Ocean Power Technologies, Inc. (OPTT) Q2 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Ocean Power Technologies' Fiscal Year 2012 Second Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded and webcast. I will now turn the call over to the Chief Financial Officer of Ocean Power Technologies, Mr. Brian Posner.

Thank you. Welcome to Ocean Power Technologies' earnings conference call for the second quarter ended October 31, 2011. OPT issued its earnings press release earlier today, and this coming Monday we will file the company's quarterly report on Form 10-Q with the Securities and Exchange Commission. All public filings can be viewed on the SEC website at sec.gov, or you may go to the OPT website, oceanpowertechnologies.com. With me on today's call is Chuck Dunleavy, our Chief Executive Officer. Please advance to Slide 2 of our presentation. During the course of this conference call, management may make projections or other forward-looking statements regarding future events or financial performance of the company within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. As indicated in this slide, these forward-looking statements are subject to numerous assumptions made by management regarding future circumstances over which the company may have little or no control and involve risks and uncertainties and other factors that may cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. We refer you to the company's Form 10-K and other recent filings with the Securities and Exchange Commission for a description of these and other risk factors. I'll now turn the call over to Chuck Dunleavy, OPT's CEO.

Thank you, Brian, and thanks to everyone for being with us today. First, turning to Slide 3. Let me briefly review our major accomplishments of recent months. It's been a very active period. We deployed our unique autonomous PowerBuoy for the Navy's Littoral Expeditionary Autonomous PowerBuoy or LEAP program off the coast of New Jersey in August. Having performed very well, including surviving Hurricane Irene, the LEAP PowerBuoy represents an exciting stage in the development and delivery of our autonomous PowerBuoys. The ocean trials of our PB150 PowerBuoy in Scotland came to a successful conclusion in October as planned. As previously discussed on our conference calls, we are very pleased with the performance of the PB150 and are now speaking with various potential customers and government entities, who may wish to utilize the PowerBuoy for commercial applications in the future. Most recently, we announced an important collaboration with Lockheed Martin, plus significant progress in Spain as I'll review further momentarily. OPT will shortly retrieve its PB40 PowerBuoy device, which has been deployed at the test site of the U.S. Marine Corps Base at Oahu, Hawaii, following the successful completion of this demonstration project. During its 2-year period of deployment, the buoy became the first-ever wave energy device to be connected to the U.S. grid, survived tsunami wave conditions and achieved over 5.5 million cycles in operation. In addition, the system features our new direct drive power take-off system, which is a major technology upgrade from our previous hydraulic power take-off. The U.S. Navy remains a valued OPT partner, and we are in discussions regarding the next stage of prospective commercial-scale wave power stations in Hawaii. We ended the quarter with a backlog of nearly $9 million as compared to $7 million at July 31, 2011, and also with cash-on-hand of approximately $40 million. We are very optimistic about the future of Ocean Power Technologies and what 2012 will bring. But now let me go into a little more detail on our major initiatives. Turning to Slide 4. I'm happy to say that our LEAP autonomous PowerBuoy performed well during its ocean demonstration, providing persistent power in all wave conditions, withstanding the 50-foot high waves of Hurricane Irene. The LEAP PowerBuoy which was taken out of water several weeks ago at the completion of its ocean trials, as provided under our contract with the U.S. Navy. We're very encouraged by the potential market for our autonomous PowerBuoy product. As a reminder, the autonomous PowerBuoy operates totally independently and can generate power in all wave conditions using OPT's proprietary power management system. This includes persistent power generation in the ranges needed for sophisticated vessel detection and tracking systems for maritime surveillance along coasts. Systems currently being used for remote power is the often utilized diesel generators, which require frequent maintenance and fuel replenishment and can be very noisy. The autonomous PowerBuoy is also appropriate for oil and gas platforms, offshore fish farming and desalination. Consider the number of oil and gas platforms worldwide that could benefit from a clean, quiet and persistent source of power right from the waves where they operate. Given its smaller size and variety of applications, the autonomous PowerBuoy is seeing increasing interest and we're marketing it aggressively. We believe there's a bright future for such buoys across a multitude of markets. Turning to Slide 5. I'd now like to provide an update on our project in Reedsport, Oregon, and the latest on our collaboration with Lockheed Martin. This agreement with Lockheed is an important step for the commercialization of our PowerBuoys. Working on the Reedsport project, Lockheed will provide their expertise in the areas of design for manufacturing and systems integration to enhance our proprietary technology. We're committed to improving power conversion efficiency, reliability, manufacturability and lowering the cost of marine operations and maintenance. Lockheed's expertise in large-scale manufacturing and supply chain management will greatly assist us in reaching these goals in a timely manner thus making our applications more attractive to our potential partners and customers. We have worked with Lockheed very well in the past and expect this latest agreement will further cement the strong relationship between our 2 companies. With regard to our progress with the Oregon project, land testing of the power take-off and control system is now in process. OPT is working on a rigorous land testing program, and we expect the buoy to be deployed in mid-2012. The PowerBuoy's direct drive, power take-off device will be more durable, involve less maintenance and provide better long-term efficiency than the previous hydraulic power take-off design. It's our expectation that this first PowerBuoy in Oregon will lead to the second phase of the Reedsport project, in which we plan to build and deploy 9 additional PB150s and then connect all 10 buoys to the Oregon power grid using an undersea substation pod, for a total power output of 1.5 megawatts. The development of the complete wave power station is subject to the receipt of final licensing from the U.S. Federal Energy Regulatory Commission, and additional project funding which we are currently pursuing. Now let me give you an update on developments in Europe, as shown on Slide 6. We recently announced that we would begin work under the European Union's WavePort project under the auspices of the EU's Seventh Framework Programme for research and innovation. We were awarded in 2010 a grant worth approximately $3 million as part of a total $6.2 million award given to a consortium of firms, including OPT, to deliver a wave power device for that project. More specifically, OPT will be responsible for the design, supply and deployment of the PowerBuoy and related systems for that WavePort project. In addition, we will work to advance the energy conversion system of our PowerBuoy through the development of the new wave assessment model. This model will be able to assess the characteristics of each incoming wave before it reaches the buoy, thereby providing more time for OPT's proprietary electronic tuning capability to react. Such technology is expected to significantly boost the power output and reduce the cost per megawatt hour of energy produced. Our belief is that this will enable more energy to be delivered per ton of steel used for fabrication than many competing renewable energy systems. This new technology will then be showcased in the PB40 PowerBuoy to be installed at an existing mooring site off Santoña, Spain on the North coast. This site was previously developed by OPT under a contract with Iberdrola and other partners. The WavePort PowerBuoy will draw an experienced gain to the development and grid connection of our PB40 in Hawaii, as well as the successful in-ocean operation of our PB150 deployed off Scotland. While we are not yet providing a precise timeline with the regard to when the Waveport PowerBuoy will be in the water, we do expect the grant to expedite the development of this next-generation energy conversion system during 2012. Turning to Slide 7. I'd like to give an update on our overseas initiatives in Japan and Australia. Starting with Japan. We're seeing an increase in business development activity and are working hand-in-hand with our partner there, Mitsui Engineering & Shipbuilding. We've already conducted engineering in connection with initiatives to develop a new mooring system for our PowerBuoys customized for wave power stations off Japan, and have also performed tests at Mitsui's wave tank facilities. Our relationship with Mitsui is expected to provide the basis for the development of a commercial scale OPT wave power station in Japan, which would be conducted in stages. These phases would commence with site development and planning work, progress to a technology demonstration and proceed to a power station with an initial capacity of several megawatts, scalable to 10 megawatts or more. The Japanese government remains very interested in our technology given the impact of this year's earthquake and tsunami, and we are optimistic that we will be able to report progress here in 2012. With regard to Australia, it is important to note that the Australian government passed a new Carbon Tax Law in November. The initial carbon price is set at $23 per ton. Revenue from this tax will fund $10 billion for investment in renewable energy, low pollution and energy efficiency technologies; another $3.2 billion to fund R&D, demonstration and commercialization of renewable energy; and $200 million to support business development of clean technologies. We believe this development will provide added momentum to the special-purpose company, Victorian Wave Partners, or VWP, or VWP, formed by Leighton Contractors. VWP was awarded the AUD 66 million grant by the Commonwealth the government for the purpose of building a 19-megawatt wave power station using OPT PowerBuoys. This project is expected to be off the coast of Victoria, providing enough energy to power up to 10,000 homes. We continue to explore strategic alternatives that could expedite commercialization and also project financing. I'll now turn the call over to Brian Posner, who will discuss our financial performance in detail.

Thank you, Chuck. As noted on Slide 8, OPT reported revenues of $1.5 million for the second quarter of fiscal 2012, as compared to revenues of $1.9 million for the 3 months ended October 31, 2010. This decrease primarily reflects lower revenues related to the company’s PB150 PowerBuoy being prepared for deployment off Reedsport, Oregon, and reduced revenues for the U.S. Navy's LEAPs and DWADS programs compared to the second quarter of fiscal 2011, as these programs are near completion. OPT's contract backlog as of October 31, 2011, was $8.8 million compared to $7.1 million as of July 31, 2011. This increase -- the increase is due primarily to the contribution of a $3 million grant tied to the company's WavePort project in Spain as Chuck discussed. The operating loss for the 3 months ended October 31, 2011 was $4 million, as compared to an operating loss of $5.7 million for the 3 months ended October 31, 2010. The reduction in operating loss year-over-year was due primarily to a decrease in product development costs, principally for the PB150 system. The net loss was $3.9 million for the 3 months ended October 31, 2011, compared to $5.5 million for the same period in the prior year. This decrease in net loss was due primarily to the decline in operating costs, partially offset by a decrease in interest income and a lower foreign exchange gain. Interest income for the quarter decreased to approximately $126,000 compared with $161,000 for the same period last year. This decrease was largely due to the decline in average yield and in the total invested cash from marketable securities. For the 6-month period ended October 31, 2011, OPT posted revenues of $3.4 million as compared to revenue of $3.2 million for the 6 months ended October 31, 2010. This increase primarily reflects revenue recorded for the U.S. Navy's LEAP program, the development of the company's next-generation PowerBuoy, the PB500, and commencement of the WavePort project off the coast of Spain. The revenue increases in these projects were partially offset by decreases in revenue from the company's PB150 in Oregon and the U.S. Navy's DWADS program. The operating loss for the 6 months ended October 31, 2011 was $9.2 million, as compared to an operating loss of $12 million for the 6 months ended October 31, 2010. The favorable reduction in operating loss year-over-year was due primarily to a decrease in product development costs, principally for the PB150 system off the coast of Scotland and the company's Hawaii project with the U.S. Navy, as these projects neared completion, an increase in gross profit and lower SG&A expenses. Gross profit for the prior year 6 months ended October 31, 2010, was negatively impacted by a reduction in revenue of $231,000 due to a change in the company's estimated revenue, recognizing connection with OPT's project off the coast of Spain. The net loss was $8.9 million for the 6 months ended October 31, 2011, compared to $11.8 million for the same period in the prior year. This decrease in net loss was due primarily to the decline in operating loss and lower foreign exchange losses, partially offset by a decrease in interest income. Interest income for the first 6 months of fiscal 2012 increased to just under $250,000 from nearly $400,000 in the prior year period, reflecting the decline in our yield and in the total invested cash and marketable securities. OPT recognized the foreign exchange gain of $20,000 for the 6 months ended October 31, 2011, as compared to a foreign exchange loss of approximately $170,000 for the same period last year. The difference was due to the relative change in the value of British pound sterling, Euro and Australian dollar, as compared to the U.S. dollar during the 2 periods. Turn to Slide 9. On October 31, 2011, total cash, cash equivalents, restricted cash and investments were $39.9 million. Net cash used in operating activities was $7.9 million for the 6 months ended October 31, 2011, compared to $9.4 million for the same period last year. As previously stated, OPT expects the rate of its cash outflows to decrease in fiscal 2012 reflecting completion of Ocean trials for its PB150 off the coast of Scotland. Now I will turn the call back over to Chuck for some closing comments.

Thanks again, Brian. And now turning to Slide 10. In the coming months, we expect our momentum to continue in several fronts. First, we expect to complete land testing of the PTO, the power take-off for the PB150, to be deployed off the coast of Oregon. Second, we plan to report progress on the PowerBuoy system for the WavePort project in Spain. Third, we'll release data from the LEAP PowerBuoy deployment. And finally, we look forward to report on favorable results from our ongoing business development efforts. Before opening the call to questions, I want to also mention that we recently announced 2 new members of our Board of Directors, David Davis and Bruce Peacock. David, the Vice President of PJM Grid Development for an independent power producer, NRG Energy, brings strong relationships with regulators, legislators and other stakeholders within both the renewable and conventional energy sectors, with over 20 years of applicable experience. Bruce, currently the Chief Business Officer of Ophthotech, a bio-pharmaceutical company, has over 30 years’ experience at companies with international operations, bringing new products to commercial status in regulatory-driven markets. We welcome to Ocean Power Technologies both of these individuals who have already played active roles in shaping our strategy for 2012 and beyond. As always, we thank our investors for their continued interest and support, and we remain very excited for OPT's future within the wave energy sector. With an active business development pipeline, strong relationships with industry leaders, such as Lockheed Martin and Mitsui Engineering & Shipbuilding, the future looks bright. We remain focused on the fundamentals, commercialization of our PowerBuoy products, new market opportunities and cash management, and we look forward to reporting progress in 2012. This concludes our prepared statement for the second quarter review and we'll now open the call for questions. Please go ahead, operator.

[Operator Instructions] And our first question will come from the line of Rob Stone with Cowen and Company. [ p id="26858707" name="Robert Stone" type="A" /> I wanted to dive a little deeper into the LEAP market opportunity. Can you give us some sense of how to think about sizing the market, would be the first part of the question. And second, in your preliminary explorations, how would you rate the criteria that would lead operators of facilities that would use the product to choose it versus diesel? Is it mainly the reliability and fueling issues associated with diesel? Or how do they think about the tradeoffs?

This is Chuck speaking. First of all, with respect to the initial part of your question about market size, we view the total worldwide market for autonomous, our autonomous PowerBuoy, as being an up to $10 billion market for equipment. Remember that this encompasses not only oil and gas, which would be driven generally by rig count, which are very significant worldwide. Also in addition to the oil and gas, we believe that maritime security, homeland security, is also a very large burgeoning market. One that we view as addressable, not just with respect to the United States, but also U.S. has a number of very strong defense partners with reciprocal defense agreements. And another area is with respect to aquaculture and fish farming as increasingly such activity is driven off the coast to avoid pollution. And that creates a problem with respect to power out there in deeper oceans. So we view it as a very large and substantial market. And one that is of the size that I mentioned and articulated at the outset of my response. With respect to the criteria that some of these prospective customers might use, one thing that is really neat about the success of our LEAP system is that we were able to demonstrate power production in very wide range of wave conditions, which include not only the Hurricane Irene, but also nonexistent waves. And that in that latter case, we have an onboard power management and storage system. So the bandwidth of performance time or just availability, the time within which we're producing power is very, very wide and extremely close to baseload power. So one criterion that they're looking at is with respect to just baseload power production. They can achieve that for diesel as long as they have enough in the way of redone diesel systems. So one interesting advantage to our power solution for them, and I think an important criterion, is the fact that on a cost basis for the -- to meet the total amount power needs, we believe it could be less cost associated with ours than the redundant diesel systems that in addition will require frequent repairs and also, of course, the refueling of them. Other aspects that are very important to oil and gas is that if you think of any individual platform, it has a certain amount of activity that occurs on platform, directly below it, that is to say, and then within a rather small -- relatively small radius outside or around that platform. With our system, we are able to extend that radius of operations because they are no longer limited by power lines that extend to whatever activity may be undertaken away from the platform. And all of a sudden, they can go a lot further out because the power source is right out there at wherever the operations may occur. So that's another very crucial criterion I think that is being looked at very actively, and certainly is part of the good feedback that we're getting in an initial basis in -- as we note of our business development activity with the oil and gas industry. So I hope that gives you a little more color about how we see some of the advantages and just the pure criteria that I used to assess us versus diesel.

That's extremely helpful. Do you have a sense of what the average nameplate would be for this kind of installation? I imagine it would vary quite a bit from something smaller for surveillance versus something bigger for an active operation like an oil rig.

Well, you're exactly right. For some of the activity that may be taking place again to that climate about the radius emanating from the hub or from the main platform, the power requirements for much further out, which includes such things as bathymetric surveys, also some of the heating systems that might be required to facilitate the flow of liquids, and also the defense or security measures. Those would be lower power, and to answer your question a little more specifically, would be up to a massive 10 kilowatts. Then as we focus instead right at the platform and the power needed at the platform, our PB150, the 150-kilowatt rated system, would be well-suited to the power needs of, especially the smaller autonomous platforms, of which there are many out there them now. As you might consider the power requirements for larger platforms than several PB150s would be apt for that. And again it underscores the point that the same core PowerBuoy technology that we sell into the utility grid connected markets is virtually identical to that which we're selling in these autonomous markets.

Great. A final question if I may, related to the PB150. I think on prior calls you've said the CapEx might be something approximately $4 million a megawatt. With the improvements to the direct drive, do you have a sense of what as a -- O&M might look like for that system?

The O&M? The way we've approached that is that starting with that $4 million per megawatt, which is in large production volumes of 400 buoys per annum, by the way, the related cost per kilowatt hour target is $0.15. Of that $0.15, Rob, about 20% of that is represented by O&M. So I'm answering your question not in absolute dollars but in terms of the portion of the total cost of energy.

And our next question will come from the line of Gerard Adams with the National Inflation Association.

I just wanted to first congratulate you on the new grant, and I can't believe how undervalued the company is right now. I was wondering if you can just touch base on how you plan on cutting cost to get the burn rate down, and just the timeline on some of the upcoming projects?

It's Brian. First of all, we've taken a hard look at our fixed cost structure. We're not a build-it-and-hope-they-come type of company. We've reduced costs, such as the A market, we've looked at our legal fees, we looked at our insurance costs. So I think we've done a very prudent job. In fact, our headcount is slightly down from about a year to 18 months ago. In terms of margins, it's basically about increasing production efficiency and effectiveness and growing our business, which obviously will help us absorb overhead. And so we have a very keen eye on both our cost structure, and obviously, our cash flow and will continue to do that.

I would add as well, Gerard, that one of the major progenitors of our cash burn in prior years has been from the R&D spending. And going forward, the majority, in fact virtually all of the ongoing developments associated with our PB500, would be externally funded from grants, other funded development contracts. And we've been very successful to date so far having brought in, USD $6.2 million towards the PB500 development. Also, we see, as we kind of look out for this year and then the next few years, in addition, what had been in prior years, a major a source of burn associated with the development of the PB150, will realize or result in a far decreased amount of spend related to our PB150, as we completed the Scotland PB150. And then in addition, and this kind of goes to your second question about the timeline of projects, as we look to complete the PB150 for Reedsport in 2012 that too would result in a significant decrease in any R&D spend related to that particular 150. So in a nutshell, reduced R&D spending would be one way in which we see a very significant reduction in cash burn as it might be compared to prior periods. And then again, on a timeline of projects, I addressed that part of your question with respect to the Reedsport system. Also the WavePort system, we haven't given specific guidance on when we expect that to go in the water, but we're really going all out during calendar 2012 to bring that whole project well along to a point of completion. So on our near-term buoys in the water target certainly include both Reedsport as well as that WavePort system.

And our next question will come from the line of Robert Littlehale with JPMorgan.

Just a couple of quick questions. PB500 -- is the direct drive take-off system going to be utilized on the PB500? Is that clear?

Yes, indeed. In fact, just to add one point. Also we have a lot of work on-going to significantly modularize that direct drive system. And we're already going to be implementing that on the WavePort project. So the PB500 will really benefit heavily from not only direct line but also this modularization that I just mentioned.

And then as it relates to -- is there any way to determine just in terms of FERC's decision as it relates to Reedsport? Is there a certain amount of time that you envision that they'll finally come back and make a determination?

Well, very broadly, we do expect a final decision on that during calendar 2012. But we really are hopeful that it will be in the first half of calendar '12. We, and also FERC, as well as a number of the other agencies at both federal and state levels are, as you know and I think we've talked about it in the past on some of our calls, we've really done a lot of homework on this, and sought to build -- and take an extra time to build a strong consensus among a lot of different stakeholders on this. And we think that as a result, that's being well-regarded by FERC and some of the other agencies. So at any rate, a quick answer to your question is we hope to see some -- a decision on this during the first of calendar 2012.

Thank you. That concludes our questioning period. Mr. Dunleavy, you may now proceed with any closing remarks.

Thank you, all, once again for attending today's call. And if you do have any further questions, please don't hesitate to contact either Brian or myself, and otherwise, we look forward to speaking with you all next quarter.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.