Earnings Call: Q2 2019

May 15, 2019

Earnings release

Greetings, and welcome to the Electrovaya Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Richard Helka, 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 twenty nineteen second quarter financial results. Today's call is being hosted by Gitanjali Dasgupta, Vice President of Operations at Electrovaya and myself, Richard Halka, Executive Vice President and CFO. Our CEO, Doctor. Shankar Dasgupta, 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 three months ended March 3139. 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 risks and uncertainties, and actual results may differ materially from those expressed or implied in such statements. Additional information about factors that could cause results 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 Q2 twenty nineteen results and the most recent annual information form and management's discussion and analysis under risks 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 two twenty nineteen 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 $3,300,000 of open orders from a combination of new and repeat customers. Our batteries are deployed across multiple sites in 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 who 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 sales and service centers to sell Electrovaya 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 systems. Our batteries are also powering autonomous robots. These are being deployed in retail environments to improve operations. The robot was displayed recently at our booth at the ProMat twenty nineteen conference in Chicago last month and was very well received. Another important focus for us is government partnerships. We've spoken before about our $2,900,000 contract with Sustainable Development Technology Canada to develop high voltage battery packs for the electric bus market. The SVTC 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 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 three months ended March 3139 was approximately $1,300,000 compared to $3,300,000 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 twenty nineteen 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 $1,900,000 compared to a net loss of $2,700,000 in the prior year. The reduced loss is primarily attributable to a significant reduction in operating expenses. Our total current our total operating expenses were $2,200,000 in Q2 twenty nineteen compared to $3,300,000 in Q2 last year, a reduction of 35% or $1,100,000 G and 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 six months ended March 3139. Revenue was $3,200,000 compared to $4,000,000 in the same period last year. Again, most of the revenue in the first half of fiscal twenty eighteen was from the Walmart order. Gross profit was $1,200,000 or 36% of revenue compared to $1,200,000 or 29% of revenue last year. And we had net earnings from continued operations of $900,000 compared to a net loss of $5,400,000 in the prior year. The net profit was primarily due to a gain on the sale of our head office worth $4,200,000 Turning to our balance sheet. We had 200,000 of cash and equivalents at March 3139. This compares to $100,000 as at September 3038, which was the year end which was our fiscal twenty eighteen year end. We used a total of $1,400,000 of cash in operating activities during the first six months of the fiscal year. We are managing our working capital very carefully during this period. Inventory was $1,000,000 as of March 3139 compared to $1,800,000 as at September 3038. 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 C500000 dollars has been drawn and we are in negotiations with the bank to expand this facility with the second and third tranche as well. The loan is cash collateralized with a cash deposit worth C250000 dollars This is an important development for Electrovaya and helps us fulfill orders while our working capital position is tight. The involvement of the bank underscores the 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 three 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 proven 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 HEV 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 a significant opportunity to reach new customers. Raymond's sales and service team can engage with forklift operators on a much larger scale than Electrovivise could on its own. We believe this offers a tremendous opportunity to expand our sales network without an investment in a direct sales force. Richard talked about the agreement we reached with the Canadian Chartered Bank to finance purchase orders. This provides funds to support the fulfillment of purchase orders and once again validates our quality of product, customer base and supply chain. Since early twenty eighteen, we have implemented several restructuring initiatives that repositioned us as a leaner, more focused company. That hard work is continuing, but 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 the remarks for this morning. Rich and I would now be pleased to answer any questions you may have. Operator sorry, Kevin, please open the lines to questions. Thank you. We'll now be conducting a question and answer session. Our first question today is coming from Craig Irwin from Roth Capital. Your line is now live. Hi, good morning and thanks for taking my questions. So, Gitanjali, can you maybe frame out 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 2019, 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 three fifty battery units for forklifts. So is it possible to I would say that's about what a twelve month period we've been doing to sort of rate that 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 had the working capital, yes, we could easily ramp up production to 1,000 units and beyond. There is no limiting factor in terms of what we can do through our supply chain. We have multiple suppliers, very flexible supply chain. So that's not really a constraint. We don't have a manufacturing constraint at this point. Great. So at COMAX and Capazzo 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 timeline 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 I 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. Thank you for that. And then last question, if I may. The partnership with Raymond, the availability of product for Raymond. Can you maybe describe for us in a little bit more detail what the SKUs are? What the specific portions of their sales you're able to provide energy storage for? And are there plans to expand the offering through 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 that 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. Gitanj, would you like to add anything Yes. For the material handling industry, people are looking at more premium forklifts that have to run ten, twelve, twenty four hours a day, which is where we really fit that market perfectly. They either go to one of two vendors for their forklifts, Raymond or Crown. So and Raymond being the bigger of the two. So in that sense, having being Raymond's partner here on a product line that we're particularly well suited to as they're going 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 of a good market coverage. Great. And 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? 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, 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. Great. Thank you, Gitanjali. Thanks again for taking my questions. Our pleasure. Good talking to you, Craig. Thank you. Our next question today is coming from Ashok Kumar from Sync Equity. Your line is now live. Good morning, Richard and David. Hi, Juli. A multi part question. The question is, could you please provide some granularity, quantitative granularity on your revenues, specifically the mix of front channel sales and OEM sales and also by end markets, MHEV versus AGV? And then an operational question would be the breaking in revenue rate and the timeline you foresee achieving that target? Thank you. 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 two 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. So, Richard, can you translate this 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 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 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 a 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 we can hear my question was more like sorry, Vitania, please go ahead. So yes, Shok, are you asking about the recent trade tariffs and the impact to life? Yes, yes. So that's why my question thank you for bringing that Vitanglia. So my recent question was that you are advantageously positioned given that your customers will look at stores battery technology domestically, right? So you should be advantageously positioned to grow share because of some of the macro quality issues. Yes, we should. And soft Canadian dollar is also helpful. Got it, got it. And in terms of briefly, you talked 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%, twenty two % in terms of cost reduction, right? So I was wondering if you have some differentiation there. Thank you. 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 the weeds, Richard, in terms of the technology, right? So I guess in terms of if you look at the components or metals content of lithium ion battery cathode, nickel, I guess it depends on the technology, right, either cobalt, nickel or some of the related material, right, is going to make up the highest percentage by weight. I was wondering, do you have a secure source as we look at it with your technology roadmap? We're fairly well cushioned from commodity or raw material pricing. So cobalt and other pricings has not been a factor. Not a factor. That'd be great. Once again, thank you so much and congratulations on your progress. Thanks, Ashok. Thank you. 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 three reporting. And if in the interim you have questions, there are always ways to reach us. Thank you again. Thank you. Thank you, everyone. Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.