Electrovaya Inc. (ELVA) Q2 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Electrovaya Inc. Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. Richard Halka, Executive Vice President and Chief Financial Officer for Electrovaya. Thank you. You may begin.

Thank you, Operator. Good morning, everyone and thank you for joining us for today’s conference call to discuss Electrovaya’s Q2 fiscal 2016 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. Friday evening, after the markets closed, Electrovaya issued a press release concerning its business highlights and financial results for the quarter ending March 31, 2016. 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 and Management Discussion and Analysis, you can access it on SEDAR website at www.sedar.com. As with previous calls, our comments today are subject to normal provisions related to forward-looking information. We will provide information relating to our current views regarding trends in our markets, including the 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 materials factors or assumptions applied in making forward-looking statements may be found in the Company’s most recent annual and interim Management’s Discussion and Analysis, under Risks and Uncertainties, as well as in other public disclosures 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. Sankar?

Thank you, Richard. Good morning and thanks everyone for taking the time to listen into our second quarter fiscal 2016 conference call. We are really pleased with our second quarter results, as we have laid the foundation for long-term sustainable growth. We are pursuing opportunities in several key vertical sectors. We have developed a number of prototypes in qualifying our products with several leaders in these key verticals. We will be releasing this morning two product concepts and product ideas. One is our one-kilowatt-hour battery module, LITACORE1000 and an intelligent 48 volt, 2.3 kilowatt hour module as building blocks for OEMs designing lithium ion batteries. Both these products, we have now launched customers for, so really looking forward to it. As we move into contracted multiyear agreements, we will of course disclose these two as investments in public. Much like others, we have been very busy this quarter, developing products and developing business relationships. As you can see from the results, we have made significant investments in R&D, investments which will bear fruit for years to come. We have been active globally meeting customers and potential customers in Asia, Europe and North America. We have spoken at tradeshows and showcased our products and solutions, and reinforced our position as a safest and longest cycle life lithium ion solution in the market. We have a magnificent lithium ion plant, which we believe the most advanced on the planet and a terrific team of German and Canadian engineers committed to being as a forefront of what Deutsche Bank last week has termed as a Lithium-ion Age. At this point, I’ll turn the call over to Richard to review our financials and give some color to our acquisition.

Thank you, Sankar. As we mentioned earlier, our financial release was sent out on Friday evening, at which time the financial statements, MD&A and press release were filed on SEDAR. This was a very important quarter for us, as we invest for the future and build a robust and scalable platform for sustainable growth. We have made some key hirings in business development, engineering and project management. We have made key supply chain arrangements with new and existing suppliers, which will help to shorten our production cycle and ensure continuity of supply. We have begun putting in place essential building blocks such as enterprise resource planning systems and rigid quality assurance procedures, which have met the certification requirements necessary for our major customer demands. I would like to touch for a moment on what some people see as a disconnect between contracts we have announced and our revenue. Contracts establish price and committed volumes, but specific delivery could be modified due to the customer’s production needs. A couple of our existing customers have requested changes to delivery as they are experiencing production delays. This has caused our finished goods levels to rise by US$2.2 million to US$6.9 million from Q1 level of US$4.7 million. There is no doubt the customers will be requiring products, but it has caused some lumpiness in delivery schedule. We would expect these issues to be resolved in the third quarter. We have done this all while keeping a prudent eye on cash resources and working capital lock up. Our cash from operating activities, net working capital and cash position are all stronger than what they were at the end of 2016. Our cash balance was US$4.3 million or Cdn $5.6 million as at March 31, 2016 compared to US$3.3 million or Cdn $4.3 million at the end of Q1 2016. We have ended the quarter with a stronger balance sheet, robust pipeline and efficient production facility and industry-leading products. We continue to be very bullish about our future and our place in the lithium-ion age. I would now like to turn the call back to Sankar.

Thank you, Richard. The last quarter was very, very interesting, as we are moving into the transformation after we took over the Litarion operations. The technology developed by Canada and as well as in Germany gives us a wide technology gap over our competitors. Our business strategy is very simple, have a wide technology gap over our competitors; deliver through our highly automated plants, which presently manufacture critical elements of anodes and cathodes and separators; develop products which the market demands; and grow quickly. We are developing the products which the markets demand and we have a very fast developments team who are generating a range of products, which the market needs. We started initially at electrodes and separators in Q3 2015. We quickly developed the 40Ah cell, which was announced in Q1 of 2016 and we are now receiving a number of launch customers who are interested in purchasing separators, electrodes as well as cells. Today this morning we’ll also be announcing the first building block, which will give our OEMs and partners a complete capability to build complete lithium-ion battery systems. Today’s product announcement, which is happening this morning of 1 kilowatt hour module as well as 2.3 kilowatt hour intelligent module with integrated intelligent battery management systems in my opinion is a game changer in our lithium-ion battery industry. We can now build seamlessly all battery systems from 1 kilowatt hour to megawatt hour range all containing our key differentiators, high safety and high cycle life along with the intelligent battery management system. A great help these building blocks will be to all our OEM customers. When do we see the cash flow from these products? It’s happening now. The electrodes, separators and cells are generating funds. OEMs have started qualifying the various new building blocks, which we mentioned just now. And I am delighted to say, we have launched customers who are moving quickly to qualify these modules. I believe the full flow will start towards the end of this year in the next two quarters. Actually, as we expand our product offering from electrodes and separators and now to cells and modules, we see a wider range of customers for our products. These modules are the game changers for us. It allows most folks to use these building blocks and create the systems for all applications from residential energy storage, to telecom, to electro mobility in car, buses and electric trucks. This is a good lego block. I sincerely believe that with our combined technology, we have the innovation leadership in this industrial sector. How big is this industrial sector? Large. Last week Deutsche Bank put in a report naming “Welcome to the Lithium-ion Age.” The stone age, the iron age and now the lithium-ion age. We plan to be the global leader in this sector. There are fiscal giants but we are better in the critical innovation and technology. The next two quarter are extremely exciting as our highly motivated and talented team in Mississauga, Germany and Asia drives us to become the global leader in this Lithium-ion Age. As Richard says, we will have some lumpy quarters, but what we have today is a game changer and we have the team to do it. With today’s announcement, which builds on the separators, electrodes and cells mentioned earlier, we along with our partners now can deliver most of the systems, the market demands. Over to you, Richard.

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

Thank you. [Operator Instruction] Our first question comes from the line of Carter Driscoll with FBR. Please proceed with your question.

First question, maybe you could talk, I think you’ve put last quarter some parameters around your near term pipeline. If I remember correctly, you talked about somewhere in the neighborhood of Cdn $50 million. Is that near-term pipeline shifted out at all, is that because of some of the newer products, potentially that you just introduced that they want to qualify? Maybe you could also address the -- I guess it sounded like an order push out that you talked about being reclaimed in the following quarter and maybe talk about the magnitude of that and the number of customers? And then, I have a couple of follow-ups.

Carter, it’s Richard here. I’ll start with the order push out one, just to give that little more color. It affects a couple of major customers have basically what we had discussed and planned was a regular stream of production and delivery. They requested that it be more lumpy; they want a large order. Just to give you an example and this is in specific but it just gives you some idea of the quantum here, instead of taking delivery at let’s say 5,000 cells per month, so for 15,000 in the quarter, they want delivery of 20,000 sales, which to give it a dollar value would be over $1 million worth of sales. So that gives you some idea of the quantum of what we are looking at. And that’s just an example of one customer. It’s not that the order is in jeopardy at all. It’s just that the customer is having some production related delays and as requested, rather than a regular flow of goods. But, they will tell us when they want the goods, but they want them in a big, big volume. We really don’t have -- I can’t assure you as to the timing of that. I am certainly hoping that that will rectify itself within the third quarter here.

Yes, it should rectify by the next quarter?

Yes, within the third here.

Okay. So, just following up on that example, so you maybe have more lumpiness already -- you have lumpiness in business and maybe it’s becoming even little bit more lumpy, but it sounds like potentially the order size could increase, but you don’t have consistency as originally hoped for. Is that a fair qualification?

Yes, I think this will smooth out with two things. One, you have to remember that these are basically components that our customers are purchasing to put into their production cycles. And it’s a new component to them; it depended on their demand out there et cetera as well. So, as that smooths out, that will make it less lumpy, as they get their production running smoothly. But also as we introduce more customers, that will also smooth it out because right now, this is a couple of significant customers that are causing us lumpiness. As more customers are added, the lumpiness factor will start to dissipate.

Okay, fair enough. And then, any quantification you can put around by question about -- the way you think about your term versus your longer term, in near term order work versus a longer term pipeline opportunities?

It really is -- and I am not trying to be evasive, Carter, but it -- what I am learning is it’s somewhat unpredictable. It’s very easy for me to look into 2017 and later in this year to see as these things all come on stream that we’ll be at a run rate, as we have initially indicated. But for the two near-term quarters this quarter that we’re in right now, it’s a little bit -- it depends on how deliveries go, which is dependent on what the customers want.

And Carter in order to also help the OEMs, we are announcing this morning two new product lines. And this really helps the OEM to put back their systems together. And these are 1 kilowatt hour and 2.3 kilowatt hour. These are modules with everything laser well and put in a box, so the OEM customer put different applications, he can use them as his building block to build systems very, very quickly; much more easier than if he has to buy cells from us and weld them and put them in a box. So, we believe a lot of the lumpiness will disappear with these new two product lines. And we are seeing tremendous interest in the market for them.

And you made a couple of comment, Sankar, about qualification period. Maybe you could talk about if an application some of the OEMs are looking at and the length of the qualification period; is that changed now that you have produced the modules rather than individual components?

We feel the qualification period is much faster with the module. So, with the modules which we’re announcing this morning, both have launch customers associated with it. We’re very, very pleased how fast they qualified the product. They qualified the product; then these are fairly major customers. And they went and qualified our production, audited everything and really liked it. And life becomes much easier because now all the cells are together as 1 kilowatt hour or 2.3 kilowatt hour module. And if they want to -- I don’t know, golf car battery they take three of them; put them in a box and you’re outrunning. And similar to let’s say the lot of discussion about product called Powerwall, very similar again our product 2.3 kilowatt hour, put them into a three systems in a box and you have 7 kilowatt hours running. So, I think the qualification time is much faster with the modules, because the BMS and the intelligence is already developed by us and integrated into the modules.

If you could take my next question, maybe you could just talk about the storage market and where are you seeing in the various segments greater demand? Obviously you’re starting to see a little bit of demand on the commercial side but residential seems to be the largest opportunity today. Maybe talk about where are you in discussions with your customer base or any type of quantification you can talk about, e-mobility versus storage in your near-term opportunity and where you see the greatest near-term demand coming from?

Cater, if you had asked me this question about a month ago, I would have said storage. But, I am absolutely surprised by how fast the e-mobility market is moving. In the e-mobility market, you’ve got three kinds of customers; one is the auto customer who has very long qualification time and doesn’t give you as good a margin to the near-term customers like electric buses, electric trucks, electric forklifts; we are seeing tremendous demand in these three sectors. Recently there was analyst report out saying this electric bus will require about $30 billion worth of lithium-ion batteries, just one small sector. So, e-mobility is becoming very, very big for us, especially in those sectors. But, the storage market is also large and growing very quickly. We’re seeing residential storage coming through very quickly, which is why we are building all these modules for the OEMs to be able to use it effectively. We are seeing industrial energy storage markets coming up. I think both, e-mobility and the storage markets, both are moving well. Our pipeline, now we have to covert pipeline into purchase orders. Pipeline is several hundreds of millions, as we I think mentioned earlier as well.

Carter, Richard here. Just one interesting side note to it is, we’ve had a number of discussions internally here with the team about strategically, do you just want to pursue a single vertical and dominate that vertical or do you want to be diversified and pursue several verticals. We’ve made the strategic decision that it is best for us to pursue several key verticals rather than just concentrate on a single vertical, because as Sankar has said, sometimes there are slowdowns within those particular key verticals and speed ups in other key verticals. So, we made a decision that we have a product here now that we’ve introduced that is pretty much agnostic to whichever vertical it’s going into. And that was a specific decision we made that we wanted to use a building block that could meet multiple sectors’ needs.

You’re referring to the recent product launches, is that?

Yes.

Can you talk about some of the hiring you’ve done and whether that’s complete or whether we should expect a continued investment along the lines of what you did in this particular quarter? And then, what key areas you still need to fill out, if there any?

I would say that this quarter was -- our investment was more intensive than what we would see going forward, particularly in the R&D area. I think you’ll notice that that’s up significantly. And the new products explain that, the qualifications et cetera. I think in the key personnel area, it is a very fluid situation. We feel that we have the right people we need for right now. But, as we pursue various verticals et cetera, we will probably look at getting some expertise in for those particular sectors. But, I would have to say that we are generally happy with where we are right now in terms of personnel, but certainly would see adding further people as we move forward and continue a growth.

And then the last question, I’ll go back to the queue, because of the lumpiness and potentially I guess even larger [indiscernible] individual basis, the orders that you are facing in the coming months that can affect your working capital need and do you feel you have sufficient capital if that continues to layer in? And then, maybe just an idea of what type of working capital you think is sufficient over the next couple of quarters to satisfy these orders?

I think we have been very prudent with our working capital management. As I indicated in the discussion that I feel we are in a stronger position this quarter than how we ended the previous quarter, which was a fairly strong position too. I think we would like to see some -- I would suggest bank financing that would support us and more aggressive growth in the near-term. But I think at this stage, we are being prudent with our resources. And I think that going forward, we would certainly look at adding probably some debt financing in there.

Okay. I’ll take my rest offline. I appreciate you answering my questions.

Thanks.

Thank you. [Operator Instruction] Dr. Das Gupta, we have come to the end of our question session. I would like to turn the floor back to you for any final remarks.

Thank you very much, Melissa. Thanks for listening this morning to our conference call. And we are really very, very bullish on the future, a lot of new products coming out, which as we transform the new Electrovaya Litarion to a very market-driven organization. Thank you.

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