Polar Power Inc (POLA) 2018 Q2 法說會逐字稿

Good day, and welcome to the Polar Power's Second Quarter 2018 Financial Results Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Shawn Severson, alphaDIRECT. Please go ahead, sir.

Thank you, good afternoon, everyone. I'd like to thank you all for taking the time to join us for Polar Power's second quarter 2018 conference call.

Your hosts today are Arthur Sams, the company's Chief Executive Officer; Raj Masina, COO; Luis Zavala, the company's Chief Financial Officer. Arthur will provide a business update, which will cover customer announcements, product updates and operational milestones, while Luis will discuss the financial results.

A press release detailing this quarter's results crossed the wires today at 04:00 p.m. Eastern time and is available on the company's website, polarpower.com. Following management's prepared comments, we will open up the call for questions.

Before we begin, I'd like to remind everyone that statements made on the call and webcast, including those regarding future financial results and industry prospects, are forward-looking and may be subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the call. Please refer to the company's SEC filings for a list of associated risks, and we also would refer you to the company's website for more supporting industry information.

At this time, I'd like to turn the call over to Arthur Sams. Arthur?

Thank you, Shawn, and welcome everyone to Polar Power's second quarter 2018 earnings conference call. For today's call, I will provide a brief summary of Polar Power's second quarter 2018 highlights before I provide the highlights of each of our core markets.

First, I'd like to say that we're really pleased with our 138% year-over-year revenue growth in the second quarter of 2018, which demonstrates our 4 consecutive quarters of growth and revenue.

A significant portion of growth in this quarter is attributed to the sale of DC power systems to AT&T. In addition, our backlog has grown 132% quarter-over-quarter, validating a strong demand for our technology and products.

During this quarter, we will continue to deliver units to AT&T, and so far this year, we've shipped over 450 units, with several more in backlog and forecasted for the rest of the year. Most of the deployments are going into existing sites for either AT&T's legacy sites or for FirstNet sites.

Just 12 months ago, we had only one Tier 1 telecom customer, and since then, we've added 2 additional Tier 1 customers. Also as previously announced, we received a $1.8 million purchase order for Polar Power's DC power systems from a new Tier 1 U.S. wireless carrier during the second quarter. And we are pleased to report that, earlier this week, we received a follow-on order of $1.9 million from the same customer. These units are to be delivered in 2018. These initial orders are a part of the Tier 1 carrier's new cell site hardening initiative, and it is the result of recently completed evaluation for customized and more economical DC power system for this specific customer. In the third quarter, we began delivery of this $1.8 million or 105-unit order for the 15-kilowatt backup generators.

Our gross margins have grown from 30% in the first quarter to 36% in the second quarter, reflecting the benefits of increased utilization of plant and equipment resulting from higher shipments.

During the third quarter, we plan to continue adding production capacity to our second plant, being operational, which should shorten delivery times for our Tier 1 customers in United States.

As you know, one of our key strategic initiatives is to diversify and grow our presence in emerging markets due to higher infrastructure investment. Over the last 6 months, we have demonstrated success, and we've made initial inroads into Namibia and Sri Lanka, securing initial purchase orders from the local Tier 1 telecom carriers.

During this quarter, we also entered the wireless infrastructure market in Namibia, South Africa and the initial $0.8 million purchase order to construct new cell sites across the country.

In order to make us more competitive in these markets, we initiated a localized plan where we are creating a wholly owned subsidiary, Polar Power Africa, which is headquartered in Windhoek, Namibia. This endeavor should set an initial blueprint showcasing our DC power solutions and opening up additional opportunities in the region.

This will also give us more insight into the true market potential of these emerging markets, along with having participation opportunities in free trading zones.

Our operating expenses as a percentage of sales during the second quarter reduced year-over-year from 55% in the second quarter 2017 to 32% during the same period in 2018. The 23% favorable improvement is primarily due to higher revenues and improved gross margins.

Another key factor in the U.S. market is that call and data reliability has become a key differentiator in telecom markets. You might have seen our Tier 1 carriers advertising the presence of backup generators at their telecom towers and their ability to provide service during emergencies and disasters. We believe this is a key growth driver for Polar as telecom providers move to equip cell towers with more reliable power systems. The key drivers for us have been investment in the sales infrastructure since 2017 combined with the higher installed base of DC generators in the U.S. market, which has given us the opportunity to gain market share in the telecom carrier market.

And in international sales, we're also pleased to announce that, in July, we received an initial purchase order from a Tier 1 provider in Sri Lanka. These orders of hybrid systems, which include our DC generator lithium ion energy storage are for off-grid sites in remote areas where the customer plans to begin testing our technology during the third quarter. Successful demonstration at these 5 sites may lead to additional production orders in 2019. In addition, we're also required to maintain and service these sites, which will provide additional revenues and control our maintenance -- control the maintenance of our product.

Regarding military sales, we have disclosed previously that we received orders for hybrid generators for autonomous vehicles. During the second quarter we received additional orders for this program.

In the third quarter, we began to delivering -- we began delivering our hybrid systems and plan to ship the remainder by the end of 2018.

Now Raj will provide you a quarterly update for each individual market segment.

Thank you, Arthur.

I'll begin with updates on production first and then move into the service infrastructure and later our R&D activities for the quarter. So as far as production is concerned, our production capacity has increased by 30% for many different areas within the shop since the first quarter of 2018, and we are adding additional production staff.

As mentioned during the last quarter call, we continue to successfully enter long-term contracts with our suppliers for favorable pricing, and we continue to buy key parts directly from the manufacturer as opposed to buying it from distributors. This would reduce our cost of materials sold. With additional production capacity and additional state-of-the-art manufacturing equipment, we plan to reduce the lead times for our customers. Our continued investment in production staff training on safety and processes are starting to show results in improving production efficiency and quality, thereby, reducing our warranty expenses to new industry lows.

Our warranty expense as a percentage of sales reduced from 2% last year to 0.8% this year for the first 6 months, 6 months to 6 months.

During the second quarter, we also added about $700,000 in new automated fabrication equipment for our plant, which is anticipated to improve labor efficiency and quality of our products. Large purchases from our Tier 1 customers will allow us to rationalize our designs and undertake cost reduction activities through product redesign.

Our effort on reducing material costs during the past year has started taking effect as we begin receiving new inventory with lower and better negotiated prices. We're closely monitoring if the new trade policies resulting in tariffs may negatively impact our margins, however, so far the changes in the trade have had minimal effect. We continue to hire new production employees to staff our new production facility, which may initially impact our short-term margins. However, increased production may offset by improving fixed cost absorption. With increased sales deployed nationwide, we have strengthened our aftermarket services network to support installations and repairs. In addition, we have enhanced our customer service team, predefined application requirements during presales and also assist customers during equipment installation.

As part of this effort, we have recently hired Mr. John Bristol to head our support and service divisions. John has extensive experience in the telecom industry, working as an implementation and construction manager, so he would be the perfect person to lead the service and support divisions.

As far as R&D is concerned, our engineering has focused on new generator models for the Tier 1 MNO carriers equipped with lithium ion battery packages with a new battery charging system. The new controller will take advantage of these updates and significantly lower the costs further. Also, with our new variable speed fan and controller, we'll be able to lower the noise of the generators and increase the reliability and maintenance of them.

With these changes to our control system, we'll be able to reduce the current cost, and we've also managed to facilitate the programming process by creating an embedded web page for our controls, which is an important engineering and programming effort. The web page is an integration of MATLAB, and we hope we'll be able to increase the system capability, communications and reporting while lowering our current costs.

Furthermore, during this quarter, we've developed an auxiliary power unit for an autonomous vehicle program for the U.S. Military that we have disclosed in the past quarter. This unit is specifically designed to be submerged in water and be exposed to rugged environmental conditions for a longer period of time. We believe this will open more doors into markets for APUs in specialty hybrid vehicles for other applications.

In addition, we teamed with a large engine manufacturer in Japan to develop our own line of LPG and natural gas engines. We believe this development will lead to significant applications in the solar hybrid systems, distributed power and electric vehicle charging.

I'll now turn the call over to our CFO, Luis Zavala for his financial summary.

Thank you, Raj.

Net sales totaled $5.8 million in Q2 2018, an increase of 138% as compared to $2.4 million in Q2 2017. The increase in net sales was primarily a result of sales of our DC power systems to AT&T on top of sales to our legacy customer, Verizon Wireless. Our success in diversifying our customer base continues to gain momentum, and we believe we will reach significant sales from other customers in the quarters to come.

Backlog totaled $5.8 million at June 30, 2018 as compared to $2.5 million at March 31, 2018. The increase in backlog at the end of the second quarter of 2018 as compared to the end of the first quarter of 2018 was attributable to increases in purchase orders from AT&T, our military customers and a $1.8 million order from a new Tier 1 wireless telecommunication carrier customer.

Gross profit increased 139% (sic) [169%] to $2.0 million in Q2 2018 as compared to $0.7 million in Q2 2017. Gross profit as a percentage of net sales increased to 36% in Q2 2018 as compared to 31% in Q2 2017. The gross profit in Q2 2018 was attributable to improved labor efficiencies and improved manufacturing overhead absorption. We believe our gross margin will continue to improve as net sales increase and as a result of the significant improvements made to our production facility and staff training.

Operating expenses increased to $1.8 million in Q2 2018 from $1.3 million in Q2 2017. The increase in operating expenses was primarily due to an increase in sales and marketing as well as G&A expenses increased by stock compensation expense for stock options issued to the executive officers earlier in 2018.

Net income in Q2 2018 totaled $0.2 million or $0.02 per basic and diluted share compared to a net loss of $0.2 million (sic) [$0.3 million] or $0.02 (sic) [$0.03] per basic and diluted share in Q2 2017. The increase in net income is attributable to an increase in net sales of our DC power systems.

Cash at June 30, 2018 totaled $11.7 million as compared to $14.2 million at December 31, 2017, with $0.6 million in long-term debt outstanding. The decrease in cash as of the comparative periods ended June 30, 2018 and December 31, 2017 was the result of a $0.7 million increase in inventory, $0.7 million in financing cost for purchase of plant equipment to support a higher production rate and an increase in accounts receivable resulting from increased sales.

Now I'll turn the call back to Arthur. Arthur?

Yes. Thank you, Luis. Net sales totaled 5.8 -- yes, I would like to thank everybody for their time today. We appreciate all of your support as we continue to work on executing our growth strategy. Also, if we are unable to address all your questions today, please feel free to contact us or our Investor Relations firm, alphaDIRECT Advisors, who would be happy to answer them. We look forward to speaking with you on our third quarter financial results conference call. Operator?

(Operator Instructions) And we'll take our first question from Craig Irwin from Roth Capital.

First, I should say, congratulations on the healthy quarter here. It's nice to see revenue ahead, margins ahead and EPS ahead.

So the margins ahead was, frankly, a little bit of a surprise, given that you had the new facility come online in the quarter. Typically, most companies struggle a little bit with costs when they commission new facilities. Can you comment whether or not you had revenue production out of the new facility? And obviously something went right for you on the margin side. Any color you can give us on the sequential improvement there would be helpful?

Craig, this is Luis. The new facility has not kicked in yet. We did sign the lease agreement in June, and it was effective July 1. Now the current tenant at that property, which is the owner of the building, needed a little bit more time to vacate. So that is being pushed to sometime this month. It's actually next week. So in the meantime, what we've done is, we started a second shift. We did a temporary second shift to help out with production. And it was a very easy transition. Basically, this is something we've done in the past, and it was fairly easy for us to implement all over again.

Also, some of the equipment that is going in to the new facility has been purchased over time in anticipation of more production space. So the expenditures have occurred over a longer period of time.

You mentioned the $1.8 million order from T-Mobile in the quarter. Can you comment for us what portion was actually shipped in the June quarter?

Nothing was shipped in Q2 because the order was received in the far end of June. And the delivery schedules were for July and August and September. So we are currently delivering on that order. And on top of that, we've received another $1.9 million earlier this week that is to be delivered in October.

Okay, excellent. So then if we could talk about the backlog, the $5.8 million backlog you reported as of June 30, how much of that backlog is shippable in the September quarter?

Okay. A significant portion of that is going to be shipped in the September quarter except for probably 15% of the military orders, which would be for Q4 and some even for Q1 of next year. Most of those orders are to be delivered in Q3.

Okay, excellent. And then of the $1.9 million follow-on order from AT&T, can you maybe give us some color on the delivery timeline on that? Is that expected to be largely delivered in the September quarter or will that roll a little bit into the December quarter as well?

That would be rolling into the Q4. The delivery expectation on that one is for October of this year. So it will fall into -- that's for the new customer, by the way, that's for the new Tier 1 customer.

Oh, the new Tier 1.

Correct, that is not for AT&T.

Yes, that's not for AT&T.

Okay, okay, excellent. So then...

Also, Craig, one quick addition there is, that $5.8 million backlog that we mentioned, that is as of June 30. And after that is when we received the $1.9 follow-on order or the $0.8 million Namibia order. So those 2 -- that $5.8 million does not include those 2.

Okay. So then, where does the backlog stand today, if we were to look sort of at a photo snap of your total backlog?

Okay, yes, it's between $6 million and $7 million today. We can't give an exact number, but yes, it's between $6 million and $7 million, $6 million and $7 million.

Okay, excellent. And then I don't know if we're going to have to wait for the 10-Q for this, but can you share with us the percentage of revenue from Verizon?

Verizon, I believe, it was about -- between 10% and 15%.

So 10% and 15% of revenue? Okay. If we could sort of change subjects a little bit and talk about the efforts to improve the margins on the core product, you're obviously focused on purchasing and focused on designing cost out of the product. How much room is there for margin improvement over the course of the next year from improved purchasing leverage that you have with your different component suppliers?

Okay, well, we see a battle there. On one hand, we've got Trump tariffs that are affecting aluminum and steel and certain raw materials that do come out of China. And on the other hand, we're negotiating more favorable contracts with our suppliers, particularly engine suppliers. And just to add, we added -- we just recently hired a full time senior buyer to our staff, which will also be very aggressive in trying to counter the cost increases in aluminum and steel and some of the other components that we have to suffer through right now. So it's kind of a complex and very changing environment right now for us to predict that. It would be more easily predictable to look at the changes in labor and the amount of labor that goes into the machine. And this is where our greatest opportunities lie. So I'm continuing to automate processes to streamline workflows so that we can do a significant reduction in labor.

So the next subjects I wanted to touch on is international sales momentum, congratulations on the award in Namibia. Do you think the Namibia project can reasonably lead to repeat business before the end of the year?

And do you still expect half of your revenue in 2019 to come from international projects?

Raj?

Yes. So yes, we do believe that Namibia will be a repeat order. Right now, we're in the process of delivering on that first order. And subject to how that goes, we expect that it will result to further orders for the year, mostly for Q4. And what was your second question, Craig?

Do you still expect 50%...

Yes, now that's the thing, it's once again a moving target. That's our goal is to be 50%, is what we have indicated in the past. But it's not happening in 2018 because the U.S. business is going strong. And even for 2019, the preliminary forecast -- the months of August and September are mainly planning months for the Tier 1 telecoms. So far, we have been very encouraged with what we are hearing for 2019. But -- so it would be difficult to say at this point of time if at all we can achieve that 50-50 target that we originally had for 2019. It could be 75-25 or something like that. We don't know. We can't accurately predict that.

Okay, that's fair. Can you remind us the geographies that you're most excited about and maybe share some color with us on progress with different customers in these geographies? I know you have to be careful about competitive issues, but anything you can share with us is useful.

Okay. We've got a lot of -- some excitement in Japan for backup power and for some special emergency or disaster power systems. We've got some interest from -- in Thailand, where we currently have some demonstrational units going. Indonesia continues to look like a very big market for us. We participated on some RFPs there, and we're awaiting some of the outcomes there. And Australia is probably the -- Australia and South Africa and Sri Lanka are probably our largest 3 contenders for generating substantial purchase orders.

Immediate growth opportunities.

Immediate growth opportunities. So I would say things are looking pretty good in Australia, particularly with the government telecom services and Telstra. And Namibia, what's happening there is that we're gaining a lot of attention from MNOs from the other countries, neighboring countries like Botswana, Tanzania and stuff like that. So I do think things are really looking promising. We're trying to hire more people. We just brought on a full time recruiter into Polar Power in order for us to now support some of this -- the sales activities that are going overseas and domestically. So we are bulging with opportunity and out there searching for additional human resource and, at the same time, building up production and delivering product.

That's really good to hear. Can you maybe quantify for us the total pipeline or opportunity that you're chasing internationally?

If I gave a number to that, I might be committed. I really -- the opportunity is large. Opportunity overseas exceeds the U.S. markets, simply put. I mean, it dwarfs the U.S. market. Overseas, we have a lot more competition, so that also has to be factored into.

And we'll take our next question from Ashok Kumar of ThinkEquity.

The first question is a 3-part question on the new carrier relationship. If you could clarify, is this a direct relationship or is this through a channel partner? And if so, is it a back-to-back agreement?

The second, given your first phase of contract, which is $1.9 million and additional follow-on, so would you -- so I guess this total opportunity is between $4 million and $5 million for calendar '18. And Raj, you indicated a 3-month delivery period for the first contract and I assume that the second PO will be delivered in the October-November-December time frame.

And the last part of it is, you indicated the first phase of the contract of 105 units, so I assume the ASPs for the second phase would also be similar to the first, which was $17,500? And I have some follow-up.

Go ahead, Raj, please.

Okay. So as far as the relationship with Verizon, AT&T, they are direct relationships. We have contracts and purchase orders directly from them. With T-Mobile, we have received purchase orders from their integration partner, which is Delta Electronics. So our purchase orders are channeled through them.

As far as your second question is concerned regarding the delivery time frames for the T-Mobile order, the initial $1.8 million order would be delivered in the months of July and August and September. The $1.9 million is for October only, not October, November and December, just October only. And so we are expecting follow-up orders for November and December. They have not been cut yet. And what -- and the last one?

Yes, the ASPs, given they were for the first purchase order was $17,500, would you expect a similar...

Yes. Unfortunately, Ashok, we don't give information due to competitive reasons. We don't give information regarding ASPs in our products. We just -- yes, because they're a mixture of units. It's not just one model that they're buying. It's -- all these clients are buying multiple models, so yes.

Raj and Arthur, right, in terms of your telco customers, you had indicated -- Luis indicated the Q1 mix of Verizon was 27%, dropped to 10% to 15% in Q2? Now if we look at these 4 telco customers, Verizon, AT&T, T-Mobile and Sprint, how do you rank order the long-term opportunity, given the positioning of each of these customers in terms of the state of the union and the backup infrastructure?

Okay. Yes, so as we indicated to the markets before, Verizon has -- or Verizon prides itself as the carrier which has the most resilient network among the 4 carriers, which basically means that AT&T and T-Mobile and Sprint have a lot to catch up. And so their focus there -- one of the top priorities is to harden their networks. So as far as backup systems are concerned for us, AT&T and T-Mobile will probably spend more money in terms -- or they'll be deploying more generators in the sites compared to Verizon. As far as Sprint is concerned, the industry is waiting for the integration efforts or merger efforts of Sprint and T-Mobile which, for us, would be a positive.

Just to read between the lines, Raj, would you say, given T-Mobile is the most underpenetrated and given your track record in terms of product performance, would it be safe to say that you're positioned to capture a disproportionate share of this opportunity?

We would say both AT&T and T-Mobile would be relatively aggressive in terms of the deployment plans because they're quite behind. And also, AT&T has this first in profit, which is another key driver for them. And all these carriers have a push towards 5G, which is kind of a key success factor or key driver for our sales as well. So I would say, we were not able to say the percentage allocations between both of them, but both of them I think would be formidable customers for us.

And the military was about 6% of mix Q1, what is the mix in Q2, please?

Luis? Was that 23%?

No, that was a backlog. So the backlog was high but not the -- you have to say...

Ashok, it was about 3%. I believe it was about 2% to 3%.

Now moving on to the competitive front, macro and micro issues. I assume, the primary focus is on AC generators and their primary opportunity would be for 2G sites that require the support of AC generators and then shifting the lens to the DC opportunity, I assume it's primarily Delta versus Polar, and I assume that, in the near term, depending upon how the tariff war plays out and the Chinese products that are manufactured in China, will they be slapped on tariffs and that could potentially position you advantageously near term?

Well, I guess first response is who can predict Trump and what he's going to do with the tariffs. But the bigger issue is that they're -- the customers, T-Mobile seems to prefer a U.S.-made product over a Chinese-made product. I think that's what it all boils down to.

So again, so in a lot of markets, it would be safe to say, Arthur, that your product is preferred over Delta so for variety of reasons including quality and product performance so that would also position you for increased market share gain over the near term?

Yes.

Got it. Now moving on to the international markets, Arthur, Raj and Luis, I think you talked about Namibia and setting up an operational -- ground based operational support in Windhoek. So will this be primarily to support MTC or do you see other opportunities in Namibia? I assume MTC is the primary carrier in that market?

Well, I like to consider Namibia has a large potential in multiple markets, and not just telecom. I -- it's an ideal place to be in due to good labor source locally, good nice working conditions, good communications. So there's many opportunities for us in Southern Africa, and Namibia is a good place to set up headquarters to service the local area.

But initial market opportunities or initial opportunity, Arthur, will be with Mobile Telecom, right?

Correct. It's always good to have an anchor.

Absolutely. And then on Sri Lanka, Arthur, is the potential opportunity with Dialog, right? Have you signed the contract? Where do you stand in terms of the opportunity there, please?

Yes. We do have back-to-back contracts. So we used a local channel partner to have back-to-back contracts with Dialog. And they were -- yes, they're put in place. And so right now, they're evaluating -- they gave us an initial purchase order for 5 units. And so they're evaluating them now. We're shipping them this week actually. And we are going there to install it as well. So subject to them liking the units and subject to our unit's performing to the standards that we have set, we expect further orders from them.

And Raj, just a clarification on that, given the Dialog is a unit of Malaysia's Axiata group and you had -- earlier on in the year, you had mentioned opportunities in Malaysia, would this also present an opportunity for you in Malaysia to engage?

Correct, correct. Axiata has presence in more than 15 countries. And typically, Sri Lanka is their testing ground. A lot of people don't know that they're also testing 5G there now. So yes, I mean, that would be an important ground for us to prove ourselves so that we could also penetrate into other markets.

Right. One last question, Arthur, Luis and Raj is on the productivity, right? You focused on some of the component advantages in terms of component costs on the procurement side, but I assume labor cost is the big factor. And you're approaching the revenue level where direct labor is being absorbed at more optimized level. And given improvements you've put in place on the production equipment, tooling, machinery and training, right, what is the revenue level you can support with the current infrastructure? Is it $6 million or $7 million? And I mean, as a hypothetical question related to that, at $7 million, will you be looking at 40% gross margins versus the 36% you reported?

Now Ashok, right now, with the investments in equipment that we've done and also with the additional space that we've rented or leased, yes, we should be very close to the $10 million a quarter with this, what we're putting in place. And that's with a standard one shift a day.

Talking about production capacity.

Per quarter?

Talking about production capacity, right? But he is asking about the gross margins, would they actually increase if it goes to $7 million or $8 million or $9 million? So that was his main question.

Yes, we do believe our gross margin can improve. And that's simply because of the efficiencies with the systems automations on the equipment that we've been purchasing.

And we'll take our final question from [Gregg Hillman] from private investors.

And just 2 questions, one was on the engineers -- what was the number of engineers you had in the company at the time of the IPO? And what would be the number of engineers you have now? And have you had turnover of engineers, that they left? And are you having -- are you willing to pay out to get the engineers you want?

Okay. To start off, it's kind of hard to count engineers. I would say, yes, we've maybe doubled our engineering staff since the IPO. And there's 2 types of engineer turnover. One, is where we hire an engineer and we find that they really don't have the capabilities reflected in their resume. So we let them go. The other time is that, sometimes we have a good engineer and he gets hired away because he's either drawn to a buddy in another company that recruits him. And so the friendship is a boundary that's kind of hard to keep the guy even if you offer more money. But I would say that we've been pretty stable with engineers, and we do have ads out there to bring in more engineers. I'd like to at least add about another 6 or 7 engineers to our staff, both in terms of customer support and in terms of R&D and testing. So if you know of anyone in mechanical, electrical and CAD drafting, give him our number.

Okay. And then, Arthur, on another point, basically manufacturing internationally and local content, number one, whatever happened to Romania? Weren't you going to do assembly there? And did anything come out of that? And what -- go ahead.

Okay, now. Romania was always going to be a -- I mean Romania was going to be a support center. And we were going to do some product testing and development out of Romania. Currently, we have limited our role to having them travel the globe and supporting some of our customers overseas. We sent our Romanians to Puerto Rico during the disaster. We sent them to South Africa, we sent them to Japan, we sent them to Malaysia and Thailand. And now they're headed over to Sri Lanka. Romania provides a nice pool of technical people willing to travel and not get offended by bugs in the hotel room.

Okay. And then Arthur, just your strategy about when you would eventually open a plant outside of the United States, what would cause that to happen? Do you think it would be a local content rule? Or -- and does it make sense for you to have assembly in Namibia? Or can you just talk about that? What's your thoughts along those lines?

Okay, good question. First of all, I don't try to let local politics have a dominant influence over discussion. And it's got to be strategic. Now, for example, in overseas countries, we look at opportunities. One of the first things to build overseas is a fuel tank. A fuel tank has a lot of labor, it's very simple, consists mostly of welding. And if we had to ship a fuel tank from the United States, it represents a significant shipping cost because of the empty volume of a fuel tank. It's big and empty. So that would be one opportunity. Now that opportunity, you'd have to have a minimum number of fuel tanks to even get the local manufacturing companies' interest in producing it. So that quantity may be 10, 20 or 100. It depends on vendor to vendor, region to region. Another thing about manufacturing is that if you're going to service someone in a country with repair parts -- repairs, parts and stuff like that, you need to have technical people in order to do that. And you might as well keep those technical people busy. So we are looking for opportunities to reduce the cost to the customer and to improve the delivery time. And a lot of times, if you are doing a local assembly, you can reduce your cost, improve your delivery time and reducing cost again gives you an advantage over competition. So there's more than one factor outside of government saying that we want local content. Did I answer your question?

Yes. And so it's likely that you'll have like assembly somewhere else, sometime in the next 2 or 3 years?

Or sooner. For example, if some of our CHP products that we are beginning to do take hold in Europe, then we would be doing assembly out of Romania to deliver those products and to service them, and again to service and support them. South Africa would be important. If the quantities go up high, again, we'd be looking at fuel tanks and enclosures and assembly, solar ray structures, stuff like that. In terms of telecommunications work in Australia, that would be a country to also manufacture in. The difficulties in Australia is the high labor cost in country. So each country would have to have its own strategy.

Okay. And then just one final question, Arthur. In terms of you're being involved more with renewable energy, such as solar, wind or for those towers, do you have an effort in that area? Or is that just too much of a distraction at this point?

Solar is never a distraction. As you know, we were founded on producing solar powered vaccine refrigerators back in '79. The opportunity in solar keeps getting bigger and especially as the price of the photovoltaic modules drop. But the reason we haven't really seen solar take off in certain markets is that there is no companies there that can integrate the solar into a viable application, such as solar-powered air conditioning or solar-powered refrigeration or solar hybrid systems for telcos. The telecom market hasn't entirely embraced solar yet, they're moving in that direction. Their concern is theft of the solar and reliability of the solar. So we feel that our solar solutions solve some of the problems of -- even though the modules are inexpensive, you have the batteries. So we add the DC generator and a bit of fuel to offset the battery capital cost and maintenance cost of the battery. So by adding a little bit of fuel, we can reduce the solar system cost in half and cut the maintenance by more than half, just by burning fuel, a little bit of it.

And that concludes today's question-and-answer session. I'd like to turn the call back over to Arthur Sams, CEO, for closing remarks.

Okay. I'll keep it simple. Thank you very much for participating in our second quarter 2018 call. I hope to hear from you guys on our next quarter call. And in the meantime, watch our website and some of our announcements, and we will try to keep you posted.

Thank you.

Thank you.

And that concludes today's conference. Thank you for your participation. You may now disconnect.