Electrovaya Inc. (ELVA) Q3 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the Electrovaya Third Quarter 2016 Financial Results 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 Q3 fiscal 2016 financial results. Today's call is being hosted by Dr. Sankar Das Gupta, Chairman and CEO of Electrovaya; and myself, Richard Halka, Executive Vice President and Chief Financial Officer. Thursday evening, after the markets closed, Electrovaya issued a press release concerning its business highlights and financial results for the quarter ended June 30, 2016. If you would like a copy of the release, you can access on our website. If you'd also like the copy of our financial statements and management discussion and analysis, 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 statements. We will provide information relating to our current views regarding trends in our market, including their size and potential for growth, and our competitive position in our target markets. Although we believe that our 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 most recent annual and interim Management's Discussion and Analysis under Risk and Uncertainties, as well in other public disclosures documents filed with the Canadian securities regulatory authorities. And now, let me turn the call over to Dr. Sankar Das Gupta, Chairman and CEO of Electrovaya.

Thank you, Richard. Good morning, and thanks for taking the time to listen in to our third quarter fiscal 2016 conference call. I would like to begin by mentioning that we are really very deeply saddened to announce the sudden passing away of Professor Dr. Bernard Fleet, one of our long-standing board members and a great mentor and friend of all at Electrovaya. Bernard was a great scientist and entrepreneur. We will all miss his great enthusiasm and passion for climate change mitigation, for electric vehicles and electrochemistry, along with his inimitable sense of humor and really great sage advice. The Q3 fiscal 2016 was pivotal for Electrovaya as it laid the foundation for massive revenue growth for the company. As we pivot away from making electrodes and separators in our highly automated plant in Germany to the fast-growing electro-mobility and energy storage applications, we needed both appropriate products and Tier 1 customers. Our research, engineering and business development teams have now laid that ground work for exponential revenue growth. The Q3 revenues were expected as Electrovaya transits to deliver new products to major Tier 1 customers. The development of our lithium-ion battery modules allowed major OEMs to start testing and then moving towards purchasing the Electrovaya products in diverse industries. We have decided to diversify. We have signed multiple OEMs in such a short period. It demonstrates both the dedication and technical abilities of our team, and more importantly, the validation of the advantages of all the technical superiority we have of safety, cycle-life, energy density, et cetera, over competitors. It was easy to win with such hugely superior technology. Just the four recent major announcements combined could generate an estimated USD360 million, CAD 460 million of revenue over a three year period. This is just the start of the roll out of our new product portfolio to address the needs of the fast growing industries of electro-mobility, energy storage and climate change mitigation. The execution and delivery of these products will be achieved by building on our proven manufacturing capabilities in Germany combined with a strong manufacturing supply chain. At this point, I'll turn the call over to Richard to review our financial and later I'll review the business highlights in more details.

Thank you, Sankar. As we mentioned earlier our financial released was sent out yesterday evening at which time the financial statements MD&A and press release were filed on SEDAR. Let me begin by explaining some strategic decisions taken this quarter, which impacted near-term results but better positions us for the future. Our LITACORE module was a game changer for us as Sankar mentioned. We needed to modify our strategy because of it. When we announced the introduction of this product we provided samples to key leaders in a number of verticals. The results were outstanding. The OEMs tested, trialed and reviewed our processes, quality, ability to manufacture to meet their stringent requirements and volume delivery estimates. Our success meant we needed to assess our production planning. We negotiated with some of our existing customers who would reschedule deliveries in Q2 and essentially moved all production away from any chemistry or formats which were not consistent with LITACELL and LITACORE production. This impacted revenue, which was $2.6 million in Q3 2016 and $15.1 million for the nine months ended June 30, 2016 and I just like to mention that all the figures I'm providing are in U.S. dollars. We build our finished good stock in order to meet the contracted demand for multiple OEMs. We needed to build a safety stock level to ensure our customers’ delivery expectations are met. Our inventory was $16.7 million at June 30, 2016 of which $11.4 million was in semi-finished and finished goods. This compares to $11.7 million in total inventory at March 31, 2016 of which $7.3 million was in semi-finished and finished goods. In short we manufactured to meet future demand and this impacted our sales this quarter. We were also very pleased to sign a $10 million working capital facility with one of Canada's largest banks. This not only provides a critical element for our revenue growth, but also validates our customer agreements, growth plans as the bank provided - performed an extremely thrilled due diligence upon our agreements, customers and ability to deliver. I would now like to turn the call back to Sankar to discuss our business highlights.

Thank you, Richard. This was the breakthrough quarter for Electrovaya, which we had all hoped and worked hard to achieve. After our transformational acquisition last year this was the next major quarter for the company as we rolled out a portfolio of products with high demand and very clear technological superiority. Prototypes were given to a few sophisticated OEMs, who carried out intensive testing and we are pleasantly surprised that we started winning pretty much with every major OEMs we targeted in multiple diverse sectors. This is a foundation for exponential growth. The two critical products which we’ve launched are a 1 kilowatt hour battery module branded as LITACORE, which has a multiple number of Litacells all laser weleded and with some rudimentary electronics. And the second product is an intelligent 48 volts 2.3 kilowatt hour module, Litastore 2.3, which has an integrated battery management system both can be easily used as building blocks for OEM's much like lego building blocks. So we no longer have the niche products which we had started up in the German plant with electrodes and separators, but now we have mainstream products, which are demanded by very sophisticated OEMs. Let me give you some color on the four OEM announcements we have done this past quarter. The first win was with a NYSE FORTUNE 1000 Company for the supply of the LITACORE modules for an industrial application. A very sophisticated OEM tested us extensively against four or five competitors, loved the product, then they audited our capabilities, our delivery, our QA capabilities in Canada, Germany, our whole entire supply chain, agreed on the pricing and then they signed up. The three year MSA is estimated to generate revenues of about $80 million, CAD105 million, and it may even be more as they launch us in many of their products - product lines. This month, we have started delivery of products under that multiyear Master Service Agreement. The second win was in a different sector. It was for electric buses. Electric buses are expected to generate over $32 billion worth of demand for lithium-ion batteries. $32 billion as one analyst predicts is just for one small sector in this electro-mobility. You can imagine how large this market will become. So we sampled and targeted the second OEM, a major assembler of bus batteries for electric buses. He is a leading European OEM, with operations and factories in Europe and a large factory in China. He liked the cycle life he saw, he loved the safety level we gave with our ceramic separators. I'm told, we're the only technology which passed his slew of safety test. We are only estimating that this OEM will require about $12 million worth of our products in fiscal 2017, and we are predicting much, much larger growth. Again, it was a great win against all the global players in this sector. The third win was the major global OEM in the electro-mobility industry. This is a massive OEM. Revenue wise, the biggest of the four, probably in the $50 billion plus range. He is going for a major product launch in the electro-mobility electric vehicle space, and he is going with us. We are the supplier for the lithium-ion battery module. He is estimating revenues of about $41 million in fiscal year 2017, and their numbers in 2018 and onwards are mind-boggling as per their CEO pronouncements. Then the fourth win, possibly the world's largest residential energy storage company. Again, they tested us against all the major global players and signed up with us. Revenues over a period of three years is estimated to be $223 million. Volume deliveries expected to ramp up from Q1 fiscal year 2017. It's starting in the December quarter. I believe we are becoming the largest battery player in the residential energy storage sector, and this is just a small start with just one OEM. These four OEMs now have a demand for - and Canadian always sounds better, it demand for about CAD460 million for our products, and the wins are all because the technology is far superior and the delivery they are assured from our operational German plant. To give a wider number of investors’ easier access to the trading of our shares, we’ve joined the OTC-QX market in the United States this month. The digital trading should start shortly, and trading volumes will continue to grow. The stock is getting more liquid. I noticed two weeks ago, Air Canada also listed in the OTC-QX trading platform. Finally branding, a new website was launched on August 9th, two days ago, which showcases the innovations and products of the company as it starts to roll its new high value product portfolio and branding you will start seeing us in many-many forums as we connect to the market. Every month we are at a trade shows sometimes more than once. So let me conclude with the progress we made, last year we purchased the most magnificent factory Money Can Build the European giga plant, it had wonderful fundamental products like electrodes and separators and had a single customer, the auto company, we were their captive supplier. A magnificent factory, which executes and produces well all 20,000 Mercedes electric smart cars running and being powered with our components, the factory has showed flawless execution with the highest TS rating. Today we have two great building blocks, battery building blocks, legolite [ph] boxes, attractive to the broad OEM community and after extensive testing against the best in the world just four OEMs are looking at a CAD460 million worth of products and this achieved in a very short timeframe just from these four OEMs. It looks like we have captured the residential energy storage market $0.25 billion starter program and it’s a start. We’re capturing OEMs in diverse sectors almost all of them whom we had also given samples and tested extensively and this is just a start, the game has just started and I believe that we will become the dominant player in this sector. Other OEMs are now coming in, we’re sampling them and our roll out of product has just begun. The technology superiority of Electrovaya is the fundamental difference. This concludes our prepared remarks. Melissa we are ready to open the call to questions.

Thank you. At this time we’ll begin with the question-and-answer session. [Operator Instructions] Our first question comes from the line of Carter Driscoll with FBR Capital Markets. Please proceed with your question.

Sorry to hear about the passing of your board member, I'm sure this is a difficult day for you. I wanted to - if you can give us an update obviously you did an exceptional job of utilizing your new products to secure some major wins with OEMs I guess you had also talked about shipping against one of those MSAs this I believe either late-late July or early this month talk about your expectations for how that ramps over the next couple of quarters? I think you also mentioned one in residential storage could ship in fourth quarter I know that was calendar fiscal 4Q talk about when you think you might be able to identify some of these OEMs by name I realized you’re kind of limited in confidentiality, but kind of give us an update on kind of the roll out of the next couple of quarters as we kind of bridge the gap to when it really begins to take off in calendar 1Q ‘17? And then I have a couple of follow-ups.

Yeah, thanks Carter. The roll out is happening, the major roll out will start in the October to December quarter, and since both the residential sector will start volume roll out happening in that sector, as well as with the industrial OEM which we have just started production. Now regarding the names all these four OEMs are launching new products in the sector and they have been trying to keep it a secret from their competitors. So - but I expect for example the residential sector because it’s such a broad sector with such diverse B2C applications, we’ll be able to announce their names probably as soon as the next month. So that’s going to happen and really the growth, and really the huge growth is going to start in the 2017. And Carter the other interesting thing is initially we had given the sampling to a few OEMs just to make sure that everything was fine. And we are amazed how fast these guys are moving from their present supplier to Electrovaya. And now we have a slew of other OEMs who are lined up, who are now in the process of looking and testing. These are all major Tier 1 OEMs and you’ll see rollout of new products coming out. And as I said this is just the start we’re just beginning and the market is very large

Carter, Richard here. I think we're getting a lot more visibility on where we see the revenue going. And what I would anticipate is probably with the release of the year end numbers, we should be able to give some guidance with regards to 2017. It's been - things have been moving extremely quickly this quarter as Sankar indicated the number of contracts announced. But I think now that we have our let's call it core customers in place, our production lined up for that that we will have more visibility. And as Sankar indicated I think that this is probably a transitional quarter and we would see the fourth quarter of our fiscal year starting to move up with our revenue growth and then into Q1 it will be much more indicative of what we're likely to see.

Okay, I appreciate that color. Maybe Sankar talking about some of the - obviously you had a targeted group I think you had originally talked about initial samples in kind of the January-ish timeframe for five OEMs. Maybe talk about the number that are looking at or any differentiation in application from what you'd announced with the four you have current wins with? Any type of color there in terms of nuance within e-mobility or storage. And then maybe talk about the dynamics between our expectations between e-mobility and storage going forward. Obviously there are a lot of different market size estimates out there from third party forecasters and certainly a very burgeoning competitive environment the storage sector. So I'd love to get your thoughts on those. I realize there is a whole bunch of questions wrapped up there.

No that's good. Carter we'd sort of initially had sampled five of the major OEMs, four of those we have won and the fifth one I suspect we're going to win as well. We decided because we were really working with the single captive automotive earlier, we decided to move to multiple OEMs multiple sectors. And I'm about a year ago would have said the storage would move faster, but we are seeing that e-mobility moving probably even faster. And - but the OEMs are everywhere. I didn't mentioned Con Edison we are producing a very interesting product for Con Edison, which I think is delivery is in the October to December quarter and that's a grid connected applications. The other wins on the residential sector, we had initially expected that most of the demand will start coming in the 2017 calendar year, but with more further discussions with that group they are pushing us very hard to start delivering volume in the October to December quarter. So I think you'll see large pick up during that area. In the industrial sector also the growth will be faster than what we had initially predicted. Again the October to December is where it's all going to happen. So just now it looks like the e-mobility side is winning in the sense we've got contracts, but how can I say here is the energy storage sector where I think we've just become the largest lithium-ion battery supplier to the energy storage sector and this is catapulted over the five incomings in that sector. So suddenly just one single OEM is looking at almost $0.25 billion battery products from us. So Carter very hard to say which is moving faster and then there is a utility space as well.

Maybe just talk about the - what you are seeing in kind of the pricing environment and why you differentiation allows you to kind of price above your competitors and talk very specifically about what you are - what is so compelling to the OEMs that you won and allowed you to mostly likely I think in some cases displays people that we are closed to potentially going with the competitive solution just reminds again what to three factors do you think really differentiate you in the marketplace for that?

Yes, the fundamental challenges to lithium-ion batteries, there were three fundamental challenges to lithium-ion batteries. One was the toxic production, nobody likes it and it's a very expensive method. So Electrovaya had that breakthrough technology there. The second differentiation is safety. As the lithium-ion batteries are getting more and more higher energy density safety is becoming a paramount problem and we are seeing - we saw lot of electric vehicle catching fires, we had even the Boeing 787 had the fiasco. So safety is becoming more and more difficult and look at China they’re reimagining their whole electric bus sector because of the safety concerns. And in almost all these wins safety was the largest factor, which moved the needle towards us and our ceramic separator give a higher level of safety than anything we have seen, anything our OEM have seen. In one of the bus contracts I think it was our OEM number two, he did a very intricate safety testing and there was nobody even came near passing it except Electrovaya. So safety is the massive driver. And the second - other driver has been cycle-life. When you are using the batteries softly like let's say an electric car where you are really driving the car for an hour or two or three a day and it sits there for 20 hours, 22 hours a day there you can use lithium-ion batteries, which are inferior. So you'll see the automotive sector going to the inferior batteries. But when the challenge comes where you are using electro-mobility or energy storage were using it for 8 hours 10 hours 12 hours a day there comes the test for what is the cycle-life and here that's what we won in every case whether it was electric buses or the energy storage systems or the residential storage systems the proof came. Hey if I'm going to use the lithium-ion batteries not for light use, but for heavy load the only, only candidate is Electrovaya. And these are the ones which are driving the OEMs’ trust and because of that on the pricing side we are not the lowest-cost price. I suspect we are about 10-15 percent higher than the market price and that has not been a barrier. People have been quite happy to get a higher value product, a higher technology product and that pricing delta is not a huge thing. But safety is a massive consideration and cycle-life is a massive consideration.

Just switching gears quickly before I get back in queue. Richard maybe a couple of quick questions for you. So you obviously secured a facility with leading Canadian bank, do you feel that the inventory level you have now is sufficient to supply the orders that you think are going to start kicking next quarter? Do you think you are going to have to have a continuous build, do you think you are going to be able to match that when you get a more definitive type of order pattern at the end of fiscal year? Hope you understand whether you have sufficient working capital. I realize the facility is still relatively underutilized. So I'm not so much concerned with the German facility right now. But certainly for the finished product side, the last thing you would want is not to have sufficient product to meet the surging demand.

Absolutely, Carter. And allow me to go on a little bit of a tangent here just to discuss this for a minute. One thing that I think everyone needs to be aware of is just how conservative the banks are, the big 5 in Canada. To get a loan with them, a commercial loan is a difficult process. And if you look at our historic results, look at everything in our past, you would say, no way, no way that we could do this. The reason that we can do this is they did a very, very thorough due diligence. They reviewed every one of these agreements, they looked behind it to see the company, they looked at the volumes, they looked at everything. And they came away and validated it and said, yes, we can help you deliver on this. We're very excited about this opportunity. And our bank financing is split into two pieces; I'll just give you a little color on that. There is a $6 million facility, which is used to finance inventory, receivables, et cetera; and then there is a $4 million letter of credit facility, which will be used to finance basically an operating line for our German subsidiary. So with that said, we feel very comfortable that we can begin our growth pattern here, finance our lockup in terms of working capital until our receivable start flowing in. That said, there is other levers that we can pull, as we move along, as we grow, as we start collecting the receivables, as the business begins to perform the way that the bank and ourselves agree at will, there is a possibility of a upsizing the facility, syndicating the facility, et cetera. So there is a number of levers that you can pull as long as you gain that traction and you perform and you go according to plan exactly as what's been indicated. So I guess, that's sort of a long-winded way of saying, Carter, I am comfortable with the facility. I think $10 million is a good start here. Do I think the $10 million is adequate for, let's say, a $200 million revenue stream. No, but I think we have ways to go to get there, and I think I'm quite comfortable that our facility can grow with this. And the other thing that I'll just comment on is as well, we get criticized for not naming, I so wanted to name this bank, but they came back and said that they protect their brand and they have introduced a policy this year, where they do not allow the bank to be named. What I can tell you it's one of the big three. So it's either RBC, TD or Scotia Bank. So just to appease some of the people out there questioning what we're doing here. Does that answer your question, Carter?

Yes, I mean it sounds like just securing the facility is most important and then as long as you perform up scaling it, shouldn't be a big hurdle as it's actually getting into become a partnership with you.

Yes. And there is another a little bit of color I'll add on to this as well, Carter, is that this has taken quite a while with us in the back. And from when our initial discussions started, we were only discussing many of these contracts. We had provided the samples; they were looking at the product. And then with each week that passed, we passed more milestones in terms of agreements with various OEMs. And the bank's confidence just continued to grow and grow and grow. Seeing that, well, the product really is - is really being picked up by the OEMs. The OEMs are huge OEMs, and our confidence is really growing with this. So it's taken to this point to get us to get the bank entirely comfortable, and we're very pleased to have them as our partner, and we look forward to growing in the future with them.

Okay. I don’t want to monopolize the call. I’ll get back in queue. Thank you.

Thanks.

[Operator Instructions] Dr. Das Gupta, it seems there are no further questions, I'd like to turn the floor back to you for final remarks.

Well, thanks, Melissa. Thank you, everybody to who came on this wonderful morning in Toronto to listen to us. Thanks, and have a wonderful weekend. And we look forward to speaking to you in about three months’ time. Goodbye.

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