Earnings Call Transcript - ELVA Q1 2024

Operator, Operator

Greetings. Welcome to the Electrovaya Q1 2024 Financial Results Conference Call. Please note that this conference is being recorded. I will now turn the conference over to your host, John Gibson, CFO. You may begin.

John Gibson, CFO

Thank you and good evening, everyone. Thank you for joining today's call to discuss Electrovaya's Q1 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 month period ended December 31, 2023. If you would like a copy of the release, you can access it on our website. If you’d like 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's 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 the size and potential for growth and our competitive position within those target markets. Although we believe that the expectations reflected in such forward-looking statements are reasonable, they do obviously involve risks and uncertainties, and actual results may differ materially from those expressed or implied in such statements. Additionally, information about factors that could cause actual results to differ materially from those expectations and about material factors or assumptions applied in making forward-looking statements may be found in the company's press release announced in the Q1 fiscal 2024 results and the most recent Annual Information Form and Management Discussion and Analysis under risk and uncertainties, as well as in other public disclosure documents filed with the Canadian and US security regulatory authorities. Finally, please note that all the numbers discussed on the call are in US dollars, unless otherwise noted. Now, I'd like to turn the call over to Raj.

Raj DasGupta, CEO

Thank you, John, and good evening, everyone. Thank you for joining our fiscal Q1 2024 call. Our first quarter results met our internal targets, setting the company on track to achieve our full year revenue target. As those who have followed Electrovaya for the last few years may recall, our first quarter is typically our weakest quarter of the year due to the purchasing patterns of our customer mix. Our revenue this quarter increased by 41% over the first quarter of last fiscal year, making for a good start to the current fiscal year. Importantly, our gross margins also improved substantially from the previous quarter with battery systems exceeding 30% and total revenue with more than 29% gross margin. We anticipate further margin improvements in the second half of fiscal 2024 from anticipated cost reductions and increased volumes. Finally, we continued our trend to profitability with our fourth consecutive quarterly positive EBITDA result. While it has been a short time since our last corporate update, I'd like to reflect on a few of the key milestones we achieved over the quarter and our vision going forward. First, we delivered a strong first quarter with strong revenue, improved margins and order intake. We continue to track towards our fiscal year 2024 revenue and profitability targets. Sales of battery systems for material handling applications through our OEM partners drive the majority of our revenue. During the quarter, we also posted meaningful engineering services revenue, which is tied to a key development program with one of our OEM partners. I expect this particular development program to eventually lead to significant revenue potential as these products move from engineering and development to production by the end of the calendar year. This program also demonstrates the key partnership we have with this OEM and the level of investment being made into these new electrified platforms by both Electrovaya and the OEM partner. Second, we continue to make progress in broadening our market reach for other applications for our Infinity Battery Technology. We are in discussions with multiple potential partners in a diversity of markets such as electrified construction, mining, transit, and energy storage. As we mentioned in our last quarterly update, Electrovaya is growing a relationship with one of the largest Japanese trading companies. Through them, we are in discussions with several potential OEM partners and are making good progress. I expect to have a customer win in the near-term through this partnership. Also, last call, I mentioned some interactions with a leading bus OEM, and those have continued over the first few weeks of the new year. Our High-Voltage Battery Systems will also be going through a full ECE R100 Certification in the coming months, which will support further sales development and prove some of the safety benefits of Electrovaya’s Infinity Technology. My vision is for Electrovaya to become the leading battery player for the heavy-duty applications that require longer-lasting and safer batteries. Thirdly, we are making progress in increasing our working capital availability through a new debt facility. This planned increase in working capital availability will be key to provide us with the runway to achieve our anticipated revenue growth for the current fiscal year. In parallel, we are making progress towards securing financing for investment in our project to expand manufacturing and cell assembly in Jamestown, New York. As mentioned previously, we anticipate the financing will have a government-backed component, which requires a higher level of due diligence on the part of the lenders. We have weekly calls with this government entity and are gaining confidence in closing a transaction within the next two to three months. With that, I'd like to pass the call to John Gibson, who will go into the financial results in more detail.

John Gibson, CFO

Thanks, Raj. As you just mentioned, we continue the momentum from fiscal year 2023 into the first quarter, and that is emphasized by the results. Revenue for Q1 was $12.1 million compared to $8.6 million in the prior year, an increase of 41% year-over-year. This substantial revenue increase was due to sustained execution of growing orders and an operational transformation of the company in general. Gross margins increased by 360 basis points to 29.2%, significant gross margin for battery systems on an individual revenue stream basis. Importantly, our adjusted EBITDA grew by $0.8 million to a positive $0.6 million for the quarter. We had a small operating loss of $0.1 million, which related primarily to some one-off costs in the quarter, and we expect that to turn to our profit as we progress through the fiscal year. Our overall net loss for the quarter was $0.2 million, an improvement on a loss of $2.4 million in the same quarter in 2022. The company had positive working capital of $0.1 million for the quarter and significant improvement from negative $2.5 million in the prior year. At December 31, 2023, our total debt was $17.4 million compared to $14.6 million in the prior year. The company continues to manage its cash conservatively. And that concludes the financial overview. I now turn the call over to Raj for some concluding remarks.

Raj DasGupta, CEO

Thank you, John. Our fiscal year 2024 has had a strong start. We have set some clear priorities and goals for the fiscal year. This includes meeting our revenue guidance of between $65 million to $75 million; finalizing the financing for the planned Jamestown Gigafactory expansion; establishing new verticals and OEM partnerships for our Infinity Battery technology; setting ourselves up for strong and growing demand for fiscal 2025 and beyond; and finally, continue to make headway in technology development, including for our solid-state battery efforts. I believe that the team at Electrovaya continues to make progress in developing each of these goals. And today, we are reaffirming our guidance for the current fiscal year. As previously mentioned, we expect that our revenue for the fiscal year to be back half weighted. That concludes our remarks this evening. John and I would now be pleased to hold a question-and-answer session.

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question comes from Eric Stine with Craig Hallum. Please go ahead.

Eric Stine, Analyst

Hi, Raj. Hi, John.

John Gibson, CFO

Hi, Eric.

Eric Stine, Analyst

Could you provide an update on Jamestown? You seem confident about finalizing it, and I understand you have enhanced manufacturing capabilities in Canada. Where does that stand? Do you have a timeline for securing the necessary financing? I'm trying to gauge your comfort level with the timeline and your ability to meet demand looking ahead to 2025 and 2026. I'd appreciate your thoughts on this.

Raj DasGupta, CEO

That's correct. The majority of these investments are for cell assembly. We are already producing cells in Asia, but this investment will help enhance that production, taking advantage of inflation and overall improving our company's ability to manage larger projects. The Canadian site currently has the capacity to generate about $130 million in revenue, so revenue is not the immediate concern. Our focus is on enabling projects in other sectors that would benefit from IRA incentives for Made in America. Therefore, we are prioritizing getting it operational as soon as possible.

Eric Stine, Analyst

Yes. That makes sense. Thanks for that. Regarding the engineering services business you mentioned in the quarter, can you confirm if that is with a materials handling OEM? If so, I am curious about how you see that process unfolding and what you anticipate as the end result?

Raj DasGupta, CEO

Yeah. So this is a project, which has been ongoing for almost the last year. Its efforts, though, have been stepped up considerably, especially in our fiscal Q1, where the revenue from Engineering Services was what John quoted to $600,000 or roughly there. That revenue, we're of course, putting in our own investments on top of that through time and engineering resources. But the target is for a new electrified platform, which would be launched, let's say, for 2025. A lot of work goes into that. But this is with one of our existing OEM partners.

Eric Stine, Analyst

Got it. Okay. And then maybe last one for me. You mentioned the discussions in the business opportunities that you're seeing because of the relationship with the Japanese trading company. I guess, I had previously thought that that would be more skewed towards heavier equipment, so mining, construction equipment, but it does sound like that's a little more broad. So maybe I guess, correct me if I'm wrong, is that a more diversified opportunity? And when you talk about that near-term potential, either order or relationship, how should we think about that in terms of end market?

Raj DasGupta, CEO

So Eric, you are right. The initial targets are mining and construction OEM partners. We have been having discussions with one of them for a while now. Nothing is finalized yet, but things are progressing well. Revenue is expected to come primarily in 2025 and beyond. However, this opens up a new sector for the company, establishing another OEM relationship. Achieving this is an important milestone when it happens.

Operator, Operator

The next question comes from Amit Dayal with H.C. Wainwright. Please proceed.

Amit Dayal, Analyst

Thank you. Good afternoon, everyone. Raj, regarding the Jamestown facility and the annual guidance you've provided, is the guidance dependent on the facility coming online or is it independent of that?

Raj DasGupta, CEO

No, our fiscal year guidance is independent of Jamestown completely. So, as I mentioned previously, the Canadian operations, which are focused on material handling applications, they can sustain revenue of about $130 million per annum, so roughly double our guidance. So, the guidance is all based on material handling. Where Jamestown is going to be important is to support our High-Voltage Battery Systems and of course cell and module production that becomes IRA-eligible.

Amit Dayal, Analyst

Thank you for that. Regarding the Japanese partnership, could you elaborate on what the process entails? You mentioned that there might be a customer win soon, but can you clarify who is responsible for the sales work on these deals? Is it your team or the partner's? I'm interested in understanding what the process looks like and what steps are involved in securing contracts.

Raj DasGupta, CEO

It's a partnership where we are closely involved. We're utilizing the relationships that our trading partner already has, specifically with an OEM they supply, and we are becoming a new technology partner for an electrified vehicle. For example, I just returned from Japan on Friday, and our team regularly travels there to help establish these new partnerships.

Amit Dayal, Analyst

Okay. Understood. Maybe just one last question from me. Regarding the Jamestown financing, is there a specific milestone that needs to be achieved, or does the process just need to unfold, and do you believe that can happen within the next one or two months?

John Gibson, CFO

I think it's just a process. Yes, there's no other significant milestones. As Raj alluded to, the environmental work would usually take five, six to eight weeks to complete, but that due diligence has been cut down quite significantly. So, that was really one of the only things that kind of was lingering in the background. So now it's just a process going through the remaining questions with the lender and getting over the line.

Amit Dayal, Analyst

Thank you, John. Just one more for you maybe, John. Liquidity position, are you comfortable with your working capital needs, et cetera, for the near-term, given that you have, I guess, $1.7 million in transit right now? I'm just wondering if you have adequate liquidity for the near-term in terms of growth objectives, et cetera?

John Gibson, CFO

Yes, I believe we do. We have a significant amount of inventory that we can build batteries with. So, yes, converting our AR into cash and converting that inventory into products to sell to our customers. Yes, I believe we have enough liquidity to see us in there for the rest of the fiscal.

Amit Dayal, Analyst

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

Operator, Operator

Up next, we have Jeffrey Campbell with Seaport Research. Please proceed.

Jeffrey Campbell, Analyst

Good afternoon and congratulations on the quarter. Raj, when you made reference to a new electrified platform for 2025, is this referencing or distinguishing the Infinity Battery as an integral part of the OEM design as opposed to previously where batteries are adapted to prior designs?

Raj DasGupta, CEO

Yes, that's correct. Most of our revenue currently comes from batteries designed for existing material handling vehicles. For example, our power plus models include caverns that were originally designed for lead-acid batteries, and our lithium-ion batteries maintain the same form, fit, and function but utilize lithium-ion power. We are observing a trend, particularly in extremely heavy-duty vehicles that were initially meant for internal combustion engines. These are platforms where customized energy storage systems are integrated into the vehicles. This involves significantly more engineering and development work, and that's the area we are currently focused on.

Jeffrey Campbell, Analyst

Okay. No, appreciate that. John referenced the operational transformation of the company and its positive effects on revenues. Could you expand on what he was referring to by this transformation?

John Gibson, CFO

It's more just related to the kind of internal efficiency and our ability to flow orders through the plant itself. So we're definitely getting more efficient even from the order intake perspectives. It's really a pretty dynamic shift from where we were even 12 months ago.

Jeffrey Campbell, Analyst

Okay. Yes, I was wondering if perhaps some of the automation efforts that you guys have talked about in the past might be part of it as well. This sounds like it's almost more of an HR systems kind of thing. Is that more accurate?

John Gibson, CFO

Yes. It's more a soft skills improvement. We do still plan on assessing where we could use any automation. No, we're not going all out and converting the plant to a fully automated plant. There's still a requirement for a significant number of employees, and we want to keep that way because we value our team. They're a great asset to the company. But what it will do is it will just increase the efficiency and speed again that a battery can go through this production cycle.

Jeffrey Campbell, Analyst

Okay.

John Gibson, CFO

We are currently evaluating a few projects, and once we decide which ones to pursue, we will issue a press release regarding that.

Jeffrey Campbell, Analyst

Thank you for that. I have a question about the mining industry. Are you mainly focusing on very heavy machinery, or are you also considering lighter vehicles like the Toyota Land Cruiser, which is a leading off-road truck in the mining sector, especially in the Far East?

John Gibson, CFO

So starting with construction, we're probably starting out with smaller construction-related equipment. On the mining side, the target would not be those, maybe it could be down the road, but we're not looking at the cars. It would be, again, heavy equipment.

Jeffrey Campbell, Analyst

Okay. And my last one, just kind of a higher view question. You've talked a lot recently about large customers in various industries that are adopting the Infinity Battery. I wonder how you see the structural shift from lead-acid batteries to Li-ion battery progressing? And has this started to become a catalyst for Infinity Battery sales yet?

John Gibson, CFO

I think so. I think right now, our estimate is about 10%, let's say, our first OEM partner, which is Raymond Corp. I would say we're at roughly 10% adoption rate, and lead-acid still makes the majority. But the lithium-ion has gone from zero to 10 very quickly. So I anticipate that growth to continue. In fact, what we were anticipating is to getting to about 50% adoption rates within a few years.

Operator, Operator

The next question comes from Pavel Molchanov with Raymond James. Please proceed.

Pavel Molchanov, Analyst

Yeah. Thanks for taking the question. You've had more than a year now with positive adjusted EBITDA. And I'm curious at what point, or what needs to happen for you to start giving EBITDA guidance alongside the revenue guidance.

John Gibson, CFO

Hi, Pavel, it's John. That's a good question. I think that's something we can definitely move towards as we see more regular.

Raj DasGupta, CEO

I think it really requires us to have clarity on when Jamestown operations will be affecting margins. Realistically, you're looking at some point in mid to late fiscal 2025 for that kind of guidance to be provided.

John Gibson, CFO

Yeah. I mean, our EBITDA percentage for the quarter was about 5%. What we can say is we're targeting a much higher EBITDA percentage. But to give you the actual figure, it's probably not something we can do right now.

Pavel Molchanov, Analyst

Okay. As you begin to generate revenue from outside the forklift market, will that impact your gross margin percentage positively or negatively? Your margins are currently very high due to your strong position in the forklift sector. Should we expect them to be potentially lower in these other areas?

Raj DasGupta, CEO

It will be lower, but it won't constitute a significant portion of the overall revenue. It was just under $700,000 this quarter, and we don't expect it to be that high every quarter.

John Gibson, CFO

Yes, Pavel, are you referring to the system itself or the engineering efforts?

Pavel Molchanov, Analyst

The product sales.

John Gibson, CFO

The product sales in this current fiscal year will be significantly smaller than the material handling sales, making very little difference. However, these are new products being launched, which can be viewed as having some engineering development aspects. We are not targeting any applications where we cannot achieve more than 30% gross margins. Once these products enter production, we expect to attain 30% or higher gross margins. The initial segments we are focusing on are construction and electric buses, both of which can sustain stronger margins. By that time, material handling will also have higher margins, as it is a more mature product. The industry recognizes and values our technology, allowing us to consistently achieve the highest margins in material handling, while these other markets will closely follow. As they develop, I anticipate a similar growth trajectory in those sectors.

Pavel Molchanov, Analyst

Okay. Last question from my end. We saw just a few days ago, the EU finalizing their version of the Inflation Reduction Act, the net zero industrial plan. And you've talked about wanting to bolster your footprint in Europe, maybe just get an update on that?

John Gibson, CFO

Yes, that's a generally positive development. Our long-term goal is to have Jamestown operational, supporting both our new and existing verticals. Additionally, Electrovaya aims to be the leading battery provider for heavy-duty applications, which will necessitate expanding our global presence at some point. We are considering markets for further expansion beyond Jamestown, with Japan and Europe as potential opportunities, particularly the United Kingdom.

Operator, Operator

The next question comes from Orin Hirschman with AIGH Investment Partners.

Orin Hirschman, Analyst

Hi. Congratulations on the progress. Regarding the NRE, is it all related to that one project or are there multiple NRE projects?

John Gibson, CFO

That's just one project.

Orin Hirschman, Analyst

In terms of the reasons or the need for NRE, is it because it doesn't exist today in terms of like you were saying before, there was no form factor to easily slip in electric, in the heavy-duty construction vehicle or something your mining vehicle like that?

Raj DasGupta, CEO

That's correct. And if you think about the other batteries, their Electrovaya finished products, which can be removed from the vehicle, they can be installed in an older vehicle, et cetera. So they're almost a separate entity. In this case, the battery system is integral to the vehicle, and it's almost designed in. So that's essentially why there's significant NREs which in other parts we don't use.

Orin Hirschman, Analyst

Is it being driven by Clean Energy, let's say, in heavy-duty construction, or is there a cost savings to being able to use electric in such an application?

Raj DasGupta, CEO

So overall, most industrial vehicles are heading towards electrification. So if you just look at the material handling market, roughly currently 60% is already electrified. The remaining 40% likely will be electrified. Some of those vehicles are extremely heavy duty in nature. Traditional lead-acid battery technology would not have been able to work. However, our technology will, that's combined with overall movements on both the legislative bodies and industrial conglomerates to move away from internal combustion engines in general. And there are multiple driving factors to go electric here.

Orin Hirschman, Analyst

Okay. When you say 40%, you mean 40% of different types of materials handling have an option for electric, that's what you mean, correct?

Raj DasGupta, CEO

If you look at all the vehicles produced in material handling today, 60% are electrified and 40% are primarily internal combustion. That 40% will also transition to electric, which is the focus of this particular project.

Orin Hirschman, Analyst

I'm not following the numbers, but if I may just ask, I apologize, you mentioned before, let's say, with Raymond’s, you're up to 10% penetration, go back and correlate those two numbers because I know they mean different things. So just – so I can make sure I follow.

Raj DasGupta, CEO

Yes, they do mean different things. So with Raymond, Raymond only makes electrified vehicles. So, 10% with Raymond is one thing. If you look at the overall market, though, including all of the OEMs, that share of electric drops to about 60%. In fact, our other OEM partner, the majority of what they produce is the IC engine based. So there's a large opportunity for us to both continue growth on already electrified platform and in electrifying IC engine platforms.

Orin Hirschman, Analyst

Okay. And I assume on some of these projects, these NRE projects, there is some special advantage you have from the Infinity platform. Is that fair to say?

Raj DasGupta, CEO

That's completely correct. So the reason we can electrify these platforms to begin with is, number one, we can package enough energy in the vehicle to meet their, let's say, eight-hour requirement. Then we can also charge this battery quickly and do so many times over without leading to degradation on the battery performance. So those are the key factors on choosing Electrovaya's technology over other companies.

John Gibson, CFO

Sorry, I'll add, cycle-life advantage, energy density advantage as well.

Orin Hirschman, Analyst

And two last questions, if I may. And then I'll let other people ask. And thank you for giving me the extra audience. In terms of having to go to another shift or multiple shifts in Canada, where that could potentially have a dragging effect on your gross margin, is that accurate, or does it not necessarily have a dragging effect on your gross margin?

John Gibson, CFO

So I think that if we had to go to our shift then that means we're essentially utilizing more of the labor time because there are more orders to go through the plants. So labor doesn't make up a huge portion of our gross margin anyway, so I don't expect that to have a significant effect on the gross margin.

Raj DasGupta, CEO

And Orin, when we do go to a second shift, the volume, you can expect that to happen in the second half of the fiscal year, if we need to. And by then, we're expecting gross margins to improve because of some cost reductions that we're expecting to kick in, as well as other factors.

Orin Hirschman, Analyst

Okay. And finally, just if I have to ask it, and I know it's much further out in the future, but any progress on the solid-state project?

Raj DasGupta, CEO

There has been continued progress there. The reason I didn't put it into our remarks is it's been a few weeks since we last provided some update there. The direction we're going in is we're making a proprietary ceramic material in-house, as well as that ceramic separator utilizing that proprietary material. So our team is making good progress. We're looking to see improvements in consistency before we publish any results.

Operator, Operator

I would now like to turn the call back to Management, for any closing remarks.

John Gibson, CFO

Thank you everybody for joining our call today for listening in. We look forward to speaking to you again, as we report our second quarter 2024 results. Have a wonderful evening.

Operator, Operator

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