OTTAWA (Reuters) – The recession will end, the chief executive of Canadian solar equipment maker Carmanah Technologies Corp likes to say, and the bright light at the end of the tunnel is solar powered.
But the timing of that recovery remains murky, and customers are delaying orders for the solar lights, solar power and solar grid-tie systems Carmanah makes for industrial use.
“Customers are being very cautious, so nobody has canceled any orders and they have not told us they won’t be ordering,” CEO Ted Lattimore said in an interview.
“As they get their own financial gardens in a row…they’re being very careful with when they actually make a purchase. So, if they can delay something, they are doing that.”
Carmanah, which slimmed down dramatically before the economy and the stock market sank, recently reported flat first-quarter sales of its key strategic solar products, breaking a 5-year streak of 30 percent growth.
It cut its forecast for full-year sales to C$50 million from a range of C$55 million to C$60 million, reflecting the sale of its roadway sign business, Lattimore said.
The company is still waiting for government stimulus spending on green projects to boost sales and help reverse 2008’s painful conditions, when a credit crunch and global recession hurt sector demand.
Punished in the past for disappointing investors, Carmanah’s stock has fallen to 85 Canadian cents on the Toronto Stock Exchange, more than 75 percent down from a March 2006 high of C$4.19.
“We remain optimistic that the company should be able to get back on track with its organic revenue growth by next year,” Salman Partners analyst Mike Plaster said in a report after the firm’s first-quarter results.
But he said there are risks to his forecasts if the economy remains weak for an extended period of time. Plaster has a “buy” recommendation on Carmanah and a target price of C$1.30 a share.
BLOATED FROM ACQUISITIONS
Lattimore, a former telecom executive, has stripped down Carmanah since he took the company over October 2007, complaining it was bloated from too many acquisitions.
“Carmanah was an acquirer from 2003 to 2005 and it actually created most of the problems that the company got into. We spent a good year restructuring,” he said.
Lattimore sold some divisions, closed a factory and outsourced work to contract manufacturer Flextronics, He also shuttered warehouses and offices, cut costs and reduced staff to 150 from about 265.
Today the Victoria, British Columbia-based company is debt free, with C$9 million in cash. It plans to spend C$6 million on research and development this year.
Carmanah has set a target of C$200 million in annual sales within five years, C$100 million of that from outdoor solar light systems for streets and parking lots.
“There are absolutely billions of dollars of those kinds of lights that are purchased around the world on an annual basis. Not just replacements, I mean brand new projects,” Lattimore said.
The key catalyst for solar-powered outdoor light is oil prices. If power costs rise and technology prices drop, as Lattimore expects, his company’s solar technology will one day match the cost of the grid-tied lights currently in use.
“Take the total cost of ownership of those two things and when they are equal, then surely this shifts the whole game,” he said.
He expects major market growth in South America and Europe. But Africa will be “the real flyer” because it lacks grid infrastructure, but has modest financial reserves.
“I grew up in a big corporate culture where you had to be conservative in how you approached the balance sheet,” he said.
“But on the income statement, we’re aggressive. We see that we can do some wonderful things but I see that the opportunity…is absolutely based on that foundation of a strong balance sheet.” ($1=$1.09 Canadian)
A Carmanah parking lot light can cost from four to seven thousand dollars, easily twice the upfront cost of a traditional light. Mr. Lattimore can argue that, when you factor in the costs of connecting traditional lights to the grid and paying for power, his product is a better deal, but he recognizes that, ultimately, his costs have to fall.
“That will be the challenge to make us into a big company,” Mr. Lattimore said.
That is one of the things that keeps fund manager Greg Payne from buying shares in the company. He has been following Carmanah for several years, and held shares in the past, but wishes the company would keep it simple and stick to its marine and aviation products, instead of branching out into the area lighting business.
“It’s what everybody believes will be the future, and it’s more environmental, and it could be more cost effective and efficient, but it’s still very expensive right now,” said Mr. Payne, who manages a fund for environmental investment company Investeco Financial Corp. in Toronto. “I don’t think Carmanah has the technology to drive the price points down.”
When Mr. Lattimore took the reins as CEO in October, 2007, Carmanah was focused on revenue growth, in debt, and had made acquisitions that stretched it too far. Mr. Lattimore dropped some non-core operations and outsourced the manufacturing of its core products, making the company more nimble.
Sales tend to be “lumpy,” Mr. Lattimore said, so by outsourcing manufacturing, he won’t have to lay off staff if sales slow. Likewise, he can react to an upsurge in orders more quickly.
Mr. Lattimore’s restructuring came at the right time for the company. It entered the recession with no debt, and an unused $10-million line of credit. Once the company eliminated any need for cash, private equity investors started calling, chequebook in hand. “We had people come to us saying, ‘If we gave you some money, what would you do with it?’ Well there isn’t anything I would do with the money right now,” he said.
The company does not need more money to build sales of its area lighting products, Mr. Lattimore said. “Nor do we have our eye on anything specific in terms of an acquisition that enhances our position, particularly in this economic environment,” he added.
Mr. Lattimore’s restructuring and the company’s ability to fund itself is a key strength, said Rupert Merer, an analyst at National Bank Financial.
“If this company had any weakness on its balance sheet today, it would be finished,” Mr. Merer said. “But now we have a company that has a fairly strong cash position and a core business focus that’s quite profitable.”
Mr. Merer expects that with technological innovation in the solar market, Carmanah’s input costs will drop over time, but says that even at current costs, the market is big. He estimates U.S. government spending on street lighting at $3-billion (U.S.) a year.
The challenge for Carmanah now is distribution, Mr. Merer said. In 2008, more than three quarters of the company’s sales were within North America. Mr. Lattimore’s target is to have half of sales made outside of North America within five years.
“Developing nations are a huge opportunity,” Mr. Lattimore said. Many are in the sun belt and they often don’t have a power distribution grid, or have inconsistent power supplies, making Carmanah’s solar products, which require no infrastructure, attractive. To meet those needs, Carmanah has revamped its distribution network, setting up a network of 250-300 dealers around the world.
One of the challenges will be finding buyers that can afford Carmanah’s products in poorer nations. That said, Mr. Lattimore said he is seeing increased interest, though not yet a lot of sales, from those regions.