Electrovaya Inc. Q3 FY2024 Earnings Call

Greetings. Welcome to the Electrovaya Q3 2024 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. Please note, this conference is being recorded. I will now turn the conference over to your host, John Gibson. You may begin.

Thank you, Mike. Good afternoon, everybody, and thank you for joining today's call to discuss Electrovaya's Q3 2024 financial results. Today's call is being hosted by Dr. Raj DasGupta, CEO of Electrovaya; and myself, John Gibson, CFO. Today, Electrovaya issued a press release concerning its business highlights and financial results for the three and nine months period ending June 30, 2024. If you would like a copy of the release, you can access it on our website. If you want to view our financial statements and management discussion and analysis, you can access those documents on the new SEDAR+ website at www.sedarplus.ca or on the SEC EDGAR website at sec.gov/edgar. As with previous calls, our comments today are subject to the normal provisions relating to forward-looking information. We will provide information relating to our current views regarding market trends, including their size and potential for growth, and our competitive position within our target markets. Although we believe that the expectations reflected in such forward-looking statements are reasonable, they do involve risks and uncertainties, and actual results may differ 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 Q3 2024 results and the most recent annual information form and management discussion and analysis under Risks and Uncertainties, as well as in other public disclosure documents filed with Canadian security regulatory authorities. Also, please note that all the numbers discussed on the call are in U.S. dollars, unless otherwise noted. And now I'd like to turn the call over to Raj.

Thank you, John, and good evening, everyone. Thank you for joining our fiscal Q3 2024 call. We continue to strengthen our business through new product development, business development initiatives, and by consistently posting strong margins for our core material handling battery product lines. Our focus this fiscal year, where we demonstrated significant progress in the current quarter, is to establish the foundation for rapid growth in fiscal 2025 and beyond. This includes developing new product lines for current and new OEM partners and financial partnerships to sustain our long-term growth objectives. While we expect fiscal 2024 to be a strong year, we are experiencing an impact from the movement of orders to fiscal 2025 by our customers, particularly for new warehouse construction. Accordingly, we are adjusting our fiscal year 2024 outlook for revenue to approximately $45 million for the full year, which represents growth over fiscal year 2023. Importantly, this is just a shift from one fiscal year to the next due to timing requests from our customers. The orders are in hand, and demand for our batteries remains strong. That said, we expect demand for our core material handling battery products and additional demand from other sectors to grow significantly for fiscal 2025 and especially for fiscal 2026 and beyond. We are investing for Electrovaya's future. In the current quarter, we incurred additional costs associated with new product development, including certification and third-party validation testing, and costs associated with a larger engineering team. These are part of our large co-investments that Electrovaya has been making over the last year with respect to an OEM project that will launch in fiscal year 2025. These additional costs are reflected in our increased research and development spending. This is just one example of a few development programs Electrovaya is currently engaged in. We expect these investments to transform into significant revenue drivers in subsequent fiscal years. Increased investments in sales and marketing, including headcount, also contributed to higher operating costs. We believe these investments will yield strong returns as Electrovaya enters new markets and targets increased direct sales. Management has been making significant progress in meeting our strategic financing objectives for both our existing operations in the form of lower-cost, longer-term refinancing with a major North American bank and financing our Jamestown lithium-ion battery manufacturing facility with a U.S. federal agency. We are optimistic about closing both of these financings in the current fiscal year. Our relationship with Sumitomo Corporation Power & Mobility continues to present new opportunities. We are on schedule to make our first deliveries to a major Japanese construction equipment OEM as part of our supply agreement with Sumitomo in the Spring of next year. We have other opportunities we are actively pursuing with Sumitomo and see significant potential in Japan and the Asia-Pacific region in general. We expect to begin moving to low-volume serial production of our high-voltage battery systems in the first quarter of calendar year 2025 as these products gain sales traction. There are various applications for these systems, including defense, mining vehicles, construction, and rail applications. Given our battery technology's ability to sustain higher safety levels, cycle life, and overall performance compared to typical lithium-ion battery systems, we can continue to command a premium in the material handling industry. Concerns about battery safety globally are increasing. Electrovaya has proprietary technologies that make lithium-ion batteries substantially safer. Our lithium-ion ceramic technology has been deployed in thousands of passenger vehicles and material handling vehicles without any safety issues. We have passed the most stringent destructive battery tests available, including literally setting a cell on fire in a high-voltage battery system. We did that twice, and there was no fire propagation inside the battery system. I don't think many, if any, other battery companies can claim that. Recent lithium-ion battery fires in Korea and elsewhere highlight this issue, and I believe our advantage will become more evident over time. With that, I'd like to pass the call back to John Gibson, who will go into the financial results in more detail.

Thanks, Raj. Revenue for Q3 was $10.3 million compared to a restated $10.6 million in Q3 fiscal 2023, a modest decline of 3% year-over-year. Revenue was not as high as we anticipated due to certain orders being delayed by customers. As Raj mentioned, those delays were at our customers' request and largely related to construction projects. Importantly, however, we increased our gross margin both on a dollar basis and as a percentage of revenue. Gross margin was $3.5 million or 33.7% of revenue compared to $3.2 million or 30.5% of revenue in the year-ago quarter, further emphasizing the operational transformation of the company in general. Importantly, adjusted EBITDA was $594,000 compared to $1.7 million for the year-ago quarter, giving us an EBITDA percentage of 6% for the current period. Our trailing 12-month adjusted EBITDA was $4.8 million and revenue of $49.4 million, giving us an adjusted EBITDA margin of 9.7%. We had an operating loss of $0.6 million compared to an operating income of $0.8 million in the previous year. Our net loss for the quarter was $324,000, showing an improvement of $232,000 from the prior year. For the first nine months of fiscal 2024, the company generated positive cash from operating activities of $0.5 million compared to cash used in operating activities of $2.6 million in the prior year. At June 30, 2024, total debt was $18.2 million compared to $17.3 million in the prior year. The company continues to manage cash conservatively. With the additional capacity in our revolving facility, we believe we have adequate liquidity to support our anticipated growth for fiscal year 2025 and beyond. That concludes the financial overview. I'll now turn the call over to Raj for concluding remarks.

Thank you, John. My vision for Electrovaya remains to become the world's leading lithium-ion battery manufacturer for heavy-duty, mission-critical applications. I'm confident that we will achieve this goal. While we are disappointed that we did not hit the top-line targets set last year, fiscal 2024 is certainly on a path to be a foundation year, and the company is positioned better than it ever has been. Electrovaya has outstanding customers and relationships, strong margins, technology, and a clear path to grow into our existing verticals and expand into new ones. This might not be fully reflected in the markets, but fortunes are made in downturns. There are many companies in our sector that are struggling at the moment, but Electrovaya is not one of them. Our highly differentiated technology has no shortage of demand. Development, validation, and scale take time, and as observers, it can be challenging to gauge progress, but it's there, and the timing for this is set for 2025. Now, I'll take questions.

At this time, we will be conducting a question-and-answer session. We have our first questioner, Eric Stine with Craig-Hallum.

Hi, Raj and John.

Hi, Eric.

So, starting with the guidance, I'm curious if you would classify this as multiple customers participating. Is it concentrated? I'm trying to understand how to interpret that $45 million. Should we consider it a baseline, or could there be some projects where the timing might change?

You mean on the $45 million?

Yes.

Given that there are only a few weeks left to the end of the fiscal year, it's fairly certain that that's going to be the number. We don't expect any further movement of orders for this fiscal year. The movements that took place were really from three major customers with multiple warehouses responsible for the movement.

Got it. Okay. I guess, strengthens the view of '25. Okay. That's helpful, just to have an idea around that. And then, just on Sumitomo, it sounds like first shipments in early fiscal '25. In the past, you've mentioned discussions with multiple other parties on the construction side and some other applications. So, just curious if you can update on those. Do you feel like fiscal '25 is the year where we do see expansion to some other customers and applications?

Yes. I mentioned the construction equipment, and we'll start making shipments for that OEM, which is a fairly major OEM. You've probably seen their equipment in Minnesota or elsewhere. We do also expect to start making some shipments of high-voltage battery systems to a number of customers in fiscal '25. For instance, we've been making small shipments of batteries to a defense contractor. We expect to make shipments to a rail customer potentially and a few others.

Got it. Okay. Maybe one last question for me regarding financing. I see these two financings as somewhat interconnected. While the Jamestown financing may not be directly dependent, the process would be significantly smoother if we could refinance the current debt. Is that a fair way to characterize it?

I mean all financing is somewhat interrelated. However, they are separate parties with limited interaction. So, in one case, it's a large bank for refinancing, which is to take out our existing working capital facilities, add capability for growth, and lower the cost of that debt. That's a big portion of it, and we're excited about that opportunity. John and I are working hard on getting that over the line. The Jamestown financing is dependent on the overall strength of the business. They wouldn't consider providing this capital if Electrovaya wasn't in a position to service their facility. So, in that sense, they are related, but it focuses on equipment and construction in Jamestown, New York. The terms of that facility are unique to government agencies. Banks typically cannot offer some of those terms. This has been a long process for Electrovaya, but we're nearing the end of the tunnel. There's light at the end of the tunnel, but with anything like this, there remains risks in getting us over the line.

Right. Okay. Thanks a lot.

Our next question comes from Craig Irwin with ROTH Capital Partners.

Good evening, and thanks for taking my questions. So, Raj, you mentioned some of the different things you're doing for market development away from materials handling, some of the newer opportunities that you're facing down, that you're working on actively. Can you help us rank the different opportunities there from a potential materiality standpoint? If we are looking at things you're possibly doing in Japan with Sumitomo or the other mining equipment producers and the other high-voltage products that you're introducing, which one do you think could potentially make the largest contribution to revenue in 2025 or fiscal 2025? Are there other market opportunities you would call out as material that we should pay attention to?

There are quite a number, and this is dynamic, it can change rapidly. Right now, we have a breadth of applications for our high-voltage battery system. The same battery can go into rail, defense, or vehicle applications. Where we see significant activities in 2025 will be, the rail side of things can be quite substantial next year, surprisingly. The defense sector has batteries with four defense groups right now; all small numbers could expand depending on their schedules, which is a bit of an unknown. We see opportunities somewhat adjacent to material handling, looking at airport ground equipment, where we previously shied away but now see opportunities. In terms of mining, that will be the largest opportunity, I would say mining and construction. But mining will take until 2025 to see major developments; there will be some revenue, but 2026 is where it will start to take off. Overall, material handling will still dominate in 2025, while other sectors will gradually become meaningful. Long-term, mining represents a terrific sector for us.

That's very good to hear. Gross margins, you were again very strong, similar to last quarter. There seems to be continuous improvement in the character of the customers you're serving, the pricing strategy, and execution in Mississauga. Can you talk about what's going right on the gross margin side? Is there any potential volatility you see that could impact margins sequentially in the fourth quarter? How should we think about potential margin development in '25? Should we expect margin expansion?

Yes, I would expect margins to improve. The volatility is unlikely since the material costs are mostly set for the next 12 months. We have a very good understanding of those costs, and in some cases, they may be coming down. Overall, we are getting more efficient at manufacturing, and I expect our margins to improve quarter-over-quarter over the next 12 months.

Excellent. Last question for me is around the EBITDA. This is your sixth sequential quarter of solidly being EBITDA positive. If you're seeking loans from a lending institution, it helps that you're profitable. But customers also want assurance that companies are making money for stability. Can you unpack what this profitability means for your customer relationships? You're acquiring high-profile Tier 1 customers, and they might be sensitive to long-term staying power. Could you explain how they perceive Electrovaya's profitability and growth profile?

For sure. Years back, companies took significant risks to partner with us. Fortunately, they did, and that led us to where we are today. We’ve had six straight quarters of positive EBITDA, and that's why this major North American bank is refinacing our working capital without any guarantees or third parties involved. This speaks volumes about our business. Regarding customers, I agree. Some customers are opting to work with us because they have concerns about their existing vendors. We like to think it's because we are the best, which we are, but we are witnessing this trend. In the battery and climate technology spaces, many companies are struggling; in the short term, this affects us as well, given our share price may decline alongside the market. However, the strong players will succeed, and Electrovaya will be among them.

Great. Well, congratulations on the commercial progress. I'll hop back in the queue.

Thanks, Craig.

We now have Amit Dayal from Wainwright.

Thank you. Good afternoon. So, Raj, with respect to the non-material handling side of the business going into fiscal 2025, are these orders still at the pilot level? If you could give us a sense of what your expectations are for the revenue mix in fiscal '25? We're at around $45 million in revenues for fiscal '24. Should we expect growth on that $45 million plus non-material handling to drive revenues for fiscal '25?

Yes. I expect growth in material handling for sure, and it will account for over, back of the envelope, 90% of the revenue. However, 10% revenue from non-material handling is significant, especially given the larger top line. That's what we're expecting, and I anticipate that impact to start in Q2 of fiscal '25 and ramp from there. Prior to that point, it will be development orders, not reflected prominently in our financial statements, but I expect something meaningful in Q2 fiscal '25 and then carry on from there.

Understood. The brand picture looks strong. Industry trends are favorable, as are regulatory trends. Is it the financing aspect holding you back a bit from capturing potential growth? In that context, do you have a time frame, let's say by the end of calendar 2024, for lining up financing that positions you solidly for the next 18-24 months?

Yes, financing has been part of it. We expect that the working capital refinancing will close by the end of this fiscal year, so just a few weeks from now. That's key. On the Jamestown front, things are moving quickly with the U.S. government agency we're working with. They are visiting us soon, and we aim to finalize an agreement by the end of the fiscal year. There are many factors involved, and the goal is battery production out of Jamestown, New York, by 2026. The market demand for our batteries is substantial, and I expect it to grow. However, it takes time for companies to validate and get our systems into full production. For instance, our OEM project has been in development for over a year, and while we've invested significant resources, it won't go into production until 2025. This reflects typical time horizons.

I'll add, Amit, that while general financing has held us back somewhat, we have achieved a lot with so little. We more than doubled our revenue last year and sustained it this year. An increase in working capital will really help us step up to the next level.

Understood. That makes sense. In the press release, you indicated some co-investment for new product development. If you could clarify what this is about, I would appreciate it.

Yes, that may be a bit confusing. We are collaborating on a project with one of our main OEM partners, involving significant co-development of that system. We've invested engineering resources, and the OEM has been cost-sharing these activities. This project will go into production next year.

Is this for the construction end market or storage or something else?

Actually, we are also doing co-development with the Japanese construction vehicle OEM at a much smaller scale. This specific project is in the material handling space for a new industrial material handling vehicle.

Okay. That's all I have, guys. Thank you so much. Appreciate it.

Thanks. We have reached the end of our question-and-answer session. I will now turn the call back over to your hosts for any parting thoughts.

Well, thanks, everyone. That concludes our call, and thank you for listening.

We do have two questioners that just joined at this moment. Would you like to take additional questions?

I think we'll leave it for today. That concludes our call, and thank you for listening. We look forward to speaking with you again after we report our fourth quarter 2024 results. Have a wonderful evening.

This concludes today's conference, and you may disconnect your phone lines at this time. Thank you for your participation.