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Composite
Technology Corporation
First
Quarter 2011 Earnings Conference Call
February
9, 2011
Operator: Good day and welcome
to the Composite Technology Corporation First Quarter 2011 Earnings Conference
Call. All participants will be in a
listen-only-mode. Should you need assistance, please signal a
conference specialist by pressing the star key, followed by
zero. After today’s presentation, there will be an opportunity to ask
questions. Please note, this event is being recorded.
I would
now like to turn the conference over to James Carswell. Mr. Carswell,
the floor is yours, sir.
James Carswell: Thank you and
welcome to our earnings call for the quarter ending December 31,
2010. With us today on the call are Benton Wilcoxon, our CEO, Stewart
Ramsay, President of CTC Cable and DJ Carney, our CFO. Before we get
started, I’d like to read a brief Safe Harbor statement and then turn the call
over to Benton Wilcoxon.
Statements
made during this call, which are not strictly historical in nature, constitute
forward-looking statements. Those statements include, but are not
limited to, the statements regarding the potential sales of ACCC® conductors and
related products, expectations regarding CTC Cable revenues, costs, expenses and
cash flow for the fiscal 2011. Expectations regarding any current or
future litigation, top line growth, earnings potential and CTC Cable business
and the company’s position in the green energy efficiency energy sectors, 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 2011. 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 in such
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 wellbeing, courses of material and the risk that the company
will continue as a going concern. The risk that customers who use our
ACCC® conductor technology may not grow as anticipated and the risk that the
anticipated market opportunities may not materialize at the expected level, or
at all, and risks that activities may not result in the growth of possible
revenue.
All
forward looking statements are quantified in their entirety, excuse me,
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 statement discussed in this call as the result of new
information, future events, or otherwise, other than required, under the
applicable securities laws. And now I’d like to turn the 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 some commentary on
our financial results, then, Stewart Ramsay, our CTC Cable, President and I will
provide some comments on 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 our, the financial
results for the first quarter, beginning with the P&L and then our balance
sheet.
ACCC®
product revenues for the December 2010 quarter were $5.2 million, nearly double
the 2.7 million in revenues in the prior December quarter and 3.3 million in
revenues in the September of 2010 quarter. The December 2010 revenues
exceeded our guidance of 4.5 million that we provided in
November. Revenues improved due to an increased number of kilometers
sold, primarily due to increases of sales into North America and
China. We are unable to provide revenue guidance for our March 2011
quarter due to uncertainties surrounding delivery times and revenue recognition
for our $13.8 million Paraguay bid award which Benton and Stewart will discuss
later in the call.
Our loss
from operations for the December quarter improved by $2.6, to $3.6, a reduction
from $6.2 million in the prior year, due to the net effect of a million three in
higher gross margin and operating expense reductions of $1.3
million. Our December 2010 gross margins were 27% of revenues, an
improvement from the 5% margin recorded in the December 2009
quarter. In dollar terms, gross margin increased by 1.3 million from
December 2009 due to higher unit sales of higher per unit margin in ACCC® core
sold in 2010 and a reduction in ACCC® core charge-offs from the prior year’s
quarter. The 2010 operations expense decrease of 1.3 million from the
December quarter was driven primarily by G&A expense reductions of 1.8
million, offset by increases of 600,000 in sales and marketing
expenses. The G&A reductions were due to a combination of cost
cutting measures implemented throughout 2010, in addition to reductions in costs
from 2009 related to idle manufacturing and a onetime charge which was recorded
in 2009 for a payroll tax expense accrual related to the 2002 to 2005 tax
years. The sales and marketing expense increase is due to increased
headcount and other costs related to our investment in top line growth as well
as commissions costs on higher revenue levels.
2
As to the
balance sheet, we ended the December quarter with total cash of 18.3 million, a
reduction of 1.1 million from the September 2010 quarter. Included in
our cash balance is over 16 million of cash remaining in escrow from our 2009
DeWind sale, of which 11.7 million is scheduled to be released later this
year.
During
the quarter, we violated the debt covenants of our $10 million debt with
PFG. While this technically could allow PFG to declare us in formal
default, to date this has not occurred. We continue to work with our
lenders who continue to see the value of CTC and who recognize our recent sale
successes. And with that, I will turn the call back to our CEO,
Benton Wilcoxon to discuss business opportunities and the business moving
forward. Benton?
Benton Wilcoxon: Thank you,
DJ. Overall, we are very encouraged by the financial results of the
December quarter and our recent sales wins. The revenue growth is
tracking in the right direction and is a good start to the fiscal year as we
move towards profitability. Our December quarter revenues of 5.2
million, in addition to expected shipments from our backlog of over 17 million,
represent potential revenues of over 22 million. Already more than
double all of fiscal 2010’s revenues, we are only a third of the way through the
fiscal year. At this pace, we are exceeding our internal operating
plans, which if achieved projects consolidated EBITDAs profitability in
2011. Not included in our backlogs, are non-binding commitments for
over 30 million more in core sales over the next 12 to 18 months and to add a
little more information on all these subjects, I would like for our CTC Cable
President, Stewart Ramsay to discuss various events that occurred with CTC
Cable.
Stewart Ramsay: Thanks,
Benton. I’ll provide a quick summary on the progress that we’re
making in sales and market development. Year-to-date, we’ve done
well. We’re ahead of plan on sales, we had a major win in Paraguay
with an 1100 kilometer project. We’ve also booked a dozen other
conductor, or core orders and eight hardware orders. These orders
have come from all regions and are, represent a mix of new and repeat
customers. The combination of the win in Paraguay and the other wins
total over $20 million in new orders since the beginning of the fiscal
year. As a reference point, as Benton mentioned, our revenues for
fiscal 2010 were just above 10 million. The level of the activity in
the market continues at a strong pace. We are seeing continued growth
in the number of meetings and presentations that are being requested, both
introductory meetings, as well as detailed technical discussions. The
increase is uniform across existing and new markets. The executive
level interest in our product continues. In the past three months,
we’ve had over a dozen meetings with utility executives discussing the strategic
value of our ACCC® conductor. We remain busy running analysis for
customers that are looking at ACCC® conductor as the solution to issues raised
by NERC Order 810 that we discussed in our last call.
3
We are
continuing with our strategy of developing relationships with high quality
stranders in each of the major economic zones. We’ve added Taihan in
Korea. We are also in discussions with stranders in other markets and
expect to be able to announce the results of those discussions in coming
months. The strategy is paying off. IMSA, who signed last
fall is already production for projects that we have sold in
Chile. We are working with Sterlight in India on several tenders, or
proposals for the Indian market and we are already working on Taihan with some
high profile project opportunities in Korea. CTC and Alcan have been
in some very high level discussions with utilities for major projects in the US
and Lamifil and CTC have delivered conductor for a high priority project for one
of the utilities in the UK, the installation of which began this
week.
There are
several more game changing opportunities like Paraguay in our pipeline and while
our revenue forecasts don’t rely on those, those opportunities do exist and are
being pursued diligently.
We’re
moving rapidly in R&D. We continue to develop a range of ultra
low side conductors, as well as faster installation method and we are expanding
the range of hardware options available to our customers. All of
these developments are complementary to our existing ACCC® product
family. In all areas of the business, we continue to augment our team
and build our bench strength. We continue to do so judiciously and
deliberately with a focus on areas that could potentially become bottlenecks to
grow. With that, I’ll turn it back to Benton.
Benton Wilcoxon: Thank you,
Stewart. Brief update on China, our new office in Beijing is now open
and our employee team has moved in. We are planning a formal opening
ceremony to occur within the next few weeks. Our Chinese employees
are involved with strategic marketing, managing our relationships with stranders
in China, assisting in certain sales, working on creating standards in China
with the government for composite core conductors and assisting us in managing
relationships with potential strategic partners. After several trips
by our COO, Marv Sepe and many meetings there, we are now in serious
negotiations with a strong potential partner in China to create a significant
joint venture with our CTC Cable Asia unit. As soon as everyone is
back on work schedule from the Chinese New Year, we are in the process of
finalizing further meetings, planned later this month, to work out details of a
business plan and timeline for implementation and finalize the proposed
structure. We are confident that we are on the track with our current
China strategy and we believe that we will see significant results yet this
year.
On the
subject of financial matters, the company will need additional financing to
achieve the objectives outlined by Stewart and myself and therefore, we are in
discussions with potential lenders as well as potential equity
sources. We are also in negotiations to secure partial release of the
escrowed funds from our sale of DeWind. While we are mindful that
shareholders in general do not dilution at our current market level, we also
know that the company needs to have cash to be able to operate and secure the
proper inventory levels to achieve the objectives outlined in our call
today.
4
On the
legal front, we remain confident in our pursuit of each of our legal
cases. The details in the cases are sensitive and some are coming
towards conclusion, we are not going to comment further on any of the legal
cases at this time. And with that, I believe we will turn the meeting
over to some questions.
Operator: Thank you,
sir. We will now begin the question and answer session. To
ask a question, you may press star, then one on your touchtone
phone. If you are using a speaker phone, please pick-up your handset
before pressing the keys. If your question has been answered and you
would like to withdraw your question, please press star, then
two. Again, if you’d like to ask a question, please press star, then
one. At this time, we will pause momentarily to assemble our
roster.
And the
first question we have comes from Mike Breard of Hodges
Capital. Please go ahead.
Mike Breard: Yes,
congratulations on making some good progress. I was just wondering on
your financing where you had to meet the covenant test on January 15th, if you
could comment on what’s going on there and what actions you may have taken to
have met that already. Thanks.
Benton Wilcoxon: Well, we are
working ,I think as DJ pointed out, we are working with the lenders on resolving
the issues and they had given us a waiver up until that point and they have
still effectively giving us the, the waiver up to this point and we continue
discussions. I believe that it’s clear that we do need to bring in
additional financing in one form or another, or secure funds from the escrow, as
I described a little earlier, and I think other than that, I think everyone is
encouraged by our sales, our sales prospects, our, our order book going forward
and our, the pipeline of potential projects which have already been engineered
and remained open to the timelines of the various utilities around the world
that have submitted those projects for analysis and evaluation as to the
economic benefits of them. So, we remain confident that we will
resolve the issues.
Mike Breard: In terms of your
financing, are you talking about $5 million, $15 million, 20 million, could you
give some broad area of what you might be looking for?
Benton Wilcoxon: Well, at this
point in time, we don’t think that is prudent to do. Obviously, it
needs to be enough to accomplish the objectives and it may take place partially
in equity, or partially in loans, or partially from this release from
escrow. So, it’s a little hard to look at the, how that would occur
and I wouldn’t want to, to really color any of the recurring negotiations with
any of the particular players at this point in time.
5
Mike Breard:
Okay. Well, you’ve been very successful in raising money in the past,
so, I assume you’re going to continue to be successful. Also, there’s
been several comments on various message boards that your plan is working at
close to full capacity. Is this some large order that you’re not
allowed to announce until the product gets hung, or what, surely you’re not
dealing for inventory, but could you give us some insight on what’s going on
there?
Benton Wilcoxon: Sure, I’ll
let Stewart address that since he’s the hands-on head of the cable
division.
Stewart Ramsay: Sure, we had
been running pretty much at full capacity and it’s been to supply a relatively
large number of orders that came in toward the end of last year and, the end of
last calendar year and the beginning of this calendar year, including some
advance work we’ve been doing to meet tight deadlines for
Paraguay. We’ve gone ahead and produced some core to be able to
support that project. I guess what we would say is that we’re, we’re
managing the production to meet the delivery requests for the
customers. We’re pretty happy to see the plant running at pretty much
full capacity.
Mike Breard: Okay, on the
Paraguay order, as I understand it from the Paraguay newspapers, it sounds like
they wrote that specifically for composite cable and that just, just have some
sore losers that are holding things up. I know it’s a Third World
country and there’s no way you can know for sure, but, I would assume you feel
very confident that, that contract will be signed.
Stewart Ramsay: Sure, I think,
I mean there are a couple of things there that I think we need to
address. When we received the spec, I think the initial documents
came to us in August of last year, the specification was written, I wouldn’t say
it was written for composite conductors, it was really focused on
high-temperature, low sag conductors. Composite our, composite
conductors are one of the types of technology that, that could be successful in
that. So, it was slightly broader than composite. There
was a large number of competitors, there was a lot of work done by the utility,
I forget the number of the addenda that were issued, but there was a large
number of addenda that continued to broaden the number of competitors that could
bid and we, we were awarded the project and one of the other competitors
protested. We prevailed in the first two protests, the third protest,
we lodged our response to yesterday morning and we feel fairly confident based
on the feedback from our team in Paraguay that we’ll prevail. So,
we’re, until we see the paper, it’s certainly not a done deal and at this point,
we are still fairly confident that, that project will come to CTC.
6
Mike Breard: Okay and
apparently they want it fairly quickly so they should generate some revenues
pretty quickly.
Stewart Ramsay:
Yes. The contract requires delivery within 150 days of
issuance of the irrevocable letter of credit. So, it’s a fast
turnaround. We know that they have a fairly urgent need in Paraguay
for this line, they need it in service sometime in the June/July timeframe to be
able to meet anticipated demand. So, and we and Alcan who will be
stranding that conductor for us have got a production schedule down, we have
very strong commitments from Alcan. They’re a great partner for
us on this project and very helpful all along the way and they’ve tooled up and
prepared their facilities to be able to jump on this and assure that we can get
the conductor down to Paraguay as quickly as possible.
Mike Breard: Okay as I
understand that once you deliver the core to Alcan, you can take that into
revenues, can’t you?
Benton Wilcoxon: No, it’s a
conductor order.
Mike Breard:
Okay.
DJ Carney: So, we, we’re still
evaluating the revenue recognition on the Paraguay order right
now. That’s one of the reasons we’re not giving any forward looking
guidance to our revenue numbers to the quarter.
Mike Breard: No matter how you
do it, it’ll be recognized the next couple of quarters if they want it so
quickly.
Benton Wilcoxon: We
probably─we hope that in the final terms of the letter of credit that there
would be partial releases if the shipments are made so, we hope that’s the
case.
Mike Breard: Oh, okay. All
right. And the, on China, it sounds like you’re making good progress
there with that entail, eventually building a plant in China to produce core, or
what, how much to meet the demands there?
Benton Wilcoxon: Well, in
China, we will─we really have to wait and see how this relationship that is
gelling at the moment plays out, but it would call for a significant amount of
business in China. They are a very large player in China and we would
anticipate that would lead to some joint manufacturing activities in China at
their facility.
Mike Breard: Ok, all
right. And then, just, one last question on the escrow, is that
something that the 11.7 million I believe you said, or the first amount that may
come in, is that something where maybe you could just make a small payment to
somebody and get a bunch of escrow released, or is that more of a long drawn out
process?
Benton Wilcoxon: It’s a little
complex and we’re right in the middle of those discussions right now, so I
really don’t want to get into details, but there certainly are one last supplier
issue that we’re finalizing at the moment and then upon doing that, we are
hopeful that we will really resolve things and accelerate the release of the
escrow.
7
Mike Breard:
Okay. Well good. I didn’t have a chance to read all of your 10-Q, but
you did seem to indicate a much better outlook than previous 10-Q’s and I
congratulate you for it and thank you for the update.
Benton Wilcoxon: Well, thank
you, thank you Mike and thank you for remaining a good shareholder.
Mike Breard: Well, one of
these days it’ll payoff.
Benton Wilcoxon: We hope so,
for all of us. And with that, I don’t believe there’s anymore current
questions, and most of us need to go back to the task at hand which is
fulfilling the objectives that Stewart outlined on all the potential projects we
have and the potential orders. With that, I think we will call this
to a conclusion and I would like to thank everyone for their continued support
of the company.
Operator: And we thank you,
sir and we thank you the management for your time and the conference is now
concluded and again, we thank you all for attending today’s
presentation. At this time, you may disconnect your
lines. Thank you.