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Composite
Technology Corporation
First
Quarter 2010 Earnings
February
9, 2010
Operator: Ladies
and gentlemen, thank you for standing by. Welcome to the Composite
Technology Corporation First Quarter 2010 Earnings conference
call. During today’s presentation, all parties will be in a
listen-only mode; and following the presentation, the conference will be open
for questions. If you have a question at that time, please press the
star, followed by the one on your touchtone phone. If you’d like to
withdraw that question, please press the star, followed by two. And
if you’re using a speakerphone today, please lift the handset before making your
selection. As a reminder, this conference is being recorded today,
Tuesday, February 9th,
2010.
And now I’d like to turn the
conference over to Mr. James Carswell, Vice President of Investor
Relations. Please go ahead, sir.
James
Carswell: Thank
you and welcome to our earnings call for the quarter. With us today
on the call are Benton Wilcoxon, our Chief Executive Officer; John Brewster, our
new President of CTC Cable; DJ Carney, our Chief Financial Officer; and Marv
Sepe, our COO.
Before we get started, I’d like to
read a brief Safe Harbor statement and then turn the call over to
Benton. The statements made during this call and which are not
strictly historical in nature constitute forward-looking
statements. Such statements include but are not limited to the
statements regarding the potential sales of ACCC® Conductors and related
products; expectations regarding CTC Cable’s revenues, costs, expenses and cash
flow for fiscal 2010; expectations regarding any current or future litigation,
top line growth, earnings potential with CTC Cable business, and the Company’s
position in the green energy efficiency and alternative energy state, as well as
the Company’s plans for CTC Cable in the United States or internationally; plans
for development efforts in the CTC Cable business; expectations for current and
future CTC Cable sales, and anticipated financial results for fiscal
2010. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause CTC’s actual results to
be materially different from those expressed or implied, such as forward-looking
statements. These factors include but are not limited to risks
related to the operations of CTC Cable; risks related to the Company’s financial
well being, sourcing of materials and the risk that the Company will continue as
a going concern; the risk that customers use our ACCC® Conductor technology may
not grow as anticipated; and the risk that the anticipated market opportunities
may not materialize at the expected levels or at all; activities may not result
in the growth of possible revenue. All forward-looking statements are
qualified in their entirety by this cautionary statement and CTC is providing
this information as of this date and does not take any obligation to update any
forward-looking statements discussed in the call as a result of new information,
future events, or otherwise, other than required under the applicable securities
law.
And I’d now like to turn this call
over to our CEO, Mr. Benton Wilcoxon.
Benton
Wilcoxon: Thank
you, James. Our agenda for today’s call will be as
follows: First, our CFO, DJ Carney, will provide commentary on our
financial results. Then our new CTC Cable President, John Brewster,
and I will provide some color for the quarter and talk about near and mid-term
objectives and opportunities for the business. Finally, we will take
questions on the results.
I’d now like to turn over the call to
our CFO.
DJ
Carney: Thanks,
Benton. I’ll take a few minutes to walk through the financial results
for the first quarter. ACCC® revenues for the quarter were
2.7 million as compared to 4.4 million of revenues in the prior
December quarter and 5.5 million in the September 2009
quarter. Revenue declines were due to lower unit shipments, primarily
due to the decrease of sales into China. Revenues outside of China
increased by 35% from 2 million in the 2008 quarter to 2.7 million in
2009 but decreased from 4.9 million in the September 2009 quarter, as a
large $3.3 million delivery to a customer in South Africa in August of 2009
did not recur in the December quarter.
Our net loss from continuing
operations for the quarter increased 2.3 million to 6.5 million from
4.2 million in the prior year, due to the net effect of 1.1 million in
lower gross margin and operating expense increases of
1.3 million. Gross margin decreased by 1.1 million from
December 2008 due to lower unit sales, a lower portion of higher per unit margin
ACCC® Core sold in 2009 versus 2008, and an ACCC® Core
charge-off. Gross margins of 200,000 decreased to 8% of revenues due
to a 0.2 million ACCC® Core charge-off, in addition to 0.5 million in
negative manufacturing cost variances caused by lower unit sales levels and
which required greater per unit absorption of fixed labor and overhead
costs. Excluding these items, our gross margin percentage would have
been 33% of revenues, in line with historical ACCC® Conductor gross
margins.
The 2009 operations expense increase
of 1.3 million over the December 2008 quarter was driven by a combination
of a non-recurring expense accrual recorded into the December quarter after the
completion of an employment tax audit by the IRS and pertaining to the years
2001 through 2005, along with a $0.5 million G&A expense in CTC Cable
caused by the significant idle manufacturing and that was previously capitalized
into inventory. These increases were offset by lower sales
commissions in 2009 due to lower revenues, as well as lower stock compensation
charges.
We ended the quarter with total cash
of 13.9 million, a reduction of $10 million from the September 2009
year end and includes spending of 2.6 million on primarily non-recurring,
discontinued operations payables, EBITDAS loss of $5.6 million, and working
capital changes of 1.8 million.
And with that, I will turn the call
over to our CEO, Benton Wilcoxon.
Benton
Wilcoxon: Thank
you, DJ. Overall, we are disappointed with the financial results of
the quarter but feel that we have taken steps, including the hiring of John
Brewster to head CTC Cable Corporation, that should position ourselves to
increase revenue by increasing the sales of ACCC® Conductor and ACCC®
Core.
Before I add any comments, I would
like to introduce John to the shareholders on the call and have him provide a
glimpse into some of his observations and plans that are
underway. Before I introduce John, I will state that the Board of
Directors was quite pleased with his recent in-depth presentation to the Board
and we are quite confident that we are on the right track. John,
would you please introduce yourself?
John
Brewster: Thanks,
Benton, and it is a pleasure to be a part of Composite Technology going
forward. I am excited as we move this Company forward.
I would like to start by saying, over
the last two months that I’ve been evaluating the Company’s structure, the
organization as a whole, and the approach that CTC uses to market our products,
we’re now using a business development approach for marketing those
products. This may seem like a small change but it is very important
that we focus on the true value of the project and not just the price of the
conductor. With our developers in the region, our agents in the
field, and now adding Alcan to the team, we expect to have a broader span to all
potential customers.
The last quarter of 2009 and the
beginning of this year brought many successful installations for ACCC®
Conductor. These installations represent significant progress in
entering new markets. At the end of 2009, with training and expertise
provided by qualified CTC Cable field personnel, second installations in both
Mexico and Chile were completed. ACCC® Conductor was installed in two
trial projects in Germany, representing CTC Cable’s first entry into the German
market, and a notable project in Portugal which installed and energized before
the end of the year. In the U.S., the number of installations at new
customers continues to increase, with two new installations in the south in the
last two months, and a third at South Texas Electric Cooperative currently
underway.
CTC Cable has been pleased with recent
orders from Indonesia, bringing the total to four in that market, as well as
additional orders from the U.S. market in the first quarter for a project in the
Middle East. CTC Cable is in the final stages of completing type
registration for a very important market in Europe. This would put
ACCC® Conductors straight into the hands of the line designers as an approved
product that could be selected as appropriate. This achievement would
also serve as a benchmark for other utilities and will offer further proof of
the acceptance of ACCC® Conductors in a new market.
In addition to the Company’s focus on
business development and increased market penetration, CTC Cable is in
discussions with several stranders worldwide in support of the local stranding
content. Current discussions focus on Latin America, Korea, and
Russia, among others. This would further expand on our current
stranding partnership with Lamifil, Midal, PT Tranka, PT KMI, and Far
East. The effort to increase the supply of ACCC® Conductor also
extends into the ACCC® hardware and ancillary hardware through cooperative talks
with third party hardware suppliers around the world.
Benton
Wilcoxon: Thank
you, John. I would like to also briefly mention some key points of
the quarter and those points since the end of the quarter. Again, as
I said, although we are deeply disappointed with the quarterly performance
clearly driven by the continued softness in orders, we have taken steps to
address these issues, and we plan to take additional steps to continue the
recovery of the business.
In addition to the key hire of John
Brewster as President of CTC Cable, as he mentioned earlier, we’re in the
process of adding some experienced top managers to CTC Cable to further round
out the team and provide the strategic management to initiatives that are
underway and certainly in the planning phase as well as we expand into new
markets. This should allow us to accelerate and expand the execution
of the sales and marketing with a renewed focus on satisfying all of the
attention necessary to address all of the issues involved with a new customer,
in essence, providing the expertise to hold the hand, which is what John was
speaking about when he discussed business development. It’s really
the business development of a project; it’s not just the sale of a piece of
wire, because the project is where the customer sees the advantage, the savings
in capital costs, the savings in energy, and of course, the increased
performance including the reduced sag, the additional reserve capacity, and some
of the other key advantages that our product brings to market, which no other
product does these same features with the same precision, as well as the
quantity and quality that ours does.
More projects should be announced over
the coming weeks. John alluded to some of these. We are
required to be completed with construction and installation before being
committed to public announcement by the customer. Since the customer
is king, we are staying with the, or living with the customer’s demands in this
particular area but you will be hearing from these announcements very
shortly.
We also focused on structuring the
business for these effective sales and manufacturing executions, which increased
upgrading some of our process to be able to handle the increased demand which we
foresee in our forward-looking projections from the internal pipeline that we
are aware of here. We have taken a careful look at each of our
operating agreements, sales agreements to eliminate a restructure in effective
agreement and to be efficient in how we promote and deliver our
products. We’ve made tremendous progress in working with key
suppliers to reduce critical material costs, including our stranding
costs. This will allow us to improve our competitive position in
projects that are more sensitive to cost over performance
requirements.
So the key factor in making this
possible, of course, is the maximum utilization of our manufacturing
floors. The low utilization in the past quarter is painfully obvious
in last quarter’s financial performance. We are engaged in
discussions on a number of strategic business relationships that we believe will
result in long-term, high volume orders that will maximize revenues and facility
utilization. These relationships include restoring the Chinese
market, a key strategic goal we mentioned and reported to you in our last
call. As reported in our last call, we have taken the step to project
CTC Cable into China through the formation of CTC Cable Asia in
Beijing. This brings us close to the Chinese customer and allows us
to take focused steps towards business development of the market and specific
projects.
We are venturing into new markets,
such as the Middle East, and spending focused efforts in markets that we’ve
already penetrated, such as South America, to expanding those areas, Europe and
Mexico, where we have initial success but we wish to broaden our penetration and
include various stranding relationships so that we can indeed be closer to the
customer and avoid some of the problems of importation duties, et cetera, into
those local markets.
So we believe that our improved cost
structure and our broader stranding base will make us very competitive and
attractive in every market. We have known for a long time the
technical hurdles for ACCC® have been cleared, and we are now very pleased to
report that we believe we have the correct cost and operational steps to clear
the final commercial hurdle for broad market penetration.
One key area that we have mentioned
just briefly is that we have just announced—I mean, just signed and reported in
the Q that we have entered into a new relationship with Alcan Cable that
includes both a distribution relationship for key strategic customers and a
stranding relationship for the U.S. and Canada. This relationship
supports the strategic goals we have set for North America for cost and market
penetration and we look forward to an expanding relationship over the coming
months and you will receive further announcements as we both progress in our
joint relationship.
As far as finances go, we still have
17 million in escrow with very specific relief provisions, which we are
working on but not counting on a timely release of any of these
funds. We also have several alternatives that may provide us with
additional funds for operations while revenues are increased. We
prefer developing these opportunities rather than a capital raise; however, if
necessary, we will do whatever we need to in order to support the business
success and give time for the new programs to be launched and executed and reap
the returns, which we expect internally here on our projections and which we are
very confident will come to pass very shortly to bring the Company into a more
positive—actually, cash flow positive state.
Litigation issues remain; however, we
are confident with the underlying fundamental strength in each of these matters
and are committed to our strategy, knowing that some of these issues will just
have to run their course in time in the system. But none of these are
causing us to really lose sleep at night, just a requirement of doing business
in America where everyone loves litigation.
As soon as we have defined our new
plans, enhanced our team, and our enhanced team has begun executing, we will
once again bring some road shows and promote the Company in the United States
and abroad to increase awareness of the unique place that our Company has in the
building of the modern grid. You hear so much about the smart grid,
but you still have to connect up all those wonderful computers and sensors with
a conductor. And in that, we are saying that the modern grid is the
key, and that would, of course, employ all of the smart sensors, computers,
switching systems, and systems to turn on different companies, electricmotors,
engines, et cetera, that are very nice and very, very key to advancing
technology and the utilization of technology, but which all have to be connected
together by a conductor. Ours is the most energy efficient conductor
and we believe has a key role in this modern grid and is something which our new
team, headed by John Brewster, is going to be taking that message to both
Washington, where he has already made some preliminary visits, as well as to
each of the different States around to encompass their initiatives to both make
the grid more efficient and have additional capacity to support the growth of
America.
Thank you. Now we’ll take a
few questions.
Operator: Thank
you, sir. We will now begin the question and answer
session. As a reminder, if you have a question, please press the
star, followed by the one on your touchtone phone. If you’d like to
withdraw that question, please press the star, followed by two. And
if you are on speakerphone today, please lift the handset before making a
selection. One moment, please.
As a reminder, ladies and gentlemen,
if you have a question, please press the star, followed by one at this
time. One moment, please.
And our first question comes from the
line of Brian Cahill with Market-Smart. Please go ahead.
Brian
Cahill: How
we doing, Board? Everything sounds great. You seem to be
the greatest thing since sliced bread but nobody knows it. I’m a
shareholder, holding for the last five years, just under a quarter million
shares, and I average at $0.86 at the moment. A question for John
Brewster; when will we see this positive cash flow and profitability and
shareholder revenue? Seems like we’re building a team and all the
money’s going to the team and not to the shareholder.
John
Brewster: Right. Well
again, with two months in, I’m just not in a position to give guidance
today. I can say that the whole reason for me to come here was to
look at that and grow the business, but with just two months here, I’m just not
able to answer that.
Brian
Cahill: I’m
so far very happy with your presentation. I would like to see the
action and more information disseminated. With new press releases,
pretty much you’re left in the dark. Thank you.
John
Brewster: Right. Thank
you.
Operator: Thank
you. And our next question comes from the line of Oliver Sultani
. Please go ahead.
Oliver
Sultani: Hello. I
just would like to know a little more detail in respect to the litigation that
you mentioned with Mercury and all the other actions that are taking
place.
Benton
Wilcoxon: Okay. Well,
these—what we released in the Q, of course, is really the main material
information which we’ve released, and we have to be a little careful since we
are involved in these legal battles and they change, you know, moment by moment
according to the latest ruling or what’s being allowed. But, you
know, we are aggressively pursuing our case, in the case of Mercury Cable, both
in the State court here involving allegations that we have made against them and
then, of course, their counter to that. And we have been delayed in
discovery until—up to this point in time. We’re expecting another
hearing very shortly, which should release us to proceed with discovery, in
which case that case will start to move forward and take its normal
course.
And in the other action with Mercury,
we still have the patent infringement suit, which is basically in a holding
pattern until the U.S. Patent Office proceeds with their evaluation of the
patent. And in both cases, we do not lose sleep at night, but we do
have to continue the diligent prosecution of our patents, defending them, as
well as to assert our rights and our contractual issues which we have made in
the case.
Operator: Thank
you. And our next question comes from the line of Michael Mastropaolo
, a private investor. Please go ahead.
Michael
Mastropaolo: Yes. I’d
like to know your opinion on the effect on your competitiveness should this
technology not—turn out not to be patentable. Would you still be able
to compete effectively without any patent protection?
Benton
Wilcoxon: Right. Well,
we have several patents, including some which were not even questioned, and
inside each of those patents, there are many claims. We feel very
strongly that although a claim or so may be disallowed, that not all of the
dozens and dozens of claims would be abruptly denied. In addition, we
have the other patents which are part of our portfolio, which also play another
key role in our whole intellectual property position. We have
additional patents also being—underway which we—have been planned for a long
time and are going into play, which are expansions on our existing patent
portfolio, which is the normal course of how you deal with
patents. They’re really not an event; they’re a process, so it’s a
continuously evolving concept. So, therefore, we are not overly
concerned with this particular issue, although one never knows. We
see no reason to be overly concerned at this point in time.
Michael
Mastropaolo:
Okay, thank you.
Operator:
Thank you. And our next question comes from the line of Jack Cameron
with Wells Fargo Investor—Advisors, excuse me. Go ahead.
Jack
Cameron: Good
afternoon, gents. We all, of course, are looking for something to
increase the value of the share in the marketplace but that really, in my
estimation, has to do with getting your technology accepted in the
U.S. The most recent big order I saw was in
Indonesia. They’re a bunch of small orders, 50 miles between Reno and
Carson City and things like that. But it looks like, if this is as
good as I think it is and as you think it is, why is it that we can’t get
utility companies on board knocking at your door, wanting this stuff to double
the capacity of their cables that are currently hanging up there?
Benton
Wilcoxon: John,
do you want to address your first thoughts?
John
Brewster: Yes,
this is John Brewster.
Jack
Cameron: Sure.
John
Brewster: Let
me just say that part of the uniqueness about the U.S. utility industry is the
transmission grid is all about many, many players. So even with CTC
having its technology accepted by one utility does not mean that it will not
have to go through the standard testing by all other utilities. So
the point is not every utility accepts their counterparts. And these
tests may take six months to a year to get completed, so you know, we are going
through those processes. If you look, we spend a tremendous amount of
money on research and development. We spend a tremendous amount of
money on testing, which all of that testing is tied to these certifications to
the different utility companies in the U.S.; whereas, internationally in most
cases, once you become accepted by the national grids which are owned by the
government, then in most cases, that your technology will be accepted by anyone
that is putting that wire up.
Jack
Cameron:
Okay. One other question and that is, is there only one strander in
the U.S.? Is your contract with Alcan now making them the only
strander in the U.S.?
John
Brewster: No. They
are not the only strander in the U.S., but for us, that—again, we utilize
stranders all over the world and, to be quite frank, some of the projects that
we do, it makes more sense to have those stranders internationally right
now.
Jack
Cameron: Is
there any friction between you and the other—well, the three major distribution
companies? I haven’t heard the biggest one mentioned yet, but I know
that you had one with the smallest of the three and now you have an agreement
with the middle one. Is there any friction between your marketing
sales force and theirs?
Benton
Wilcoxon: No. If
you look historically at our involvement with—I think you’re referring to
General Cable. We did almost all of the sales in that particular case
and had been stranded under a contract. Their sales force is
primarily geared to selling a commodity, as all the others are as well, and this
is one of the focuses of John—John’s arrival, in that instead of focusing on a
sale, which they already know the customers, we really have to do what we were
doing before but we need to get better at it and more proficient at explaining
the whole value proposition on a business case. And that’s why the
emphasis on business development now and accompanying the various salesmen from
the different companies, so whether that would be General or whether it would be
Alcan or whether it would be anyone else internationally, this is rather the new
approach because they are experienced in sales but not experienced in a new type
of value-added technology enhanced product. Whereas, that is what we
need to—that’s what we do and that’s what we need to do, but we’re not
experienced and have years of relationship with those particular
customers. So that is part of the changing or morphing of the Company
here to address those issues, which we believe is going to increase our
acceptance in both the United States and internationally.
Jack
Cameron: Thank
you, Benton, and let me just finish by welcoming John to the group.
Benton
Wilcoxon: Thank
you.
John
Brewster: Thank
you.
Operator:
Thank you. And our next question comes from the line of Mike Breard
with Hodges Capital. Please go ahead.
Mike
Breard: Yes. Is
it possible to give us a little more color on the Alcan
situation? Are you talking about 100 miles a quarter of your
conductor, or 500 miles or…? And when do you think they may have
their stranding process approved by (inaudible)?
Benton
Wilcoxon: Well,
since we have just signed this, we’re in the process of sort of finalizing each
of those questions, and we have agreed not to preemptively state anything until
we jointly announce those things together. So I don’t really want to
give you a timeline, but I can tell you it’s fairly soon and, yes, they do have
particular guidelines as to customers that they intend to sell some product to
in the very near term and with specific amounts. And so there is a
process really underway that we are quite pleased with and I have to say I’m
going to defer to John and his relationship with Alcan to handle this in a
manner which makes sure everybody’s happy as we start this.
John
Brewster: Yes,
and let me just add that, again, we’ve just signed the agreement. We
felt it was important. It was such a significant event that it needed
to be put into the 10-Q, but they are partners and we are trying to work through
those press releases and are aggressively getting those signed off on both sides
so we can go out with the details.
Mike
Breard: Okay,
thank you. And then on China, what progress have you made there in
selling or finding another strander other than who you have now?
Benton
Wilcoxon: Well,
I’d like to have Marv Sepe make a comment, a quick comment. We do
have some progress going on there now and have also—he’s recently had a meeting
with our current strander over there who continues to agree to a stranding
relationship with us, albeit not on an exclusive basis.
Marvin
Sepe: Yes,
hi, Mike. It’s Marv Sepe. The stranding relationship in
China is still very strong. Far East has a very large capacity of
absolute first rate stranding capacity. We’ve met with
them. They are firmly in the game as our strander from
China. As we mentioned in the text, we formed our CTC Cable Asia
subsidiary, headquartered in Beijing. This will allow us direct
access to the customer at a more senior level, not necessarily just the project
levels, which we continue to pursue, but also in that acceptance and basically
the knowledge base. So people at the highest levels of
(unintelligible) to the provincial power bureaus, fully understand the product
and its benefits, so we’ve sought support and have gained support at the highest
levels, and we’ll use that as part of our business development strategy in
China. We’re very confident of regaining our momentum in China quite
quickly.
Mike
Breard: Okay. And
then the—you’ve got two pools of escrow money, 5.5 million and
11.7 million. You said originally the 5.5 million might be
settled within six months; now you’re saying a year. And it looks
like you may be having some cash problems near term. Is there any
chance you can get part of that 5.5 million?
Benton
Wilcoxon: Well,
that is being worked on, you know, as we speak. So we’re just being
conservative when we push things out. We’re being conservative and
also we do have some other relationships involving some of our sales, some of
which we believe will be positive and would assist us in cash.
Mike
Breard: Okay. So
if the Alcan deal is signed, it could generate some immediate cash?
Benton
Wilcoxon: Well,
it doesn’t generate it immediately but there are other deals in other places in
other countries that we’re also doing simultaneously.
Mike
Breard: Okay.
Benton
Wilcoxon: And
then we do expect some orders, of course, shortly involved with some of the
situations.
Marvin
Sepe: The
Alcan thing is actually signed.
Operator: Thank
you, sir. And our next question comes from the line of Robert
Billings , a private investor. Please go ahead.
Robert
Billings: Yes. Gentlemen,
what is going on with—I know you had indicated a lawsuit with Mercury and now
that General Cable has decided to use them exclusively, do they become involved
in the lawsuit? And what prospects do they have now in China, because
I understand Mercury is also trying to get some of that Chinese business, along
with whatever else they could get?
Benton
Wilcoxon: Well,
you know, we have yet to see a conductor of Mercury appear anywhere and to
complete really significant testing. We have yet to find any other
customer out there or would-be customer out there which has received both
serious test quantity samples, as well as complete test results. So
while there’s lots of talk and lots of noise, we also don’t even have an
official communication from General Cable as to what they have or haven’t agreed
to with Mercury.
Robert
Billings: I
spoke to the company – I think his name is Dickerson or something, the investor
relations fellow – and he said that Mr. Lampert made the decision himself to
switch to Mercury, so it was a—it’s, you know, it’s a fait accompli, I
believe. I don’t know why they haven’t made an announcement or
anything yet. What discussions have you had? Did Mr.
Lampert discuss with you before he made that decision?
Marvin
Sepe: Greg
had no discussions with us before he made his decision. You know,
Robert, it’s their decision. If they wanted to do that, they’re
certainly welcome to do that. You know, you can’t ignore the fact
that we’ve been in this market for over five years. We have thousands
and thousands of miles of working product out there, and no matter what anybody
says, they cannot make up the time and the usage. So Mercury can
squawk all they want and General Cable can try to stand for
them. They cannot make up the fact that they have nothing in the
field and won’t have it for a long time, so we’re going to take advantage of our
leadership position around the world and all the testing and everything else
that we’ve done, and we’re going to take a very aggressive, offensive strategy
and just continue to sell. That’s the only thing you can do and we’re
going to be very successful with that.
Benton
Wilcoxon: Additionally,
to my knowledge, they have been granted no patents and they do have to be
mindful that if they do infringe on our patents that it will be
prosecution.
Marvin
Sepe: And
you mentioned China, and just the fact that it’s offshore does not give them,
even in China where our patents are issued, it does not give anybody the ability
to infringe on our patents.
Operator:
Thank
you, sir. Our next question comes from the line of Michael Kellogg ,
a private investor. Please go ahead.
Michael
Kellogg: Good
afternoon, gentlemen. Just to set my mind straight, on an order like
you just confirmed last week with Belgium, how much in revenues will that be
providing for the Company?
Benton
Wilcoxon: Let’s
see. I don’t—they’re going to look it up right now. While
they’re hunting for the information…
DJ
Carney:
I think the significance of that was more than in the new market.
Benton
Wilcoxon: Well,
yes, the significance is basically that a decision which was made through the
combined efforts of both ourselves and Lamifil with the Belgian grid and, of
course, it was installed by an engineering team which is quite a large team over
there. And so I think the significance is, in each one of these
markets, we finally have to get at least one project up so that we can
determine—well, should we say prove that it’s both easy to install as well as
that it performs as we specified. And every place we’ve done this, we
really have a repeat order coming after it in due course, and so I think that’s
the major significance in that particular area.
Michael
Kellogg: Thank
you. I noticed that, you know, of your 140, 150 projects that you’ve
been involved with, most of these have been for the purpose of increasing
capacity. In one of those installations that you did with AEP back in
December of 2005, you did a study on between Pleasanton and Leon Creek, you put
in 15 miles.
Benton
Wilcoxon: Yes.
Michael
Kellogg: And,
again, you had capital savings from that installation for the customer of
$1.2 million. There was also an annual line loss reduction of
$570,000 computed per year of the savings for that customer. And what
I’m wondering is, I assume that that savings is because of the less resistance
of the composite core versus the braided steel core.
Benton
Wilcoxon: Yes.
Michael
Kellogg: And
what I’m wondering is, is this a savings that’s real typical that comes in every
time you install a line?
Benton
Wilcoxon: Well,
it is typical if they’re putting the same amount of power through. If
they are not—in other words, if they want to run it at over capacity for some
reason and it gets hotter, then by putting a greateramount of power down through
the same size, then they would not necessarily have lower losses. But
given a just direct replacement with ours, of same size diameter of an existing
line, then you would see these savings, absolutely. The same
proportionate type of savings, plus or minus a little bit depending on their
utilization, but very close.
Michael
Kellogg: But
what surprises me is that this reduction of line losses isn’t a major selling
point for your clients.
Benton
Wilcoxon:
It
surprises some of us, too.
John
Brewster: Well,
that is one of the—that is one of the things that we are starting to focus on,
is in that—if you think of it with the reduction in line losses, that is
actually a reduction in CO2 emitted into the environment. So as you
back that up—so that’s megawatts that are being generated at a power plant so
you’re getting more megawatts to the customer so you’re having to use less fuel
to produce the amount of megawatts needed. So that is part of the
added value, the thing that we’re putting together as we’re moving this from a
sales to a business development type of approach.
Michael
Kellogg: Right. I
mean, with $570,000 of savings to the customer per year—correct me or at least
give me the correct answer for this one—how many years does it take to actually
pay for the wire? I mean, in my calculation, I come up with like,
maybe four years.
John
Brewster: That’s
about right. Four to five years is normal payback for
this.
Benton
Wilcoxon: Right.
John
Brewster: That’s
exactly right.
Michael
Kellogg: So
the customer is basically getting a free wire after four years.
John
Brewster: That’s
right. Well, they’re actually getting a return.
Benton
Wilcoxon: Yes,
they’re actually getting a return. And the other thing is, in the
case of some places, I believe that one in Texas would apply, they’re actually
using fossil fuel for the generation. So there actually is a
reduction in greenhouse gas that could be computed in this equation in addition
to this, and somebody could take advantage of that on some level, either in
credits or in some type of government acknowledgement that they were being
greener than they were before. And this is another area that John’s
been to Washington, trying to talk to his contacts and people from the power
industry who are very concerned about these particular issues.
John
Brewster: As
you can imagine, utilities in some ways are not necessarily incentivized to make
the right decision. If they get their recovery of their capital costs
from the rate base and they’re allowed a certain return on their money, they’re
looking at that initial investment, not necessarily the greenhouse gas
improvement, the reduction in capital .
Michael
Kellogg: So
the utilities, if they do not receive $600,000 per year, they therefore feel
that they can raise the rate—they can justify raising the rate so, therefore,
they pick it up that way?
John
Brewster: No.
Michael
Kellogg: If
you understand that twisted logic.
John
Brewster: Well,
what it is, if they go in for a rate case to pay for a capital line or a capital
investment of a line that is going in, they’re asking for recovery, and of
course, they’re allowed a normal rate of return that’s approved by each
commission. The piece that’s there is why would they take the risk
with the new technology when they can go with the old technology and still get
the same rate of return.
Michael
Kellogg: Well,
I guess but after four years, they also receive a—if they can make it through
four years, they got the cable for free.
Benton
Wilcoxon: Well,
it could—it’s certainly something which we believe is the case and which we
believe—this is part of the business argument that needs to be made again and
again…
Michael
Kellogg: Yes.
Benton
Wilcoxon: And
shall we say, made clearer and clearer in getting as specific as possible to
each project, which we believe is just critical to spreading this message and,
ultimately, I believe everyone will see it in this particular
manner. It’s just not—hasn’t happened as fast as I would like it,
let’s put it that way.
Michael
Kellogg: Right,
right. Well, hopefully AEP has seen this thing
happening.
Benton
Wilcoxon: Yes,
they have.
Michael
Kellogg: Good
luck to you. That sounds great. Thank you.
Benton
Wilcoxon: Okay,
thanks.
Operator: Thank
you. And, management, there are no further questions in the
queue. Please continue with any closing remarks.
Benton
Wilcoxon: All
right. Well I’d like to thank all of you, especially the
shareholders, for your continued support and hanging in there with us through
some difficult times as we’ve pulled out of the economic slump. It’s
slowed down many of these orders from utilities. We are very
confident in our pipeline and with our execution strategy and believe that very
soon these—the tone of these calls will be altered significantly to the
positive. With that, thank you for listening to our call
today.
Operator: Ladies
and gentlemen, this concludes the Composite Technology Corporation First Quarter
2010 Earnings conference call. Thank you for your participation and
you may now disconnect.