lot more development this year or moving more to a product side? And I say this year is sort of a transition. We're doing a little bit of both.

Primarily, we're transitioning from development to actual manufacturing. We just moved into a new, bigger facility. It's about five times the size of our previous facility, which is allowing us to do that.

We are negotiating several production orders, but we still do have some development, and the development is for customized systems some of our customers have asked for so they could make a custom product for themselves. So we're doing that for some of our bigger customers.

I'm not sure -- did that answer the question?

Yes, that's great. Thank you very much.

(Operator Instructions). There are no further questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to John Moore for any closing remarks.

Thank you very much. I think it's all been well said. I appreciate the hard work on the part of our management teams to build these -- to build our companies and create shareholder value, and I appreciate and acknowledge the shareholders and the brokers and the money managers and the analysts that continue to have patience with us as we pioneer these exciting areas of the energy industry.

Thank you very much, and that concludes our remarks.

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