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Russ: This is The Business Makers show, heard here and online at thebusinessmakers.com, and it's guest time on the show. And this morning I happen to be in the headquarters of Acro Energy Technologies. And my guest is the founder and CEO, Harry Fleming. Harry, thanks for having me, and welcome to The Business Makers show.
Harry: Well, thanks for having us on, Russ. We appreciate it.
Russ: Well, let's start by you telling us about Acro Energy Technologies.
Harry: Well, Acro is an integrator. That's a company that designs and installs solar systems for either residences or commercial buildings.
Russ: Okay, so if I was considering powering my home with solar energy, Acro Energy is a company that I should consider calling, right?
Harry: That's correct.
Russ: Okay, well, take me back to the beginning. How, how did the company get off the ground?
Harry: A couple of years ago, we formed a shell, and we took it public on the Toronto stock exchange. The reason we did this, we wanted a vehicle to roll in other integrators throughout the country. And as you do M&A deals, you see that the sellers, they often want to stay in the business, so it's not just cash they're looking for. They want to stay involved. And this was a way to give them stock, and so they own part of the new company going forward, so it's an attractive vehicle to bring in the, the best talent out there.
Russ: Okay, so your background, therefore is more in the M&A category as opposed to an actual hands-on integrator?
Harry: Right, I got legal and financial experience for M&A and securities work, but really no practical experience in the solar industry.
Russ: Okay, well, the solar energy is really happening right now. Is that what attracted you to it?
Harry: We saw an opportunity. We think it's really going to take off even more than it has the last two years. And the market's really being driven by the Chinese panel manufacturers that are day-to-day driving down prices, which really is going to make this a mainstream product starting in the year 2010.
Russ: Okay, so here we are. It's 2009 July, to be specific. And have you actually already made some acquisitions of companies that do this?
Harry: Yes, we closed our first acquisition on February the 23rd. We bought a company in California called Acro Electric. And then we adopted the Acro part of the name to become Acro Energy Technologies. And then we completed our second acquisition in May a company just outside of San Francisco in a city called Concord. And we're currently in talks with a couple companies in southern California which will then give us full coverage of the state of California, which, by the way, California accounts for 80% of the solar market in the United States.
Russ: Okay, that's interesting. Well, tell us a little bit about Acro Electric, the company that you acquired, so we can get a picture of what kind of companies you are accumulating here.
Harry: Well, Acro Electric is a, a company that did about $7 million in revenues. It's in an area they call the central valley of California, very hot very high electric rates. And what we found after interviewing dozens of candidates to purchase, that Acro Electric was a very well run, efficient company, and being legal or financial expertise out of Houston, we needed that solar expertise, and we wanted to, to get the best run company we could find as our cornerstone. And we think we found that with Acro Electric.
Russ: Okay, so describe for us a little bit more why somebody who has a successfully operating solar energy integration company today, why they would want to become part of this larger endeavor.
Harry: Well, the main reason is the industry is maturing. It's really just a few years old. Three or four years ago is when solar really started hitting a stride in California. So what you have is about five or six major players out there that are, combined, taking around 30% of the market. And the other 400 to 500 hundred installers are what we call mom and pop installers. As the market matures and becomes more sophisticated, the mom and pop players are going to be squeezed out. So what, what we're doing is we're looking for the so-called mom and pop players that have a lot of potential. We're looking for the guy who wants to build that national company with us. He's not looking just to get cashed out. And you know, that's why the, the biggest part of our search is identifying the right players that fit with us, not just buying any company.
Russ: Okay, when you mentioned five or six major players, and then you mentioned the, the others the mom and pops does that mean that you're not going after the five or six major players?
Harry: Right, for a variety of reasons they're not available, or they don't fit with what we're doing, so that right now they don't make sense for us.
Russ: Okay, so you're a public company on the Toronto exchange. I would imagine that, that's perhaps fairly appealing to some of these operations?
Harry: Right, now we had an option of being an over-the-counter company, but I've found throughout the years that often there's a stigma with being a bulletin board company. So we thought with the regulations-and they are very tough up there in Toronto in the national reach-you really have a better shot at getting credibility. And that's what we have to have as we begin talks with these companies.
Russ: Okay, are most of your acquisitions for stock?
Harry: It, it's a combination of cash, stock, and debt. So we mix it up, and we try to tailor it for whatever suits that seller the best. And, for example, right now we're looking at one company where the owner actually wants to leave after a year. Well, because we have another company in that same general area that has a very strong general manager, that actually fits with us, because we like the team that we see with this company. So sometimes it will fit. It just depends on where we are.
Russ: Okay, we're talking with Harry Fleming, founder and CEO of Acro Energy Technologies, and we'll be back with more with Harry after this. You're listening to The Business Makers show, heard here and online at thebusinessmakers.com.
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Russ: This is The Business Makers Show, heard here and online at thebusinessmakers.com, and continuing on with Harry Fleming, founder and CEO of Acro Energy Technologies. Well, Harry, I sort of had the picture that you're out there on this mission of finding the best solar integrators to bring together and, and form it into one company. Do you see this at some point in the not too distance future, where you are one company. That all the companies look alike, that they might even be reporting up through some sort of regional manager structure?
Harry: That's a good question. What we're trying to do is we're trying to bring in a host of companies around the country. We want to have the best operators out there, so we want to take off the backs of the operators financial issues, back office issues, let them take their sales leads, close them, and install these efficiency at the right margins. So out of Houston we bring a financial team that takes all these burdens off of the operator, and they can focus on what they do best. That's in selling and then installing the systems. And so, with that in mind, we also have marketing that is being set up to all come out of Houston. In other words, we, we want to be able to just give these guys the sales leads. Here they are, close the sales, and then get your installers to install them in an efficient manner.
Russ: Do, do you find that to be compatible with the owners and the original founders of these companies?
Harry: These, these guys love it. What they hate is-they started the business because they love it. But what they hate is the, the mundane details of running a business. They don't want to have to worry about payroll. They don't want to have to worry about paying for panels. They like what they do, and that's installing, and they like selling. So it, it's a good match.
Russ: Okay, now obviously, we're here in headquarters, in Houston, Texas. And both of your acquisitions so far in California, and you mentioned the importance of California. I'm assuming you plan to go beyond California?
Harry: Right, once we tie up southern California with the next round of acquisitions here in July and August, we're going to move eastward. Now, there's markets in Arizona, Colorado, and the Northeast that are viable, strong markets, driven by state government rebates. And so there's a host of companies out there that we're currently in talks with. And the question is really what order do we bring them in? And, it's, it's a matter of having orderly growth here as we move the stock.
Russ: Well, are there companies in Texas as well?
Harry: Well, we have some local utility districts with rebates, but not a statewide program.
Russ: So, obviously government plans in subsidies are extremely important to your expansion plan?
Harry: Right those are the markets to get into first, but there's another factor that's really going to be driving the markets in 2010. If you look at your typical solar system, a home solar system, you bid it on a per watt basis, so a 5000 or 5k watt system, at $8 a watt, would be $40,000 last year. Last year, half of that, $4 a watt, $4 of the $8 per watt bid, was just for the cost of the panel. Because of the huge influx of Chinese panel manufacturers, that cost is now below $3 on average, and is heading below $2 by the end of the year. And we can see 2010 being below $1.50. So if that happens, that $40,000 system is going to drop down to the low 20s, before rebates. Which means after rebates and incentives, you're looking at around $10,000 to $12,000 for your average home system. There's no more financing issues. These are credit card payments.
Russ: Okay, so the things that are working in your favor obviously is a lowering of the cost of goods sold big time.
Harry: Right.
Russ: As well as, it does seem that state governments, and the federal government are both really encouraging the implementation of solar systems.
Harry: Absolutely, and, and let me be clear also in Texas, we are currently talking with several companies. We want to start and get a foothold in Texas, because we think it's going to be the second biggest market, once, once we get some kind of state program here.
Russ: Okay, are there actually federal stimulus dollars headed in this direction as well?
Harry: Yes, there's the investment tax credit, the ITC. That's 30% of your total cost of your system can be written off in, in a tax, uh, tax credit.
Russ: Okay, okay, very interesting. Well, let's talk a little bit about the technology. I still hear the debate sometimes that if you stripped out the subsidies, it does not make economic sense. Where is the technology, and, and where is the break even on the economics?
Harry: Well here's the way it works. The cells really haven't changed all that much since the 60s when we started putting these things in space. So back then you're around 11% efficiency. The top panels today are around 18%. The average panel is around 14%, but what it all means is you know, how do you use these to supplant your electricity bill? And in California, where the rates are up to $0.38, $0.39 a kilowatt hour, versus Texas, we're around $0.11. You can see how if you take the highest rates during the day when these panels produce, you can have a payback that can be in as little as two to three years. And these systems, the panels, for example, are warranted for 25 years. But there's no real lifetime on these systems. They should go on forever. And so the payback in Texas might be ten years, whereas in a state like California, it can be as little as two or three years. But that's why the rebates are so important. In Austin and in Colorado, the utility providers of the state are given $4 a watt rebates. Add that to the ITC at 30%, which is equal to about $2.40 a watt, you find that 85% of your system is paid for by the local and federal governments. So you can see how the payback really comes real soon, one or two years in, in those areas.
Russ: Okay, all right. We're talking with Harry Fleming, founder and CEO of Acro Energy Technologies. And we'll be back with more with Harry after this. You're listening to The Business Makers show, heard here and online at thebusinessmakers.com.
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Russ: This is The Business Makers show, heard here and online at thebusinessmakers.com, and continuing on with Harry Fleming, the founder and CEO of Acro Energy Technologies. Well, Harry it, it seems like you know, you came into this space with extensive merger and acquisition background. Is this the first time that you've identified a particular industry that was ripe for this sort of aggregation?
Harry: No, early in my legal career, the first 15 years when I was a M&A lawyer, I did a lot of rollups. Garbage companies out of Houston All Waste you remember BFI, every one of them was doing rollups, and I worked on a lot of those deals. And then in the late 90s, I took a few years off and went to business school at Boston college to move into the business end of this type of transaction. So really the last ten years I've been doing business/legal deals on M&A and securities work. And several years ago I was involved in a rollup where we took some companies public on the Toronto stock exchange, and that got me familiar with how they do the deals up there. And one of the things we noticed is that bay street is, is counted as Wall Street. They'll look at smaller deals. Wall Street, they really need much, much bigger deals. So smaller deals are really more accepted up there in Toronto. That's another benefit of, of doing a deal up on that exchange.
Russ: Okay, so after you became familiar with the Toronto exchange, were you then out looking for an industry that was right for this, or-?
Harry: Well, a couple of years ago, when I had finished another deal, I wanted to get into solar. I had been thinking about solar for many years, and really the analysis was how do you get into solar? Panel manufacturers at that time that was a $50 million investment. That wasn't going to work. So after you really did your research, you found that billions, literally billions of dollars have gone into not only plants to increase capacity, but technology. And the, really the common theme was it's all to benefit the consumers. So the idea was how do you take part in that. And really, you take the last stop before the consumer, and that's the integrator. We don't care what the technology is. We'll put whatever the latest is on, on the roofs. And so I felt that that's really the place to play, the last stop before it hits the consumer because ultimately that's where all the technology is headed for.
Russ: Well, right, obviously, it is a big happening space. Are there others doing what you're doing right now?
Harry: There's a couple of companies that have done a similar thing in the past, but they've moved more to commercial though, over the years. And we've chosen not to go into the commercial space. It's very sophisticated. Your margins are just not very good there, so we like the residential space where we can have margins and actually have some profits.
Russ: Okay, so what is the long term vision?
Harry: Well, I look out a year, and I see us having a footprint across the country, as panels are now down to $1 to $1.50 a watt, which means this becomes a real, mainstay in the community, these systems. And we can really take advantage of what we see is going to be a just tidal wave of business as we hit the year 2010. So we want to get as big a footprint as we can to really take advantage of the huge increase in business that we're seeing.
Russ: Okay, and if somebody wanted to find out more, uh, about Acro Energy Technologies, what's the website?
Harry: Acroenergy.com
Russ: Okay, and you're on the Toronto exchange?
Harry: Yeah, we're on that thing called the venture exchange. It's like a junior exchange up there, and our symbol is ART.
Russ: Okay, well, Harry, I really appreciate you giving us some time and sharing your story.
Harry: Well, thanks for having us again, Russ.
Russ: You bet and I'm going to stay in touch and hear how it goes.
Harry: Thank you very much.
Russ: You bet. We've been talking to Harry Fleming, founder and CEO of Acro Energy Technologies. And you're listening to The Business Makers show, heard here and online at thebusinessmakers.com.