Tecogen Inc. (TGEN) Q4 2014 Earnings Report, Transcript and Summary

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 you 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 remain available until Wednesday, April 1, 2015. Individuals may access the recording by dialing 877-344-7529 from inside the U.S. 855-669-9658 from Canada or 412-317-0088 from outside the U.S. enter the replay conference number 10062381 followed by the pound sign. Now I would like to introduce David Garrison, Chief Financial Officer.

Thank you, Kate. I’d like to read the Safe Harbor statement to start our call. This presentation contains forward-looking statements as that term is used in Federal Securitas Laws. Our growth backlog of orders, cash usage, gross margin improvement, attaining profitability, meeting their 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 such words as; expects, goals, intent, planned, 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 odds are that we will -- looking at the big increases in backlogs that we have. With that I'd like to ask Ben Locke who is responsible for major part of the success and also after him we will hear from Bob Panora who is the genius and has created all this new technologies. Ben?

Thank you, John. Well, it's 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 am happy to have this opportunity to update all of you on our progress. As reminder to those who maybe 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 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 in our 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 shift seven Tecochills to a range of customers in the fourth quarter, from universities to product manufacturers to JCCs. We’re very pleased that our overall chiller sales in 2014 increased 184% from 2013, as the only natural gas engine driven chiller manufacturer we earn a unique position to market these products. We've continued to grow our turnkey business as well with 3.28 million 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 it's beginning to demonstrate Ilios’s potential as the world’s most efficient heat pump. To this then we've established the sales office in Florida to adjust 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 a 130 kilowatt generator retrofit system. I would encourage you all to watch the video on our Web site describing the generator retrofit projects. We also received our first bio-fuel system order, which was also a retrofit project and is notable and at 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 projects 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 operation for prolonged period of time during grid-outage situations or blackout conditions such as was experienced with Hurricane Sandy. As mentioned in the press release the existing co-generation system in this building do not offer black-start operation. So all-in-all we’re very pleased with our results for the fourth quarter and I am fully confident we’ll continue improving our results in 2015. With that I would like to turn the call over 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’ll provide a review of technology and what we’re doing to improve company operations, especially involving issues highlighted in our last earnings call. So let me begin with technology, starting with the Ultra Emission System. In Q4, we've received orders for system in three distinct applications; the first was as Ben said Gage Canal Company in the Riverside, California for a 15 liter Caterpillar engine, is the near identical kit to our original water pump installation started in 2013 in Perris, California. The Gage Canal sale was precipitated by management visits to the NAVIS installation, they like what they saw and now they want to evaluate the system for their engines as well. The second sale was for a 50 liter bio-fueled engine located in a wastewater plant in Moreno Valley, California, it will replace a decommissioned fuel cell as a recipient of the bio-fuel gas. Here the driver was new stricter regulations for bio-fueled engines that will start in 2016. The third sale was to an industrial customer with a requirement to upgrade their emissions performance of their standby generators. Their engines range in size from 7 liters to 12 liters and like all generators in the area they are exempt from super strict standard that we face from our cogeneration products. As long as they limit their annual operation to $200 or less, but this industrial customer has a requirement for great annual run outs about 800 which of course would violate the permit conditions. So they contracted Tecogen’s two phases, Phase I is to demonstrate performance in our Waltham Lab on a newly purchased 130 kilowatt generator from a well known manufacturer. In Phase II we delivered that system to their facility and supply chips for the remaining sites -- for the main generators on site. As you may recall we hosted a Webinar on February 3rd to describe the generator project and its significance. Let’s a take a look back at some of the data I want to highlight from that February's Webinar. So in my first slide, stage emissions from the generator as purchased are presented, the graph to the left shows our measurement as full loads and graph to the right shows low load operation. The emissions at full load are typical or conventional technology but not sufficient for the permanent requirements the carbon monoxide needs to be about 7 ppm for the permit and the engine of course you can seeds at by about 30 fold. At the low point the engine is non-compliant in both NOx and CO which is an indication of poor engine control which is common for these types of systems. I want to note that the particular generator that we’re testing is really gaining -- was state-of-the-art emissions controls from that manufacturer. So this is the state- of-the-art performance. On the right side of my second slide, I'm sorry in the left side of my second slide is the data for the SOx emission system but during transient loading, that is we put a power level and then suddenly take a step change. After the load change the emissions are destabilized for several minutes which we 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 un-measurable, able to detect some of the emissions analyze of more or less. And then when the event occurs there is no perturbation at all we have a very wide control vent and it facilitates very steady performance. So the current status of the order again as I discussed in February, we've moved further along from that. We provided all the data to the customer needless to say they're very pleased and have initiated the permanent process for our test generator and 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 generator can up-fitted with a Tecogen system to become a clean source of energy. Very similar in footprint, solution footprint to a fuel cell which is quite remarkable. And there is actually a wide application for such a system; ordinary generators that mostly sit idle could be dispatched to operate weekdays to offset utility peak demand charges. Utilities will actually pay customers to 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're developing a proposal for customers in Central California that has a several buildings that he'd 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 is 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, I want to speak to how works and its potential. This product like the early Ilios resource heat pump takes heat thermal energy from one source and moves it to another. Referring to my third slide, which is up now the water source unit takes the heat from a low temperature water stream and moves the energy to a second one that needs to be heated. So many of us are familiar with geothermal heat pumps which is groundwater well essentially as the low temperature source, but the biotech customers doing something that’s different, it's 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 circulates in parallel for different laboratory. So each therm decide to pick -- each therm of natural gas into the Ilios unit that customer will get 2 therms of hot water and 1 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 they all have the simultaneous need, and the savings from the financial perspective are excellent and in effect doubled with the sub effect system. The last topic I want to discuss is operations. In our November call we discussed the need to improve margins and describe various actions we were taking. Our efforts here have been productive as Ben talked about it earlier and as one would expect our collective results of many actions. So today I just want to provide some of the highlights. In the manufacturing area we brought in an experience professional to revamp our processes and as we expect on numerous areas to improve better management of our supplier, supplier chain management and so forth also the shop flow is been reorganized to use a cellular system to minimize labor and increase the throughput and it's been very effective. The new method, this new cellular method is up and running for the co-generation products and the Ilios units will come online with this type of system next with this new biotech order that we've spoken about. We have been also focused on service, the service group. And this effect goes back quite a few months and has been a special effect of improving margins. As we announced previously we placed the new service center in Brooklyn, is in Brooklyn area where the concentration of units has increased sharply and the impact has been immediate, improved runtimes, lower cost, all because the service folks have less distance to travel to get products and so forth. We have also initiated regular inter-department meetings with the service group and this has been very productive relating to improving the mirrored service related activities including training. So that’s been a big help for us and we're going to do that regularly going forward. In terms of the turnkey business we have a driving turnkey business and we also needed to improve margins there as well. And for this business our improvement is focused on several areas, I’ll talk about two. Contract terms, carefully written contracts really are very important for these projects and we've made careful adjustments to establish clear accountability and delineation of responsibility and when contracts are clear precise, say exactly who is doing what, the things go very well. The other thing we've done to improve how these projects go, as we've recognized that we need a strong hands on presence during construction to keep the work sorted properly into coordinate commissioning. We created new specialized position in the company, we took one of the service guy who was particularly capable and experienced and we made him dedicated to the installation projects, whereby he travels from project-to-project really gets into the detail, sees the projects through to the end and then when commissioning comes things goes smoothly. So that’s some of the things that we’re doing the operation and as I said it's been very effective and we’re going to continue to pressing forward along these initiatives. And that includes my summary of operations and technology and I am going to turn the microphone over to Dave Garrison and he would add an insight to the financials and so forth.

Thanks Bob. The gross margin improvement of 40% in the fourth quarter represents the expected management goals of a 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 manufacturers were able to maintain existing contribution margins with the reductions in labor and material as Bob spoke off. And the expenses to any improvements going forward should be offset by those savings. Beginning to meet the operational scale has been the key component of this margin improvement. The turnkey business will continue to invest those increases in margins and staff to make improvements with this expanded service offering. This service and maintenance segment which Bob spoke off with the improved training process will be meeting its goals for a consistent contribution from this reoccurring third of our total revenues. On the operational expense side, general administrative expenses were higher in 2014 and '13 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 maintained 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 obtainable going forward. Management’s goal of near-term profitability is not only obtainable 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. First, the 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’s not entirely the case for the markets we’re addressing. Fuel costs are only contributing component to the high electric rates. 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 signs nor do we expect any significant drops in electric rates in our key market areas. As much as some of our customers are like to hear differently as 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 want to call your attention you may have seen the recent Executive Order signed by President Obama setting the goal for reduction in greenhouse gas emissions by 40% in 2025. Co-generation systems will play an important part in reaching this goal. A typical Tecogen InVerde system avoids approximately 600 tonnes 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 tonnes of carbon dioxide as compared to prudential energy sources. The 206 CHP projects that Tecogen has reported the EPA since 2006 have collectively avoided an estimated 570,000 metric tonnes of emissions. We believe these new federal emission reduction goals will encourage more adoption of our CHP systems in the United States. Lastly, relating to the Ultra-Emission System. As awareness increases about the harmful health effects of smug, 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 U.S. and eventually overseas. Our Ultra-Emission System technology that Bob described is ideally suited to meet and exceed these limits. As demonstrated in our recent projects our emission 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've demonstrated here in the fourth quarter. Specifically we expect continued growths of unit sales in our core co-generation and chiller systems. We also expect continued growth in our Ilios products to include geographies outside the continent of United States. We expect our turnkey sales to continue robust growth, as mentioned in our call our turnkey projects established the basis for long-term profitable service contracts. And lastly we expect increasing orders for our ultra-emissions retrofit system. As Bob mentioned, retrofitting these systems on generators that open a door for lucrative demand response contracts. So in closing we have very great prospects for growing Tecogen and we look forward to sharing developments with you as they occur. With that I'd like to turn it over to the operator for questions.

[Operator Instructions]. And the first question comes from Colin Rush of Northland Capital Markets. Please go ahead.

Could you walk us thorough a couple of points here, one question. But could you give us an update on any progress that you made in emission technology for mobile applications. And obviously you've done some analysis on the breakeven point. If you can give us a sense of where do you think revenue to get to hit that EBITDA breakeven? And if there is some mixed implications in terms of how you will get there just walk us through what that would look like?

Well, I'll look at the second question first and then I'll ask Bob to make a few comments about the emissions technology. As you can see in our fourth quarter we're right at breakeven and so we consider this kind of the point that we should be considering going forward to maintain breakeven revenues in cash.

And how should we think about operating leverage with the plus one?

Sorry, can you repeat that question Colin?

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

Colin, the leverage that we've 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 operational we would gain will be rolling back in to the cost of those improvements. 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.

And then would like to hear about the mobile applications you guys have.

This is Bob Panora, Colin how are you? I can't say too much about what's happening there but I will tell you that we're having discussions with one trade industry group that wants to introduce us to the folks in their industry after we presented them results recently. So that’s the work in process but nothing firm but discussions.

As you can probably get Colin, those markets are particularly, you have to be particularly careful how you proceed. I think we mentioned in our February call we're 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 that we're making some progress but we're being very deliberate and careful in terms of our intellectual property prediction.

The next question comes from Walter Nasdeo of Ardour Capital. Please go ahead.

This is a nice quarter for you guys, I’m 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'll get buying power, you'll also have the ability to pick up from a different supplier is somebody is lacking something or can’t deliver on a schedule that you need. So if you could just give me a little bit of color that I would appreciate it.

Walter that’s a mouthful. Let me start up with the inventory. We have redundant suppliers in some areas and with those suppliers what we’re 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 a level it's at now going forward. So that should 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 performance where we do not have existing redundant suppliers now but those components to be frank are more of a commodity and we’re currently working to test and authorize a substitute materials in those areas. When it comes to turns, one of the things we've also begun doing is to had 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 asset level is at now going forward even with the increase to production and operational leverage.

[Operator Instructions]. The next question comes from Roger Liddell of Clear Harbor Asset. Please go ahead.

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

You are absolutely right Rorger, the backlog consists of unit orders and turnkey but not our service contracts. So in many cases we do get the 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’s a five year requirement and New Jersey it’s a 10 year requirement. So as you said the service maintenance contracts are not included in our backlog.

Now for the substantive question and you just touched on it a moment ago the incentive programs in New York, New Jersey 1,800, 2,000 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’m driving at is how dependent do you view maybe I should reword that, is the vulnerability to the outlook on revenues from what could be politically derived reduction or elimination of those incentives?

Roger that’s a good question and being the base out there in the sales that I would say absolutely not. The incentives are nice, they help. They bring the payback down a bit, but even absent the incentives and indeed a lot of 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 incentives are nice we’ll take them, but we don’t need them. And I’m not too worried about our ability continue our revenue growth even if incentives start to subside.

Recently I spoke with the mechanical engineer down in Florida the issue was peak loads and application of Tecogen equipment to the opportunity in Florida and ventured the thought that with the passage of time and that the context was not many years that Florida power in late 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 would happened it could be a tremendous opportunity, do you -- is it considerable that Tecogen like partner with a utility at some point as simply another distribution aspect of the company's current plan.

That’s a great question Roger. One of the real underselling attributes of our technology is our micro bit feature, which as you know allows these units to operate and I am going to turn to Bob in a minute for little more color. But basically the off the grid we do have the site in New York just to fix systems, it's completely off the grid. They don’t have any coned electricity going there, and these fix systems now operate stably and allow 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’s a perfect fit for Tecogen. Bob you want to mention anything about that.

Yes, that’s a very good summary Ben, but four, five years ago when we were talking about micro grids, I don’t think most people have heard that word I knew what I was talking about. But it's 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’s been built into the InVerde, absolutely designed just for this type of operation, dispatch it in and out of the grid when you need to. That way my vision when we started developing it, that if we do that. For an outage or for a peak demand situation.

There are no other questions at this time.

We thank you all both on our Tecogen side and on our investment side. And we'll 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.

Thank you.

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