Electrovaya Inc (ELVA) 2017 Q2 法說會逐字稿

Greetings, and welcome to Electrovaya Second Quarter Fiscal 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Richard Halka, Executive Vice President and Chief Financial Officer. Please begin, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us for today's conference call to discuss Electrovaya's fiscal Q2 2017 financial results. Today's call is being hosted by

Dr. Sankar Das Gupta, Chairman and CEO of Electrovaya; and myself, Richard Halka, EVP and CFO.

Thursday evening, after the markets closed, Electrovaya issued a press release concerning its business highlights and financial results for the quarter ended March 31, 2017. If you would like a copy of the release, you can access it on our website. If you would also like a copy of our financial statements, management's discussion and analysis and annual information form, you can access it on the SEDAR website at www.sedar.com.

As with previous calls, our comments today are subject to the normal provisions related to forward-looking information. We will provide information relating to our current views regarding trends in our markets, including their size, potential for growth and our competitive position in our target markets. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties, and actual results may differ materially from those expressed or implied in such statements. Additional information about factors that could cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements may be found in the company's press release announcing the second quarter's results and the most recent annual information form and management's discussion and analysis under risk factors, as well as in other public disclosure documents filed with Canadian securities regulatory authorities.

And now let me turn the call over to Dr. Sankar Das Gupta, Chairman and CEO of Electrovaya.

Thank you, Richard. Good morning to all, and thanks for taking the time to listen into our conference call.

Q2 2017 was important for Electrovaya as the company's balance sheet and working capital was strengthened. We can now move forward faster with our value-added products and relationships with customers in multiple markets. Innovation has always been a key to our growth plans. Electrovaya is focusing on applications where its competitive advantage is accentuated through innovation, namely applications that have higher duty cycles and greater requirements for cycle life and safety.

At this point, I'll turn over the call to Richard to review our financials, and later, I'll review the business highlights in more details.

Thank you, Sankar. As we mentioned earlier, our financial release was sent out yesterday evening, at which time the financial statements, MD&A and press release were filed on SEDAR.

A key development in Q2 was a private placement on March 27, 2017 of CAD 15 million, 9% convertible debentures. This significantly strengthened our working capital position and gives the company the resources to accelerate our growth initiatives. This funding was received very late in the quarter, therefore had little to no impact on the Q2 results, but it positions us well for Q3 and Q4.

Q2 2017 revenue was $2 million or CAD 2.7 million for the quarter ended March 31, 2017 compared to Q2 2016 revenue of $4.3 million or CAD 5.9 million. We continue to provide product to our OEM customers. While volumes are still in preproduction levels, they are growing as seen in the growth in the revenue from Q1 2017 of $1.1 million to Q2 2017 of $2 million.

Our working capital position has been strengthened with cash and restricted cash at March 31, 2017 of $9.2 million, up from $5.4 million at December 31, 2016 and $4.3 million at March 31, 2016.

Our inventory has come down from the December level of $17.9 million to March 31, 2017 level of $15.6 million. We would expect it to further reduce as we move forward.

Our trade and other payables has also been reduced from December 31, 2016 balance of $12.4 million to $9.9 million at March 31, 2017.

We have renewed both our CAD 6.25 million first mortgage and our CAD 1 million second mortgage. The renewal is for an additional year.

All in all, we are making progress and carefully monitoring our position to ensure we are well positioned to meet the needs of our customers.

I will now turn the call back to Sankar to discuss our business highlights.

Thanks, Richard. As Richard mentioned, we improved our working capital and balance sheet in late March 2017. And now, we can focus on our growth initiatives and business development. Our competition consists mainly of massive global company who are strongly supported by their national governments, a formidable competition with strong balance sheet. They all feel that Lithium Ion batteries is the holy grail of technology as the world economy moves from fossil fuels to clean electricity.

Electrovaya's strength is innovation and technology. We give impressive safety, impressive cycle life and impressive performance. Customers are also massive organizations, and they have a choice to go with global companies who give them the comfort of balance sheet strength and usually, you do not get fired by choosing globally branded conglomerate or go with Electrovaya and move towards higher performance, innovation and higher product safety.

Nowadays, customers strongly like Lithium Ion batteries with higher safety, an important differentiation. We do see long sales cycle as our customers take extended levels of testing to validate their decisions to move to us and to a new technology. Our products have a wide addressable range of industrial sectors from many electro-mobility applications to strategic energy storage applications. We focus on those sectors where our innovations in safety, cycle life and, as necessary, our Battery Management System, to provide a compelling reason to choose Electrovaya.

Not only the sales cycle and testing cycles are long, but as Richard pointed out, many of our partners are launching new complex products, which needs time to integrate, then validate with extensive prototype iterations and meet their needed regulatory requirements.

I'm pleased to say that our first forklift manufacturer, an OEM, who had earlier signed a master service agreement has, to date, continued to give us increasing purchase orders as they move forward on their market product launches. Our electro-mobility business is expected to grow in the electric delivery truck, electric bus and electric vehicle for off-roads, and we are making progress.

Electric delivery trucks operate for 6 to -- 8 to 16 hours a day inside cities and are a prime source for diesel particulates, similar is for electric buses.

Electrovaya believes this is an important industrial sector, and as earlier announced, Electrovaya is working with an OEM in this sector. Development work on this project is continuing.

Electrovaya has started working with other companies in this electro-mobility sector and, as announced earlier, is working with another Fortune 1000 NYSE company where Electrovaya is designing the complete battery system for integration into the OEM's off-road electric vehicle.

We are seeing interest coming from the autonomous vehicle sector, and we received our first purchase order in the European railway sector. Both sectors are in a growth phase.

The energy storage sector can be price sensitive, and our focus is where innovations in safety and cycle life performance are important. For example, in the residential energy storage sector, we now have multiple clients, all using our LITASTORE 2.3 kilowatt hour and 48-volt modules. There is good growth in this sector, especially in Europe.

We continue to sell also to battery integrators who packages our cells for products in electro-mobility and energy storage.

In all of the above businesses, we are dependent on our OEM partners on both timing and launch volumes. Hence, I'm especially pleased that, in parallel, we have launched our Elivate series of batteries, which can be sold directly to the final customer in the forklift industry as a drop-in replacement for their existing lead acid battery. These sales to the final user can give improved product margins and better sales timing visibility.

In this direct sales model, we developed the Elivate battery and targeted our first customer, a large Fortune 100 company, a global giant in the processed food business. I'm pleased to say that 2 things happened, both of which took some time but both strengthens the foundations of this direct sales business. Our customer used 2 demonstration Elivate battery units and tested it for over 5 months in a 3-shift, 24-hour, 6-days-a-week operation. Additionally, they asked their lift truck OEM for additional validation. This new OEM truck maker then tested our batteries for several months from an OEM point of view and finally, gave the green signal to our launch customer. And last month, we received the first purchase order.

We are focused into -- we are focusing into this industry. And in this quarter, Murray Pickrem joined us as Director of U.S. sales. Murray has over 20 years’ experience in this materials handling and logistics sector. Also in April, last month, we showcased our Elivate line of products at the ProMat trade show in Chicago, the largest trade show this year in the materials handling sector.

We now have ongoing [trials] with multiple users in this sector. The users are mainly large companies, Fortune 100, 500 or 1000. We also strengthened our leadership and corporate governance by adding 2 highly regarded and skilled board members. Professor Carolyn Hansson, Order of Canada, who is Vice President of Research at Waterloo University oversaw Waterloo's innovations in all fields. And former Premier of Ontario, Dalton McGuinty, who is known world over in the environmental and climate change community.

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

(Operator Instructions) Our first question comes from the line of Carter Driscoll with FBR.

Richard, Sankar, the first question if I may. Could you talk about where you stand in terms of the 5 OEMs that you signed fairly rapidly last year? And in terms of getting into firm contracts, I know you've gotten some POs from a couple of them, but in terms of advancing long-term multiyear contracts, can you talk about where you stand? And in terms of timing and whether the -- either the magnitude or the pricing has materially changed in your discussions? And then I have a few follow-ups.

Maybe on the [latter thing], Carter, no material change in pricing or other discussions. They are all moving in different places. I think the -- our main contract, which was a master service agreement with the forklift OEM, that's moving well. I think -- and Richard may correct me, I think we get purchase orders every month now, and it's moving well. Our products are getting launched into number of their vehicles. And of course, these are new Lithium Ion batteries going in places where it's new for the OEM. So he has his hands full on making sure that the system is working fine, prototyping iterations and, of course, any necessary regulations. No, they're all going well. And Carter, beyond those 5, of course, we've got a number of other OEMs who have come in -- a second OEM in the forklift business. There are also OEMs in off-road vehicles and so on.

Carter, it's Richard here. I'll just add to what Sankar has said. In all cases, we have received POs from all of those customers. Therein some of them are moving into a bigger volume, but no one has gotten to the full production scale. Therefore, it's sort of prototype volumes. We're working with all of them in terms of fine-tuning the requirements. We are essentially agreed on pricing, et cetera, all the terms, conditions there -- everything is going forward there. The issue here is purely that the volumes are what I would describe as modest volumes at this stage. There's no reason to believe that, that isn't going to accelerate in the future that -- they're very happy with the product, but what I can't tell you is the timing on that. I would have anticipated that we would be at that level now. Unfortunately, it's taking longer than what we initially expected.

You talked about when they come back, you may be adjusted some of the -- moving from prototype into kind of initial preproduction orders. Can you talk about maybe some of the changes that they are requesting about specifically speaking to other sector (inaudible)

Actually, that -- I'll just take you a little bit through how the evolution goes. They get the cell and they test that, and then they're happy with the performance. They want to prove that the cycle life is what we indicated, the safety, et cetera. So it goes through extensive testing. I mean, if you think about it to get up to the number of cycles, what they have to do, obviously, as -- at 8,000 cycles, you are looking at several years. So what they do is they test it hard for a few months and then extrapolate the results to see where that would get to. So it's an extensive testing period on the cell. And then we move into, if it's a module, the module. And then the module, in some cases what we're finding here is that there is a physical change in terms of what they decided in their end use, so that sometimes happens. Sometimes, it's at their end. There is nothing in terms of at the cell level or in the Battery Management System, et cetera, problems. What we're finding is just in terms of fine-tuning, you've got complex system speaking to complex system. And again, there has to be changes made in the way the software works, et cetera, the monitoring different features they want to add, et cetera. So there is nothing -- it just takes time. The other thing that I would add is, as Sankar mentioned in the forklift area, that we're very pleased with seeing some of the traction we're getting there. We have approximately 10 trial forklifts that are in warehouses throughout North America. But you've got to remember with the warehouse, that's their life blood. That -- that's a real leap of faith to move from lead acid to Lithium Ion. So they'll get one of these forklifts and they'll trial it, they'll run it 24/7, see how it performs. And our first PO that we received, they had that for probably about 5 months. So it does -- it is -- honestly, I'm sure it's frustrating for us, and I'm sure it's frustrating for our investors, but these things are taking time, but we are getting the traction.

Would you feel comfortable that the iterations back and forth between you and your customers are focused more on their production ramps and tweaking the product and making sure it's the appropriate fit for their eventual end use rather than them looking to being faced with ASP declines and people coming back and introducing newer products that because the battery prices, I think, particular for, let's say, storage application come down extremely rapidly, you don't feel it's them waiting to see whether product might be on a price basis versus their competition, and then maybe either rearchitecting or repurposing their work, the scope of work with you for maybe a slightly different application. Have you have any of those types of situations?

I think the one thing that you're absolutely right about is from the other side of the table, they've made the buying decision. They like the product. They like what it does. But yes, they pressure on the price. And so where we're going is that we say, okay, these initial orders, they are at a high price. We -- and if you want that kind of pricing, then we've got to have this level of volume. And what we've also done is we've looked at our operations and we have a road map to get our costs down, increase our density, et cetera, so that as that volume increases and they are given discounts in terms of pricing, that we've already brought on a -- basically, the discipline to get our costs down. So I think that we're -- there's not really any surprises there. I think you're right, but that's -- there is constant pressure on the industry. And we can charge a premium, but it has to be a reasonable premium.

Yes, and Carter, just a little more clarity on what Richard said. Our strategy on reducing cost is not to attack our margins, so that we -- our road map on cost is to reduce our -- increase our energy density. Just to give you an example, suppose you can take a 40 amp-hour cell and make it into, I don't know, let's say, 55 amp-hour cell. So immediately, you get a 35%, 40% increase in energy density. So you're fundamentally -- now you're getting 40% or 35% more revenue without having an extra cost. So now that extra 35%, 40% increase in revenue we can share now. A little bit to them, a little bit to us. So energy density is a very, very powerful way of reducing our costs.

So where do you stand on that product road map in terms of increasing that energy density for your...

We have a fairly large research team both in Toronto and Germany, and we work with lot of people. My personal feeling is we are increasing energy density probably at a fast rate, maybe faster than competitors. And so we are -- we should be able to travel on the cost-reduction curve without eating into our margins. And of course, as Richard said, because we give a little bit higher safety, a little bit higher cycle life, "Hey, can you give us a little higher margins?"

Okay. Going back to the forklift market, which seems to be your biggest near-term opportunity. You were working with -- directly with an OEM on one of their products. Are there any issues with your going direct to market for drop-in replacement in terms of...

Look, Carter, there was an issue. So, for example, when we targeted our launch customer, which was this Fortune 100 very large global process food giant, so they tested it for about over 5 months. And then they said it looks so incredibly good, but we need the OEM's blessings also on the battery. Now this OEM was not the first OEM we had our master service agreement with, this was another OEM, and I think he has a larger footprint in the forklift market than our first OEM. Anyway, so the second OEM comes in and he tests the battery slightly differently. He does shock, vibration, all kinds of things, which the OEM would want to do. He does test our battery management interfacing with his trucks' controls and et cetera. And again intensive testing which went over for a few months and then he gave the green light and blessed the product, and that's how the first purchase order came through. And now -- so we don't expect the second and third purchase order should take that long. So this purchase order came a few weeks ago in April. And as Richard mentioned, we've got nearly 10 units now running in lot of other large companies. And all test results, they are all looking good.

Carter, I think -- Richard here. I think you may have also in that question have been asking about the initial OEM that we have an okay from them to sell direct to the end market and the answer there is, yes.

Both the OEMs have given us okay to sell directly into the market.

I mean, is it a different target market? I mean, why -- I guess, I'm just a little confused why they wouldn't see that as a direct competition to what you're doing with them and who they're targeting.

Because without getting too much into their business, they're selling the new forklifts, correct? This is a replacement battery for already sold forklifts that they're dropping in.

Got it. So they're not going after the drop-in replacement.

No. Well, they will probably eventually. But right now, they're focused on the product lines they're going to roll out. And rather than lose that piece of the market, they have indicated that it's fine for us to go after it.

And they've told some of the distributors to go for it and sell our drop-in batteries without having to worry about them. So they've given the green signal to some of their distributors as well.

And the class of forklift trucks that you're targeting are, I'm assuming, Class 3, maybe Class 1 and 2. It's a little surprising that you are looking for heavy duty applications in terms of multiple shifts, I think that is unique in terms of what are the target markets, especially for lead acid batteries being able to replace that. So I guess I'm trying to wrestle in my head, is it the cost of the battery itself that has come down so dramatically versus lead acid? Is it that it operates at a steadier performance level, it can charge at a faster pace? What is it vis-à-vis the lead acid battery that makes your product so attractive from the drop-in replacement from an economic perspective?

Carter, it has got absolutely nothing to do with the price of the battery, price of the lead acid battery or the Lithium Ion battery. It's got everything to do with the efficiency of the logistics company that they don't have to recharge batteries, they don't have to have 3 batteries, one cooling down, one charging, one running the truck. They don't have to replace batteries. One of the major customers we are working with, he had a serious accident where, I think, one person died where a lead acid fell on him. Our Lithium Ion batteries gives absolutely steady charge, so he is very, very -- he is good on that. What -- the reason he is buying that is because it improves his efficiency so much that his rate of return is very, very high and it -- our 5 or 6 places where he is improving. He is using less manpower. He doesn't have time for necessary for -- it's essentially manpower improvements and efficiency in his operations.

Okay. Maybe shifting gears a little bit. One more for me, if I may. On the storage side, quite a bit of consternation in the market, delays of implementation, whether it's from California's SGIP program and the reset that they had there, seems to be a lot of discussion and talk, but not a lot of deployments. If you could kind of characterize vis-à-vis your mobility opportunity versus storage, and that seems to becoming even more cutthroat on price, and certainly, the implementations elongating even though I think a lot of people agree that storage is very necessary, in particular, in conjunction with increasing renewable deployment and microgrid opportunities. But what are you seeing out there in terms of either the -- your potential customers' development schedules, the pricing pressure? Is that really as exacerbated as people are discussing? However you can characterize or any color you can give would be appreciated.

Because of our improved safety, which we are giving, we are seeing larger interest from the electro-mobility sector because they really, really like it. Now we are also seeing increase in the energy storage side because they like our cycle life, which -- so holistically, our cycle life would give them a low -- probably the lowest cost per cycle in the game. So there is a bit of both. Now there was always a little bit of a pushback we used to have before, before this financing came through about our weakness in the balance sheet side. So that's happening. But Carter, the market is so massively large and we can approach so many different sectors, so our focus now is which sector will give us the highest margins. And so we are going after the sectors, where the battery product is used at least 6 or 8 hours a day and used intensively and preferably, 24 hours a day. Then it's really good. So -- but on the pressure in California, et cetera, we are not seeing that effect yet. I think that's one area -- actually, with our other areas, we have slightly higher margins, so we didn't push hard into that energy storage areas in California, et cetera.

Carter, Richard here. I think that just, as Sankar said, we want to go into the markets where we're demonstrably superior, where the performance makes a real difference, where the cycle life, the safety, et cetera. And I think your perception of the market are correct, that energy storage -- the large energy storage is just a little bit more -- it's more competitive. There are players in that market that it does make a lot of sense for them to go with us, and we're talking to them. But you're right. That's a tougher market than, let's say, the electro-mobility intensive use market like trucks, forklifts, et cetera.

And just -- I realize it's probably too soon, in particular, because you don't control the rollout schedules of your customers. And certainly, I think you had thought last year, at this point, you would have been at a faster ramp. Do you have any visibility in terms of -- do you see, maybe, the second half of fiscal '17 materially ramping? (inaudible) is steadily growing? How -- as best as you can try to characterize where you see your top line heading in the next several quarters? Or any level of specificity would be helpful.

I really don't want to get into anything specific because that's been our problem. Had I said a number, I would have been wrong. What I can say though is that, as I mentioned, let's just take the forklifts for instance because as you've rightfully said, that's a near term, we have the solution that's in place. As I said, it's out there at 9 different sites. Two OEMs have approved it, and so it really comes down to -- they are talking about decent volumes at those sites, and we're rolling the forklift out of one site and into another site. And the discussions have all been, every one of them, very positive. They're very engaged in this, and we are quite -- I won't even go -- I'd say, we're quite certain that there is going to be a ramp-up in these orders, but the timetable is just very difficult to predict. One thing -- one complexity that adds to this is that a number of these have made the buying decision, and now they're talking to us about leasing alternatives. And of course, we're looking for and talking with various parties in that regard. So I think all these things are going to clarify as we go through the year, but we would anticipate that we've come through, let's say, the trough, and we would anticipate quarter-on-quarter growth moving ahead.

And then maybe my final question. Of the roughly $2 million in sales you had in the quarter, what's the breakdown between components and module?

The module was -- the module is starting to be a more significant piece in there. There is still significant component. I wouldn't want to break it down into a percentage. I mean, what there is in there is there is some component sales, electrode, et cetera. There is some cell sales, and there is some module sales. I wouldn't want to get specifically into which is which, but what we anticipate seeing going forward is less on the component side, steady on the cell side and growth on the module side.

I will now turn the floor back to Dr. Das Gupta for further remarks.

Thank you all for coming and listening to our conference call and have a wonderful day. Thanks.

This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.