Tecogen Inc (TGEN) 2014 Q4 法說會逐字稿

Good morning and welcome to the Tecogen fourth-quarter and 2014 year-end financial earnings conference call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). For your information, this conference is being recorded.

As a reminder, a recording of this conference call will be available for play back approximately one hour after the end of the call and will be remain available until Wednesday, April 1, 2015. Individuals may access the recording by dialing 877-344-7529 from inside the US, 855-669-9658 from Canada or 412-317-0088 from outside the US. Enter the replay conference number 10062381 followed by the #.

Now I would like to introduce David Garrison, Chief Financial Officer.

Thank you, Kate. I would like to read the Safe Harbor statement to start our call. This presentation contains forward-looking statements as that term is used in federal securities laws about our growth, backlog of orders, cash usage, gross margin improvement, attaining profitability, meeting our EBITDA and cash goals, adequacy of capital resources, our manufacturing improvements with cost reduction goals and our recent activities.

Forward-looking statements may be identified by words such as expects, goals, intend, plan and similar phrases. These forward-looking statements are subject to numerous assumptions, risks and uncertainties described in the Company's form 10-K and other recent filings with the Securities and Exchange Commission that may cause Tecogen's actual results to be materially different from any future results expressed or implied in such statements. Because of the risks and uncertainties, Tecogen cautions you not to place undue reliance on these statements which speak only to the date of this presentation. We undertake no obligation and specifically disclaim any obligation to release any revisions to any forward-looking statements to reflect events or circumstances after the date of this presentation.

I now turn the call over to John Hatsopoulos, Co-CEO.

Good morning, ladies and gentlemen. I would like to take this opportunity to congratulate our management and the guidance of our Board of Directors for the success that we had this quarter. As you probably have noticed, our gross margin rose to 40% from 26% in the third quarter and 40% from 33% the fourth quarter of 2013.

Our goal is to continue to have similar success in the near future and the (inaudible) that were looking at the big increases in backlog that we have.

With that I would like to ask Ben Locke, who is responsible for a major part of the success. And also after him, you will hear from Bob Panora, who is the genius that has created all these new technologies. Ben?

Thank you, John. It has been about three months since our last update with the exception of the Webinar that was held in February updating our progress on our emissions technology so I'm happy to have this opportunity to update all of you on our progress.

As a reminder to those you who may be new to our Company, Tecogen's core business model and mission is clear, heat, power and cooling that is cheaper, cleaner and more reliable. As John has indicated, we made good progress in the fourth quarter in three major metrics for our success. As you can see on slide three in the presentation, fourth-quarter revenues grew to approximately $6.4 million, a 54% increase over the third quarter. This brings our total revenues for 2014 to approximately $19.3 million, a 22% increase over 2013.

Secondly, gross margin rose to 40% in the fourth quarter as compared to 26% gross margin in the third quarter. This increase is largely due to the efforts mentioned on our last call to improve our manufacturing and vendor relationships so that our costs are as lean and competitive as possible. Bob will provide some more detail on these efforts in just a few minutes.

Lastly, as John mentioned, we are continuing to build a robust backlog of projects. Backlog as of March 20, 2015 was approximately $12.2 million as compared to $9.9 million at the end of the fourth quarter. While some of this backlog includes construction projects that extend into 2016, the majority of it will be realized in 2015.

We also reached some additional noteworthy achievements in the fourth quarter. Looking to slide 4, we shipped seven TECOCHILLs to a range of customers in the fourth quarter from universities to product manufacturers to JCCs. We are very pleased that our overall chiller sales in 2014 increased 184% from 2013. As the only natural gas engine driven chiller manufacturer, we are in a unique position to market these products.

We continue to grow our turnkey business as well with $3.28 million in turnkey revenues in the year for an overall increase of 35% over 2013.

Other major highlights since our last conference call include the sale of seven ILIOS water source heat pumps in February of this year. The ILIOS water source heat pump was introduced in early 2014 and along with our air source unit is beginning to demonstrate ILIOS's potential as the world's most efficient heat pump. To this end we have established a sales office in Florida to address opportunities not just for ILIOS but for CHP and chillers as well in Southeast United States and the Caribbean.

Next, we received several orders for the Ultra emissions after treatment system including the Gage Canal Water Pumping District and 130 kW generator retrofit system. I would encourage you all to watch the video on our website describing the generator retrofit project.

We also received our first biofuel system order which was also a retrofit project and is notable in that the engine system is replacing a decommissioned fuel cell at that location. Again, Bob will provide some additional information on these developments in just a few minutes.

Lastly as announced this morning, we received another turnkey project for a large residential building in New York City. This project is noteworthy for a few reasons. First, it reaffirms our core market to provide significant savings to buildings with high electric rates similar to New York City but more importantly it demonstrates Tecogen's reputation as the most efficient and reliable choice for dependable operations in both grid tie and grid outage situations.

Tecogen is the only CHP manufacturer that has demonstrated reliable operations for prolonged periods of time during grid outage situations or blackout conditions such as was experienced with Hurricane Sandy. As mentioned in the press release, the existing cogeneration system in this building did not offer a black start operation.

So all in all we are very pleased with our results for the fourth quarter and I am fully confident we will continue improving our results in 2015.

With that I would like to turn the call over to Bob to provide more detail on the progress of our Ultra emissions technology, ILIOS product development and overall operations, service and turnkey progress. Dave Garrison will then provide some more color on our financial results. Bob?

Thank you, Ben, and John also. Today I will provide a review of technology and what we are doing to improve company operations especially involving issues highlighted in our last earnings call.

So let me begin with technology starting with the Ultra emissions system. In Q4 we received orders for systems in three distinct applications. The first was as Ben said Gage Canal Company in Riverside California for a 15-liter Caterpillar engine. It is a near identical kit to our original water pump installation started in 2013 in Paris, California. The Gage Canal sale was precipitated by management visits to their neighbor's installation. They liked what they saw and now they want to evaluate the system for their engines as well.

The second sale was for a 50-liter biofueled engine located in a wastewater plant in Merino Valley, California. It will replace a decommissioned fuel cell as a recipient of the biofuel gas. Here the driver was new stricter regulations for biofueled engines that will start in 2016.

The third sale was to an industrial customer with a requirement to upgrade their emissions performance to that of their standby generators. Their engines range in size from 7 to 12 liters and like all generators in the area, they are exempt from super strict standards that we face for our cogeneration products as long as they limit their annual operation to 200 hours or less. But this industrial customer has a requirement for greater annual run hours, about 800, which of course would violate the permit conditions. So their contract for Tecogen is two phases. Phase 1 is to demonstrate performance in our Waltham lab on a newly purchased 130 kW generator from a well-known manufacturer.

In phase 2, we deliver that system to their facility and supply kits for the remaining generators on site.

As you may recall, we hosted a webinar on February 3 to describe the generator project and its significance.

Let's take a look back at some of the data I want to highlight from that February Webinar.

So in my first slide, steady-state emissions from the generator as purchased are presented. The graph to the left shows our measurements at full load and the graph to the right shows low load operation. The emissions at full load are typical of conventional technology but not sufficient for the permit requirements. Carbon monoxide needs to be a 7 PPM for the permit and the engine of course you can see exceeds that by about 30 fold. At the low load point, the engine is noncompliant in both NOx and CO which is then indication of poor engine control which is common for these types of systems.

I want to note that the particular generator that we are testing is really -- was bought with state-of-the-art emissions controls from that manufacturer. So this is a state-of-the-art performance.

On the right side of my second slide -- I'm sorry, on the left side of my second slide is the data for the stock emissions system but during a transient loading. That is when you put a power level, set a power level and then suddenly take a step change. After the load change the emissions are destabilized for several minutes which you can see and then on the right side, we did the same thing with the Tecogen Ultra system added to that engine. And as you can see before the step change, the emissions are unmeasurable, you can't even detect them with the emissions analyzer more or less. And then when the event occurs, there is no perturbation at all. We have a very wide control band and it facilitates this very steady performance.

So the current status of the order began as I discussed in February, we have moved further along from that. We provided all the data to the customer. Needless to say they are very pleased and have initiated the permit process for our test generator and the others that they own.

I want to talk a little bit about the significance of this project. It shows that a simple, low-cost, off-the-shelf emergency generator can be outfitted with a Tecogen system to become a clean source of energy. Very similar in footprint, pollution footprint to a fuel-cell which is quite remarkable. There is actually a wide application for such a system. Ordinary generators that mostly sit idle could instead be dispatched to operate weekdays to offset utility peak demand charges. Utilities will actually pay customers directly to curtail load in demand response programs. They notify the customer a day before the generators go on at the prescribed time and there is a payment from the utility for that curtailment.

In fact, we are developing a proposal for a customer in central California that has several buildings that he would like to apply this concept to.

So I want to shift topics for a moment and talk about the ILIOS water source heat pump that Ben mentioned. The water source heat pump was introduced early 2014 and has really generated very strong interest. The seven unit biotech order announced a month ago is typical of how this product will be applied and I want to speak to how it works and its potential.

This product like the earlier ILIOS air source heat pump takes heat, thermal energy from one source and moves it to another. But referring to my third slide which is up now, the water source unit takes the heat from a low temperature water stream and moves it, moves the energy to a second one that needs to be heated. So many of us are familiar with geothermal heat pump which is groundwater well essentially as the low temperature source but the biotech customer is doing something that is different that is very clever.

As the lab needs both heating and cooling at the same time, the low temperature source becomes the chilled water loop and the heat recipient is the hot water system that circulates in parallel for the laboratory. So for each thermos this slide depicts, for each thermal of natural gas into the ILIOS unit, that customer will get two therms of hot water and one therm of cooling, a threefold gain in the savings of the gas and electric bill.

Buildings that have the need for simultaneous heating and cooling are of course very common, hospitals, hotels and what have you. They all have the simultaneous need and the savings from the financial perspective are excellent as they are in effect doubled with this double effect system.

The last topic I want to discuss is operations. In our November call, we discussed the need to improve margins and described various actions we were taking. Our efforts here have been productive as Ben talked about earlier and as one would expect, collective results of many actions. So today I just want to provide some of the highlights.

In the manufacturing area, we brought in an experienced professional to revamp our processes and as we expected, he found numerous areas to improve, better management of our suppliers, supply chain management and so forth. Also the shop floor is being reorganized to use a cellular system to minimize labor and increase the throughput and it has been very effective. The new method, this new cellular method is up and running for the cogeneration products and the ILIOS units will come online with this type of system next with this new biotech order that we have spoken about.

We have been also focused on service, the service group and this effort goes back quite a few months and has been especially effective in improving margins. As we announced previously, we placed a service center in Brooklyn in the Brooklyn area where the concentration of units has increased sharply and the impact has been immediate, improved run times, lower cost all because the service folks have less distance to travel to get products and so forth.

We have also initiated regular interdepartment meetings with the service group and this has been very productive relating to improving the myriad of products and the myriad of service related activities including training. That has been a big help for us and we are going to do that regularly going forward.

In terms of the turnkey business, we have a thriving turnkey business and we also needed to improve margins there as well and for this business our improvement is focused on several areas, I will talk about two. Contract terms, carefully written contracts really are very important for these projects and we have made careful adjustments to establish clear accountability and delineation of responsibility. And when the contracts are clear, precise, say exactly who is doing what, things go very well.

The other thing we have done to improve how these projects go is we recognize that we need a strong hands-on presence during construction to keep the work sorted properly and to coordinate commissioning. We created a new specialized position in the company. We took one of the service guys who is particularly capable and experienced and we made him a dedicated to the installation projects whereby he travels from project to project, really gets into the details, sees the projects through to the end and then when commissioning comes, things go smoothly.

So that is some of the things that we are doing in the operation and as I said, it has been very effective and we are going to continue pressing forward along these initiatives.

And that concludes my summary of operations and technology. I am going to turn the microphone over to Dave Garrison and he has a few more added insight to the financials and so forth.

Thank you, Bob. The gross margin improvement to 40% represents -- in the fourth quarter, represents the expected management goals of the consolidated margin for our segments going forward. The fourth quarter should not be an isolated event but representative of management's goal and the result of our improvements going forward.

With our continued growth, manufacturing has been able to maintain existing contribution margins with the reductions in labor and material as Bob spoke of. And the expenses to any improvements going forward should be offset by those savings. Beginning to meet the operational scale has been a key component of this margin improvement.

The turnkey business will continue to invest those increases in margins in staff to make improvements with this expanded service offering. The service and maintenance segment which Bob spoke of with the improved training process will be meeting its goals for consistent contribution from this reoccurring third of our total revenues.

On the operational expense side, general administrative expenses were higher in 2014 than 2013 mainly due to the increased legal costs and audit fees and some overlapping staff as the company transitioned to being public. The selling expenses were relatively flat as a percentage of sales and we expect this going forward. We also maintain our R&D expenses at the current level and we did so year-to-year. With these spending levels, management believes that EBITDA breakeven is attainable going forward.

Management's goal of near-term profitability is not only attainable but is our focus. During 2014, $1.75 million in cash was used by our expansion in an increase in AR and inventory. This combination with our losses was the primary use of cash. Going forward management is improving cash flow by changing our sales contract structures, implementing vendor consignment for materials and dramatically reducing our losses. With those three elements, we again focus on near-term profitability and EBITDA breakeven.

I now turn it over to Ben Locke for some closing remarks.

Thanks, Dave. I did want to spend just a few minutes looking at this last slide looking forward and indeed thinking about some of the overall trends that are working in our favor right now and in the future.

Firstly, lower natural gas prices really do help the economics of our cogeneration and chiller systems. While lower energy prices are sometimes perceived to be detrimental for drop in clean energy technologies, that is not entirely the case for the markets we are addressing.

Feel costs are only a contributing component to the high electric grades. Transmission, distribution and infrastructure costs dominate electric rates in areas that Tecogen is focused on. Despite decreases in natural gas prices, we have not seen any sign nor do we expect any significant drop in electric rates in our key market areas.

As much as some of our customers would like to hear differently, so long as utility companies strive to keep up with required infrastructure improvements, rates will continue to increase. The only question is how drastic these increments will occur.

Next, I wanted to call your attention, you may have seen the recent Executive Order signed by President Obama setting a goal for reduction in greenhouse gas emissions by 40% in 2025. Cogeneration systems will play an important part in reaching this goal. A typical Tecogen inVerde system avoids approximately 600 tons of greenhouse gas emissions per year. Each year Tecogen receives a certificate from the EPA certifying avoided greenhouse gas emissions for the systems that we report to them. In 2014, Tecogen Systems have avoided an estimated 95,500 metric tons of carbon dioxide as compared to conventional energy sources.

The 206 CHP projects that Tecogen has reported to EPA since 2006 have collectively avoided an estimated 570,000 metric tons of emissions. We believe these new federal emissions reduction goals will encourage even more adoption of our CHP systems in the United States.

Lastly, relating to the Ultra emissions system, as awareness increases about the harmful health effects of smog, states are increasingly adopting strict limits on criteria emissions such as CO and NOx. All indications are that this trend will continue both in the US and eventually overseas. Our Ultra emissions system technology that Bob described is ideally suited to meet and exceed these limits.

As demonstrated in our recent projects, our emissions systems have been shown to be retrofittable to a variety of natural gas engines, reliable and robust in operation, and cost-effective when faced with punitive regulatory actions. As we continue to develop this technology, we can foresee eventually expanding the systems to larger scale markets such as transportation vehicles such as for trucks, engines or other natural gas fleets.

So in conclusion, our goal for 2015 will be to build on the positive developments we have demonstrated here in the fourth quarter. Specifically we expect continued growth of unit sales in our core cogeneration and chiller systems. We also expect continued growth in our ILIOS products to include geographies outside the continental United States. We expect our turnkey sales to continue robust growth. As mentioned in our call, our turnkey projects establish a basis for long-term profitable service contracts.

Lastly, we expect increasing orders for our Ultra emissions retrofit system. As Bob mentioned, retrofitting these systems on generators could open the door for lucrative demand response contracts.

So in closing, we have very bright prospects for growing Tecogen and we look forward to sharing developments with you as they occur.

With that I would like to turn it over to the operator for questions.

(Operator Instructions). Colin Rusch, Northland Capital Markets.

Well done on all the progress, really glad to see all of this happening. Walk us through a couple of points here. Sorry I'm limited to one question but one, if you could give us an update on any progress that you have made with licensing the emissions technology for mobile applications?

Then obviously you have done some analysis on the breakeven point. If you could give us a sense of where you need revenue to get to to hit that EBITDA breakeven and if there is some mix implications in terms of how you would get there. Just walk us through what that would look like.

I will look at the second question first and then I will ask Bob to make a few comments about the emissions technology.

As you can see on our fourth quarter, we are right at breakeven and so we consider this kind of to be the point that we should be considering going forward to maintain breakeven revenues and cash.

Okay, great. How should we think about operating leverage with the platform?

Sorry, can you repeat that question, Colin?

Operating leverage, so if we think about incremental revenue, should we be thinking about incremental operating margins kind of on the 5%, 10% range? What do you think is the right leverage number to think about as we grow revenue?

Colin, the leverage that we have gotten off of margin growth currently, we actually do not expect to yield any improved margin going forward with sales at least not in the near future because any of the leverage that we would gain operationally we would gain we would be rolling back into the cost of those improvement. So we don't see any more pickup on margin as revenues increase in the near term. I do caution that is a near-term measure, not a long-term measure.

Okay, awesome. And then would love to hear about the mobile applications you guys have.

Yes, this is Bob Panora, Colin. How are you? Good to hear from you. I can't say too much about what is happening there. But I will tell you that we are having discussions with one trade industry group that wants to introduce us to the folks in their industry after we presented them the results recently. So that is a work in process but nothing firm but discussions.

As you can probably guess, Colin, those markets are particularly -- you have to be particularly careful how you proceed. As I think we mentioned in our February call, we are being very deliberate with how we assemble our intellectual property and how we get our patents together before we go too far in any of these discussions. So suffice to say as Bob said, we are making some progress but we are being very deliberate and careful in terms of our intellectual property protection.

Okay, brilliant. Thanks so much, guys. I will hop back in queue.

Walter Nasdeo, Ardour Capital.

Thank you very much. Good morning, gentlemen. Listen, this is a nice quarter for you guys. I am very interested to maybe get just a little bit more color and information on the operational improvements that you have been making over the course of the last half year or so and how that is leading into inventory management and maybe how you are turning your inventory and deploying your inventory? And then just as kind of a tail to that, how the supplier network is developing so that you have some redundancy there so when things take off you will get buying power and you will also have the ability to pick up from a different supplier if somebody is lacking something or can't deliver on a schedule that you need. So if you can just give me a little bit of color on that I would appreciate it.

Walter, that is a mouthful. Let me start off with the inventory. We have redundant suppliers in some areas and with those suppliers what we are going through right now is a process of having them stock our materials at their location so that we can try to keep that inventory at the level it is at now going forward so as to not have that absorb the cash as it has in the past.

Also, when it comes to redundant suppliers, I will say there are some critical components where we do not have existing redundant suppliers now but those components to be frank are more of a commodity and we are currently working to test and authorize substitute materials in those areas.

When it comes to turns, one of the things we have also begun doing is to take the long, hard analysis for each of our service centers to understand how to maintain the inventories at our service centers to give our customers the best response but also to keep that at the lowest level possible so sort of that balance between those two elements.

So inventory is always a focus and our goal is to keep that at the level it is at now going forward even with the increase to production and operational leverage.

Very good, very good. I appreciate the clarity on that, guys. Thank you.

(Operator Instructions). Roger Liddell, Clear Harbor Asset.

Yes, good morning, gentlemen. Just one quick clarifying question and then to the substantive one. As I recall, backlog figures never include maintenance revenues. So could you just touch on that for a moment?

You are absolutely right, Roger. The backlog consists of unit orders and turnkey but not our service contracts. In many cases, we do get a service contract with our orders. In fact, as I think I mentioned in previous calls, many of the incentive programs, New York, New Jersey, Massachusetts, require these sites to sign a maintenance contract with the product manufacturer. In New York, it is a five-year requirement. In New Jersey, it is a 10-year requirement. So as you said, the service maintenance contracts are not included in our backlog.

Okay, thank you. Now for the substantive question and you just touched on it a moment to ago, the incentive programs, the New York, New Jersey, 1800, 2000 a kilowatt I know there are other figures that vary from state to state in New England and perhaps outside the Northeast. But the issue I am driving at is how dependent do you view -- maybe I should reword that, is there a vulnerability to the outlook on revenues from what could be politically derived reduction or elimination of those incentives?

Roger, that is a good question and being the face out there in the sales effort, I would say absolutely not. The incentives are nice, they help. They bring the pay back down a bit but even absent the incentives and indeed a lot of the systems we are selling are being installed without incentives. Even without incentives, we get paybacks that are typically within the comfort range of our customers of just a few years. So the incentives are nice, we will take them but we don't need them and I am not too worried about our ability to continue our revenue growth even if the incentives start to subside.

Recently I spoke with a mechanical engineer down in Florida. The issue was peak loads and application of Tecogen equipment to the opportunity in Florida and he ventured the thought that with the passage of time and that the context was not many years, that Florida Power & Light might require commercial customers to go off the grid during the daytime because of the enormous expense of trying to make the grid robust enough for those transient peak loads.

If something like that were to happen, it could be a tremendous opportunity. Is it conceivable that Tecogen might partner with a utility at some point as simply another distribution aspect of the company's current plan?

That is a great question, Roger. You know, one of the real underselling attributes of our technology is our micro grid feature which as you know allows these units to operate -- and I'm going to turn to Bob in a minute for a little more color but basically to operate off grid. We do have a site in New York that has got six system that is completely off the grid. They don't have any Con Ed electricity going there and these six systems all operate stably and allow the business to run without any need from the utility.

So I absolutely agree, if there is opportunities to partner with the utility because some businesses need to get entirely off the grid and take advantage of this micro grid infrastructure, that is a perfect fit for Tecogen.

Bob, do you want to mention a little bit more about that?

Yes, that is a very good summary, Ben, but four or five years ago when we were talking about micro grids, I don't think most people had heard that word or knew what I was talking about but it is all over the news today. Micro grids, peak load problems because of solar has changed the peak demand in California. So all of our technologies really play into this. The chillers that we sell are really a way of avoiding the peak demand.

It takes the peak right out of your air-conditioning system and of course the micro grid that has been built into the inVerdes is absolutely designed just for this type of operation, dispatch it in and out of the grid when you need to. And that was my vision when we started developing it that it could do that for an outage or a peak demand situation.

Okay, thank you.

There are no other questions at this time.

We thank you all both on our Tecogen side and on our investor side and we will talk to you again by the end of next -- by the conference call of this quarter, actually the quarter ends at the end of this week. So thank you very much.

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