Tecogen Inc. (TGEN) Q4 2015 Earnings Report, Transcript and Summary

Good morning and welcome to the Tecogen’s Fourth Quarter and Full Year 2015 Earnings Conference Call. [Operator Instructions]. For you information, this conference is being recorded. As a reminder, a recording of this conference call will be available for playback, approximately one hour after the end of the call and will remain available until Monday, April 04, 2016. 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 of 1007-9911 followed by the pound sign. Now I would like to introduce Ariel Babcock, Tecogen’s Director of Investor Relations. Please go ahead.

Thank you, Rocco. Good day and thank you all for joining us on our fourth quarter and full year 2015 earnings conference call. On the call with me today are John Hatsopoulos and Benjamin Locke, our Co-Chief Executive Officers. Also joining us today are David Garrison, Tecogen’s Chief Financial Officer and Robert Panora our President and Chief of Operations. During the call we will be referencing slides posted on the Investor Relations section of our website at Tecogen.com. Before we begin, I’d like to remind you that this presentation includes forward-looking statements within the meaning of section 27-A of the Securities and Exchange Act of 1933 and Section 21-E of the Securities and Exchange Act of 1934. Such statements include declaration regarding the intent, belief or current expectations of the company and its management. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that can materially and adversely affect the actual results as identified from time to time in the company’s SEC filings. Forward-looking statements provided herein are as of the specified date and not reaffirmed or updated at any time. I will now turn it over to John Hatsopoulos, our Co-CEO for some opening remarks. John?

Good morning, ladies and gentlemen. Thank you very much for listening to our story. This is an exciting period for us as some of you as shareholders for a long time know that we have spent a tremendous amount of money for technology, for new technology or combined heat and power. Also we have spent a lot of money for patents, money that I never thought, large amounts of money that I never thought would reach that kind of level, but it appears that now with our technologies moving along it looks like we are going to start getting back some of our or all of our investment and maybe more. I want to remind you that our patents are covered by Lloyd's of London which is something that it was very important for us because spending all these amounts of money without the protection of a large institution like Lloyd’s made them worthless. With that, I’d like to ask Ben who is my partner to give you an update to see how the company is doing and hopefully tell you how he sees the company in the future. Ben?

Thank you, John. I’d like to start off our call by reminding those who maybe new to our company with Tecogen's core business model, as shown on Slide 4. Heat, power and cooling that is cheaper, cleaner and more reliable. Our proprietary technology for improving efficiency, emissions and grid resiliency is truly disruptive to the traditional method of heating, cooling and powering buildings and infrastructure. As I’ll describe in this discussion, the combination of our unique technology, overall trends in energy supply and demand and increasing global emphasis on environmentally clean technology all favor Tecogen's continued growth. As seen from the timeline on slide four, 2015 was a very productive year for the company and we will spend some time discussing these strategic accomplishments. First, turn to slide five, I will review some of the key financial metrics for our company, revenues, margin and sales backlog. The year 2015 saw our revenues reach $21.4 million compared to $19.3 million in 2014, an increase of 11%. This was driven by a 16.6% growth in product revenue and 6.2% growth in service revenue. Gross margin for 2015 increased by 250 basis points to 35.6% compared to 33.1% in 2014. This improvement was driven by improved margins in both product revenues and service revenues, accomplishing a stated goal for 2015. And although it wasn’t one of our strongest fourth quarters, significant progress was made on key metrics that we’ll build on in 2016. First, in the fourth quarter we increased our gross margins to 37.4% exceeding our objective of achieving margins above 35% each quarter. Second, we made good progress controlling operating expenses for the quarter. We feel our expenses have leveled off and hope to make more improvement in managing them going forward. While we ended the quarter with a loss, it’s worth mentioning that important activities such as business development and product marketing prove to be excellent areas to invest our resources. The marketing of our new InVerde, and emissions technology and the business development efforts through each new sales markets and geographies as well as developing strategic ventures such as ULTRATEK while consuming resources that contributed to our loss in the long run are very important for the company to ultimately reach profitability. Moving the backlog, we continue to have a robust sales pipeline; backlog as of year-end 2015 was $11.6 million, a 70% increase compared to $9.9 million at the end of 2014. Current backlog as of March 21 is $12.2 million, well ahead of the company’s goal to maintain backlog above $10 million. Lastly, gross profit for 2015 increased to $7.63 million compared to $6.4 million in 2014, an increase of 19%. Turning to slide seven, I’d like to now take a few moments to discuss some of the key strategic accomplishments for the company. First, I’d like to discuss the Ilios heat pump. We have initiated the process to acquire the remaining minority stake in Ilios via a private placement exchange offer. We expect to have this transaction completed in the coming months. This is exciting because of the continued progress we are making towards advancing sales of the Ilios products. Not only did we double Ilios sales from the previous year, we felt Ilios units in key market segments such as the seven units in a major bio tech facility in Florida. Installations and hotels and hospitality projects in sales and new geographies such as Hawaii, Puerto Rico, Atlanta and the U.K. We have also introduced a new product variation which is a split air source heat pump. This allows the air source heat exchanger portion of the Ilios unit to reside outside where it is needed while the actual Ilios engine and unit are located inside in a boiler room where piping and installation is more cost effective. Now turning to sales more broadly. We have added new sales associates to round off our team. We expect this team to continue focusing on our key market segments as well as growing additional market segments and in combination with our product representatives and sales agents continue to grow our backlog in 2016. And as announced last week, we entered into a strategic partnership with a large gas company to bring Ilios chillers and ultimately CHP systems to commercial and industrial customers. This exclusive partnership includes a commitment to joint marketing, dedicated local sales resources from the Gas Company and yearly milestones for project leads and installations. We look forward to sharing more details of this partnership as we make progress in 2016. Turning to service, we made excellent progress increasing our service revenues and margins. As mentioned in previous calls our turnkey installation services not only helped Tecogen bring CHP systems directly to our key market segments, it also assures long term profitable service revenues to the company. Total service revenues for 2015 showed a 6.2% growth over 2014, service revenues with gross margins improving nearly 300 basis points over 2014 margins. This improvement was due to the start up of good quality turnkey sites by Tecogen in 2015 as well as lower cost by virtue of better located valley stream, service depot, better inventory control and overall improved cost control measures. Turning to slide seven, we made significant technology advances that will better position Tecogen for further gross in 2016. First, as indicated by a recent press release, we introduced the next generation InVerde product, called the InVerde e+. The e+ offers several new features that improve savings for customers and provide additional functionality not available by any other competing product. For a combination of improved InVerde technology and a new engine platform, electrical efficiency has increased to levels best in class for any engine driven CHP system. Additionally, the e+ has other upgrades such as rapid less than 10 seconds start up in black-start situations. Being able to start and energize emergency building loads in under 10 seconds is an important aspect for buildings with stringent emergency power requirements. Rob will discuss other important improvements to the e+ system a little bit later in the call. A related improvement we introduced in early 2016 is a partnership with GE’s equipment insight system to provide dramatically improved data collection, analyzation and management capabilities. The GE system will not only allow customers to see real time production data such as power output, historic production, gas consumption and system efficiency. It will also allow Tecogen service app to more efficiently monitor, diagnose and maintain Tecogen systems using modern technology, such as mobile applications and real time data monitoring. As we advance this roll out of the GE system, we expect to develop user friendly mobile apps and other systems that would clearly show how our product operates and saves money for customers. Lastly, and potentially most importantly we made significant progress bringing our proprietary emissions technology to larger markets. Beginning with the rebranding of the Emissions technology under the brand name Ultera we reached several milestones for retrofitting the technology to stationary engines such as biogas engines and generators which Bob will describe in just a moment. An important development on Emissions was also announced in January of this year where we established a joint venture for the development of Ultera for gasoline vehicles. As Bob will describe in more detail shortly, we have always contemplated the application of Ultera for gasoline vehicles and the recent controversy over current auto emissions capabilities and testing has provided us with the right context to investigate Ultera for automotive applications. In all, we’ve made excellent progress in 2015 and will believe will help make 2016 even more successful. Slide eight shows a sampling of some of the growth and product sales in 2015 in our key market segments. As you can see we continue to reach a broad swap of market segments and customers. And turning to slide nine, it further demonstrates that our backlog and installed base are consistent with our stated market segments and sales goals. With that, I’d like to turn it over to Bob for a more detailed discussion of our technology developments followed by Dave with a more detailed view of our financials. Bob?

Thank you, Ben and good morning. I will begin my discussion with our new product launch just mentioned by Ben and announced on January 26th. As described in the press release, our main stay CHP product InVerde will be phased out over the next few quarters replaced by a significantly more advanced second generation model, the InVerde e+. This new model has been in development for a number of years and represents a large quality of upgrades and refinements that further distance us from the competition. Let me elaborate. The heart of the e+ is the new proprietary InVerde utilizing the latest in electronics; it operates at a high efficiency than its predecessor with less components and reduced noise signature. The InVerde includes on-board power electronics and control to directly accept DC power from a battery of solar PV system. We believe the battery application will be an important one especially as battery technology improves, similar to solar systems being able to be bank electricity with -- and related time has significant value. This will be for example in applications for electricity tests vary by time and day, electricity produced off peak would be expanded on peak for grid revenue and so forth. Battery storage also provides us a capability to amplify our systems on critical power applications such as UTS or uninterrupted power supply type systems. Our engine has also been upgraded to a larger, more efficient model which includes the Ultera emissions after treatment but also in the advanced features such as computer managed ignition system requiring no maintenance or adjustment, the larger engine permits us to run at a lower engine RPM which has positive impact on fuel consumption, service and noise. Its larger size provides an opportunity for higher chiller rating [ph] which we anticipate for the e+ down the road. We have upgraded our user interface as Ben mentioned to more on touch screen with our GE monitoring system, operators will be able to connect to the unit using any Intel device through our user friendly interface. As with the original InVerde the e+ will include the micro grid feature and of course the Ultera emissions after treatment. The e+ has been certified to all the standards for standby power and utility interconnection and we have incorporated a rapid start up feature 10 seconds the e+ will then be qualifiers for primary back up power source in New York City. All told, we believe the e+ resets the benchmark for the co-generation module for module of the co-generation for years to come to the future. I will now move -- I will move now to update on several ongoing emissions related items. As we reported about a year ago, the company sold an Ultera emissions kit to a water district in Southern California. In this case, the chip was to be utilized on a much larger engine in fuel combined natural gas but by a gas manufacture on site as a by-product of their waste water treatment process. Power generation with biofuel, a common practice in recent years is becoming problematic in Southern California. Bio fuel engines beginning in 2017 will be subject to regulations equivalent to those applying to natural gas sources, hence the interest in the Ultera system by these customers. The Bio-Fuel engine commenced operation with the Ultera device last November with excellent results day one and has since performed just as well since. Last week, the water district hosted the trade association meeting at the site featuring the systems other California water districts, so a very positive outcome to that project. Our other notable project is the application of the Ultera device to a group of natural gas generator sighted near Los Angeles and as I discussed in our last earnings call the application requires extraordinary low emissions as these generators seek permits for heavy duty use. In fuel 4, we completed shipment of the kits and the prototype generator that was used in the first phase of the project to demonstrate performance, the work that remains is for us to retrofit the kits. This has been postponed because of conflicting onsite work there. Otherwise the stationary after treatment market we will continue to pursue numerous leaves and have a number of proposal issues that we are hopeful of closing as a regulatory urgency builds. Okay, I want to move next to our newly formed joint venture involving gasoline vehicles ULTRATEK which is obviously of great interest. As we discussed during January conference call this program is an important opportunity for us, the timing is excellent and as the problems related to vehicle emissions have been largely exposed by the Volkswagen scandal and relate precisely to the class of pollutants addressed by our technology, namely NOx and hydrocarbons. Moreover, we are especially pleased to have been provided the substantial resources to conduct a focus scientific inquiry thoroughly and without delay, both being essential elements for this effort to succeed. Let me provide some background for those who might have missed our call in January and then I’ll provide an update. Last fall, the Volkswagen scandal prompted the company to form a fully acknowledgeable individuals to assess the Ultera technology for applicability to vehicles, gasoline vehicles. We understood that our technology was not fit for diesel engines, however we noted that the reporting by diesel non compliance included considerable mention of gasoline vehicles, not that there was a issue regarding the integrity of the testing but rather that the testing in method field that replicate emissions associated with real world driving, in other words the test cycles appear to understate the actual pollution impact of gasoline vehicles. This is not a surprise. The basic test cycle was developed 40 years ago on a very different era and we see evidence of the problem in our urban air quality which has lagged expectations given the improvements meet autos in the last few decades. As I've reported in our last earnings call the outcome of committee was strongly positive and I'll summarize here that their main conclusions. Current after treatment system for gasoline vehicles maybe inadequate for future industry needs. Two reasons to stand out; first strict emission standard will commence in 2017 which are structured to more restrictive each year through 2025. Secondly, greater test scrutiny already underway will pressure regulators to make modifications to the certification process as such after treatment systems that may have been considered adequate for the future must not be cost concern. The other compelling theme from the committee is that the Ultera technology is a good fit for addressing the weakness of current automotive technology, that is, it addresses problems that occur in the difficult streams of operation, rapid acceleration and deceleration, heavy duty cycles et cetera, while at the same time being relatively simple and non-intrusive. Lastly from the committee, we believe that the success of technology was natural engines demonstrated continuously since 2010 and many engines in the U.S. can be replicated in gasoline operative vehicles. This needs to be proven of course, but we are optimistic. Since the formation of the new company we have focused on executing our business plan. This begins with the team which is now fully formed for our initial phase. As I stated during the January call our plan is to not utilize significant internal Tecogen resources, instead we will complete much of the work through third party resources such as consultants. To that end and as was announced in January 21, ULTRATEK has contracted AVL North America to perform testing and validation of the system. We are very pleased to have them under contract. They have world-class personnel and facilities for this type of work and they are certainly well respected by auto makers. In addition to AVL we have retain several consultants with relevant expertise to the project work statement, this includes the senior project engineer to perform the detail technical work that we required. Technical oversight will be the responsibility of Professor Ghoniem [ph] and the Tecogen Engineering Manager. Currently, the ULTRATEK team is moving forward with our business plan, with our first test being to baseline test with our candidate vehicle. We have a lot of work to do for sure, but I couldn't be more pleased with the capabilities of the group in their prospect. I don't want to conclude without mentioning the group's foremost members, our Swiss investors. They are ready and willing to provide the necessary funds to bring this company to a successful outcome. And one thing I want to mention also is for obvious reasons we will be very valid and reporting our progress until we feel the time is appropriate. With that, I'd like to turn the call over to David Garrison to discuss the company financials.

Thanks Bob. Reviewing the highlights from the year-over-year financial results, revenues increased with strong product revenue related to an increase in cogen unit shipments, while the heat pump unit volume increase, the decrease in chiller unit volume lead to a decrease in dollar revenue for the category. We expect this category to rebound in 2016. Installation services and service maintenance contract revenue continued its steady growth resulting in more than half of our total revenues. We are pleased with the nearly 11% growth in revenues. This growth in conjunction with consistent backlog of over $10 million meets management goal of a book-to-bill ratio in the range of 1 to 1.5. Cost of sales benefited from reaching scale as manufacturing volume continues to grow and our efficiency programs continue to yield improvement. Margins for both products and services improved with lean initiatives and continued focus on higher value added work. Management expects to continue this trend in the near future. Gross margins and expense reduction programs continue as management uses its cash resources in a thoughtful manager. On slide 15, we have our charts that we use to guide us through this process. Starting with the chart in the upper left hand corner, total revenue for the year is $21.5 million. The year-over-year growth is 11%, while the quarter to quarter revenue shows some volatility. The longer term growth trend continuous and we expect recent partnerships will yield greater growth in the near future. The chart in the upper right illustrates management success in our goal of improving consolidated gross margins of greater than 35%. This success is expected to continue into the future. In the lower right is a chart of our operating expenses. It’s our first full year been public. Managements goal to lower operating expenses have begun. We believe the current year will be our peak as a team works to tighten and decrease spending as a move forward towards profitability continues. And finally, in the lower left, the backlog chart plus our weekly backlog, currently at $12.2 million as of March 21. This backlog is ahead of management goal to exceed 10 million in product and turnkey service revenue. As a reminder, backlog does not include service contract revenue which was more than one third of our revenues in 2015. On slide 16, our targets are clear. Management continues to meet its goal of delivery improving margin in the range of 35% to 40%. Backlog has maintained above 10 million in revenue from product and installation sales. And stable operating expenses of 10 million on a 12 month basis is our target that we believe we can make. And now, I’ll turn it over to Ben for closing remarks.

Thanks Dave. In terms of churns in our favor, we expect demand for our CHP systems to remain strong. The fundamental economics of CHP such as high electric rates, low gas rates and great resiliency concern continue to be in our favor. The Ilios market continue to extend both geographically and in different market segments and we expect additional sales of our water source system and facilities that consistently have the need for simultaneous heating and cooling process water, such as manufacturing. And as Bob described, adapting the Ultera missions technology the gasoline vehicles represents an exciting and game changing new market for Tecogen. The prospect of vehicle fleets and passion of vehicles operating with standard engine technology but realizing fuel sale like emissions is tremendously compelling from a policy and market standpoint. Our plan is to seize on this opportunity the improvement of the Ultera technology is the best5 way to meet strict emission standards. And lastly we will continue to grow our patent and intellectual property base around this technology. In addition to the patent applications filed this year around emissions controls, new patents and trade mark applications will be filed to protect the company’s competitive position in its very promising market. In closing we have very wide prospects for growing Tecogen in 2016 and look forward to sharing developments with you as they occur. With that I’d like to thank you for joining our call and look forward to speaking with you again in our next earnings call.