Electrovaya Inc (ELVA) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Electrovaya Third Quarter 2017 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Richard Halka, Execute Vice President and CFO for Electrovaya. Mr. Halka, please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us for today's conference call to discuss Electrovaya's Fiscal Q3 2017 Financial Results. Today's call is being hosted by Dr. Sankar Das Gupta, CEO of Electrovaya; and myself, Richard Halka, Executive Vice President and CFO. Yesterday evening after the markets closed, Electrovaya issued a press release concerning its business highlights and financial results for the quarter ended June 30, 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 the financial statements, MD&A 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 market, including their size and potential for growth, anticipated demand for our products, development of our products, future financial performance 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. An undue reliance should not be placed on 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 third quarter results and in the most recent annual information form and management's discussion and analysis under risks and uncertainties, as well as other public disclosure documents filed with the Canadian securities regulatory authority. The company does not undertake any obligation to update publicly or to revise any of the forward-looking statements whether as a result of new information, future events or otherwise except as required by law. Also please note that all the numbers discussed on this call are in US dollars, unless otherwise noted.

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

Thanks, Richard, and good morning, everyone. Thank you for taking the time to listen in on our fiscal Q3 results conference call. It's a wonderful day. Thanks for coming in. Our Electrovaya's third quarter results show our business is establishing traction in the market and our strategy is working. Our revenue increased approximately 70% compared to Q3 2016, totaling this quarter of USD 4.4 million, which is also a very nice 120% increase compared to Q2 2017, our preceding quarter.

This is our second consecutive quarter of revenue growth and our largest revenue in the last 6 quarters. So this quarter's growth and doubling of revenues was good as it came from all of the very diverse industrial sectors we're focusing such as industrial electric vehicles, synergy storage and sales of cells into third-party back-end reassemblers.

This broad base of customers and indices are significant small, midsize firms as well as Fortune 1000 and Fortune 100 multinationals. And these companies are placing orders after intensive testing, and we have started delivering. Our strategy hasn't changed. We continue to target customers that require batteries with top-of-the-line cycle life and safety for intensive-use applications. These includes, of course, forklifts, commercial vehicles, energy storage systems.

We believe that no technology can meet the needs of customers in those markets as effectively as Electrovaya's. On-site testing by many of our current and prospective clients is confirming our belief. We think the opportunities in these segments are large, and we'll continue to win business from new and old customers going forward.

I'll now turn the call over to Richard to review our Q3 financial highlights. Richard?

Thank you, Sankar. Revenue in the third quarter ended June 30, 2017, was $4.4 million. As Sankar mentioned, this was up approximately 70% from $2.6 million in Q3 2016, and a growth of 120% from $2 million in Q2 2017. We're continuing to provide product to our larger OEM customers, while they remain at preproduction levels. The revenue came from our key verticals, including Material handling sectors sales to OEM, Material handling sector sales directly to end user, electric bus and truck sector, energy storage and component sales to third-party assemblers.

Our emphasis is to generate sales, but also to manage our working capital. Inventory was $13.7 million as of June 30, down from $17.1 million a year ago and from $15.6 million on March 31, 2017.

We would expect inventory to further reduce as we move forward, turning our inventory to sales and sales to cash. We're managing our working capital carefully to maintain balance sheet health. We needed -- we ended Q3 with $1.7 million of cash and restricted cash, and our payables continue to go down. Payables were $8.6 million on June 30, 2017 compared to $14.1 million at the end of the last fiscal year of September 30, and $12.4 million on December 31, and $9.9 million on March 31. So what I'm saying is we have a trend. We've mentioned this in the past that we want to reduce our inventory levels and that is happening. Once our OEM partners enter full production, we begin to receive increased revenue from them. We expect our working capital position to improve more. Our net loss in Q3 2017 was $6.3 million. That compares to a net loss of $3.1 million in Q3 2016 and $6.3 million for Q2 2017. Our efficiency in gross profit will remove -- and will improve and our losses decline as we complete higher volume orders in the future and our manufacturing plant and overhead costs are spread over a larger number of units, thereby, reducing the cost per unit and improving the profit margin.

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

Thank you, Richard. As I said, we were very encouraged by the fact that significant customers in all of our targeted sectors are turning to Electrovaya. There's always a lag time from early discussions to extensive testing, to order receives, to deliveries, and it is good to see that we've doubled our sales from Q1 2017 to Q2 2017. And then doubled, again, in Q3 2017. In this quarter, we're pleased that the revenues came from industrial electric vehicles like forklifts and electric delivery vans, from energy storage, as well as component sale of items such as battery sales for third-party battery assemblers. A sector I would like to highlight, is a fast-growing Materials handling and logistics sector, which are increasingly working on a 24/7 pace, and they need the best power system for this most intensive use. We have approached this sector two ways: one, through OEMs, and in this -- and in the OEM forklift sector, our sales into Hyster-Yale is steadily growing as the company ramps up carefully on their demand. We're also going after our own Electrovaya-branded Elivate line of batteries, which is targeting the large drop-in replacement battery market. So in this sector, our first breakthrough sales came in this quarter where we sold our first batch of batteries to the global $25 billion snack company. We're particularly pleased that they tested our products for over 5, 6 months, loved it. Then had the OEM truck-manufactured test our products for a few more months and approve it before their purchase order came.

Our engineering and technology team had done a terrific job and our supply team delivered. Our drop-in forklift battery replacement offers a unique opportunity for Electrovaya as we can target a large diversified group of end users as opposed to being restricted to OEMs. Our Elivate line of drop-in forklift batteries are currently being tested at some major end users, distribution and manufacturing sites in the U.S. and Canada. These users are usually large corporations, and Materials handling is very critical to their operations. They are cautious when introducing new technologies. That said, once they approve purchases, they become repeat customers and offer Electrovaya a long sales pipeline. This large company spends time qualifying suppliers and then easily stays with them. I'm pleased to say we're increasingly recognized as a industry leader in innovation in many, many conferences, trade shows around the world. People are coming up to us, who are knowledgeable about Electrovaya's products, with a keen interest in them. Here in Canada, Federal Government is recognizing us. We are receiving increasing support from export development Canada. We've been in their magazine in the last little while, this highlighted Electrovaya, and other government agencies. And global affairs Canada recently appointed Richard to its Clean Energy Advisory Group. So I'm sure Richard is going to advise them correctly. We're also pleased to welcome Ian Lance to our team as Vice President, Investor Relations. Ian is based in Boston and has a wealth of experience with many, many globally prestigious capital market firms and has over 20 years experience in the capital markets in the USA, Canada and Europe. We hope Ian is going to carry the Electrovaya message to the broad technology savvy investors in the U.S. and elsewhere.

We also added Premier Dalton McGuinty to our Board, probably 31st March, 1st of April. And Mr. McGuinty brings great energy and also credibility to Electrovaya internationally. Important, as Electrovaya's revenues are largely outside Canada, mainly in the world's most technically and fiscally demanding markets of Europe and Asia. Finally, I would note that the macro environment for our technology remains very strong, demand for lithium Ion batteries continue to grow rapidly as the world economy shifts from fossil fuels to clean energy. And as Goldman Sachs said earlier, "This is the new gasoline." Electrovaya's lithium ion ceramic battery technology with its proprietary and industry-leading safety and long operating life is ideally suited to meet the needs of many customers in our targeted markets. This is an exciting time for our company.

This concludes our remarks this morning. Richard and I would now be pleased to answer any questions you may have. Kevin, please open the line to questions.

(Operator Instructions) Our first question today is coming from Carter Driscoll from FBR Capital Markets.

So my first question is, you did a capital raise last quarter and help solidify the balance sheet, you did a solid job of maintaining the working down. The working capital balances to generate cash as well, but you did burn-through a fair amount of cash in the quarter. So I wanted to get your, kind of, puts and takes on how much revenue growth -- when you, kind of, see a tipping -- how much of revenue that you need to a tipping point to get gross margin back in positive territory and the other levers that you think will get investors more comfortable that you have an improving balance sheet going forward? And then I have a couple of follow-ups, if I may.

Yes. I think, Carter, that we've been clear that what our plan on the working capital side is, is to step -- sell the inventory we have and to then turn the set dial sales into cash. Also, working down some of our balances like accounts payable, et cetera. So that's going according to plan. It's very, very difficult looking forward, and it's been a challenge with this company to anticipate exactly what our sales level is going to be and where that tipping point is. There are some sectors where we're selling, where we get a very good margin. There are other sectors where we're selling, where the margins are quite tight and narrow. And it depends on which sector we're selling into and what our sales mix is. That's difficult for me to anticipate. But what we are seeing is that the more volume we produce, it reduces our unit cost and, therefore, improves our gross margin. The last couple of -- the last few quarters, the volume has not been large enough to really get those costs down. We have to also pursue further efficiencies across the entire company. We're always looking at also technology advances, increase our density. It's a competitive market out there, and if you stand still, you fall behind. So we're pulling all those levers, Carter. But it is, I really don't want to provide any guidance going forward. I think that we've indicated we're in a -- that, that tipping point as you described that we are in that now. And I'm -- we'll see over the next couple of quarters some, hopefully, positive movement there.

Our revenue is growing quite quickly. So we're very, very bullish about this.

No, I understand. But if I look at -- if you go back over the last, let's say, 6 quarters, you had a couple in fiscal 2Q and fiscal 4Q where at a similar revenue level where you had a better gross, probably, a positive gross profit in fiscal 2Q and a much smaller loss of the gross line in fiscal 4Q of '16. So I'm, I guess, I'm trying to figure out whether it was the sales mix towards what you said some of the sectors where there's more pricing pressure. I'm trying to think about factory utilization. I was a little surprised by the gross loss, the size in gross loss this quarter. So I'm just -- I'm struggling to figure out. Which of those factors contributed to what you put up this quarter?

I would say that the main factor is selling back then those were large -- if you take a look at the composition of customers, you'll see that 1 or 2 customers made up a significant percentage. When you're manufacturing in that volume, a single product, it's easier to have efficiencies. For example, the price on moving a container load of units is much cheaper than moving a van load of them. So that was one of the things we're seeing and then add to that as well that your manufacturing overheads get spread over those units. So your per unit cost -- our per unit cost in this quarter was higher than we find acceptable. And we're looking at that, trying to reduce that, gain some efficiencies. But it's -- as you say, it's an inflection point here. You don't want to not take those orders. And also custom orders that are higher cost to do. They're smaller companies, so it's difficult to load your upfront cost on them. But you do take them because those little acorns will grow into mighty oaks, maybe not all of them, but a few that stick well, and we've been established a good customer relationship. So that's sort of -- it's a blend of all those things going on there, Carter.

Sure, absolutely. So let me, sort of, ask in a different way. So if you -- you, obviously, have a growing customer list, even if they are not at the revenue levels or the unit levels that you're hoping, are there -- have you considered potentially not fulfilling certain orders if they are very low margin to more to preserve cash? Or is it more of a priority to try to find a different sort of financing if working capital adjustments can't get you to that type of position? I guess, I know you're not going to guide (inaudible). Was it $10 million with 5 customers that maybe get you the breakeven on the gross line or positive? Is it exiting one of the lower margin businesses? Or temporarily not taking orders there? I'm just trying to get a little bit more color on how we get in the next couple of quarters?

That's a really excellent question, Carter, because we have debated this internally as well. Would it make -- it would honestly make more financial sense for us to concentrate on the high-margin vertical and totally dedicate ourselves to that. But in the experience of this company, that's been around 15 years, these verticals, you can't predict which one will be the home run. That's why this company has been involved in so many different projects and so many different sectors. And we're applying that same strategy to say, okay, let's go across all these sectors. Let's -- we've turned away orders and you'll find this odd. It's where the orders are of such a magnitude that it would preclude us from pursuing this strategy. We don't want to become a slave to one OEM. We want to basically grow the business fundamentally with a strong base, based on various sectors, et cetera. Now with that said, by pursuing this strategy, if we -- is it expensive? Yes, it is. May we need to look at either financing of some form? Whether that be debt equity or some derivative thereof? We are considering all those things. We're managing this, and that's sort of a week-to-week kind of decision, looking at what opportunities are presented to us. Because quite often, we do have opportunities just presented to us out of the blue and considering those. So yes, Carter, that’s a really good observation on your part. And I agree.

Yes. And I agree with what Richard said. And our focus, Carter, is one of these fast-growing sectors, which is going to absolutely a beautiful margins and gross margins there. And that's why the focus is on that sector to move it forward quickly.

So could you, maybe, just elaborate or rank in terms of your near-term revenue growth, the end markets. I know you talked a fair amount about drop-in, replace some lead-acid batteries and material handling and then direct OEM sales. After material handling, could you kind of prioritize where you think your near-term revenue growth opportunities are by sector?

I think the electric -- commercial electric transportation, I think, is a very large sector for us. And that includes electric trucks and electric buses. So I would say that's probably the second largest sector.

Okay. And storage, one of the more competitive areas, would that be a fair statement from your pricing perspectives?

That will be a fair statement, yes.

Okay. Could you talk about -- I think in the last quarter, you talked about having roughly 10 different customers trialing different products whether it was OEM or drop-in replacements, correct me if I'm overlapping the two. They were testing some form of your product material handling. Is that still the same? Could you highlight any of the other opportunities or compare or contrast the OEM versus the drop-in replacement, either from a time perspective or a market opportunity?

I'd say, Carter, what you're going to see is some near-term progress in there. As Sankar indicated earlier that these are -- and as you just rightfully indicated, these products have been out there. They've been trialed for quite a while. The discussions have all progressed very well, and we believe that we're going to see some near-term traction here. I think that the -- that market runs a little bit of a cycle and this is, sort of, a bit their quiet period. But I would say, as we get into towards the fall here, we're going to see that, that work come to fruition. We're very close with a number of companies. And we think that in the near term, we're going to be able to show some progress there.

I mean, it's my last question. Could you talk about the composition of revenue between modules and component sales in the quarter? And how do you expect that, maybe, to evolve over the balance of the calendar year?

Yes. I think that the component sales are still an important factor for us. I don't want to specifically indicate, but it's a significant portion. But then, again, we are also starting to see -- component sales have been, sort of, the backbone for the last few quarters. But now we're starting to see modules starting to move. And we like that because with the more value you add in terms of the battery management systems, et cetera, your margin improves as the product differentiates itself. When you're at the component level, it's -- I wouldn't say it's a commodity but there's, sort of, narrower or tighter margins. So going forward, we would see less reliance on component sales and more growth in the completed module sales.

And systems.

And systems.

And maybe -- the last question for me is just in terms of future product development. Where are you focusing your efforts is about increasing the energy density of the cell. Maybe you can talk about what types of custom products you think that might become more utilizable across both the OEMs, if there are any such developments. I'm just trying to get a sense of where your product spend is going on your R&D line and where you can expect the cell densities to go in the near term.

I think that I'll let Sankar give the detail. But just as a broad comment, you could sort of look at that in 2 areas where we're continually looking to improve. The one is, of course, cell. At the cell level, our density, et cetera, looking at the components that are in there, our bill of materials, et cetera, and constantly trying to innovate and stay ahead of the curve there. The second piece that we don't talk about too much, but it's very important when we get into these completed system sales is the software and the Battery Management System. We've done some very, very innovative things, particularly focused on Materials handling sector, which, I think as we move forward, is really going to differentiate us. So that -- those 2 areas, the Battery Management Systems, the software side of it and the cell-level side of it, we're constantly innovating and moving forward there.

I tend to agree. And, Carter, we possibly have -- Electrovaya possibly have the largest industrial R&D and engineering team in Europe and USA. It's -- and in Europe, we're almost, almost unique. So we sit on the apex of a huge number of research institutes and others who are all funneling their research and developments to us, and the same thing, and similarly and mainly in Canada as well. So there's a very large, very large team of software, hardware, electro chemist, chemist, cell makers in our development programs.

We have reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Well, that concludes our call. And thank you for listening in, and we look forward to speaking with you, again, following the release of our fiscal fourth quarter and year-end results. Thanks.

Thank you.

Thanks. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.