Ocean Power Technologies, Inc.
Q4 2009 Earnings Call Transcript

Published: 14 Jul 2009

[Operator:]

Good day everyone and welcome to Ocean Power Technologies fiscal year 2009 audio webcast. Today's conference is being recorded and webcast. At this time for opening remarks I would like to turn the call over to the Chief Financial Officer of Ocean Power Technologies, Mr. Charles Dunleavy.

[Charles F. Dunleavy:]

Good morning and welcome to Ocean Power Technologies audio Web cast for the fiscal year ended April 30, 2009. Today we issued our year-end earnings press release and we will be filing our annual report on Form 10-K with the Securities and Exchange Commission today. Our public filings can be viewed on the SEC Web site at sec.gov or you may go to our Web site, oceanpowertechnologies.com. I will be joined on today's webcast by Mark Draper, our Chief Executive Officer. During the course of this conference call management may make projections or other forward-looking statements regarding future events or financial performance of the company within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. As indicated in the slide, these forward-looking statements are subject to numerous assumptions made by management regarding future circumstances over which the company may have little or no control, and involve risks and uncertainties and other factors that may cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. We refer you to the company's Form 10-K and other recent filings with the Securities and Exchange Commission for a description of these and other risk factors. I'll now turn the call over the Mark Draper, our Chief Executive Officer.

[Mark R. Draper:]

Thanks to everyone who has joined us today for the Web cast. Fiscal year 2009 has been a pivotal year for OPT. We saw strengthening of our leadership team. In addition, we made significant progress in the development of the PB150 PowerBuoy and also achieved major milestones on a number of key projects, including the deployment of several PowerBuoys. Our contract order backlog increased over the prior year. We advanced our relationships with existing partners and established new relationships in our global market. I would now like to discuss some of these operational successes. This year has seen of our leadership team with several key senior appointments. Effective February 1, 2009, I was appointed Chief Executive Officer of OPT in succession to Dr. George Taylor. Dr. Taylor will continue as executive chairman, providing OPT with strategic guidance and focus on business development opportunities. Seymour Preston, previously OPT’s Chairman and Non-Executive Director, was appointed Vice Chairman of the company and Lead Independent Director. In this capacity he will preside at all meetings of the board of directors and the stockholders. Other key appointments included key appointments included Dr. Philip Hart, who is recognized internationally for his expertise in marine technology, as our Chief Technology Officer. I will discuss Phil's background later. Victor Chatigny was appointed Non-Executive Director. Victor served over many years in a senior managing capacity at Measurement Specialties, Inc., a publicly-held company specializing in the design and manufacture of advanced technology-based sensors. In June 2009, Angus Norman was appointed Chief Executive of our wholly-owned wick, England. Angus joined us from EDF Energy where he held the position of Managing Director of Sustainable Solutions and brings more than a decade of leadership experience in the energy and renewable energy generation sector. For my part, I had held the position of Chief Operating Officer of OPT since June 2007, as well as Chief Executive and Director of OPT, Ltd., our European subsidiary, since September 2004. During this time I have been closely involved in the development of our PB150 PowerBuoy and in expanding operations in Europe and North America. Prior to joining OPT I undertook a broad range of senior managerial and engineering roles at Powergen PLC, a major UK energy utility, including responsibility for nine major power stations, a combined heat and power business, the technology division and the company’s renewable energy business, where I played a key role in establishing and managing the growth of Powergen's renewable generation activities, including on-shore and off-shore wind farms. In addition, we have strengthened our technical capability through the hiring of qualified personnel in the manufacturing, deployment, and engineering functions. As of April 30, 2009, OPT had 57 employees, an increase of 10 over the year. OPT is delighted to welcome our new team members, who bring with them a wealth of expertise garnered from diverse experience in the ocean industry, engineering, and energy and renewable power generation, which will prove invaluable as the company moves to the next stage of growth. The strengthening of the company can be seen in the business development successes that were achieved over the year. We strengthened our relationship with existing partners, in particular the U.S. Navy and Lockheed Martin, and established strong foundations with new ones, such as with Leighton Contractors and Griffin Energy in Australia. We received several awards of additional funding, including the receipt of $2.0 million from the U.S. Department of Energy in support of our wave power project in Reedsport, Oregon, which is the first award for the building of ocean wave energy systems by the DOE. Our contract order backlog as of April 30, 2009, increased to $7.5 million compared with $5.5 million at the end of fiscal year 2008. All of these developments further OPT's expansion strategy and improve the company's future prospects. Now, I would like to give you an update of some of our major projects under development. This year we expanded our operations in Europe as we deployed and ocean-tested our first PowerBuoy under contract with Iberdrola, one of the world's largest renewable energy companies, and its partners, at a site approximately three miles off the coast of Santoña, Spain. The buoy, an enhanced PB40 PowerBuoy, is our first in European waters. Enhanced PB40 has a length and diameter of 20 meters and 7 meters respectively and weights approximately 60 tons, so we were very pleased to establish a safe and efficient deployment. Following deployment and initial ocean testing of the PowerBuoy last September, OPT retrieved the buoy and has been working on improvements to the power take-off and control systems, and also the manufacturing and testing of the underwater substation pod. The company is currently in discussions with its partners in the Spain project regarding the nature and costs of the system improvements and their effects on the plans for the redeployment of the buoy and the next phase of the project. The underwater power transmission cable has been purchased for this project. Construction of the underwater substation pod is nearly complete and will soon commence testing. Both the cable and substation pod are awaiting a permit to allow for installation. Also in Europe, this year we secured a 2MW berth at the European Marine Energy Center in the Orkney Islands of Scotland and made significant progress on the development of a 150kW PowerBuoy, which is expected to be deployed at this site under contract with the Scottish government. The PowerBuoy is expected to be ready for deployment by the end of 2009. We are also very encouraged by government and European support for the Wave Hub project in the southwest of England. For the Wave Hub, which is managed by the South West of England Regional Development Agency [SWRDA], OPT is in the process of planning and developing a project to install a 5MW demonstration wave power station off the coast of Cornwall. During fiscal year, OPT worked with the engineering contractor appointed by SWRDA to manage the construction of the marine energy test site the tender process for the design and build of the infrastructure is underway. The Wave Hub cabling and subsea infrastructure is expected to be installed in 2010 and we expect some positive news from the U.K. government that will also take this project forward. In the United States we ocean tested two PowerBuoys under contract with the U.S. Navy. The first was part of an ongoing program with the U.S. Navy for the development and construction of wave power stations at the Marine Corps Base in Oahu, Hawaii, for which we received an additional $1.4 million in funding from the U.S. Navy in fiscal year 2009. In October 2008 we developed the 40KW peak-rated PowerBuoy near Kaneohe Bay. Initial commissioning tests provided encouraging results and the power produced was in line with the predicted levels. The buoy is expected to be redeployed later this year to continue testing and ultimately to be connected to the grid via an existing underwater power transmission cable. The second buoy for the U.S. Navy was under our $1.7 million contract to provide the U.S. Navy with autonomous PowerBuoy technology for their Deep Water Acoustic Detection System for ocean data gathering and Homeland Security. We ocean tested this PowerBuoy off the coast of New Jersey in October 2008. Following this test phase, OPT received a new $3.0 million contract from the U.S. Navy for the second stage of the program for the building of an advanced version of the autonomous PowerBuoy, on which work began during the year. As already mentioned, this year we received a $2.0 million award from the U.S. Department of Energy in support of our wave power project in Reedsport, Oregon, which also is in collaboration with PNGC Power [Pacific Northwest Generating Cooperative]. The grant will be used to fund the fabrication, assembly, and factory testing of the first PowerBuoy to be installed at the Reedsport site, which will be a 150KW-rated PowerBuoy. We are currently working closely with interested stakeholder groups at local, county, state, and federal agency levels while making steady progress on the overall permitting and licensing process. Another key development was the signing of a letter of intent with Lockheed Martin Corporation to collaborate in the delivery of a utility-scale wave power generation project in North America, which is expected to be off the coast of either California or Oregon. This builds on our previous work together on systems for U.S. Homeland Security and maritime surveillance. Finally, we expanded our global presence with the signing of two agreements in Australia. In May 2008 OPT signed a joint development agreement Griffin Energy, a leading Western Australia diversified energy supplier, to explore the development of a 10MW power station in Western Australia and potential expansion to 100MW. We are also collaborating with Leighton Contractors, part of one of Australia’s largest project development and contracting groups, on establishing the renewable energy sector with the development of wave power projects off the east and south coasts of Australia. Central to our success in these projects is the continuing development of our PowerBuoy technology. We are delighted to welcome Dr. Phil Hart to the position of Chief Technology Officer, where he will lead the development of the next generation of PowerBuoy systems, as well as take charge of OPT's ongoing engineering programs. Dr Hart is recognized internationally for his expertise in marine technology. His career includes extensive experience in developing and implementing technology and leading teams of marine engineers on a wide range of marine and subsea development engineering projects. His inventions and developments have been successfully applied on an international basis on ships at sea at subsea vehicles and installations. Prior to joining OPT, Dr. Hart worked for eight years for Global Marine Systems and International Marine Technology, an engineering company. A major part of our current efforts are focused on the PB150 PowerBuoy, which is due to be ready for deployment in the Orkney Islands by the end of this year and is also expected to be deployed at a later time off Reedsport, Oregon. Earlier in the year we announced electrical control systems, which is a core for PB150 system, have been shipped to the U.K. from OPT's Pennington, New Jersey, manufacturing facility. More recently we have achieved two further manufacturing [inaudible] of the completion of the mechanical elements of the power system and the awarding of the steel fabrication contract for the PowerBuoy structure. Moreover, the advances we have made with the 150KW PowerBuoy system will facilitate our future transition to the 500KW PowerBuoy. As a result, the current focus of OPT's engineering and development efforts has increased the power output and maintainability of the PowerBuoy and exploring design and construction techniques that are expected to enable the large system to be built, deployed, and maintained at a significant reduced cost. We are also very pleased that three new U.S. patents were issued during fiscal 2009, bringing a total as of year end to 40 issues U.S. patents and we filed applications for seven new U.S. patents during the year. With that, I will hand the presentation over to Chuck to discuss fiscal year 2009's financial results.

[Charles F. Dunleavy:]

Our earnings decreased in fiscal 2009 to $4.0 million as compared to $4.8 million in fiscal 2008. The decrease in revenues primarily reflects the lower level of billable activity in connection with work on our wave power station off the coast of Spain. Also, lower revenues related to our Hawaii project for the U.S. Navy and our EMEC project off Orkney, Scotland, were offset by an increase in revenue related to our wave power project off the coast of Reedsport, Oregon. Cost of revenues decreased to $4.8 million in fiscal 2009 as compared to $8.0 million in fiscal 2008. This decrease reflected a lower level of activity on revenue-bearing contracts and the recognition in fiscal 2008 of an additional anticipated loss at completion on our contract for a wave power station off the coast of Spain. Our development costs increased to $8.4 million as compared to $8.3 million in fiscal 2008. This reflected our continuing work to increase the power output of our utility PowerBuoy system to complete the 150KW PowerBuoy. We expect our product development costs to increase next year as we continue to focus on increasing the output and efficiency of our PowerBuoy systems. Selling, general, and administrative costs increased to $9.6 million in fiscal 2009 as compared to $7.7 million in fiscal 2008. The increase was primarily due to an additional $1.8 million in payroll and incentive-based costs related to company growth. Our loss from operations, at $18.7 million, was in accordance with our budget set at the beginning of the year. Interest income in fiscal 2009 decreased by $2.7 million to $1.7 million as compared to $4.4 million in fiscal 2008. This reflected lower interest rates as well as a decrease in cash, cash equivalents, and investments. The company recognized a foreign exchange loss of $1.3 million in fiscal 2009 compared to a foreign exchange gain of $84,000 in the prior year. The difference was primarily attributable to the relative change in value of the British pound sterling compared to the U.S. dollar during the two periods. The company finished the year with very strong liquidity. At April 30, 2009, total cash, cash equivalents, and investments, were $81.7 million compared to $101.1 million at April 30, 2008. Our cash equivalents, certificates of deposit, and marketable cash investments consist primarily of U.S. Treasury bills and notes, terms deposits at highly-rated commercial banks, and money market funds with large commercial banks. Of the total, non-U.S. dollar denominated certificates of deposits and cash accounts had a balance of $8.5 million as of April 30, 2009, or just over 10% of the total. Net cash used in operating activities was $16.7 million for fiscal year 2009 as compared to $13.7 million for the prior year. The change was the result of an increase in net loss, an increase in non-cash charges of $1.6 million, and a decrease in cash provided by operating assets from liabilities of $0.9 million. Net cash used in investing activities was $58.6 million for fiscal 2009 compared with $4.4 million for fiscal 2008. The change primarily reflected a net increase in purchases of securities with maturities longer than 90 days, as well as increases in purchases of equipment and patent costs. Net cash provided by financing activities was $0.2 million in fiscal 2009, primarily reflecting our receipts of a non-interest bearing loan from the state of New Jersey. In fiscal 2008 net cash used in financing activities was $0.6 million, resulting from a payment of certain accrued expenses associated with our U.S. initial public offering, partially offset by proceeds from the exercise of stock options. Going forward, we expect to devote substantial resources to continue our development efforts for our PowerBuoy systems and to expand our sales, marketing, and manufacturing programs associated with the commercialization of the PowerBuoy system. However, in fiscal 2010 we expect our cash burn to be less than that experienced in fiscal 2009. Now I will turn the call back over to Mark for our view on OPT's future development and outlook for the wave power industry.

[Mark R. Draper:]

I would now like to look forward and discuss our growth strategies as we enter the next stage of our development. Over the forthcoming months OPT will reach further milestones with a number of key projects, including our PB150 PowerBuoy being ready for deployment at EMEC by the end of calendar year 2009, the redeployment this year in collaboration with the U.S. Navy of the Hawaii PowerBuoy to continue testing and ultimately to be connected to the Oahu power grid and strong progress on manufacture of the first PB150 for the Reedsport, Oregon, project. We are also currently working on an advanced version of the autonomous PowerBuoy under the DWADS program with the U.S. Navy. For our project in Spain we are continuing on the manufacture and test of the underwater substation pod. We anticipate achieving noticeable success with all of these projects. While we continue to focus on the construction of our PB150 PowerBuoy, and advancing our existing projects, we remain committed to increasing our sales and marketing efforts over the next three years, primarily on the West Coast of North America, the West Coast of Europe, and the coast of Australia and Japan. These areas represent strong potential markets for our PowerBuoy wave power stations because they combine favorable wave conditions, political and economic stability, large population centers, high levels of industrialization, and significant and increasing electricity requirements. We intend to build on our existing commercial relationships and expand the number and size of projects we have with our current customers. We have already delivered on this strategy by continuing to build on our relationships with the U.S. Navy and Lockheed Martin respectively, as well as established new partnerships, such as with Leighton Contractors in Australia. Fiscal 2009 has been an important year in the development of the company. We have achieved significant milestones in our projects and product development, furthered existing partnerships and established new relationships, and have strengthened our management and technical capabilities. This corresponded with a macro economic climate of growing interest in wave power as a clean alternative to traditional sources of energy, as well as increasing recognition of how it compared favorably with other renewable energy sources. Market demand is looking positive and OPT is well placed to benefit from this momentum. In particular, we expect to benefit from the recent expansion of the production tax credit in the United States to include wave energy as well as funding opportunities under economic stimulus initiatives. The Obama administration appears to be keen on developing renewable energy as a commercial source of energy for the country and it is expected that the U.S. federal and state governments will increase their investments in the renewable energy sector. In anticipation of such investments, we are devoting additional resources to develop proposals to seek government funding to support existing projects and technology enhancements. As an early indication of this grant support is OPT's receipt of a $2.0 million award from the U.S. Department of Energy in support of our wave power project in Reedsport, Oregon. Finally, OPT has a strong financial position that we can leverage as we continue to expand our business. Our cash position is an important advantage, given the current economy and the weak credit market. Our cash burn for fiscal 2009 has remained in line with guidance and our plans for this new fiscal year 2010 includes a reduction in our cash burn rate. At OPT we are dedicated to maintaining our strong financial position as we focus on driving the company forward. With that, I would like to thank you all for attending today's Web cast and for your continued support and interest as we work towards making Ocean Power Technologies a leading player in the worldwide energy marketplace.

[Operator:]

This concludes today’s conference call.