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Some Prefer Southern Company Over Wisconsin Energy: I Just Don’t Get It

Summary I recently published a follow- up article about Wisconsin Energy after the acquisition of Integrys. Several friends told me that I should prefer Southern Company over Wisconsin Energy. They claim that the superior yield is due to some short term hardships that will soon be over. I totally disagree, I believe Wisconsin Energy is by far a superior investment. I will now try to explain why. Introduction A week ago I wrote this article about Wisconsin Energy (NYSE: WEC ). In the article, I tried to analyze the company after the acquisition of Integrys (NYSE: TEG ). The article is really in favor of buying the shares of the company. Several friends told me after reading the article that I should prefer Southern Company (NYSE: SO ) over Wisconsin Energy. They claim that the superior dividend yield and the longer streak of dividend raises make it a superior investment for dividend growth investors. They believe that currently, the company suffers from short-term headwinds. I read a lot about Southern Company and I totally disagree. In this article, I will show the fundamentals and valuation of the company, and then show a comparison with Wisconsin Energy, that I believe will allow me to emphasize the superiority of Wisconsin Energy over Southern Company. Southern Company through its subsidiaries, Alabama Power Company, Georgia Power Company, Gulf Power Company and Mississippi Power Company, supplies electric service in the states of Alabama, Georgia, Florida, and Mississippi. Each of those subsidiaries is an operating public utility company. Additionally, Southern Company owns all of the common stock of Southern Power Company, which is also an operating public utility company, which constructs, acquires, owns, and manages generation assets and sells electricity at market-based rates in the wholesale market. Fundamentals Southern Company has terrible fundamentals, really, it is hard for me to describe it otherwise. The revenues for example grew from $13.554 in 2005 to $18.467 in 2014. This is CAGR of 3%, which might be reasonable if the income is growing at least at the same pace. Yes, it is a utility company which doesn’t show fast growth, but I still have higher expectations. SO Revenue (NYSE: TTM ) data by YCharts EPS growth is even worse, when thinking about the EPS growth together with inflation, well there is practically none. The EPS grew from $2.13 in 2005 to $2.18 in 2014. This is CAGR of 0.23%, which is practically no growth, and when taking inflation into consideration, it is practically declining. Let’s look now towards the future. The analysts’ estimates are for growth of 2.5%- 3% in EPS for the next 3- 5 years. Having said that, I am not happy with the EPS growth in the past and the future estimates. SO EPS Diluted (Annual) data by YCharts The dividend is another weak fundamental in my opinion. The annual payment grew from $1.49 in 2005 to $2.1 in 2014. That is CAGR of just 3.5%. As you read above, as EPS is flat, the dividend rose by expanding the payout ratio. This is not sustainable for the long run, and therefore it makes me worry about the ability of the company to show real growth. In 2014, the payout ratio was over 95%, and even for the estimate for 2015, the payout ratio will be over 75% which is high for utilities. Currently, the company yields just under 5%. I don’t think the yield is high enough to justify such slow growth. SO Dividend data by YCharts Usually I like it when companies reward shareholders by using big parts of the FCF for dividends and share repurchases. However, with such a high payout ratio, I didn’t expect Southern Company to buy its own shares. Yet, I figured out that not only that the number of shares didn’t decrease, it actually rose by over 22% over the past decade. I don’t mind being diluted when smart acquisitions are made like the acquisition of Integrys by Wisconsin, or by the purchases of new properties by Realty Income (NYSE: O ). In these cases the dilution is used to grow EPS and FFO. In this case, the dilution comes with low growth. Not my cup of tea. Valuation When I look at the valuation of Southern Company, I find a company that is valued cheaper than Wisconsin Energy. The difference in the valuation makes perfect sense as Wisconsin Energy is growing its EPS while Southern Company has stagnated. In my opinion, the difference isn’t big enough. I find Wisconsin Energy fairly valued for a company that will grow at around 6% every year. By looking at the forward P/E for this year and the year after, I can see that the gap is becoming smaller and smaller. As a long term investor, it is hard for me to justify purchasing Southern Company at the current valuation. SO PE Ratio ( TTM ) data by YCharts The lower valuation is not low enough for me to consider Southern Company at the moment. It might sound odd, but I find it overvalued when compared to other high yielding companies, with slower than average growth. Risks As I see Southern Company, there are two main risks to this investment. The first one is the lack of growth catalysts. The company is forecasted to grow its earnings by less than 3% annually over the next several years. This is very low even for a utility company, especially one that expanded its payout ratio so much. The company must find new ways to grow its income and revenues. The second risk is the still increasing expenses of the Kemper project in Mississippi. This project consumes more and more money, and it takes a big part of the cash flow as it increases the capex. In 2014 alone, the expenses on this project cost the company $0.83 per share. Southern Company will have to invest more money in order to finish it. Finishing it will indeed free some if its cash flow, but it will still not be able to serve as a real growth catalyst. Opportunities Southern Company still has several opportunities, but I find them pretty vague. Firstly, most major expenses on the Kemper project are behind us already. The necessary investment will now be much lower, and it will allow the company to use the money in a better way. Another opportunity is the fact that even when it suffers from headwinds, Southern Company still manages to show fair margins and fair return on equity. If the company will be able to find growth prospects, it will be able to utilize its efficient structure to create more income and more value to its shareholders. Comparison with Wisconsin Energy I will now sum the comparison between these companies. I believe that Wisconsin Energy has superior fundamentals when looking at the past decade and the next five years. Southern Company is valued cheaper, but not cheap enough to justify the lack of growth in the EPS. Wisconsin Energy, doesn’t suffer from huge expenses due to problematic projects such as Kemper in Mississippi. This kind of projects consume a lot of capital, and it will be hard for them to return the money invested. Wisconsin Energy has a lower debt burden. The debt to equity ratio is lower, and it gives Wisconsin Energy more flexibility. Southern company has more debt and a very high payout ratio. This is a combination that can be damaging to the company. It puts the dividend in an unpleasant place. Not only that, Wisconsin Energy is working on lowering its debt after the acquisition of Integrys. Southern Company on the other hand has higher margins and return on equity. This is a positive sign, which is not enough when the company can’t find growth prospects. Yet, to be fair, holding a more profitable company is always a plus. I am writing from my position as dividend growth investor, so it makes perfect sense that I will give Southern Company credit for the higher dividend yield. The dividend yield is much higher at almost 5% compared to the yield of over 3.5% that Wisconsin Energy has. If you look for income it is an important aspect. Conclusion I am certain that Wisconsin Energy can show superior returns for the near future. It has better fundamentals and growth opportunities, and I think that dividend growth investors should prefer it over Southern Company. In my opinion, it will also beat Southern Company in total returns even though the latter has higher dividend yield. I would only pick Southern Company if I were a retiree who is looking for income right here and right now.

Just Energy (JE) Q2 2016 Results – Earnings Call Transcript

Just Energy Group Inc. (NYSE: JE ) Q2 2016 Earnings Conference Call November 12, 2015 02:00 PM ET Executives Rebecca MacDonald – Executive Chair Deb Merril – Co-CEO James Lewis – Co-CEO Pat McCullough – CFO Analysts Nelson Ng – RBC Capital Markets Damir Gunja – TD Securities Kevin Chiang – CIBC Carter Driscoll – FBR Operator Good afternoon, ladies and gentlemen. Welcome to the Just Energy Group Incorporated Conference Call to discuss the Second Quarter 2016 Results for the period ended September 30, 2015. At the end of today’s presentation, there will be a formal Q&A session. [Operator Instructions] I would now like to turn the meeting over to Deb Merril. Please go ahead, Deb. Deb Merril Thank you very much. Hi. My name is Deb Merril. I’m the Co-CEO of Just Energy and I would like to welcome you all for our fiscal 2016 second quarter conference call. I have with me today Rebecca MacDonald, our Executive Chair; my Co-CEO, James Lewis; as well as Pat McCullough, our CFO. Pat and I will discuss the results of the quarter as well as our expectations for the future. We will then open the call to questions. Before we begin, let me preface the call by telling you that our earnings release and potentially our answers to your questions will contain forward-looking financial information. This information may eventually prove to be inaccurate, so please read the disclaimer regarding such information at the bottom of our press release. We are extremely pleased with the results this quarter. Our business continues to perform very well delivering results that demonstrate a significantly improved profitability profile of the company, as well as highlight our ability to generate meaningful cash flow to meet our ongoing capital commitments, while funding our strategic growth. Our profitability profile continued to improve as a result of our margin per customer improvement initiatives. As a result, we were able to convert solid top-line revenue growth during the period to a 44% increase in base EBITDA. During the quarter, we added 290,000 gross customers in total, this fully offset the attrition and failure to renew within our customer base of over 4.6 million residential customer equivalent, as well as resulted in net customer additions of 4,000 RCEs. While down year-over-year it’s important to understand that these net additions were accomplished in the midst of our ongoing margin improvement initiatives which as you all are well aware has resulted in the company greatly improving the overall profit goals. This aligns with our pursue to driving more margin per customer and highlights our commitment to only accept new customers that meet our profitability profile, even if that results in temporary increases into attrition. Our goal is to optimize absolute profit, absolute cash and absolute returns for our shareholders. If that means we have the color our book order slightly to deliver superior absolute returns that’s what we’ll do. Now that doesn’t mean we aren’t claiming we’re on growth. We will grow in three ways. First, we’re going to increase of our footprint to bring our product to the markets. We’re currently evaluating our opportunities both domestically and internationally to do this. Second, we’ll increase the number of products per customer through adding new products and technology into our portfolio. Finally, we’ll continue to pursue relationships with strategic partners to deliver broader energy management solutions, like our partnership with Clean Power Finance. I’ll also give more detail on these things in my closing comments. This was a great quarter for our business. The improve profitability drove significantly improved cash flow, an increase based on some continuing operations. In addition base funds from continuing operations increased 59% during the quarter and we achieved a payout ratio of 50% during the second quarter. These are levels that this company has not seen in years. In early September, we successfully renegotiated the credit facility, resulting in an increase to our line of credit for an additional three years under favorable terms. Simultaneously, we continue to reduce our long-term debt while growing earnings. We are very pleased to be able to say that our book value net debt was under three times our trailing 12 month base EBITDA, significantly improved from 4.3 times just one-year ago. We’re working hard to further improve upon that significant accomplishment and we remain committed to further reducing this ratio and in time would like to see that ratio closer to two. We remain committed to running the financially prudent organization for the benefit of shareholders. Our aim is to de-lever, restructure our existing debt, protect the $0.50 per share dividend and protect our owners from further deletion — from future deletions. Overall, the results for the quarter in the first-half with fiscal 2016 exceeded management’s expectations and provides us great confidence we can continue to deliver throughout the back half of our fiscal year and beyond. With that I’ll turn it over to Pat. Pat McCullough Thank you, Deb. As Deb said, we had another outstanding quarter in terms of both profitability and cash flow. In fact this is the third straight quarter in which the business has delivered greater than 20% year-over-year growth in both base EBITDA and base funds from operations. The business is performing exceptionally well and we’re beginning to see a consistency in our ability to take exceptional top-line performance and deliver even more impressive bottom-line results. Much like the first quarter you can see that amplification effect again in our second quarter as we drove top-line revenue growth by 18%, grew gross margin by 26% and delivered even higher year-over-year growth and base EBITDA 44%. As I said last quarter, this is very important to us as it means that we’re doing more with every dollar of sales that we bring into the company. The continued improvement in our operating results is also reflected in our cash flow performance in the quarter. We ended the quarter with 89 million in cash and cash equivalents, up from 79 million at the end of fiscal 2015 and up from $30 million 12 months ago. In addition base funds from operations increased 59% from the same quarter last year and are up 72% during the first six months of the year compared to last year. Let me cover some of the highlights of the second quarter and then provide some added color in certain areas. In the period, gross margin was up 26% to $167.2 million both the consumer and commercial divisions were able to increase gross margin year-over-year by double-digit, as a result of management’s ongoing margin per customer improvement initiatives as well as lower commodity cost and the strengthening of the U.S. dollar. As we’ve discussed in great detail with you over the course of the past year, we continue to successfully execute our margin per customer improvement initiatives in which we remain focused on implementing a more disciplined pricing strategy, in which we only accept new customers that meet our profitability targets and allow lower margin customers to a trip [ph]. The result of the past year demonstrate the success of this initiative as we’ve improved our year-over-year gross margin by 22% on a trailing 12 month basis with even more progress available to us. To add some additional color on a most recent effectiveness of this initiative. We’re now signing consumer margins at $209 per RCE which compares to $188 one year ago. The higher margin on consumer customers is an important positive trend as these customers are largely locked into multi-year contract terms. On the commercial side margins are now being added at $84 per RCE which compares to only $80 one year ago. Perhaps just as notable is the widening gross margin spread between customer added and customers loss in both divisions during the period. Base EBITDA of $45.7 million grew 44% year-over-year even while absorbing 3.4 million of commercial prepaid commission expense. This was due to last quarter’s change in our commercial commission firms. Before the impact of prepaid commission expense, we actually grew year-over-year base EBITDA by an outstanding 55% during the quarter. The consumer division contributed 29.5 million to base EBITDA for the quarter, an increase of 75% while the commercial division contributed 16.2 million to base EBITDA, a 9% increase year-over-year. Within commercial there was a 32% increase in base EBITDA before the impact of prepaid commission expense. As Deb mentioned earlier, we continue to effectively manage overhead cost. General and administrative expenses declined year-over-year after taking into account the impact of the stronger dollar on U.S. based cost. Selling and marketing expenses increased by over 23% from the same quarter last year. However, nearly all of the increase was driven by the stronger dollar and prepaid commission expense. Similar to general and administrative expenses our fixed sales and marketing cost were actually flat year-over-year after that adjustment. Let me close with an update on our other key financial metrics and balance sheet items. The payout ratio from base funds from continuing operations was 50% for the three months ending September 30th, compared to 78% reported in the same quarter of fiscal 2015. On a trailing 12 month basis, the payout ratio has now decline to 62% overall. We ended the quarter with 88.6 million in cash and cash equivalents, an increase of 197% from 29.8 million reported in the year ago period. We reported no debt outstanding on the credit facilities at quarter end as compared to 163.1 million drawn last year. The increase in cash balances and decrease in credit facility withdrawals over the past year have resulted in 222 million of additional corporate buying power. As we head into the fiscal third quarter, I want to stop and remind everyone [Audio Gap] expensed for fiscal 2016. We expected over half of that 20 million will be expensed in the upcoming third quarter. This will of course also affect the payout ratio in the third quarter. With that said, we remain committed to reaching and maintaining a payout ratio of less than 70% in the near-term as we continue to grow FFO while remaining committed to our current dividend policy. At quarter end long-term debt was $685.5 million, a decrease of $126.3 million or 16% year-over-year. Booked value net debt was 2.96 or less than three times the trailing 12 month base EBITDA, significantly improved from 4.3 times just one year ago and something the team here is extremely proud of accomplishing in a relatively short time frame. As Deb mentioned, we renegotiated the credit facility during the quarter resulting in an increased line to 277.5 million for an additional three years under favorable terms from a very impressive group of syndicate lenders. No cash was withdrawn on the facility as of September 30, 2015. During the quarter, we also purchased 3.3 million of the 330 million convertible debentures under our NCIB program. During the past year $6 million of the $330 million convertible debentures have been repurchased under this program. In summary, the business has delivered outstanding results in the first half of fiscal 2016 and we expect this to continue in the second half of the year. As such we are reaffirming our previously provided guidance of $193 million to $203 million of base EBITDA for the full year fiscal 2016, an increase of 7% to 13% when compared directly to fiscal 2015. Please keep in mind that the guidance for fiscal 2016 includes $20 million of incremental deductions in base EBITDA related to the recently implemented change to our commercial commission terms, meaning that management have effectively raised our guidance for the year by $20 million. When adjusted for this $20 million change in classifications base EBITDA actually is increasing by 18% to 24% in fiscal 2016. With that, I’ll turn it over to Deb for some concluding remarks. Deb Merril Thank you, Pat. Having heard more of the details from Pat, I trust you can appreciate why the team here at Just Energy is enthusiastic about the progress being made. We are very proud of the financial improvements, but even more importantly, we are excited about the opportunities to grow this business through new initiatives. I’ll just make a few final comments to update you on some of these exciting growth initiatives. From a geographical expectation perspective, the UK business continues to thrive. Today, that market has grown to become 6% of our customer base at 275,000 RCEs in total. This is a very profitable piece of the business for our company and we are seeing growth both on commercial and the consumer side. We believe this early success validates or model and our ability to compete outside of North America taking the lessons learned and evaluating new avenues for growth and new market that will benefit from our innovative approach to energy management solutions. Given or greatly improved financial position, we are actively evaluating new market opportunity that offers from demographic, clear participation and industry trend and favorable regulatory landscape across new parts in the world. From a product innovation perspective, we believe a large part of our continue success, will be driven by our ability to provide innovative, value driven products to meet customers need. We’re finding these types of products are gaining more appeal and presenting more value per customers which in turn allows us to price our energy management solutions at more premium points as well as retain customers for a longer duration and drive sustainable profitability for the future. For example, our flat bill offering, which are now being marketed in Ontario, Illinois, Pennsylvania, Ohio, Georgia and the UK allow consumers ultimate predictability. We introduced this product over two years ago in Ontario and based on that success we rolled it out on a broader scale just in the last few months. These products remove the price and volume risk from customers billed by guaranteeing them the same price every month for their energy supply regardless of price fluctuation or changes in usage. We can demonstrate greater than average margins on its offering as customers see the value and predictability in this product. Another example is our smart thermostat, where we currently have almost 50,000 customers today with the product. The smart thermostat are bundled with the commodity contract and our experience indicates that customers with bundled product have lower attraction and higher overall profitability. Further expansions of flat bill offering smart thermostat and other innovative products or key drivers for continued growth of Just Energy and we’ll keep adding new innovative product bundled with technology to drive continued improvement and the profitability of the business. Before concluding, let me provide you with an update on our solar business. Just Energy Solar program remains on track. The feedback has been very positive and the door-to-door efficiencies are proving to support strong growth in this platform. We commenced our initial pilot phase in California and New York with a volume of customer signed during this initial pilot resulting in higher-than-expected profit. We continue to integrate lessons learned through our pilot program into our go-to-market strategy, we brought in key talent to support our solar growth and we are working closely with our partner Clean Power Finance to create innovative new products that address the challenges within the solar market associated with strict underwriting criteria as well as installation capacity. Based on the success for the pilot launch, operations will continue to grow with further expansion and the near-term, while continuing to push the industry forward towards developing more value-add customer friendly products. During Q1 and Q2, Just Energy added hundreds of new solar customers and by fiscal year-end we expect to have [indiscernible]. To summarize, we’re operating from a greatly improved financial position, which we expect will continue to strengthen. Our financial flexibility, combined with our commitment to maintaining a capital-light model, supports our ability to pursue our growth strategy, which focuses on new geographies, innovative products that meet customers changing demands, and new energy management solutions that will continue to disrupt the traditional utility model. Our first half performance puts us on track to achieve our full year expectations. As we are now beginning our largest seasonal sales generated quarters. With that, we’ll now open for questions. Question-and-Answer Session Operator Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Nelson Ng from RBC Capital Markets. Nelson please go ahead. Nelson Ng Quick question on the 2017 debts, can you just give us update on programs in terms of the — I guess eventual refi of that debt and I guess based on what you know today and what’s your — what the most likely solution for that debt? Pat McCullough Thanks Nelson. This is Pat. Let’s talk about what we’re trying to do in reference what Deb was talking about. So as we look at the overall strategy we tend to de-lever, we like to restructure that debt and we’re obviously focused on the 2017 330 million converse given their size and being an earliest maturity. But we’re also looking to protect shareholders from future dilution. So what management is attempting to do right now is restructure those 330s with a pure debt instrument. And in our pursuits of doing that if we’re able to do that we’ll obviously protect the shareholders from a future dilutive instrument. If we’re unable to accomplish that through a pure debt instrument then we obviously know that the Canadian convertible market, the U.S. convertible market maybe price a debt with stock warrants will be there for us. But the company is really aiming to protect the shareholders in terms of restructuring net debt. Prior to going towards something with an equity hook. Nelson Ng And then just kind of moving on to weather, I think everyone has been talking about El Niño lately, can you just comment about the weather derivatives you have and what type of variability you would expect in fiscal Q4 if the weather turns out to be quite warm? James Lewis Nelson this ism James Lewis. From our perspective as you know, we look to stabilize our all financials there and we put the weather hedge in place. As we’ve said historically, we expect that weather hedge to perform effectively in the range of 0% to 5% in terms of dollar impact there. But historically we’ve done a much better job of identifying new ways to protecting ourselves and we feel like that weather hedge that put in place in the last few years has served us well. Nelson Ng And I guess just one last question, I think Deb mentioned that you guys are looking to expanding to new regions, I presume you’re talking about new countries rather than new states and provinces? And also does that mean you’re kind of expanding your European presence? Deb Merril What I think — the UK expansion, we’re very pleased with the success of it and it kind of proved out the model that we can take what we know here and what we do unique here to other countries where it make sense. So we are actively looking at Europe and other parts of the world right now, to decide where we want to expand to next. It will be all be based on making sure that our model fit there as well as what technology is available, what we can really do in that market as far as bringing some alternatives that is unique. So the answer is yes and probably most of it will be international expansion. We have some utilities in some markets that we’re not currently in, which will round that out over the next bit, but most of the focus will be international. Operator And our next question comes from Damir Gunja from TD Securities. Damir, please go ahead. Damir Gunja Just wanted to touch on — obviously, you’ve done a great job taking you margins up and letting go of the lower margin customers coming up for renewal, where would you see along that process when you look at your book, I am just trying to think about the coming year and sort of how much of that process has been completed and how much is left? James Lewis Damir, I think, James here again, I think when you look at our book right now, the way we’ve evaluated is as we go forward, we look at the market that provide us the greatest flexibility and profitability, one of the things that we’ve done as we analyzed the market and the brokers, we look at the brokers who are providing us the high margin [Audio Gap] customers are the ones we’re working with to make sure we are giving those folks what they need for them to be successful which is allowing us to be successful. And then on the flipside on the residential, what we’re looking at as Deb talked about those innovative products, the places that slowed it down are some of the utilities that can’t handle them, that can’t handle like a [indiscernible] or other innovative type product and we’re working feverishly on those markets. So that’s the way we look at it to go forward. We think we see growth for the foreseeable future here as we move forward. Damir Gunja Is there a number that you can peg, like could you say 25% of the book is still at lower margins or is it 10% or is it 5%? That’s probably a tough thing to answer. Deb Merril It’s really, Damir, it’s on discipline. So it’s not necessarily looking at the bookings and saying when to get rid of these customers, it is disciplined around every product, ever opportunity we have to interact with customer and get a customer. We want to maintain discipline around margins. So those are the things that drive that number not necessarily — okay, we’re 10% through this or 95% through this, it really is a matter of discipline on how we’re operating the business. Damir Gunja Could you give us a little bit of color by region, say Canada, UK versus U.S. or you’re seeing the best margins or is there good and bad in every market? Deb Merril There is definitely, and there are ebbs and flows as well. So if you look at, markets like Texas are highly competitive, but we have profitable products with the ecobee and some other things that we bundled together. So really it just depends on the market and kind of customers we’re going after. Operator [Operator Instructions] And our next question comes from Kevin Chiang from CIBC. Kevin, please go ahead. Kevin Chiang Thanks for taking my question. Maybe just more of a housekeeping question for me. I know you’ve change some of your, I guess accounting practices to be more transparent with some of these commission costs moving to the SG&A line and if you do highlight, it will be a $40 million, I guess headwind in 2017. Given some of the margin left you’re seeing and pushing to solar. Would you expect 2017 earnings to be higher than fiscal 2016 even in the face of this $40 million headwind reflecting some of these margin improvements and new opportunities or is that too bigger of a step-up to deal with? Deb Merril Yes. Kevin, I think from our perspective. We’re going to shoot for that double-digit growth, I think even in 2017 that 8% to 10% probably, is obviously a big headwind to overcome. So we believe that given what we’re seeing in our book as well as some of these other initiatives, that we can still maintain that. Kevin Chiang And just to clarify from that perceptively, when you look at 8% to 10% I presume a lot of that will be driven by solar, sounds like that’s going well. Do you have a sense or are you able to share with us that how much solar contributes to your outlook into fiscal 2017, even qualitatively I know you don’t have official guidance out there right now. Pat McCullough Yes, Kevin. The majority of that profit improvement will come from the three prongs of our gross strategy, which are international, geographic expansion, bring new products those flat billed products and anything like solar, those energy management solution add-ons. The uplift of that any organic the profit potential of the classic products and the classic book that we’re carrying forward. We think we can offset that 40 and still get us in that range of double-digit percentage growth. Operator And our next question comes from Carter Driscoll from FBR. Carter, please go ahead. Carter Driscoll So maybe you could help me understand, utilities can’t handle flat bill or may be qualitatively which geographies might struggle and why that should be a problem and I have several follow-ups. James Lewis Carter, which you’ll find is that some of the utilities for example and we called them rate ready market where you have to provide a rate to those customers. It can’t handle flat bill type product. So we have to be more innovative now, we adjust and communicate to customers and provide innovative product to customers in those jurisdictions. And that various by utility, so you might have multiple utilities in let’s say the state of Pennsylvania, where a few of the utilities you can do it and then few you can. Deb Merril So Carter essentially, they say give us your per kilowatt hour rate and we’ll small side of that time to customer volume and then we’ll build them for you. So in that case it’s very hard to back into a flat bill. Does that makes sense? Carter Driscoll Yes. I mean it’s almost like they’re a bigger intermediately then there are in another market, is that fair? Deb Merril Yes. There are certain utility that bill us, bill our charges on their bill and send to the customer and collect and then bring it back to us. And there are some markets where we bill the customer directly, which obviously gives us the most flexibility. Carter Driscoll I mean is the rational that they’re trying to strict closure to the customer is to why you see that being implemented into an intra-geography basis? James Lewis So Carter I think just historical. I think when you look at, the only product historically those folks have offered have been fixed rate type products or rate type products. As companies like us, have gotten more innovative and you’ve got more product whether it’s screen related, whether it’s thermostat, whether it’s LED lighting or the energy management warrantees those type of products you need to be innovative in places that allow us to bill gives us the greatest flexibility and places where we’re not allowed to build, we have to come up with alternatives to be innovative, but we think we can conquer those challenges. Carter Driscoll Okay. Thank you for that color. Moving over to solar, so obviously you’re in two markets today on regulated, one on the regulated. What are your expectations of moving into more unregulated market tradition or regulated markets to sell it as a bundle in terms of its ability to effect incremental margin. I mean are there differences, that you see between the two distinct markets where there could be a decided difference in margins. And again I realize I’m speculating here to some degree but that as you gear up to kind of port over from your pilot program over the next several quarters to new territories. I’m just trying to get a sense of where you think that margin contribution can come from and I realize it’s still going to be a small portion of your overall growth going forward in the near-term? Pat McCullough Yes. It’s a good question Carter, this is Pat. So if you think about California for example today, we can sell gas in California, we’re bringing residential rooftop solar to California. Smart thermostat and some of the future products that we’re planning can all be brought for the California resident. So the only thing we can’t deliver is that off peak power that this party come from the [indiscernible] in California. If you compared that to New York, New Jersey, Massachusetts, we can get the whole product offerings to our customers. If you think about regulated states that we’re not in today, think Arizona, Colorado, Nevada, this provides us an anchor product to enter those markets. So when we think about what Solar does for us; it number one, allows us to be more germane in a place like California where we’re only selling gas, it allows us to offer a superiors premium value prop to our current deregulated markets and then thirdly, it allows us an entry point into new markets that we don’t serve today. Carter Driscoll And then maybe just following up on that, obviously there is a bit of push back from the utilities in certain areas probably of a project and Solar city going head-to-head in that metering, Hawaii making a change, California as well. How do you think about that metering policies and their effect on maybe the territories you choose to go into, I guess you target for solar expansion? Deb Merril Carter, I think from our perspective we want policies that give customer choice and are definitely against anything that will limit their ability to take advantages of some of these things. And utility has vested interest of their own if they are trying to fight for as well. But we think there is plenty of opportunity for us to focus on the areas where we’re able to affect a customer’s sale in a positive way or how they manage their energy in a positive way. So while we’re probably on the side of Solar City and others just try to ensure that customers have all the options that they can possibly have to be able to be innovative in their home around energy. Carter Driscoll UK business, obviously I think your first target is a residential side and recently began targeting the commercial side, is there any color you can give us in terms of the split of the customers that you mostly added there, I think you’ve gone from 4% to 6% of total in the last couple of quarters? And then remind us again maybe some of the other countries in Continental Europe that might be more favorably exposed to your product offering? Deb Merril We actually started on the commercial side carter. So we took our commercial portal for pricing business customers over there quickly and was able to improve the performance of pricing and delivering price to sales channel over there. So that was the first foray into it, which has great, we cut our teeth, we learned the market, we know we have a lot of great people over there that work for us and make all this happen. So then we went into residential about a year later and residential we’ve actually focus a lot on the online shopping, we just recently started tele-sales and we’re looking at other options for us to be able to get customers. The interesting thing is taking some of the U.S. based things that we’re doing here with smart thermostat, slot bills and things like that and bring them over to the UK is very promising and it’s also very challenging because the regulators there only allow you to have four prices flash products at any given time. So that’s really a challenge for us, so if we sell a one, two and three year product then we — there is a three or four options. So we’re very limited on the number of products. But we are the only one over there who is currently marketing a flat, been getting some attention from a lot of people over there trying to understand what that actually looks like and seeing whether they believed or not. So we think eventually it’s going to take hold and really provides some innovation over there. As far as other expansion, we’re looking at Germany, Netherlands, Japan is the regulating coming up next year we’re looking at that. So we had a lot of things going on, but we’ll kind of approach this in the same way we approached the UK, which is what’s the opportunity, what’s the investment and making sure we have local talent and possibly partnerships in these areas that we can be able to grow efficiently and prudently. Carter Driscoll I am sorry just one housekeeping item, I think you talked about potentially entering year thousands [ph] of solar, I am assuming at fiscal year? Deb Merril Yes. Operator [Operator Instructions] Deb Merril Alright, so if there is no other questions, I want to thank everybody for their time and for your support and Pat, Jay and I and Rebecca would also like give a special thanks to all of the Just Energy family employees in all three countries that we currently have focus working to make this vision happen. So very much appreciate their efforts and appreciate your support and look forward to talking to you next time. Thank you very much. Operator Thank you. 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American DG Energy’s (ADGE) CEO John Hatsopoulos on Q3 2015 Results – Earnings Call Transcript

Call Start: 11:00 Call End: 11:48 American DG Energy, Inc. (NYSEMKT: ADGE ) Q3 2015 Earnings Conference Call November 11, 2015 11:00 A.M. ET Executives Bonnie Brown – CFO John N. Hatsopoulos – Co-CEO Benjamin Locke – Co-CEO Elias Samaras – CEO, EuroSite Power Analysts Ralph Wanger – RW Investments Unidentified Analyst – Oppenheimer Unidentified Analyst – Private Investor Operator Good morning and welcome to the American DG Energy Third Quarter 2015 Financial Earnings Conference Call. All participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. [Operator Instructions]. For your 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 Thursday, November 19, 2015. Individuals may access the recording by dialing 877-344-7529 from inside the U.S., 855-669-9658 from Canada, or 412-317-0088 from outside the U.S. Enter the replay conference number of 10075343 followed by the pound sign. Now, I would like to introduce Bonnie Brown, American DG Energy, Chief Financial Officer. Please go ahead. Bonnie Brown Thank you Rocco and good day and thank you all for joining us on Veterans Day for our third quarter earnings call. I am Bonnie Brown, American DG’s Chief Financial Officer. On the call with me today are John Hatsopoulos and Ben Locke our Co-CEOs. Also joining us is John Brooke [ph], our VP of Finance. Before we begin I would like to read our Safe Harbor statement. Various remarks that we may make about the company’s future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. We may make forward-looking statements about our future financial performance that involve risks and uncertainties. These risks and uncertainties could cause our results to differ materially from our current expectations. We encourage you to look at the company’s filings with the SEC to get a more complete picture of our business including the risks and uncertainties just mentioned. Also during this call, we will be referring to certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of the non-GAAP financial measures used on this call to the most directly comparable GAAP measures is available in our press release and in the tables accompanying that release. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our estimates change and therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today. And I would now turn it over to John Hatsopoulos for some opening remarks. John? John N. Hatsopoulos Ladies and gentlemen thank you very much for joining us. I would like to remind most of you that we are lucky to have Bonnie Brown back on the team. She worked for ten years at Tecogen and then for a short period of time she left us and then she missed us and came back and became CFO of American DG Energy and EuroSite. This is an exciting period for us even though the numbers are a little misleading. We had made a commitment that by 2016, the American operations of American DG will be cash flow positive and we are almost there. We lost only $51,000 for the quarter and even though the number of consolidated was 300,000 or so, 390,000 if I remember correctly, the bulk of it was because of a transition period of EuroSite which some of you might be investors and aware of the EuroSite numbers. It is our belief and goal that 2016 we will be cash flow positive in the United States and as I mentioned earlier, for the EuroSite, EuroSite believes they will be cash flow positive for the year 2016. And most probably we will be cash flow positive for the current quarter consolidated with EuroSite because they will be cash flow positive and will be either cash flow positive in the U.S. or almost there. With that I’d like to ask Ben Locke, who’s really running ADG and -– Ben? Benjamin Locke Thanks, John. So before I go into review of our third quarter, I’d like to provide a quick review of our business for those who maybe new to the call. ADG and EuroSite Power are in the business of selling energy in the form of electricity, heat, and cooling to customers who wish to save money spent on traditional sources of energy. We own the assets to produce the energy onsite and earn revenue as the customer pays ADG a discounted rate for electricity and heat or cooling. This model called an On-Site utility or OSU is quite calm and practical with energy technologies such as wind, solar and co-generation systems. The OSU model is an essential part of any distributed generation infrastructure, since not every customer has the capital or the financial flexibility to own an asset outright. I’d like to reiterate to our investors what the main focus of the company has been recently and how it relates to our plans for growing the company in the future. Our main focus, since the beginning of the year, has been to improve the operations of our existing fleet, in order to increase productivity while optimizing our margins and improving our cash flows. As our results confirm over the past three quarters, we’re seeing solid improvements in our margins. I believe demonstrating robust and consistent margins for ADG is the most important metric to guide our business forward since it is the basis from which we can resume growing the business, confident that each new project will return margins that will lead us to profitability as quickly as possible. With that I’d like to review the results for the quarter. Our third quarter revenues of $1.96 million were a bit of an improvement as compared to $1.89 million in Q3 of 2014. But we are very happy with this result given the reallocation of ADG assets that occurred late in the second quarter of this year, which I will review in a moment. Our overall gross margin without depreciation improved a 37.5% as compared to 35.3% in 2014. Our efforts to improve the U.S. fleet performance are even more demonstrated by the strong margins of the ADG North American operations, which were 45.4% for the quarter without depreciation. These margins show that the underlying business model for ADG is solid and will be the basis for growing the business in the future. As Bonnie will describe in more detail in just a few minutes, we’ve also taken many other steps with our expenses with the goal of achieving EBITDA cash flow positive operations in 2016. Before I give a review of our operations, I’d like to remind investors that our fleet consists of three segments; ADG owned and service sites in the U.S., EuroSite owned and service sites in the U.K., and sites jointly owned and serviced with our LLC partner. As discussed in our last conference call, in June we announced an agreement with our LLC partner to reallocate most of the LLC sites, based on tighter geographical footprint and customer relationships. The results gave 100% control and ownership over eight sites consisting of 13 units to American DG Energy, allowing us the ability to make improvements to these sites, to maximize performance and efficiency, as well as maintain the sites with our service partner Tecogen. The reallocation gave 100% control and ownership of seven sites consisting of nine units to the LLC partner. 5 sites consisting of 17 units will remain in the LLC for the time being, but will be under the operation and control of American DG. These changes essentially went into effect in the third quarter. Over the past four months we’ve been evaluating the LLC sites, now under ADG control to determine the best way to improve the operation. In some cases, minor repairs resulting in minimal downtime were made. In other cases more complex improvements were needed resulting in prolonged system downtime. I mentioned in the second quarter call that we anticipated a dip in revenues in the third quarter. As a result of the seven sites moving to LLC control and the downtime of the acquired LLC sites due to upgrade work, fully knowing that the long-term benefits of the changes far outweighed any short-term revenue reduction. As we saw with our revenue numbers, we do not see this dip as expected, rather we saw a bit of an increase in revenues. This is a good indication that even with the reduction due to the LLC reallocation, the improvements made to existing sites more than covered the shortfall. We will continue our efforts to review the LLC in the fourth quarter. In some cases we are expecting sites with new OSU propositions that will improve the customer savings and secure long-term profitable revenue for ADG. If new OSU’s are signed with these sites we will make more substantial improvements to the system which again may result in some revenue loss in the fourth quarter but eventually will result in long-term revenues with strong margins. Turning to our EuroSite fleet, as Paul Hamblyn described in the earnings call earlier today, EuroSite continues to show good results with revenues increasing 20.4% over the third quarter of 2014. EuroSite added one new system to their fleet in the third quarter with a second system added just after the quarter closed. If you are not able to participate in the EuroSite call, their earnings press release gives the instructions for listening to the replay. With the LLC reallocation now complete and with the addition of the system to the EuroSite fleet, as of September 30th ADG’s overall fleet consisted of 120 systems consisting of 76 ADG controlled systems, 16 systems in the LLC, and 28 systems in the UK. Turning back to the North American fleet, as I mentioned earlier, our efforts to improve productivity and operations of the fleet, resulted in the gross margin before depreciation of 45.4%. This is a direct result of our continued efforts to improve site performance. We are continuing to systematically go through existing sites for ways to improve operation with the goal of maximizing the assets potential. In some cases this involves a more detailed engineering view of the system design of the operation. Logically we are focused on larger installations for the smart in depth review as we apply cost benefit analysis to drive our decisions whether or not to proceed with upgrades and how these upgrades are prioritized. We will continue this effort in the fourth quarter and I fully expect a good pay back for this effort as site revenues increased and margins improve. Moving to sales, we are continuing to apply a new level of diligence in evaluating new sales opportunities. In some cases potential sales opportunities that were in the advanced stages of closing have been deferred as result of a more detailed level of analysis, measurement and verification, and construction estimation. It is essential for our future growth that ADG only accepts projects that will assure the deliverer the promised revenue and margins that our analysis projects. With that said the backlog of projects we are seeking to close all meet the stringent criteria for success. I am working very closely with the sales team to make sure that we only accept jobs that will meet our projections since these will be the project that materially contribute to our revenue and profitability goals. Our goal is to close at least one of these new projects in the fourth quarter. With that I would like to turn it over to Bonnie for a little more a discussion of the financials. John N. Hatsopoulos Before Bonnie gets on, I would like to add that our Board has been very excited about the success that Ben has had. And they contributed to group of money to buy shares because we felt that the shares were thoroughly undervalued and to the best of my knowledge we have already, the Board has already bought 600,000 plus shares in the open market and they are continuing to do so. Bonnie, sorry I wanted to add this. Bonnie Brown That is okay. I wanted to add a little detail from some of the highlights that Ben discussed earlier. First, our operating expenses for the quarter have decreased by $102,000 or 8.3%. Of particular note is the decrease in general and administrative expenses which decreased 28.4% or $222,000. Management has made a focused effort to improve efficiencies in tearing down of our operating expenses is evidence of that efforts. We will continue with these efforts into the coming year. Second, we are quite excited that our non-GAAP EBITDA cash outflows for American DG in North America have decreased to $51,000. We see this financial metric as a sign that we are moving in the right direction towards the goal of being in an EBITDA cash flow positive position in the not too distant future. As John said, our goal would be to reach a positive position at some point in 2016. And with that I will turn it back to Ben to discuss the next few months. Benjamin Locke Thanks, Bonnie. So looking forward to fourth quarter and beyond, I’m very confident that our efforts to improve margins on our existing fleet combined with a very selective addition of new projects, and the continued improvement of operational expenses, that Bonnie mentioned, will result in EBITDA-positive cash flow operation in 2016. Once we achieve this goal, we will be in a much better position to add new projects to the fleet and resume growth of the company knowing that the fleet is maximizing productivity and profitability. EuroSite continues to make tremendous progress in the U.K. and we expect more project announcements in the coming quarters. In summary, I believe the ADG’s business model is strong. The fundamental economic drivers for an OSU model remain favorable and customers continue to value the resiliency of the grid outages that the Tecogen’s equipment provides. With that I’d like to turn it over to the operator for any questions. Question-and-Answer Session Operator Thank you. [Operator Instructions]. And our first question comes from Ralph Wanger of RW Investments. Please go ahead. Benjamin Locke Hi there, Ralph. Ralph Wanger Hi guys. Looking at the fleet, at this point we’ve been running a very static number of systems, is that correct? Benjamin Locke Yes, that’s correct, Ralph. Ralph Wanger Yes, so and at some point over the – in – I gather some point in the next year we’ll be resuming sales efforts and try to increase the size of the fleet? Benjamin Locke Yes, yes. The plan is we have a couple of sites that are under construction now, in the back log. Of course we’re finishing those up, that’s going to add to the fleet. And then we have, as I mentioned, we’re being very, very diligent about only selecting a couple of new projects in this near-term with the cash that we have available to make sure that they’re the best returning projects we can do in the near-term. And then when we reach this cash flow positive operation, which again, we really feel strongly it’s going to be in 2016, our cash balance is going to start going up instead of down. That will really be the enabler to us to accept a lot more projects going forward. So what you can expect then Ralph, in the few quarter is we’re going to have a few more systems coming online, because they’re under construction now. We’re going to announce a couple of more projects that were very selectively chosen, and then we’re going to see the cash flow positive operation as a result in 2016. Benjamin Locke Ralph, this is John Hatsopoulos. Charlie Maxwell who is listening right now felt very strongly and so did we, but he was the leader, he’s also our Chairman. That don’t try and grow the company till you start making some money and we all agreed with him and that is the strategy we are following. Benjamin Locke I mean we’re making a lot of extra money now without even having booked new projects. That’s – and that’s very positive. Ralph Wanger Yes. Well that’s great. But then you’re going to have to crank up a marketing effort which I presume has gotten extended, now sales force tends to get pretty rusty if they’re not closing, if they’re not out getting deals? Benjamin Locke Yes, yes. Ralph Wanger And what -– so how are you going to go about rebuilding a marketing effort? Benjamin Locke Yes, well the sales team has been very fortunate to be working very closely with Tecogen and that you probably imagine how this goes Ralph, if a sales prospect wants to buy a system, Tecogen does it and if Tecogen salesman finds a project that wants to be an OSU, it goes down the hall to American DG. So the sales structure is always going to be there for our OSUs and we also have, what we call these, customer agents, these company agents, sales agents that are always looking for prospects. So I don’t think there’s ever going to be a dearth of opportunities for us when we start resuming sales in earnest next year. Ralph Wanger Are those -– yes, is that like an outside distributor that you’re talking about? Benjamin Locke Yes, well no they’re some -– they’re kind of really like, some are small ESCO’s or engineering companies that are always kind if scouting out opportunities. We pay the commission if something closes and they are on the prowl for us. It is a pretty common model. Ralph Wanger Alright, well obviously there is a transition that you have to go through to get the world understanding that you are back in business? John N. Hatsopoulos That is what we are doing Ralph right now and I will tell you, I am very excited about what Ben and actually the whole team has done in bringing us cash flow positive. I feel very strongly that even the consolidation of the fourth quarter of change. Also EuroSite is going through this transition. The fourth quarter, the quarter we are in right now we should be cash flow positive consolidated and we are lucky that the British government has also a law that gives us subsidies for green energy and that is what we are I guess. And the law exists till 2018. So we are going to see a lot of exciting things happening over the next few quarters and frankly this is the reason I think that our Board felt comfortable to put in money in purchasing our stock which have gone close to zero. And we have the bulk of our Board including Deanna Petersen and Elias — Dr. Samaras are all listening in. So if any of you have any thing and of course Charlie, if any of you have anything different to say put your name on the list and we will ask them. Ralph Wanger Okay, now when you do this — now when you start trying to get new systems do you have a balance sheet bind or how are you going to finance it? John N. Hatsopoulos Well, this is where the excitement comes in Ralph. Dr. Samaras who is the CEO and also on the Board of ADG and CEO of EuroSite has two banks that are, actually it was three banks and we are leaving it temporarily at least the third one, that they want to give us capital for facilities starting in Europe. But I visited them accidentally because they have a different name in the United States. It is an Australian Bank, one of them and in Europe they call themselves something else and in the United States something else. And I caught Holy Hell for visiting them. I didn’t even know they were the same ones and they are begging us to take their money. So, we don’t need to sell shares. The moment we sign, we will first sign the Europe which should happen within the next quarter or so maybe sooner and then we will start — when we are cash flow positive in the States we can do it right now. But we can get a hell of lot better terms if we are cash flow positive then we cannot. Then we are almost there. So, capital is not going to be an issue. I have no interest and none of our Board has any interest to sell shares at this level. As a matter of fact they are buying rather than selling. Ralph Wanger I understand that. But even on leasing dues eventually don’t you have to have some capital involved? John N. Hatsopoulos We have enough capital right now for all our operations and these that we already have. Benjamin Locke Yes, the projects that were under construction now and again the handful of projects that we hopefully will be closing soon. We have enough cash to see those through the construction and commissioning stage. That is why we don’t want to add five more projects today. We will add a couple. So, our cash balance can be used for those very worthwhile projects and then again the cash flow will start to be positive next year and for all the reasons John just mentioned give us more options for expanding further. John N. Hatsopoulos But there is also a little secret that we don’t mention only because nobody will believe us. We have a large amount of inventory of units that are not on our cash balance sheet, but if we get orders we’ll ask Tecogen to bring them up, to upgrade them, for some facilities that we have for some reason or another abandoned. So we have another few, I don’t know if it’s a couple of million dollars or $2 million or $3 million order of equipment in inventory that we can be using for other facilities. So we’re in a hell of a lot better shape than we show. Ralph Wanger Okay. Well it sounds -– if you’re going to really be a fast growing business you have to or you’re going to need, sounds like you need capital and you need a lot of marketing effort. John N. Hatsopoulos Well the marketing is Ben’s responsibility. Dr. Samaras and I – our responsibility is for the capital. And as I said, I was amazed at the line-up of banks that want to give us money. Their –- instead of us begging them they’re begging us. And originally they said, “How much money you want?” And I threw a number – I picked up a number from the sky of $10 million and they said, “Can you make it a little bigger?” I don’t know if Dr. Samaras, who is next to me, would like to say something. Elias Samaras Yes, actually they wanted -– they were talking about $13 million, $14 million, $15 million and we said we go slowly. We may need shouldn’t but for the time being we’re picking off $10 million. John N. Hatsopoulos Yes. So I -– we are in a heck of a lot better shape that one would believe by looking at our stock Ralph. But the market is the market, so that is one thing that unfortunately we cannot control. We tried but we can’t. Operator Thank you, sir. Our next question comes from Michael Zook [ph] of Oppenheimer. Please go ahead. Unidentified Analyst Good morning, everybody. Benjamin Locke Congratulations on your royals. John N. Hatsopoulos Congratulations. You and I talked about the baseball team. And you told me not to count on it. Unidentified Analyst Well, thank you. Well, we came through. Just one question regarding the balance sheet, I noticed that the outstanding amount of the convertible debentures went up compared with December 30th to September 30th by almost $1 million. I think the convertibles are due in 2018, is that correct? John N. Hatsopoulos I don’t know why they would go up, unless it’s the consolidation with EuroSite. Because American DG here in the United States has not borrowed $1 more than what we had… Bonnie Brown From December… John N. Hatsopoulos Three or four years ago and we still have another three years, May – in May to pay it off. And as a matter of fact we have prepaid all the interest for the next two and half years. And I was just… Bonnie Brown When did that happen? John N. Hatsopoulos That happened about eight months ago, 10 months ago, Joan? Bonnie Brown During 2013. John N. Hatsopoulos Anyway I did it so I should remember. And I was very annoyed at the accounting process, where even though we prepaid it, it goes on the P&L, even though we don’t pay it anymore because we’ve paid it. So we have no interest to pay for the $20 million, part of which by the way is to me, $2.5 million is mine. And we’ve gotten the share, the interest till the end of the convertible. But I don’t know why it should have gone up. Bonnie is the accountant. Bonnie Brown Yes, I — go ahead. Benjamin Locke No, I was just going to say, we’ll figure it out and give you a call back, Mike. Bonnie Brown Right. I have a… Unidentified Analyst That’s fine going forward. The next question is what is the status with ADGE and any marketing effort with the Ilios type units. Is ADGE a marketing arm for Ilios units or exactly what’s the relationship there? And is there a substantial opportunity to grow that part of the business? John N. Hatsopoulos There is -– they are -– they have a right to do marketing in Europe. As a matter of fact we have an agreement with them that even if our distributors and we have a good distributor in Ireland, that if he ever sells anything in their territory and territory I mean making energy for the facility, Tecogen will pay fee to EuroSite. But up to now the big effort obviously of EuroSite has been on a combined unit power. But they have a right to sell equipments. Benjamin Locke And it’s worth mentioning Mike that Tecogen’s working pretty closely with ADG on Ilios in some specific geographies. You might remember we had a press release last quarter of two Ilios units going to -– destined for Hawaii, they haven’t actually been delivered yet. But Hawaii is a perfect market for Ilios, whether it’s selling which ADG would do or just selling the product, of course which Tecogen would do. So there is joint marketing going on in some other geographies like Hawaii, because you’re absolutely right, it’s a perfect product for those areas. Unidentified Analyst Well, I’m looking forward. I think that we should develop a program to expand the effort with Ilios because I think it’s a heck of a product and we’ve got an advantage because we have the technology. And I would encourage the company to again, expand that effort because I think it could add significant incremental revenue and more importantly get our name out into areas where right now we are not functioning or not selling. I think we should go for it. Benjamin Locke You’re absolutely right. In fact one of our guy is in Hawaii right now. One of ADG salesman is in Hawaii right now trying to accomplish that. John N. Hatsopoulos Mike, we have a problem, and I have to be very honest with you. As you know I have a house in the Caribbean, in Nassau to be exact, and I was talking to a group there. And the first answer is, question is. “Aren’t you violating the second law of thermodynamics by creating twice the energy that you put in?” And as a matter of fact in some cases in a new product we have we’re producing three times the energy that we put in. What we need and we -– Ben is doing right now is installing units in various areas of the world so we can demonstrate that we are not violating any laws of thermodynamics. We’re not creating any energy, we’re taking the energy from the atmosphere and that’s what we’re using. But people don’t understand it. You’d be surprised at — I talk to investors. I don’t talk to engineers because I’m not an engineer. But their first question is that maybe you guys are crooks, and you’re telling us that you’re creating something out of nothing. So what Ben is doing is installing units in various parts of the world and tells them, go look at it and asked these customers to verify what we’re saying. But it takes time. It’s not like a magician. When you have a new drug to cure some disease that couldn’t be cured, overnight you have a multi-billion dollar market. In engineering products the users are very hesitant in changing technology. And I shouldn’t be wasting everybody’s time but I will. In 1970s Thermo Electron had developed a furnace that saved well over 40% of the energy for heat treating and hardening and making parts for aerospace and none of you would touch it. Because they thought that this was something crazy. You don’t save 40% of the natural gas. Then we got lucky. There was a shortage of natural gas, most of you are too young to remember the 70s, I’m at a certain age that I remember these things. And we went from 5 million in revenues for furnaces to 300 million or 400 million or 500 million, I forget the exact in less than five years. But in the beginning they wouldn’t touch it because they were scared that we had something that was some kind of a fraud. And this is the way production engineering is addressing new technologies. And again, it’s very difficult to understand, unless you are in the business. Any way maybe I answered your question Mike. Unidentified Analyst Well I appreciate that and I think we should -– you’ve got a lot of smart guys back there and I’m sure we can figure out a way to get the story out and to start booking some sales, because I know the technology works, I’m convinced of that. And now it’s just a matter of getting people on board. So my encouragement is let’s go for it. Appreciate the comments this morning and look forward to improvements in 2016. Benjamin Locke Thanks, Mike. Operator [Operator Instructions]. Our next question comes from Thomas Ore [ph], a private investor. Please go ahead. Unidentified Analyst Hey good morning, guys, how are you? Ralph Wanger really asked all the questions that I had written down with respect to growth. I mean, look, I understand what we’re doing. We stabilized our operations. I think the expense control is excellent. SG&A down is really good. I like the discipline in the new products. But I also heard Elias this morning on the EuroSite call talking about how we can pretty much get any project financed in Europe now. John, you’ve mentioned in -– that we have companies almost throwing money at us. I guess my sense is aren’t we being a little too conservative? I mean, I think what I’d like to see as an investor is maybe a little better balance of operational discipline with some sales growth, as a – I see what we’re doing, the market clearly doesn’t see it, but it will eventually. But I think until we get to a point where we can announce five or six or seven or eight orders per quarter, the stock’s just mired here with sellers. I mean we operate a 119 systems at the end of the Q2, then 121 and that’s just kind of in the trend for so long now and I know we’re closer to seeing better sales growth, but I would suggest perhaps since cash is available, we have cash on our balance sheet, it looks like we’re in good shape in Europe that we could flick the switch on maybe a little stronger on the sales growth side. So I would just put that out there as maybe something to rethink a little bit now, ratchet that up a bit as we move into the latter part of this year? John N. Hatsopoulos Tom, I think this year is over. I mean its November already. But I think by sometime the middle of next year, you’re going to see, get what you desire, at least that’s our goal. But and again, especially in the United States, being cash flow positive here is a difference between 5% interest rate versus 8% to 10% interest rate. And we’d like to be able to negotiate. As I said, I personally went to the bank and they begged me to give me money. So, but -– and they were very frank about it that the difference of cash flow positive versus not is almost double. And if you borrow money then you don’t borrow it for overnight, you borrow it for a long period of time. Interestingly enough, the company -– the bank that wants to loan us money is also trading natural gas and they have -– we have already signed with them at a huge discount at least in for Europe for natural gas prices which would increase dramatically. I know this is not a EuroSite call, but will be increased dramatically the returns of EuroSite because that’s our primary cost out our kind of service. Elias Samaras Tom this is Elias, I just want to add to what John said from our experience in Europe, before we became cash flow positive the banks wouldn’t even consider talking to us or if they were talking they were talking about double-digit interest rates. Now that the situation has changed, the banks not only are talking to us but they are giving in rates that we will announce probably for this quarter as well, that are fantastic rates, that we wouldn’t imagine. Therefore what John said, he’s right, turning to cash flow positive and that eventually would certainly open the door for the banks talking to ADG also. Unidentified Analyst Well since we’re basically there with cash – if we’re cash flow positive effectively now or in fourth quarter or next year and we’re saying that on the call and you can say that to a lending institution why would we defer any new deals there? Why wouldn’t we just get on the sales thing and go with growth right now? I mean, I don’t understand why we have to wait a couple of more quarters and kind of slug along as we get our locked and – why do we have to protect our cash then? If we have access to all this cash then and Ben said earlier, well we want to conserve our cash to make sure we get all our installations in, why do we have to be conservative at this point? Can’t we be more aggressive? Benjamin Locke Yes, well, the main thing, I’m not sure it came across in my remarks is we don’t want to take any bad deals. Unidentified Analyst Okay. That I get, I understand that. Benjamin Locke Yes, and… Unidentified Analyst It sounds like you have other, you probably could take and you are just holding off until another couple of quarters? Benjamin Locke Well, no, I think what happens is when you start to enter in a phase of M&V, doing the measurement and verification, and then doing much more construction. It prolongs the deal closure time, becomes a lot more – a lot longer of the closure process to go through all those steps. And believe me the sales men, it drives our sales men crazy that I come in there and I say, “Well, you got to do this and you got to do this,” and they’ll say “Come on, I just want to close the deal,” and but, no, we can’t just close the deal unless we do these steps. That’s what kind of -– I think some of our projects didn’t go those steps before and I want to make sure we don’t repeat those mistakes. So believe me Tom, when we do announce deals and if I were to have four deals come up and I don’t have the cash in the bank to do them but they’re really, really good deals, because they passed every hurdle that I put in front it, as John said we’ll get the money and we’ll do it. We won’t turn those deals down. Unidentified Analyst Okay. That’s good to know. Now Ben, out of our backlog of 19 systems, are those all solid from your perspective in terms of their profitability and their viability are those all good? Benjamin Locke Yes. Most of them are. I know that there’s one large site that has six units that are in construction now. One of them is close to being completed. Some of the others, and I don’t have the exact breakup in front me, I can give you a call offline Tom, but I know that some of the other ones in backlog are at this one particular university that we have many systems running. And when you work with the university, one minute they want it and the next minute the building has a data center or something and then it’s on hold. So some of them are delayed in time, but I’d say the majority of them are in fact in construction and will be running quite soon, especially that one larger one which is Luna Park, I know we’ve mentioned before. Unidentified Analyst Got it, one more quick and then I’ll jump off. I listened the EuroSite call this morning was excellent. I think, the company seems to have gone through a lot different iterations of how it reports its press releases. Sometimes its standalone with EuroSite in there, sometimes it is blended. I would say that for me it’s a little hard still to kind of sort through now and understand the operations of both in this single press release. And I’d love to hear something and see something more standalone from the company EuroSite related to the Corona Energy deal and some other stuff. I mean there were some excellent points in there that Elias touched on, and John, that aren’t as clear in the American DG press release so – I don’t know if I’m just not getting something else or if something’s to come, but I just throw that out there maybe as…? John N. Hatsopoulos Tom, again, we’ll try and give a little more details and especially for Europe. Because this quarter that we’re in its going to be a great quarter for EuroSite. Again, it is imposed so I don’t want people to think… Unidentified Analyst Those four colors alike Elias were fantastic. I just love to kind of see those be more highlighted. If you are not, if you weren’t on the call this morning you probably aren’t going to be able to see those. They are not visible in the ADG press release. I just think, it was — they were so strong and so compelling, I just love to see those maybe out a little more visible to investors, that’s all? Benjamin Locke Yes, it is a fair point and we always try to strike a balance at how much we want to repeat versus EuroSite. But I think John we are looking at each other nodding our heads that we will make sure we do a little bit more of that next time around. Unidentified Analyst Alright guys, great expense control, great operational turnaround and look forward to the growth. Nice to hear, see that Zooks [ph] Royals won the World Series and we will move on. Thanks very much. John N. Hatsopoulos You should congratulate Charlie because he is the one that pushed us on what we are doing right now. It was his thoughts and suggestions as our Chairman who has been a very active Chairman in spite of his youth. Unidentified Analyst Listen we are very fortunate to have Charlie. I have worked with him for 15 years. He is one of the most brilliant guys I have ever worked with and I will say also that I am very impressed with the new Board additions with Joan and Elias and everyone else and everyone’s efforts. So, I think we have made a remarkable turnaround for the company over the last 12 months. So, good job by you guys. Thank you. John N. Hatsopoulos Thank you. Thank you everybody. Operator Thank you. Seeing there is no further questions, I would like to thank everyone for participating today. This concludes today’s event. John N. Hatsopoulos Well, I think we should — again thank you all very much. It is an exciting period for us and again it was exciting when we started, then we went into trouble, and we are right back where we should have been for a long time. Thank you very much. Operator And thank you all for attending today’s event. You may now disconnect your lines.