Earnings Call Transcript - ELVA Q2 2024

John Gibson, CFO

Thank you. Good morning, everyone, and thank you for joining today's call to discuss Electrovaya's Q2 2024 financial results. Today's call is being hosted by Dr. Raj Das Gupta, CEO of Electrovaya; and myself, John Gibson, CFO. Today, Electrovaya issued a press release concerning its business highlights and financial results for the 3 and 6-month period ended March 31, 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 SEC EDGAR website at sec.gov/EDGAR. 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 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 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 may be found in the company's press release announcing its Q2 2024 results and in other public disclosure documents filed with the Canadian Securities Regulatory Authorities and the U.S. Security Regulatory Authorities. Also, please note that all 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.

Rajshekar Gupta, CEO

Thank you, John, and good morning, everyone. Thank you for joining our fiscal Q2 2024 call. Electrovaya continues to make great strides in strengthening our business, including a new supply agreement with Sumitomo Corporation Power and Mobility, improved non-dilutive working capital availability and progress with regards to technology development and cost optimizations. We delivered significant improvement in profitability and margins, despite less revenue growth than anticipated due to delays driven solely by our customers' delivery schedules shifting. In our business, there can be uncertainty with respect to delivery dates of our battery systems as customer sites are often newly constructed and they are thus subject to potential delays. Broader foundations are now in place to ensure continued and stronger financial performance going forward. We continue to see increasing reception of our products from major Fortune 100 customers. We expect our revenue growth to accelerate in the second half of this fiscal year and into our next fiscal year. While our revenue continued to demonstrate growth year-over-year, the most important area of financial progress is with our gross margins and overall profitability. Our gross margins increased to 35%, and this helped support growth in our adjusted EBITDA to about $1.5 million and an operating profit of $700,000. In the current era of high interest rates, profitability is paramount, and we are firmly focused on increasing our margins and ensuring our working capital is spent effectively. During the quarter, we increased our working capital facility from CAD 16 million to CAD 22 million, with accordions in place to go to CAD 26 million. This increase in working capital is important to support a growing business size. Currently, we are actively focused on reducing our cost of capital. And I believe with our strong trailing EBITDA figures and a good projection going forward, Electrovaya is in a position to have Tier 1 bank lending at more reasonable interest rates. We are actively in discussions with several banks and are optimistic about completing a refinancing this fiscal year. I'd like to reflect on a few of the key milestones we achieved over the quarter and our vision going forward. First, we signed a key supply agreement with Sumitomo Corporation Power and Mobility, a 100% subsidiary of Sumitomo Corporation. This relationship has been growing over the past 12 months and together we have closed our first supply agreement with a leading Japanese construction equipment OEM. This OEM, who has major operations in both North America and Europe, will need volume deliveries of batteries to Japanese manufacturing sites starting in 2026. This is significant as overall there have been very few, if any, North American battery companies with exports to Japan. It doesn't stop there. We are also in discussions with multiple other OEMs in the construction, equipment, and mining industries with Sumitomo. Our relationship with Sumitomo opens many doors from sales to finance support and is going to be one of the central aspects of our strategy to expand our geographic and application diversification. Secondly, our core market, the material handling industry, remains robust and is where we have the strongest set of end customers and OEM partners in the industry. Our backlog remains robust and growing despite economic and interest rate headwinds, and we have a good line of sight with regards to demand for the foreseeable future, including into fiscal 2025. This strong base provides us with the platform for growth while enabling the company to spend a greater share of its resources on product development and research and development. We have continued to make traction with existing Fortune 100 and Fortune 500 companies while also adding additional enterprises in a seed stage. Furthermore, Electrovaya continues with our OEM partners on next-generation electrified platforms and other improvements in our offerings which we expect will generate further increased interest in our products, especially in late fiscal 2025 and onwards. We've also worked with our partners to provide the longest warranty in the industry, a testament to the cycle life and quality of our battery systems. This recent update will likely lead to higher levels of adoption, especially with regards to solid-state battery systems. Our first Infinity Battery systems for material handling were deployed at Mondelez in 2017 and then at Walmart in 2018, and they are all still in operation, outlasting the vehicles they were originally installed in. These are some of the reasons Electrovaya can continue to generate high and growing margins from our products. We simply have the best product offering in the market. Thirdly, our product development efforts are moving forward. Our high voltage battery systems launched last year are continuing to be tested with initial customers with positive feedback. Given our battery technology's ability to sustain higher levels of safety, cycle life, and overall performance than typical lithium-ion battery systems, we are seeing certain applications where we stand out even further and thus can continue to garner the premium we have established in the material handling industry. Some verticals that are particularly interesting are defense, mining, and hybrid applications, and we are engaged in multiple opportunities with each. Importantly, these are applications where we sell on performance and are not dependent on government incentives, which are unpredictable and subject to change. With the overall electrification rates for bus and truck applications have been less than anticipated, and this can be seen directly from the results of some of our peers who have targeted these markets, whether they be battery companies or electric vehicle companies. One thing that we have continued to focus on are applications that sell on their own merit and are not dependent on government subsidies. The material handling market is a good example of this, and so are the other verticals I mentioned. Our customers purchase our products purely based on the return on investment that they obtain from operational and lifecycle cost efficiency. If a new subsidy becomes available or is canceled, we are immune. I believe this is especially important given the uncertainty of our political and geopolitical landscape. Despite this, we remain confident that our technology will be utilized in the all-electric bus and truck markets. We have started two research and development programs with two major bus OEMs. In the hybrid truck market segment, we are very well positioned, and we are actively in discussions on some projects. Our solid-state battery research efforts have reached some key milestones, and we plan on announcing our progress at the company's Battery Technology event on June 12. Finally, we continue to make progress towards securing financing for investment in our project to expand manufacturing and sale 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. This is still progressing but has been slower than we anticipated. That said, given improvements in supply chain and operations at our current facilities, we will not need the Jamestown output until 2026.

John Gibson, CFO

Thanks, Raj. To start, I'd like to explain the reason for filing of the quarter with a notice to reader. The reviewer work for Q2 is essentially complete. However, we discovered a currency translation difference relating to the 2022 equity balances. This obviously has a cascading effect through the equity opening balances. The adjustment has no impact on the income statement for the current year and is solely an opening balance issue. We expect to complete the analysis and the review shortly. We continue the momentum from fiscal year 2023 and the December quarter into the first quarter, and that is emphasized by some of the significant improvements we have made. Revenue for Q2 was $10.7 million compared to a restated $8.5 million for Q2 fiscal 2023, an increase of 26% year-over-year. While this is not as high as we would have liked due to some products being pushed out of the quarter, we made substantial headway in terms of profitability, further emphasizing the operational transformation of the company in general. Gross margins increased by 1,240 basis points to 34.8%, with a significant growth in the gross margin for battery systems. Importantly, our adjusted EBITDA grew by $1.7 million to a positive $1.5 million for the quarter, giving us an EBITDA percentage of 14%. This is impressive off a relatively low quarter revenue rate, and provides us confidence of continued improvement of EBITDA going forward. As of the end of this quarter, our trailing 12-month EBITDA was $5.75 million, with an operating profit of $0.7 million compared to an operating loss of $0.6 million in the prior year. We expect to continue this trend throughout the rest of the year. Our overall net loss for the quarter was $0.8 million, a decrease of $0.5 million from the prior year. As you will see from the income statement, the finance cost had a substantial impact on this number. The company had positive cash flow provided from operating activities of $0.4 million compared to cash used in operating activities of $2.4 million in the prior year. As of March 31, 2024, total debt was $18 million compared to $17.2 million in the prior year. The company continues to manage our cash conservatively. With the additional space we have in a revolving facility that Raj mentioned, we believe we have adequate liquidity to support our anticipated growth to fiscal year 2024 and beyond.

Rajshekar Gupta, CEO

Thank you, John. Electrovaya continues to demonstrate a nose-to-the-ground mentality that has led us to providing continued non-dilutive growth with a focus on the bottom line. We recognize we are still operating with a high cost of capital and will remain focused on our profitability, which I believe has made the company compelling for most banks. Our technology is truly exciting. While the material handling market remains our core market, I believe this is just the first innings as there are many applications where the Infinity Battery technology is an industry leader. It just takes time and effort to ensure this is completed at the highest standard. With regards to our revenue projections for the remainder of the fiscal year, we have decided to stand by our previous guidance of $65 million to $75 million. There are some risks of meeting this range. Approximately $20 million of this anticipated revenue is dependent on customers' new distribution center sites. Any delays on the startups of these sites may lead to a proportion of revenue moving into the subsequent fiscal year. We expect to have further clarity on the firm delivery dates of these sites over the next several months. The annual revenue forecast takes into consideration revenue from already delivered orders. The company's current purchase order backlog, which is as of May 13, 2024, is over $43 million. In addition to anticipated new orders based on historical patterns and additional demand communicated to the company, but not yet provided as a purchase order. This guidance is subject to change and is made bearing unforeseen circumstances. We continue to see increasing demand for our products in fiscal 2025, and I expect that that year will represent a significant ramp-up in deliveries, margins, and profitability. Electrovaya is focused on continuing our great progress with regards to profitability and setting the company up for its long-term goal to be a globally dominant force for heavy-duty lithium-ion batteries. That concludes our remarks this evening. John and I would now be pleased to hold any questions and answers.

Eric Stine, Analyst

So maybe just starting on gross margin, great number, especially on the lower revenue number. I mean, maybe just some thoughts on what went into this quarter, just trying to get a sense of any one-time items or things we should consider as we look at this going forward, presumably on higher revenues implied in your guidance?

John Gibson, CFO

Yes. Good question, Eric. John here. No one-offs in the quarter. What we really saw this quarter was an increase in efficiency on the floor. So if you look back at our previous quarters, 2023, there's probably a fair amount of labor under absorption that contributes to the lower margins there and maybe also some historical pricing. This year, very efficient on the floor. We are getting some economies of scale with purchasing volumes. But nothing that one-off that would pull off the margins if you pull it out of the quarter. So from a kind of a trend going forward, this is what we expect to see. And really, it's what we have always said for the last 12 months or so. We're getting to this 35% magic number. And we did it maybe a little bit earlier than we expected.

Rajshekar Gupta, CEO

Yes. Right. Eric, just to follow on that a little bit. I would expect as our revenue increases further, we are expecting further improvement to the gross margins. So this 35% number we were targeting probably a little bit later in the fiscal year, we've already hit it. It doesn't stop there. There are further improvements we're anticipating. And so our focus is very much on ensuring we have more money to the bottom line.

Eric Stine, Analyst

And then just keeping with that line in the second half, I mean, clearly your guidance implies a pretty significant step up, but you've got visibility while there are still risks. And I guess, I'm curious what you've seen here early in 3Q, how that maybe adds to your confidence going forward as you think about it.

John Gibson, CFO

Yes, Q3 started off very busy and it'll continue very busy for the rest of the quarter. As we said, there's always going to be a risk when you're delivering products at greenfield site. A lot of these delays are obviously out of our control and a lot of times it's out of the customer's control as well. We're going to build to our original purchase order dates, as Raj mentioned. We'll continue to do that. And if we do that, then we'll hit our guidance. That's just a pair of the purchase orders that we have on hand. I mean, we have a strong backlog right now. So we're going to continue to work until we've sold all of those.

Eric Stine, Analyst

I have one last question. There has been good progress with Sumitomo. I'm curious about expanding into other applications. You've already mentioned one main Japanese OEM that has selected you, but now you're discussing additional opportunities. Could you elaborate on those other applications, their potential scale, and any other relevant details?

Rajshekar Gupta, CEO

Yes, great question, Eric. The first Japanese OEM we've partnered with Sumitomo is in the construction space, and we're also in discussions with at least one other company in that sector. Additionally, we see a significant opportunity we're exploring together with Sumitomo in the mining sector. The mining industry shares many similarities with the material handling business we know well. Essentially, these vehicles are highly sensitive to downtime, operating 23 hours a day, and they are seeking top-tier electrification solutions, which our product line can provide. This is a key target market we're pursuing alongside Sumitomo.

Craig Irwin, Analyst

Congratulations on the strong EBITDA here, Raj. It's an impressive quarter. I wanted to just talk to a little bit of pricing because, obviously, you saw a pretty healthy margin mix this quarter and it seems like there's more to go. So that's exciting. Are you still pricing your products basically at parity on a kilowatt hour basis versus competitive product and not adjusting for the life cycle? Or are you maybe starting to take a view that you can price these at a premium given you get 3x the typical life of competing product?

Rajshekar Gupta, CEO

Yes, thanks, Craig. I would say our products are definitely priced at a premium, and which is what we will continue to do because the demand for our products is substantial. And we're providing our customers with a clear benefit. If you look at our customers, they're the creme de la creme of the industry, and they generally look for the best products, which gives them an operational benefit. So I don't think our customers are that focused on the capital costs. They just want the best, which is what we provide. So I would say when we compare Electrovaya to some of our competitors, we would probably be selling our products at a higher margin and a higher price.

Craig Irwin, Analyst

Yes, the margins were higher, that's for sure. So my second question is, you touched on the mining and construction opportunity through Sumitomo. But I'm going to guess there's actually mining and construction and other industrial type opportunities you've been developing with many other customers out there. Can you maybe sketch out for us the amount of activity in these non-materials handling markets for Electrovaya? What do you see as the largest opportunity over the next couple of years? And what do you see as your strengths allowing you to gain traction here?

Rajshekar Gupta, CEO

So in terms of the strengths, it is the same strength. So it's the cycle life, the longevity, the safety, and just overall general performance, which we can beat most other battery companies with. And so when you pick that, you say, who's going to like to use this technology? Defense is quite high up on that list. So we have a number of, I think, about 400 projects ongoing right now with various defense contractors, all at the sort of seed level at this point. But we see significant interest there. So that's one sector which can continue to provide high margins. It's all performance-based and one where our technology is a good fit. On the mining side, again, when we talked to a few mining companies, they are under pressure, of course, to reduce carbon footprint from their operations. But electrifying has always been a challenge because these vehicles are large. They operate 23 hours a day. They don't want to have downtime. And so they've been looking for an electrification partner, which they believe we are. So we're talking to a number of players there. That takes a bit of time with regards to development, but it's an extremely interesting and large market opportunity. So that's one I'm very excited about. Construction, again, we're seeing the demand there from the construction space. Again, similar to the material handling, it's got the heavy-duty component. And then there's also the material handling as well, right? There's a significant share of material handling which remains to be IC engine powered because it's extremely heavy-duty, it's outdoors, it's at ports, etc. And we're seeing that space, especially in places like California, where they're mandating to reduce emissions, we're seeing our OEM partner launch products for this demand. So it's across all these sectors we're seeing. And then there's one more, which would be hybrid trucks. Right? So long-distance trucking, I think electrification is maybe a tricky proposition but hybridizing those vehicles is not. And we see, again, a good opportunity for providing high-performance, high-rate batteries for hybrid long-distance trucking.

Craig Irwin, Analyst

A bunch of exciting opportunities in there. So then Raj, I was hoping for a little bit more of an update on your Jamestown, New York facility. Can you maybe share with us what's changed as far as the operational setup and how do you feel about the debt financing commitment for that facility? Is it something that's possible that we get it this summer or should we wait given the sort of broader uncertainties out there? I mean, you're constructive about your debt outlook. I like that. But the sort of fresh debt of this facility is what I'm interested in.

Rajshekar Gupta, CEO

Yes, on Jamestown, we have had multiple, in fact, we just received another term sheet from a private lender recently to fund this expansion. Our focus, though, is still to get the financing at a lower cost from a government-backed lender, who we are in advanced discussions with and have been in advanced discussions with for some time. We see some light at the end of the tunnel at this point, though. We have regular conversations with this group who's out of D.C. I'll be in D.C. in a couple of weeks as well to meet with them. So I think we're making good progress, but we do have the alternatives on the private side as well, just at a higher cost.

Craig Irwin, Analyst

Then last question, if I may. Cost, your frictional expenses were incredibly well-controlled this quarter, flat year-over-year. Can you talk about how we should expect these to track with revenue over the next couple of quarters? I assume there is some leverage in the model. But what should we be thinking about frictional costs to support the ramp in the back half of your fiscal year?

John Gibson, CFO

I don't think you're going to see a significant increase through the last two quarters of the year. We're focused on keeping our overheads and costs down to maximize profit. We want to avoid incurring unnecessary expenses. Therefore, we are being strategic, maintaining a lean operation while achieving our targets and managing everyone's expectations at the company.

Amit Dayal, Analyst

With respect to margins, going forward and expecting further improvements, is this primarily just coming from better pricing with the goods that are yet to be delivered? Or are there some other factors in play as well?

John Gibson, CFO

Yes, Amit, we have some pricing improvements that will be hitting the later half of the year and into fiscal 2025. But I think the most important thing we've done is really increased our efficiency going through the factory floor. So while we've got some economies of scale with our volumes, obviously when you buy more, you can negotiate a little bit more with your suppliers to push the price down. We're also being very good with the timing of our purchases, analyzing the costs in the market, market trends in terms of where prices are going to go, and making educated decisions with a bit more purpose than we had done previously, where we were really just kind of looking at it from a just-in-time perspective or making sure we had the orders in with our customers without really analyzing when we need deliveries, etc. So we're being a little bit more purposeful with how we manage the purchasing process and then just ensuring that when things go onto the floor, they get through the floor as efficiently as possible. Spending as little time as needed, making sure that our labor absorption is where we're over absorbed and not under absorbed to maximize that from an efficiency standpoint. And then going forward, there are going to be opportunities where we can automate parts of the production process, which would also improve efficiency and throughput for the factory, reducing the time it takes for a battery to go from a bunch of screws and some cells to a fully working operational product. So that's something that we're looking at implementing probably the first half of fiscal 2025, so these kind of improvements that you'll see going forward that will help solidify our ability to maintain margins and go from there.

Amit Dayal, Analyst

So we are now looking at maybe Jamestown coming into play in 2026. How does that sort of set you up for potential growth in revenues in 2025? Do you have enough capacity with the existing facilities to drive further growth from the guidance you provided for 2024 and 2025?

John Gibson, CFO

Absolutely. We are currently planning for fiscal '25 without needing Jamestown to boost our revenue. We are operating one shift in Ontario, which we can increase, allowing us to reach our total capacity for 2025 independently of Jamestown. Although we expect Jamestown to be operational by mid-2025, it's not necessary for meeting our revenue targets for that year. All revenue will be generated from Mississauga, and while we aim to have Jamestown ready for when our capacity increases, our revenue projections rely solely on our operations in Canada.

Amit Dayal, Analyst

With respect to some of the ongoing revenue diversification efforts in play, how should we expect the revenue mix in 2025 to change towards some of these new markets and applications you guys are working on? I mean, I believe the majority of the revenues today are material handling, but there are some interesting discussions you're having with customers in new markets. With the visibility you have, how does that sort of change the revenue mix in 2025 if some of these discussions come to fruition?

Rajshekar Gupta, CEO

Yes, 2025 will still be primarily driven by material handling revenue. However, there is an increasing number of other areas that are mostly still in the seed stage, with some moving towards higher production rates. For example, the construction OEM I mentioned earlier is already receiving pre-production battery components from us, and we expect to enter mass production by 2026. Many of these programs will expand from 2026 onwards.

Graham Price, Analyst

I noticed you gave a brief glimpse into the Analyst Day regarding the solid-state battery development. I'm curious about the topics you plan to cover and what kind of details we can expect to be shared on that day.

Rajshekar Gupta, CEO

Yes, we've kept a low profile regarding our solid-state battery development for quite some time. About a year ago, we altered our research and development approach, which has resulted in some positive advancements. One significant change was the creation of a proprietary ceramic ionically conducting material in-house, enabling us to produce the ceramic separator with better cost efficiency and control. We discovered that the material we are developing ourselves is far superior to what we can acquire from external suppliers. The separator is performing well, and we've resumed outreach to potential partners after a break. Just yesterday, we had a discussion with a major automotive company. We will share more details during the Battery Technology Day, and I am pleased with the progress made by the team at Electrovaya Labs.

Graham Price, Analyst

For my follow-up, maybe related to some of the gross margin questions, we've obviously seen battery cell and component pricing continuing to fall quite steeply. Just wondering if you're seeing that from your suppliers and to what extent?

Rajshekar Gupta, CEO

So we have seen some commodity prices drop, which definitely will affect us in a positive way. That has not yet been reflected in our sales to date. Right? With our sales to date are still based on historical higher-priced commodities. I would expect the lower-priced commodity price to have an effect on our deliveries probably later this fiscal year, towards the end of this fiscal year. But definitely 2025 is where you'll see the majority of that impact. So that's another piece working in our favor for further improved margins.

Orin Hirschman, Analyst

In terms of the bus market and the delays, can you talk about the delays because of government subsidies or the delays because of technical performance on the buses that people can't achieve? What do you think is causing the delays?

Rajshekar Gupta, CEO

We are currently collaborating with two bus original equipment manufacturers. Initially, we aimed to enter immediate production with them; however, we are now involved in a research and development program for their next-generation vehicles. This is positive as it positions us for future volume, even though those volumes will materialize later than we had anticipated. Additionally, the bus segment is not performing as well as we expected one or two years ago. If you examine the market, several manufacturers have exited entirely, with three doing so in the past year. Startups in this sector are struggling as well. A significant factor contributing to this is demand; cities are not purchasing electric buses unless substantial subsidies are provided. Currently, this market is not a natural one for electric buses. In contrast, other sectors we've discussed do represent natural markets for our products, making them less susceptible to changes in government procurement due to shifts in elections or policies.

Orin Hirschman, Analyst

I'm curious about the progress on the solid-state projects. There were two programs: one focused on solid-state and the other on liquid-solid. Can you clarify which program we are discussing? Are we looking at both, or have you decided to concentrate on one?

Rajshekar Gupta, CEO

It would be a solid-state battery featuring a ceramic ionically conducting separator. While there is some ambiguity around what constitutes a liquid, we have also developed a catholyte for it. This approach is likely quite similar to what other companies like QuantumScape are pursuing.

Orin Hirschman, Analyst

Just to clarify, the last update regarding the charge to source cycles indicated that we were far from a commercial product. That update was a long time ago. Are you suggesting that we have made significant progress due to some of the changes you've implemented, such as the ceramic do-it-yourself approach?

Rajshekar Gupta, CEO

Yes, we've seen improvements. We were facing some challenges with our previous approach. We have revisited this with a new strategy, and while the results haven't been sufficient to confirm if we've achieved our cycle life targets, I'm optimistic about their performance. The new cells are still relatively recent, which affects the timing of our assessments. Thanks, Holly. That concludes our call, and thank you for listening. We look forward to speaking with you again after we report our third quarter 2024 results. Have a wonderful morning.

Operator, Operator

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