Electrovaya Inc (ELVA) 2019 Q2 法說會逐字稿

Greetings and welcome to the Electrovaya conference call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Richard Halka, Executive Vice President and CFO for Electrovaya. Please go ahead, sir.

Thank you, Kevin. Good morning, everyone, and thank you for joining us on today's conference call to discuss Electrovaya's fiscal 2019 second quarter financial results. Today's call is being hosted by Gitanjali Das Gupta, Vice President of Operations at Electrovaya; and myself, Richard Halka, Executive Vice President and CFO. Our CEO, Dr. Sankar Das Gupta, has an important business meeting this morning and, unfortunately, can't be with us.

Yesterday, Electrovaya issued a press release concerning its business highlights and financial results for the 3 months ended March 31, 2019. If you would like a copy of the release, you can access it on our website. If you'd like to review our financial statements and Management's Discussion and Analysis, you can access those documents 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 risk 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 implied in making forward-looking statements may be found in the company's press release announcing the Q2 2019 results and the most recent annual information form and Management's Discussion and Analysis under Risk and Uncertainties as well as in other public disclosure documents filed with the Canadian regulatory authorities. Also, please note that all numbers discussed on this call are in U.S. dollars unless otherwise noted.

And now let me turn the call over to Gitanjali.

Thank you, Richard, and good morning, everyone. We're pleased to have you all join us this morning for our quarter 2 2019 financial results conference call.

We are generating a consistent flow of new purchase orders and increased interest from customers across the material handling electric vehicle, automated guided vehicle and energy storage industries. We currently have more than $3.3 million of open orders from a combination of new and repeat customers. Our batteries are deployed across multiple sites and multiple industries, and the customer feedback is consistently strong. So our business has a very positive sales momentum.

As you know, we sell to blue chip customers who are among the leaders in their industries. We are focused on supplying batteries to both end users to replace their existing lead acid batteries with our lithium ion batteries and to electric vehicle manufacturers that place their batteries directly into new builds.

We are pleased to have recently strengthened our relationships with a couple of key OEMs. Earlier this month, we announced the signing of an agreement with The Raymond Corporation, which is part of Toyota Industries. The deal allows Raymond's sales and service centers to sell Electrovaya's batteries to customers with compatible forklifts. This represents a very strong validation of our products by the industry leader. Raymond is a strong supporter of our products, and this is an outstanding opportunity to increase market penetration while raising the overall awareness of our battery system.

Our batteries are also powering autonomous robots. These are being deployed in retail environment to improve operations. The robot was displayed recently at our booth at the ProMat 2019 conference in Chicago last month and was very well received.

Another important focus for us is government partnerships. We have spoken before about our $2.9 million contract with Sustainable Development Technology Canada to develop high-voltage battery packs for the electric bus market. The SDTC contract helped us to open up a brand-new market opportunity in the electric bus industry, and we see significant potential in this market.

Today, we are now in a position for growth. Customer demand is growing. Our balance sheet is much improved following our head office sale and the removal of our former German subsidiary. We're also reducing costs every quarter and working to address our working capital position. We are confident that we are now close to building a sustainable, profitable lithium ion battery business.

I'll now turn the call over to Richard to review our fiscal second quarter results in greater detail. Richard?

Thank you, Gitanjali. Revenue for the 3 months ended March 31, 2019, was approximately $1.3 million compared to $3.3 million in the second quarter last year. The year-over-year revenue decline was attributable to the fulfillment of the large Walmart Canada order last year. It is not reflective of customer demand which is strong and growing.

Our revenue in Q2 2019 was derived entirely from deliveries of lithium ion batteries to customers in the MHEV and AGV markets, which is our primary focus.

Gross profit was $400,000 or 35% of revenue compared to $900,000 or 28% of revenue in Q2 last year. We're pleased that we are not only sustaining but improving margins. Net loss from continued operations was $1.9 million compared to a net loss of $2.7 million in the prior year. The reduced loss is primarily attributable to a significant reduction in operating expenses.

Our total operating expenses were $2.2 million in Q2 2019 compared to $3.3 million in Q2 last year, a reduction of 35% or $1.1 million. G&A expenses alone dropped $600,000 year-over-year. This reflects the strict discipline with which we are running our business. We've been reducing costs sequentially each quarter and are working hard to identify further cost-saving opportunities.

I'll now briefly review our results for the 6 months ended March 31, 2019. Revenue was $3.2 million compared to $4 million in the same period last year. Again, most of the revenue in the first half of fiscal 2018 was from the Walmart order.

Gross profit was $1.2 million or 36% of revenue compared to $1.2 million or 29% of revenue last year, and we had net earnings from continued operations of $900,000 compared to a net loss of $5.4 million in the prior year. The net profit was primarily due to a gain on the sale of our head office worth $4.2 million.

Turning to our balance sheet. We had $200,000 of cash and equivalents at March 31, 2019. This compares to $100,000 as at September 30, 2018, which was the year-end -- which was our fiscal 2018 year-end.

We used a total of $1.4 million of cash in operating activities during the first 6 months of the fiscal year. We are managing our working capital very carefully during this period. Inventory was $1 million as of March 31, 2019, compared to $1.8 million as at September 30, 2018. The decreased inventory is due to the continued fulfillment of purchase orders.

During the second quarter, a Canadian chartered bank provided a loan to Electrovaya to finance specific purchase orders. The first tranche worth CAD 500,000 has been drawn, and we are in negotiations with the bank to expand this facility with a second and third tranche as well. The loan is cash collateralized with cash deposit worth CAD 250,000. This is an important development for Electrovaya as it helps us fulfill orders while our working capital position is tight. The involvement of the bank underscores its strength of Electrovaya's blue chip customer base.

We are pleased with our financial progress. We are building strong sales momentum, critical industry relationships and market reach. We are improving our already strong margins, reducing operating costs and strengthening our financial performance. We are establishing the relationships needed to access essential financial resources to grow the business.

I would now like to turn the call back to Gitanjali to wrap up.

Thank you, Richard. The growth of our business reflects the growth of our industry. To date, we have sold and delivered batteries to commercial operations at 23 customer sites in the United States and Canada. This is a major achievement given that we launched our flagship forklift battery product less than 3 years ago.

When we began to focus on the MHEV and AGV market, so material-handling electric vehicle and autonomous guided vehicle market, we thought the opportunity was very significant. This is certainly proving to be true. This is an emerging business, and the transition to lithium ion doesn't happen overnight but it is happening rapidly. Once operators realize the benefits of lithium ion, they never switch back to lead acid. Our growth -- our growing order volume and growing customer base signifies that lithium ion adoption is speeding up.

Our batteries are more customized for MHEV and AGV customers than any of our rivals. We offer productivity and safety standards that no other company can match. Our customers are very happy with the product performance, reflected in the repeated orders we are receiving. And we continue to pursue attractive new verticals, such as the electric bus opportunity I outlined earlier.

And now we have an agreement with The Raymond Corporation which provides us with significant opportunity to reach new customers. Raymond's sales and service team can engage with forklift operators on a much larger scale than Electrovaya could on its own. We believe this offers a tremendous opportunity to expand our sales networks without any investment in a direct sales force.

Richard talked about the agreement we reached with a Canadian chartered bank to finance purchase orders. This provides funds to support the fulfillment of purchase orders and once again validate our quality product, customer base and supply chain.

Since early 2018, we have implemented several restructuring initiatives that repositioned us as a leaner, more focused company. That hard work is continuing, so we're pleased with our progress. Looking to the longer term, we are now in a stronger position to benefit from growing demand for our products and to deliver stronger performance for our shareholders.

That concludes our remarks for this morning. Richard and I would now be pleased to answer any questions you may have. Operator, -- sorry, Kevin, please open the lines to questions.

(Operator Instructions) Our first question today is coming from Craig Irwin from ROTH Capital.

So Gitanjali, can you maybe frame up for us the volume of business that you did in the forklift market over the last year? I mean are we talking units in the hundreds, in the tens? And maybe if you could discuss the potential to maybe double or triple that volume in '19. How credible is that growth opportunity?

It's Richard here, Craig. Craig, I believe, in one of our announcements, we had indicated that over the year period, and this may be calendar -- year-to-date, but we had indicated we had shipped -- completed and shipped about 350 battery units for forklifts.

So is it possible....

I would say that's about what -- a 12-month period we've been doing the sort of rate we're at.

Okay. So is it possible to do 1,000 units this year?

It is -- in terms of -- here's our limiting factors. It is not the product. It's not our supply chain. It's not our customer base. Our key constraint has been and is working capital. If we have the working capital, yes, we could easily ramp up production to 1,000 units and beyond. We -- there is no limiting factor in terms of what we can do through our supply chain. We have multiple suppliers, a very flexible supply chain. So that's not really a constraint. We don't have a manufacturing constraint at this point.

Great. So at ProMat in Chicago, in your booth, you had a video screen with pictures of different installations, and some of those customers are very well-recognized big names. I assume a couple of those were initial installations. Can you maybe frame out the time line and the process for a customer to evaluate the returns on switching from lead acid to lithium and what you would expect as far as momentum with these individual customers? If a very large retailer has your product for a year, is that long enough for them to start coming back and making multiple repeat purchases?

That's a really good question, Craig. We've seen an evolution in the sales cycle here. Initially, when we first introduced the product, there was a very long trial cycle where they would look at the product, they'd run it for months. And then if they were happy with that, they'd put in what I'd call a pilot order of a few units and then run those for a few months. We've sort of moved past that now so that where we're at is that our customers are ordering a significant number of units right off the bat. We do have out there various demo units that are moving around. But that demonstration appears to be less important, and I think the piloting is less important.

Basically, they -- it's a small world out there, and they will discuss it with other companies they know that are running it and from the feedback, place an order. So as mentioned in the press release, we have about 23 sites now across the U.S. and Canada, and that is continuing to expand. So we are seeing good momentum, and we're seeing a reduction in the sales cycle time.

That's great. And then last question, if I may, the partnership with Raymond, the availability of products for Raymond. Can you maybe describe for us in a little bit more detail what the SKUs are, what specific portions of their sales you're able to provide energy storage for? And are there plans to expand the offering for Raymond?

I guess I would -- I really don't want to speak too much directly about Raymond without Raymond's position. But what I would say, the exciting piece for this is it effectively -- as the CFO, it effectively gives us a new sales network without investing the capital into boots on the ground. So we can sell all through their retail and distribution chain. Gitanjali, would you like to add anything to that?

Yes. For the material handling industry, people are looking at more premium forklifts that have to run 10, 12, 24 hours a day, which is where we really fit that market perfectly. They either go to 1 of 2 vendors for their forklifts, Raymond or Crown, so -- and Raymond being the bigger of the 2. So in that sense, having -- being Raymond's partner here on a product line that we're particularly well suited to as their go-to lithium ion for now is really a perfect fit. So in that sense, looking at their electric forklift product line, Craig, we fit quite a substantial amount. And as you know, we're still in the process of increasing the number of models available to the market and, in that sense, have a good market coverage.

Great. And then actually, just a follow-up on Raymond. Does the agreement with Raymond provide that Electrovaya must maintain a certain minimum inventory, 50 units, 100 units for fast turnarounds? Or would that be an optional investment for you guys to capture a chunk of their business?

No, we generally don't do that. We only build to order. The product is designed like Lego building blocks, so it's very easy for us to turn inventory from one thing to another or to move things through quite rapidly once we see more firm projections from sales. So in that sense, no, we do not carry any minimum order for Raymond. But that does not hinder and should not hinder our ability to respond and build rapidly and build to order.

Our next question today is coming from Ashok Kumar from ThinkEquity.

Multiple questions. The first is could you please provide some granularity -- quantitative granularity on your revenues, specifically the mix of your own channel sales and OEM sales and also by market, MHEV versus AGV? And then an operational question would be the breakeven revenue rate and the time line you foresee achieving that target.

Thank you, Ashok, and it's a pleasure to take a question from you. I think this is the first time that we've spoken. If you'll give me just 2 seconds. I don't want to go beyond what's in the financial statements. The lion's share of the revenue came from the MHEV area. And just bear with me one second and predominantly -- I'll add to that as well, the sales predominantly being into the U.S. market. The further breakdown of that, we really haven't disclosed. And I would be -- don't really want to go beyond what's in the financial statement. But yes, as we've indicated, it is primarily to the MHEV market right now and primarily into the U.S.

Got it. Richard and Gitanjali, just if I step back and -- or if you step back and look at the global lithium ion cell manufacturing capacity, today, most of the battery cell and component manufacturing is largely confined to Asia. And given some of the macro issues in terms of trade factors and so on, I assume that you will be advantageously positioned as companies look to source or establish a local or domestic supply chain, right, given this is such a critical technology.

Ashok, there's one misconception about the company that I want to straighten people out on, and that is we totally control the manufacturing process and it's our secret sauce. So in terms of the electrolyte, the chemical formulation and everything within our cells, we control all that. We don't purchase completed cells. We control the entire manufacturing, and that's what makes our cells special. That's what gives them the longer cycle life because we've managed to reduce the parasitic reaction. So we could use other suppliers. We could set up manufacturing ourselves. But what we're looking at right now is a very robust and, essentially, a supply chain that can scale up quickly, and that's our main priorities at this stage.

So Richard, my question was more like -- sorry, Gitanjali. Please go ahead.

So yes, Ashok, were you asking about the recent trade tariffs and the impact to us?

Yes, yes. My question is that -- thank you for bringing that, Gitanjali. My conditional question was that you're advantageously positioned given that your customers will look to source battery technology domestically, right? So you should be advantageously positioned to grow share because of some of the macro policy issues.

Yes, we should. And the soft Canadian dollar isn't -- is also helpful.

Got it, got it. And in terms of briefly -- Richard, you talked about life cycle and technology trends and cell density and so on. So you do have, like you said, some secret sauce. And I was wondering, are you coming down from a cost perspective at a greater-than-the-industry learning curve, right, which historically has been like 20%, 22% in terms of cost reduction, right? So I was wondering if you have some differentiation there.

Yes. I think that we are seeing a good cost reduction, not only with -- as evidenced within our gross margin, but also within our other operating costs. What we also see going into the future is, as our volume increases, we believe that we will see even more improvement in terms of margin and reduction of our costs.

Got it. And not to get too much into detail in terms of the technology, right, so I guess in terms of -- if you look at the component or metals content of lithium ion battery cathodes, nickel -- and I guess it depends on the technology, right, either cobalt, nickel or some other related material, right, is going to make up the highest percentage by weight. So I was wondering, do you have a secure source that you look at with your technology road map?

We're fairly well cushioned from commodity or raw material pricing, so cobalt and other pricing has not been a factor.

Ladies and gentlemen, we've 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, thank you, everyone, for joining our call. This does now conclude it. We look forward to speaking with you again after our quarter 3 reporting. And if in the interim you have questions, there are always ways to reach us. Thank you again.

Thank you, everyone.

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