Electrovaya Inc (ELVA) 2017 Q4 法說會逐字稿

Greetings, and welcome to Electrovaya's Fourth Quarter 2017 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Richard Halka, EVP and CFO. Please go ahead, sir.

Thank you, Rob. Good morning, everyone, and thank you for joining us on today's conference call to discuss Electrovaya's Fiscal 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.

On December 29, Electrovaya issued a press release concerning its business highlights and financial results for the fiscal year ended September 30, 2017. If you'd like a copy of the release, you can access it on our website. If you would also like to review our financial statements, MD&A and annual information form, you can access those documents on the SEDAR website at www.sedar.com.

As with previous calls, our comments today are subject to normal provisions relating to forward-looking information. We will provide information relating to our current views regarding trends in the markets, including their size and 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 fiscal 2017 results, and the most recent annual information form and management's discussion and analysis under risks and uncertainties, as well in other public disclosure documents filed with Canadian securities regulatory authorities. 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.

Thank you, Richard, and good morning, and Happy New Year to everyone. Thank you for taking the time to listen in on our fiscal 2017 results conference call.

As we noted in the press release, the past fiscal year was a pivotal one for Electrovaya. Back in early fiscal year 2017, we launched our battery product line for powering forklifts and Materials Handling vehicles. We believe this is a large market, where the customers have a continuous demand for higher efficiency and productivity and an ideal fit for large U.S. Fortune 1000 companies operating large Material Handling facilities.

We believe we could offer greater performance and value to the intensive user that are superior to their present power source like lead acid batteries, hydrogen, propane and other Lithium Ion.

Large global companies took an interest in our product, but they required months of validation, testing before they started placing purchase orders. There is no doubt that the sales cycle is long. However, I'm pleased to say more orders are now coming in, in this sector. As you probably know, we announced a purchase order from Walmart Canada worth CAD 4.3 million in September this year -- September 2017. We started shipments on that order in December, last month. We have now received forklift orders from about 5 U.S. Fortune 500 companies. This represents good validation of our product line and it's exciting to see the batteries gained traction.

Meanwhile, many other companies continue to test our batteries. We are optimistic that our sales momentum will strengthen this year. Our batteries are a drop-in replacement and retrofits into an existing electric Material Handling vehicle.

We are also continuing to work with our OEM partners to develop new products and markets using our batteries. The preproduction process has been long and complex. The products being developed by the OEMs are sophisticated, their markets sometimes emerging, and the only part we have control over is the cells or the battery modules, which are components in this complex system.

Obviously, the lengthy validation and sales cycle means that large orders from OEMs and Fortune 500 companies have not materialized as quickly as we'd have liked, but this is possibly the norm. That has affected our liquidity and our share price, and the Board of Directors and management share your disappointment in our current valuation. But I do believe that the product development initiatives we took in the last 2.5 years have positioned us for future success.

The last 2 years can be viewed as the prelaunch phase where intensive engineering, product development took place, along with extended validation time. Looking ahead, we'll continue to target customers that require superior battery performance for intensive use applications. We believe we have identified an excellent opportunity in the large global forklift and Materials Handling vehicle market.

I'll now turn the call over to Richard to review our fiscal 2017 financial highlights in greater details. Richard?

Thank you, Sankar.

Revenue for the 12 months ended September 30, 2017 was $8.8 million. That compares to $19.5 million last year. This decrease is primarily attributable to lower order volume and a reduction in funds received. Inventory was $14.2 million as at September 30, down from $18.2 million a year ago, as we drew down stocks during fiscal year for order fulfillment. We would expect inventory to further reduce as we move forward.

Our net loss in fiscal 2017 was $21.2 million compared to $8.8 million last year. The larger net loss was due to lower revenue, continuing development costs, a $2.2 million increase in finance cost, mostly associated with the $15 million convertible debenture we issued in March 2017. This was partly offset by $800,000 reduction in direct manufacturing costs.

I'll turn briefly to our fourth quarter results. We reported revenue of $1.2 million, down from $4.4 million last year. I would note that this decrease was largely due to order delays and timing. For example, we began shipping Walmart order in December, so it will show up in our fiscal 2018 results. Our net loss for the fourth quarter was $6.2 million compared to $5.6 million in the fourth quarter of fiscal 2016.

We're managing our working capital very carefully to maintain balance sheet health as we wait for OEMs and for direct battery sales to accelerate. We ended fiscal 2017 with $4.4 million of cash and restricted cash compared to $1.7 million at the end of fiscal 2016.

We have recently taken a few important steps to increase our liquidity. In October, subsequent to the end of the fiscal 2017 year, we completed a private placement that raised CAD 5.3 million in 2 tranches. In December, we entered an agreement for an CAD 8 million draw-down equity facility and CAD 2 million private placement. We completed the private placement on December 27. For more details on the terms of the draw-down facility, please see our news release dated December 20.

Last week, we also disclosed that we have entered an agreement to sell our head office building in Mississauga, Ontario for $17.1 million. This transaction is expected to close on or around February 28. But is subject to usual closing conditions. Our plan is to leaseback a portion of the premises for up to 9 months, subject to mutual agreement with the buyer. This sale will significantly strengthen our working capital position.

We're in a period in our business cycle in which liquidity is tighter than normal. We expect our working capital position to improve as revenue increases. We'll also get a boost as we receive more revenue from our recent forklift purchase orders. As we noted in our year-end disclosure, we are confident that Electrovaya has, or has access to, adequate resources to continue operations for the foreseeable future.

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

Thank you, Richard.

When we acquired Litarion in Germany in the middle of 2015, we knew we were getting a best-in-class plant with good electrodes and separator production capacity. But our challenge was to develop new products, for which there could be significant demand, which meant we needed to develop appropriate cells, modules and engineered battery systems and find and focus on profitable markets.

We spent a lot of time and money developing such products for markets, such as energy storage and electro-mobility. We decided that there was a particularly strong opportunity in Materials Handling vehicle, which is electro-mobility under intense operating conditions.

We began an intensive product development period before launching our initial forklift batteries in fiscal 2017. We then had to be patient as we began a long sales and validation cycle, which, we believe, is normal in this industry, along with continual development of different battery modules with different voltages, different capacities, different shapes and sizes and weights, and ability to interface with multiple vehicles from different manufacturers.

Fortune 500 companies are not going to commit to orders until they have tested our products exhaustively and are convinced that will make a tangible difference to their business. Materials Handling efficiently is their life blood. And they operate in many cases round-the-clock, 24 hours a day and 6 or 7 days a week. They're global companies and have access to the best technology anywhere to drive increased efficiencies in their operations.

The Walmart Canada order is a good example of how long it can take for these purchase orders to materialize. Walmart spent 5 months testing our batteries at room temperature and also in cold warehouses. Then the company had the Materials Handling vehicle makers test the batteries for a few more months. Then we finally got the initial purchase order. Many of the forklift battery orders to date have just started, but given the strong feedback we have been getting, we believe will accelerate revenues in the future.

Our Fortune 500 customers all have their own validation process. Typically, they test our batteries in their most intensive application and this takes a few months. They also ask for a confirmation from the Materials Handling vehicle manufacturers, that those manufacturers have independently tested our batteries and that they are fully compatible with those vehicles and meets all of the interface needs as well as confirms competitive positioning. Then only we start receiving purchase orders.

As the Materials Handling vehicle makers now have operating experience with our batteries, we are expecting the sales time line to become shorter. And we've been seeing this acceleration in the last 4 months. The direct sales market to the ultimate user in the Materials Handling market is diverse and broad and could be better than selling components to OEMs where the sales pull depends on those OEMs. Their emerging complex products being developed into an emerging market with all its uncertainties.

The size of the logistics, warehousing and Materials Handling market is large. It is a mature industry. And these companies are driven by efficiency considerations. If Electrovaya batteries makes these logistics and Material Handling companies more efficient, that is the driver and the benchmark.

These Materials Handling and logistics focused companies are massive and occupy U.S. 2016 rankings like Fortune 1, Fortune 7, Fortune 15, Fortune 17, Fortune 18 and so on. They are very large companies. The large manufacturing companies also have a good demand for 24/7 operating vehicles, but less so than the logistics companies. So we have 2 large markets we are going after.

The prelaunch development time, sales cycle and validation period for our Materials Handling battery line has taken us some time. Our revenue is not yet where we want it to be, and our liquidity has been tighter than we had anticipated. We elected to raise money recently to improve our working capital during this period of low revenue. That increased the share count and impacted our stock price. However, I believe we are turning a corner. Over forklift products, which are essentially drop-in battery replacements for lead acid batteries, are clearly gaining sales momentum and we expect that to continue.

Our balance sheet is also in a better shape after the recent financings and will improve further following the closing of the building sale. While I can't predict our revenue growth, we believe, we are seeing globally sophisticated companies demonstrating a commitment to our technology.

We believe the outlook for Lithium Ion batteries remains robust. The global shift from fossil fuels to clean energy is continuing, and this will create opportunities for Electrovaya. We are also pleased that our technology continues to gain recognition from key stakeholders.

In August, we received notification of a CAD 3.8 million grant from Sustainable Development Technology Canada to further develop Lithium Ion batteries for commercial vehicles. And in November, we were invited to join the European Commission's proposed Battery Alliance. This alliance is intended to bring stakeholders together to ensure reliable battery supply for the European industry.

The last few months have been a frustrating time for our shareholders, as we see our valuation go down. But I believe we are in a strong position to capitalize on our Lithium Ion battery technology, both for the OEM market as well as for the final battery product for the forklift and the Materials Handling market.

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

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

First question. Could you talk about, you talked to -- I believe, you said you had engagements with 5 different Fortune 500 OEMs for different Material Handling applications, obviously, in different stages of their testing and validation. Can you talk about the total number of customers that you are in discussions with, and maybe give some geographic flavor as to where these customers are located? Then I have a couple of follow-ups.

Carter, of the 5 Fortune 500 companies, they are -- we have received purchase orders. So that is good news. So of the 5, some of the earlier ones like Walmart took a total of probably 9 months to qualify us, and the others are moving a little faster because now that the Materials Handling vehicle companies have approved us. So 5, we have received purchase orders. We have approximately 20 battery packs, which are moving around the place. So there are quite a few companies who are going through their testing and validation space. Most of our customers are in U.S.A., some in Canada. But our geographical positioning is really U.S.A. and Canada.

Carter there is one thing I would mention too is that normally we don't see this, but we do see this in this industry, is that there is a seasonality to it. And warehouses don't tend to really want to introduce the new technology in their sort of peak season of December. Now we had a couple of exceptions to that. But that's another reason we're anticipating that we should see a pickup going into the New Year as the level of activity in the warehouses comes down a bit, and they can introduce new technology.

Could you talk about the different classes of forklifts that your products are going into, both from a replacement perspective and then some of the engagements you have with OEMs? Are there -- you're taking Class 1 to Class 3, is it more concentrated in Class 3, just trying to get a sense of the mix within the particular classes that are typically used with lead acid?

Yes, Carter, what we're finding is that part of the reason that this took us a little longer is that they want the full suite of products. They want some -- and I apologize Carter, off the top of my head, I forget whether Class 1 is the small or [Class 5] is (inaudible).

(inaudible) Yes, Class 3 is smaller than Class 1 and Class 2.

Yes. Okay, so what we go by is the 24 volt. They wanted a number of those as well as our larger 36 volt. And now we're getting interest in the 48s. So there's a mix. Basically, we addressed 3 classes, which are essentially the 3 battery classes that lead acid goes into. The other 2 classes tend to be internal combustion engines. And that is roughly, those 3 classes make up roughly 60% of the addressable market.

And Carter, class -- we are selling as Richard said to Class 1 probably larger, but a lot of Class 3s as well, we are everywhere.

Okay. And then just from a purpose-built perspective, can you talk about -- I would imagine the timing for that in terms of testing and validation might even be longer than drop-in replacement; can you just compare and contrast the drop-in replacement versus what you're expecting in terms of time frame from the purpose-built forklifts?

The purpose-built OEMs are happening like in our last fiscal year numbers, probably. Richard, what, 90% was OEM sales, right? And less than 10% was going into the forklifts. But both are happening. But we feel that the forklift industry is so broad, it will accelerate and outpace the other direction.

Carter, I think, one thing is that we're finding that the manufacturers are actually being very helpful with us to address their markets, while they're rolling out the product. They're being very, very cautious with this. You have to remember the manufacturers that this is a new area to them to sell an all-in; usually they sell the forklift and then you go out, you buy the battery. So now they're selling -- they're looking at all-in-one solution.

It also takes a bit of work on their side in terms of the software side of things, how they use it. They want to make sure that they have the maximum benefit for their customers here. So it is, I'll be quite honest, frustratingly slow. But the good news is that a number of the sales leads we're getting have been directed by the OEMs, saying their customers are very interested and they make the introduction for us. So one of the benefits we're seeing is that now we have an additional sales market there, which is the OEMs pushing us to their distributors.

And maybe just shifting gears from market segment perspective away from forklift. Yes, I think you had several engagements both in the bus and the recreational vehicle market, and at least in the past, you had had some storage engagements. Could you talk about where you stand in that process, have those been moving forward? Are they kind of stuck in the slow testing and validation period of time, like forklifts have been starting to emerge from -- just trying to get a sense of your other end markets?

Yes, I would say that we're definitely putting our shoulder behind the forklift. We're seeing momentum there and we're seeing the potential.

The others are moving ahead. And there is some other that have come out that we didn't see, which is electric vehicle manufacturers, putting in fairly substantial orders that are not the original OEMs, but someone that has decided, well they want to have a look at this too. We're continuing to work with them and we are getting orders. But the volumes are at, what I would describe, prototype pilot phase. And we've sort of been stuck in that for probably 1.5 years. But they are moving forward. There still is a continuing flow there. But it is -- again, frustratingly slow. And that's why we are putting our shoulder behind the forklift, which we feel we can address very quickly and have a good sales network and also a good reputation in the market for it.

Do you characterize that the forklift market is maybe more focused on performance than price? And then maybe some of the other segments are more focused on price than, I don't want to say a trade-off between performance and price, but...

Yes. Exactly. Exactly.

And the other thing -- they're focused on the performance. And if they can see the value equation that the value proposition shows that they make a very high IRR on the product. And that's just not taking simply the cost over the life, but it's the savings in terms of efficiency.

The other thing that we're finding they are very excited about is basically we've put The Internet of Everything into the batteries themselves. So they can get very good logistics information about their forklifts. And that is an exciting prospect for them as well.

So I think the value proposition for forklifts is very high. And I think you're correct. In those other industries, especially where you're being engineered into a product, there's a number of alternatives. When we look at the forklift, there is competitors out there. But we think, when we put ourselves head-to-head with them, they're really -- we really do have a superior product.

In those other sectors, it's harder to justify a premium that we want on the product in those areas. But what we do focus on are the intensive users in those areas and they're the ones that tend to put a little more value on here. But it is -- it's a tougher, more competitive market. What we're fighting in forklift is sort of a long cycle of them getting comfortable. But to the best of my knowledge, there's really been no head-to-head where they're comparing one against the other and select the other. It's been basically -- we've won these just by going in and showing the performance of the battery.

Two last questions for me, if I may. The private placement, was that with a financial investor, or was it a strategic partner? I'm just trying to get some characterization of the relationship for the financing. And then just want to talk -- ask couple of questions about the sale of the facility and the -- your expectations of being there for an additional 9 months, just the machinations of how that works and the thought process behind selling the facility. Do you not need the capacity, are you going to treat it more as an R&D center and continuing the manufacturing of the cells over in Germany? Just trying to get a sense of those 2 separate transactions.

Yes. Carter, just my sort of view of this. I think one thing that companies nowadays have to look at is very much whether they pursue an asset-light strategy, in which they use contract manufacturers. The advantage of that is it's very scalable. But you are a little bit at the mercy of your contract manufacturers as opposed to owning the entire process yourself.

I think our view here in terms of what we're doing and also looking around at suitable contract manufacturers is that it is best to pursue an asset-light strategy. That combined with, quite honestly, our need for working capital results in the decision we've made. We think that -- we've already started conducting searches for suitable premises outside that 9-month period. We have a number of very good leads. We're confident that we'll be able to close this and move and continue operations without disruption.

I agree with Richard. And Carter, the investment is by a financial partner, not strategic.

Okay. All right. But then just in terms of your expectations, I thought I heard you made a comment saying that you'll have up to 9 months to remain in the facility, I mean, do you plan on leaving the facility in Mississauga eventually?

That's the negotiations we're having with the folks who are thinking of buying this place. But we are moving to -- in order to go after the growth. So a lot of our -- the way we're manufacturing is through CMs so that we can grow faster. And so we are trying to do all the design, all the research, all the critical manufacturing ourselves. We then subcontract a lot of the work outs. And then the final assembly, final testing, et cetera, we do ourselves. So we do not need such a large facility as we presently have.

Our next question is from the line of Andrew Lawlor with Canaccord Genuity.

Just got a couple of questions here. Can you provide a high-level update on the forklift industry's trend towards continued adoption of the Lithium Ion batteries and maybe your perspective on where we are at in the adoption life cycle?

It's a new product going into the Lithium Ion batteries into this forklift industry.

The industry is very mature. The industry is growing. As you can see, logistics and e-commerce growing very quickly. And the industry is very efficiency driven. If you can have a -- so they are willing to look at technology which increases efficiency. So when we went into the industry, we've started working with a fairly large company and we were -- they moved relatively fast -- 5, 6, 8 months -- and we are seeing purchase orders.

So my personal feeling is if you're running e-commerce warehouse, et cetera, where you're running 24 hours, 3 shifts, there is -- you have to move to Lithium Ion. I mean, there is no other -- the value we give is so high that -- and the IRR is so high that the industry will move to Lithium Ion.

But I think, one of the things is the speed of adoption. You got to remember that these warehouses have been running on lead acid batteries predominantly for decades and decades and decades. And I think, this is why when we make our case in terms of the value proposition, it's more the industry leaders, the big companies that get it. I think there's still a place for lead acid out there. You'll probably see them. But it's the intensive use, basically warehouses that they really see the value here.

And we're seeing manufacturing companies who are running 3 shift operation, also moving -- have started testing our products.

Very interesting. Can you provide an update on your customer pipeline, maybe a little more in detail, specifically to the forklift segment?

I think Andrew, probably, what we have disclosed, we've given a couple of business updates in the past talking about that. And as we say, we have about 20 units out there that are moving between manufacturers.

One thing Andrew, I will just touch on a little bit, which I've noted previously as well is just to let people know how this process sort of logically flows. Phase 1 is they tend to get a demonstration. They get it in their warehouse, they drive it hard. And then what you'll find after that, after a couple of months or whatever, you'll see a pilot order. Let's say, anywhere from 10 to 20 units. And then they will run those in a single warehouse, see how they like it. And then the third phase is, then they will do 1 warehouse, probably 150. And that would be sort of where the Walmart one is. They've skipped right to Phase 3. And then Phase 4 is sort of the rollout across various warehouses and Phase 5 is total adoption of the technology.

So when we say that there's 20-or-so out there, that's sort of at your Phase 1 stage, and then they move to the next -- some of these Fortune 500 companies, as I've mentioned, we're on probably about the second PO. So there are multiple POs out there. So you're seeing that they're running pilots in different warehouses. So that's sort of how it goes. It's not -- we're not anticipating. We think that the conversion of 1 warehouse is a very good target for us. And as you -- as we say, 150 batteries is $4 million to $6 million into one site. So that's sort of what we're looking for. We'd like to see more Phase 2 and Phase 3.

Interesting. That's great color. That kind of leads me into my final question. Just talking about your relationship with Walmart, and how you see that developing, I guess, from Phase 3 to Phase 4 as you said, and kind of where you're at on that and what your prospects are for the continued penetration to more warehouses?

Well, I think we need to be a little bit careful Andrew in terms of speaking about specific customers. I think we're very happy with where we are with them. We are -- our biggest challenge in front of us with Walmart is, of course, moving forward, we want to get more sales. But we want to make sure we fulfill this order to their total satisfaction.

With that, the people here have been working very, very hard. And the week before Christmas, there was 3 shipments made on 1 day. So we're getting shipments out the door. We're going to be accelerating as we move into January. But our biggest challenge with that is now on the execution side. We've got to make sure we get it there, get it on time, get it running well and that they are basically a great spokesman for us. So that's our major focus right now with -- is getting this one right, which we're well on the track to. And then our focus will be, okay, the next one and the next one.

At this time, I'll turn the floor back to Dr. Das Gupta for closing remarks.

Well, thanks, Rob. That concludes our call. Thank you for listening in. And we look forward to speaking with you again following the release of our fiscal first quarter results, probably sometime in February. Thank you again and have a wonderful day. Bye.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.