Electrovaya Inc (ELVA) 2011 Q3 法說會逐字稿

Greetings and welcome to collector to Electrovaya's third quarter fiscal 2011 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Paul Hart, CFO for Electrovaya. Thank you, Mr. Hart, you may begin.

Thank you operator. Good morning, everyone. I hope you're having a great summer and thank you for joining us on today's conference call to discuss Electrovaya's third quarter fiscal 2011 financial results. Today's call is being hosted by Dr. Sankar Das Gupta who is the Chief Executive Officer and myself, Paul Hart, Chief Financial Officer of Electrovaya. This morning, earlier this morning, we issued a press release discussing our financial results for the third quarter ending June 30, 2011. If you would like a copy of release or unaudited financial statements and management discussion and analysis, you can access it on our website or the SEDAR website at www.SEDAR.com.

I'll just read briefly the Safe Harbor language that is typical. During the course of this conference call, management may make projections or other statements regarding future conditions or events related to the Company's product and business. Among other statements concerning future events or projections, we will provide information related to our current views regarding trends and our markets including their size and potential for growth and our competitive position in our target markets. Additional information about factors that could cause actual results to differ materially from expectations and above material factors or assumptions applied in making forward-looking statements may be found on SEDAR and in the Company's most recent annual midterm MD&A under risk and uncertainties as well as in other public disclosure documents.

So, having said that, I would also note that certain financial measures we're going to discuss today on the call are expressed on a non-GAAP basis and have been adjusted to exclude stock-based compensation, non-cash financing costs, interest expense and amortization expenses. We have provided reconciliations of these non-GAAP measures in our earnings release which is available in the investor relations section of our website located at www.electrovaya.com.

Before moving to the quarter's results, I would like to make everyone aware of Electrovaya's participation at several upcoming investment conferences. On September 15, we will be presenting at the Wedbush Clean Technology and Industrial Growth Conference in San Francisco, and then again in September on the 27th, we will be presenting at the Credit Suisse Future of Energy Conference in New York.

Operator, did you have any other comments about questions or anything, or no -- how to ask questions? No, okay.

And with that, I will turn the call over to Dr. Sankar Das Gupta, CEO of Electrovaya. Thank you.

Thanks, Paul. Good morning and thank you for taking the time to listen to and discuss our third quarter fiscal 2011 results.

I am pleased to report that the third quarter was another strong quarter for Electrovaya. Total revenues grew 109% year-over-year to $2.7 million and non-GAAP income from operations rose to $103,000 from a net loss of $341,000, marking our fourth consecutive quarter of profitability.

I will turn this over to our CFO Paul Hart to give you an update on the financial results, after which I will continue with additional comments on our business highlights. We will then be happy to take your questions. Paul?

Thanks, Sankar. As Sankar mentioned, we generated revenue of $2.7 million in the third quarter of fiscal 2011, which represents an increase of 109% compared to the $1.3 million recorded in Q3 of fiscal 2010. The acceleration in sales growth was primarily related to increased shipments for the RAM PHEV program, initial shipments for the Town & Country Minivan PHEV program, and the start of a 1.5 megawatt hour energy storage system for a large utility.

Gross margin was 21% in the third quarter compared to 58% in the third quarter of last year. I would note that as -- and I think we talked about this in past calls, gross margin is continuing to fluctuate as we hit different milestones. It's important to note that for the first nine months of fiscal 2011, our gross margin was 27% which is very close to our internal target of 30%.

Our non-GAAP operating income for the quarter improved to $103,000 in the third quarter compared to a loss of $341,000 in the same quarter last year, and rose 61% sequentially.

During the quarter, we continued to make substantial investments in accounts receivable and inventory to support our customers' rollout plans. Our cash balance was $4.5 million as of June 30, 2011 and our receivables increased by $1.8 million to $4.7 million. Our cash balance as of Friday, the close of Friday on August 12, was $5.7 million.

Having said that, I will turn this over to Sankar again, our CEO, who will continue with some business highlights.

Thanks, Paul. During the third quarter, we continued to make progress in our three main growth areas of business, and two operational areas. The first growth area is the plug-in electric automobile, and especially the battery systems to our plug-in hybrid electric vehicle. The second growth area is a large-scale megawatt hour size battery system for utility scale grid storage application. The third area is a joint venture licensing opportunities globally for Electrovaya's Lithium Ion SuperPolymer battery technology. It's clean and more importantly, it's low cost manufacturing process.

The two important areas of our operations are increasing production to meet the growing demand for our batteries and operating Electrovaya with fiscal responsibility.

As Paul mentioned, this is the fourth consecutive quarter of operational profitability, which we have achieved while building up our outstanding technology for the electric vehicles and for building and developing large-scale megawatt-hour sized energy storage systems. All of this is possible because of our dedicated and really passionate team of engineers, scientists, technicians, managers, production staff, and the great support we get from our partners.

On the plug-in electric vehicle front, we have expanded our delivery of battery packs for the RAM truck and expect our full complement of battery packs to be delivered shortly. Here again, the technology we're developing includes not only cells, but complete battery systems with complex thermal management, intelligent battery management systems complete with hardware, proprietary software, and coordinating and controlling along with the vehicle control systems and onboard charges.

I am pleased to note from various reports that many of these PHEV RAMs are being driven around not only in Detroit, but now has moved to San Francisco, Sacramento, and Arizona as well. The gasoline savings from PHEV trucks is large and is higher than produced by the electrification of smaller vehicles, an important point in the concept of energy security.

This past quarter, we were pleased to announce a further plug-in hybrid program for the Town & Country Minivan. Here again, we have assumed the responsibility of design development and to produce a complete lithium ion battery system for the Minivan, including the cells, vibration/shock tolerance, thermal management, mechanical and electrical interfaces, all power electrical subsystems as well as hardware/software for the intelligence battery management system.

We are pleased to be working on two of the five or six major electric platforms announced for North America by the big OEMs.

On the two-wheeler front, Hero Electric showed its electric scooter with Electrovaya's lithium ion batteries this quarter.

The second key area for Electrovaya is the utility scale energy storage market. Recently we began building a 1.5 megawatt-hour battery system for a large US-based utility for a planned installation later this calendar year.

Moreover, we are also in advanced discussions with several other utilities for similar megawatt hour scale energy storage systems and are building a strong pipeline of projects.

We believe this is a large, maybe a higher-margin imaging opportunity and we are well positioned to capture a meaningful share of the project.

In addition to North America, we are bidding on projects elsewhere with our Japanese partner, NKE, or directly by ourselves or together with ABB, a large electrical engineering company with a global footprint.

There is a realization with the utilities that wind and solar generates electricity unreliably, while the consumers demand peak power reliably, whenever they need it. Indeed, wind and solar often has a 25%, 30%, 35% usability while, if lithium storage is added, the usability increases to 80%, 90%. Energy storage gives greater value than wind or solar. This is a new concept and utilities see energy storage to be their next big technology push.

Electrovaya's single container of 1.5 megawatt hour energy storage capacity is, we believe, the world's largest single container of lithium-ion battery ever built. It's a tribute to Electrovaya's volumetric energy density that we can put so much capacity in one single container. Furthermore, the green energy goes well with Electrovaya's non-toxic green manufacturing.

On the manufacturing front, we are increasing our manufacturing facility and our target is to achieve installed capacity of about 135 megawatt hours by March or April of 2012. We are able to grow our installed capacity in step with demand increase. This is, again, due to our non-toxic manufacturing technology and it's rather unusual in the lithium-ion battery industry.

Our manufacturing process gives us lower capital costs to increase production, lower operating cost, and for North American production, a lower cost for future liability.

Our other challenging area of focus and vision is to remove the ubiquitous user toxic chemicals for manufacturing of lithium ion batteries across the globe. So Electrovaya's vision is to license its clean and low-cost manufacturing process and carry out joint venture activities. Led by our board member and former CEO of Chrysler, Tom LaSorda, we continue to engage in discussions with potential partners globally to build low-cost nimble plants.

This concludes our prepared remarks. Operator, we are now ready to open the call to questions.

(Operator Instructions). Dev Bhangui, Fraser Mackenzie.

So thanks again for your quality commentary. I just wanted to drill down a little bit more in terms of time frames and numbers. So first, with respect to I guess the utility space, you guys have been discussing with several utility companies for last four or five months. What is the difference between what was then versus now in terms of the progression of the discussions and how much of progress has been done? If you can just give us some quantitative measures as to how many utilities where and what has been with the progress from five months ago to now, that would be great.

Dev, good question. Of course we did announce the 1.5 megawatt hour system with the state in the United States. Since then, we've been building the pipeline. We continue to be working with several others both in Canada and the United States and elsewhere to build out that pipeline. And, I think what we are finding is that 1 megawatt hour to 1.5 is sort of a sweet spot for most of these. We will, of course, be announcing them as we can, but I would just say sort of as a general thing, the pipeline is continuing to grow from one to more.

Okay. Thanks, Paul, for your comment, but I think this was a case of a case about five months ago as well, right?

Yes, Dev, things have moved -- again, utilities as we had mentioned earlier, we are dealing with quite a few utilities. We are expecting at least two of them to move much faster than the others, so -- and the others are coming behind. So I think we are quite near to closure, but obviously we have not closed anything in which case we would announce them immediately.

So, Sankar, by closer to finalization meaning a couple of months?

No, it would mean -- no, less than that.

Okay, thanks. And then just in terms of the licensing progress, it's -- you've done qualitative progress there. Can you for, I guess my benefit, at least delve down deeper into the details in terms of given your competitive advantage and all the volumetric densities and so on that you talked about, with how many batteries compared to a while ago as opposed to now? Are you guys talking to -- what kind of jurisdiction? Is it Japanese? Chinese? By when do you think you will be able to make any tangible progress in terms of licensing? And what is the definition of that particular tangible progress? You mean to say you're going to have a commercial agreement or a JV and so on? If we can just --

Yes, we are talking to the jurisdictions which you mentioned. We're talking to folks in China, India, Japan, and it's -- I think the discussions are going on well. Very difficult, Dev, to predict when we will have signatures.

Okay. The reason I'm asking is because of for example, in Canada, the JV between Tesla and Toyota is going to produce EV here in Woodstock. So, I was just curious why not -- to what extent you guys have progress because if, in being the only NMP-free company in the world and terms of technology, I thought that the progress would be much faster than what I see. or maybe I'm not able to see it because you have only qualitative color on that.

Yes. Tesla and Toyota makes a wonderful vehicle, but their design direction, especially Tesla's design direction has been quite different from the direction taking place by other people. So no, we are not looking at the Tesla-Toyota relationship.

Okay. And then one last question. Just in terms of this whole progress on board the platforms with respect to Chrysler and the financing that is supposed to come at the end of it, in terms of end of it meaning it being the testing period, can you tell us -- this has been going on with respect to RAM, the 140 I guess and then the other platform is 25. When do you think the testing would be complete for both the platforms? That means which will be the beginning of the commercial relationship with respect to the OEM?

And then I guess year financing which is coupled with that starting with the commercial production both in the US as well as Canada, if you can give us some details in terms of numbers and time lines, that would be great.

Dev, the commercial production is an OEM question and really we can't comment on that. The OEM will have to mention that. And they all -- everybody has their own strategy on that.

Okay, but right now -- (multiple speakers)

Sorry?

When would testing be complete for both the platforms?

Again, that's also an OEM question. You know, they've been -- the RAM trucks being driven around in Detroit for a quite a few months, and now it's being driven a lot of other places as well. Again, this whole -- this is more of an OEM question.

Okay. That's all I have, and I will stand back in line. Thanks a lot, and all the best, guys.

Michael Willemse, CIBC.

Good morning. Just wondering if you could comment on CapEx plans over the next 12 to 18 months, or is that really tied to what the OEMs decide to do? Or is there some CapEx plans you can give us a sense of what you are thinking?

Mike, we are adding equipment as we speak. In fact, last week, we received a fairly major chunk of equipment which flowed in. So we are adding to our production capacity on a continual basis. And it's not very expensive because we can -- we are -- as the demand is growing, we are adding all kinds of equipment to increase the demand. We don't need a very large CapEx to meet that. So, we feel the CapEx requirement over the next few months, it will be generated internally.

Now, if there is a massive demand comes up like 20, 30 -- very large, then of course, we will need a larger CapEx. But just know we feel comfortable that we are adding equipment and adding production capabilities, and our target is by March, April 2012, we will from internal generation, be able to hit the numbers of 100 to 135 megawatt hours per annum.

And what would that be relative to the beginning of this year?

The total CapEx, Mike, is very small -- probably is very low. I think it's about $3 million, $4 million.

What would you -- what was your capacity at the beginning of this year relative to that $100,000 to 135,000?

At the beginning of this year, our capacity was -- again, you need a balance capacity because there's a lot of unit processes. We sometimes may have higher capacity in one unit process while lower capacities in the other unique processes, which means your product, production really is controlled by the lowest capacity in one year's process. But in an unbalanced manner, we will probably one third, one fourth of the capacity we are planning for.

Okay, and then I know you mentioned you're still working on licensing agreements. Just wondering in particular -- any developments on the licensing agreements you've been looking at in China?

Mike, we think we are close, but it's never closed until you have signed. So, I think just like on the utilities, we think we are close on a number of deals, but nothing yet which we can announce.

On the utilities side, are most of the deals similar to the ones that you are working on now or are they bigger, smaller?

Some -- mostly about the same size. We're also working on some which are much larger.

Okay. Great. Thank you very much, guys.

Craig Irwin, Wedbush Securities.

Good morning, gentlemen, congratulations again on another profitable quarter.

The first question I wanted to ask is really high level and qualitative. I know you can't say much about your customers and their plans, but you can speak about your confidence in your business and how things have changed incrementally over the last three months, six months, and over the course of the last year. So I know you sort of -- the ramp rate and the rate of progress is subject to the plans of your customers and the timing where they essentially choose to hit those volumes that maybe are out there. But can you talk qualitatively about your confidence level now versus six months ago versus maybe a year ago and some of the lessons you've learned and some of the things qualitatively that you -- that guide your vision on the future?

Yes, Craig, Sankar here. Yes, both -- it's an imaging nascent business, so both for our various customers and ourselves, we are learning. So, we are building systems. The systems are working well, I would almost say very well. Then the system goes and gets tested, hot weather testing, cold weather testing. They hundreds and thousands and thousands of miles and so on, and they're all looking at the market, looking at and trying to make sure -- we are trying to make sure that all of our subsystems are all working well. And so it's sort of an iterative program with our customers.

And to a large extent, the actual launch, it will be done of course as the timing is completely controlled by the OEM, and it's very deficient and I think it will be both a technical and financial as well as commercial decision.

Excellent.

So technically, we are making excellent progress. That's the only thing I can say.

Great. No, that's good to hear. So the next question I had was in your SEDAR filings, under subsequent events, it's disclosed that after the end of the quarter, you received a $1.6 million payment on the second milestone of phase two. Now, there's only one agreement that I can think of that this might pertain to. Can you give us an idea of sort of the breadth of the accomplishment of phase two of the second milestone of phase two, and how many phases that might be in this agreement, and whether or not you would look for a new agreement once you do reach the end of the phases or if that would be a mature contract or purchase decision at that point?

Craig, it's a good question. It's Paul. The money was related to some work we were doing on the PHEV battery systems and that kind of thing that is sort of in support of some of the other things that we are doing with RAM and Town & Country and that kind of thing. And, the way it was structured is there are actually a couple of phases on that part of it, so these funds are sort of like a payment to help us as we go forward on continued improvements on PHEV technology and all that kind of thing. So -- and for the -- there was -- so basically, there were the two main phases related to that, so this is the second installment.

Excellent, and then Paul, if I could ask you a question directly about the financials, cash and cash equivalents have obviously been something you are focused on managing. It's nice to have a Company sort of cash profitable, but the building working capital, $1.8 million in the quarter, obviously is restricting the overall flexibility, the overall financial flexibility of the Company. Can you comment sort of what your vision is around cash management, whether or not you think that you might be able to get major customers to pay on a more aggressive time line? And whether or not if you were to receive an order for units in the mid-to several thousand units for your next fiscal year, whether or not you have the flexibility to serve the front end of that before needing capital.

Yes, that's a good point and you're absolutely right. We're really focused on working capital management, cash management and that kind of thing. What we have done is we've continued to tighten up on our collection periods as much as possible. There were I think a couple of quarters ago in a call we talked about getting the bugs out of some processes related to billing for the RAM and the Town & -- not that time, but for the RAM. For the most part, that's done. There were some blips in terms of payments right around the end of June but we were caught up in July.

As you can see overall, working capital is growing if you count cash, cash equivalents, accounts receivable and that kind of thing. So, we will continue to push hard on that.

In terms of if we got a lot a large order and we needed to finance it, Sankar did mention we have continued to do some automation of our production process as we go. Anyway, it's sort of a continuous improvement thing and then we could certainly deal with a lot of these orders in a bunch of different ways. But I think we'd be quite comfortable with our working capital amount to deal with them, and we look at other options if we need to.

Excellent. Excellent. And then, just a question of clarification in the financials. Again, congratulations on the -- on your profitable quarter. The $103,000 non-GAAP income from operations, could you itemize for us which items you are excluding there, other than the amortization, the non-cash compensation and obviously your non-cash financing costs?

Yes, I think it's a really good question and it's worthy of clarification. We really are looking at the business like an EBITDA; it's sort of at the EBITDA line. So we're basically adding back stock-based compensation, interest expense and financing cost which we think EBITDA is a pretty good measure because it is truly operational. The interest -- the only real thing there is interest, but interest is on our long-term debt. Some companies would probably put that below the line instead of in operations, so that's why we add it back.

Great. And then, Sankar, if I could ask you another question, over the last I guess four or five months, Japan, I understand, has taken action to reduce the exposure limits for NMP further below the already-tight limits that had in place. Can you update us on whether or not this has increased the overall interest in Japan in potentially licensing or evaluating your technology, and whether or not this has caught the attention of other battery manufacturers globally given that the Japanese have a strong reputation in industrial health?

Yes. Greg, we are seeing larger interest from the Japanese companies who are in -- already in manufacturing, lithium-ion batteries. And there's sort of two levels of interest we are seeing. One is, of course, they have already sunk in capital and investment in their present process. So they are looking at us to see how we could -- however, and they -- we really like the non-NMP process because of the low cost of production. They can visualize this is ultimately the lowest cost of manufacturing.

So -- however, Japanese companies being -- and most of the battery companies are very large companies. They tend to move exceedingly slowly. So there's much more consensual slow progress taking place. But, we are hopeful that the JV programs that you have started or are discussing in China, India, Japan and EU will start falling in place soon.

Great. And then next question if I may, you mentioned that you're up to or you're going to be up to around 135 megawatt hours in plant capacity I think by March of 2012. Is it fair to assume that that's inside the half of the driver that you're already using? Or does that mean you are expanding into the second driver which has been dormant for the last several years?

It's -- our target is 135 megawatt hours, yes, March-April. It will be -- the second dry room will be brought into -- which is already built, and has been -- so the second dry room will also be utilized in this extension, yes.

So then, to fully built out that second dry room, I know that in the past you had given us a very wide range of capital cost to add capacity, and we discussed potentially doubling off the 110 base capacity to 220 being something in the range of $0.50 to $0.30 a watt hour. Can you update us on your approximate capital requirements to bring the total Toronto facility up to something like 220 megawatt hours?

We're budgeting about $4 million or $5 million to take us to that 135 megawatt hours level. And, we are -- we think probably another $15 million will double that again.

Great. So then last question before I hop back in the queue and let other people asked questions, is it fair to assume that if you are going from 110 previously to 135 in March-April as far as megawatt hour capacity in your facility, that you expect to see demand that would most likely utilize that over the course of the next 12 months? Is that something that it's fair for us to say would be the reason that you would put that capital to work?

Yes, absolutely, absolutely. Just now, even as we speak, our demand is growing quite rapidly. And it's a question of how fast can we manufacture now.

Great. Well congratulations again on the strong financial discipline, and I look forward to next quarter's results. Thank you.

(Operator Instructions). Craig Irwin.

Thank you. I figured if nobody else was asking I might as well come with some follow-ups. Thank you.

So, the large-format market has been ceded by a number of manufacturers over the last couple of years, some of them with extremely high costs, others aggressive pricing and negative margins. I know that's not your discipline, and I believe that customers in the market do as well. Can you update us on what customers are thinking on the economics of large format? Is this something that still needs to be proven out, that we still need to see substantial trials and demonstration projects to understand the business case for these assets to potentially be used and incorporated in the rate base for utilities? Or, is there incremental progress that you can share with us, I guess is the question?

Okay. On the utility side, we firmly believe that a large-format cell gives you the lowest cost, you know, the lower number of connectivity, lower number of interconnections, bus bar management, the whole thing. So the utilities like the large-format cells, and what we are finding is holistically, the lithium ion battery, although it may have slightly higher initial capital cost, is actually winning out on the -- over a three-, four-year period.

And just to explain that, for example, that major -- the first major order which we won, which will be we believe the world's largest single container of lithium ion batteries, even with the highest energy capacity of about 1.5 megawatt hours in one single container, there, that particular utility looked at everything from flow batteries to sodium sulfur and to various advanced lead acids and other technology. And what they found is that the higher efficiency of storage, of lithium overtook after two, three years, the other technologies which had a much lower efficiency of electrons in to electrons out. So it's -- I'm quite amused at now how many different utilities are talking to us about these systems. Now, they are still all demonstration systems in the sense that all utilities are looking at one unit, two units, and then they will start rolling it out in larger quantities. Craig, did I get your question correctly?

Yes, no, that was very helpful. That printed out pretty well for us.

The next thing I wanted to ask is just a general question. In the past, you mentioned that you were really focused on serving one OEM and serving that OEM impeccably so that they can have a highly successful commercial launch, and help keep lower cost for yourselves so you don't have to maintain hundreds and hundreds of engineers to serve many different programs that you don't believe will go or you might have more cautious expectations around them actually going into volume or real volume in the future.

Can you update us on whether or not you would consider adding another major OEM like your existing major PHEV customer, or if you are your commitment around this customer, and obviously their commitment around you, allowing you to make a small amount of money on the work is still the same structure that you expect to pursue, just to allow you to pursue this market with a minimum cash burn and maximize your potential for shareholder returns and future profitability?

Very good question, Craig. We felt that we already are working on two fairly major platforms, and both of these major platforms have different requirements, different requirements of thermal energy, different requirements of rate and so on. And we, along with our partners are learning tremendously how to control the first cells, making sure everything is working, whether it's software, hardware, system integration etc.

The ultimate market is very, very large, but our focus is on these two platforms and I think we are not just immediately, not in the next three to six months looking for a third massive platform.

Great.

But, having said that, we are in touch with at least three, four, five other major OEMs and we can move quickly into their requirements as well.

Sankar, I guess than just a broader question that many investors will have on their mind is you've basically proven you can keep up with an OEM on a very tight budget. If you had $50 million or $100 million in cash on your balance sheet, would you be pursuing four or five other OEMs as well? Is that something you would consider?

It's not really a financial thing which is driving it, Craig. It's -- there's always a little bit of time required to test out and work out the maturity of the technology. You have to spend that time doing the hot weather testing, cold weather testing, all of the vibration, stress analysis, etc. So you really -- having more money doesn't help you. There is a time lag, time required to ripen the fruit, ripen the technology. And, I think that is pretty well getting done. So, we are -- we have been approached by about three, four other major OEMs, and we are discussing with them, but I don't think over the next four to six months, we're not going to go after any major platforms yet, because these two platforms we've got could become very large.

Excellent. And then, just assuming that one of these two platforms might be in production next year if everything goes well, I would guess that you have to achieve automotive ISO in your Toronto facilities. Is that something that you are already working on?

Yes, we're already working on it, yes.

Do you have an approximate time line to achieve that, and is that something where we will likely get incremental updates as before you actually achieve it? Or is that something we need to just wait for (multiple speakers)

Our internal time line was the fourth quarter of calendar year 2012.

Great. Thanks again and congratulations on continued profitability.

(Operator Instructions). There are no question that this time. I would like to turn the floor back to Dr. Das Gupta for further comment.

Well thanks everyone for listening to this early-morning discussion and have a wonderful summer, what's left of it. Thank you.

We look forward to speaking with you next time.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.