Electrovaya - Q3 2024

Transcript

Operator (participant)

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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, John Gibson. You may begin.

John Gibson (CFO)

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-month period ending June 30th, 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 disclosures, documents filed with Canadian securities regulatory authorities. Also, 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 Q3 2024 call. We continue to strengthen our business through new product development, business development initiatives, and in continuing to post consistent, strong margins for our core material handling battery product lines. Our focus this fiscal year, and where we demonstrated significant progress in the current quarter, is to establish the foundation so that this business can continue with rapid growth, with a rapid growth trajectory in fiscal 2025 and beyond. This not only includes the development of new product lines for current and new OEM partners, but also with respect to establishing financial partnerships to sustain our long-term growth objectives.

While we continue to 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 when the orders are related to new warehouse construction. Accordingly, we are adjusting our fiscal year 2024 outlook for the revenue to be approximately $45 million for the full year. This represents growth over fiscal year 2023, and 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 fully expect that demand for both 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 had some additional costs associated with new product development, including certification and third-party validation testing, as well as costs associated with a larger engineering team. These are part of our large co-investments that Electrovaya has been making over the course of the last year with respect to an OEM project, which will launch in fiscal year 2025. These additional costs are apparent 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 increased headcounts, also contributed to some higher operating costs. We believe these investments will show a strong return 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 a lower cost and longer-term refinancing with a major North American bank, and also with respect to financing our Jamestown lithium-ion battery manufacturing facility with a US federal agency. We are optimistic to close both of these financings in the current fiscal year. Our relationship with Sumitomo Corporation Power & Mobility continues to bring new, exciting 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 that we are actively pursuing with Sumitomo and see significant potential for the company in Japan and the Asia-Pacific region in general.

We expect to begin to move to low volume serial production of our high-voltage battery systems in the first quarter of calendar year 2025 as these products begin to gain sales traction. We see a wide variety of applications for these systems, including, but not limited to, defense, mining vehicles, construction, and even rail applications. Given our battery technology's ability to sustain higher levels of safety, cycle life, and overall performance than typical lithium-ion battery systems, there are certain applications where we stand out even further, and thus can continue to garner the premium we have established in the material handling industry. I'd also like to illustrate the concerns about battery safety globally are appearing more and more. Electrovaya has a host of proprietary technologies, which makes lithium-ion batteries substantially safer.

Our Lithium-Ion Ceramic Technology has been deployed in thousands of passenger vehicles, thousands of material handling vehicles, and without a single safety issue. We passed the most stringent of destructive battery testing available, including literally setting a cell on fire in a high-voltage battery system. We did that twice, and we had no fire propagation inside the battery system. I don't think there are many, if any, other battery companies who can claim that. Recent lithium-ion battery fires in Korea and elsewhere are bringing this issue to the forefront again. I think our advantage here is going to become more salient as time goes on. With that, I'd like to pass the call back to John Gibson, who will go into the financial results in more detail.

John Gibson (CFO)

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, and as Raj mentioned, those delays were at our customer's 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 32.7% 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 twelve-month adjusted EBITDA was $4.8 million on 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 prior year. Our net loss for the quarter was $324,000, an improvement of $232,000 from the prior year. For the first nine months of the 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 30th, 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 we have 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.

Raj DasGupta (CEO)

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've absolutely no doubt that we will achieve this goal. While we are disappointed that we did not hit the top-line targets that we set out last year, fiscal 2024 is most definitely on a path to be a foundation year, and the company is today in a better position 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 is clearly not illustrated in the markets, but fortunes are made in downturns.

There are many companies in our sector which are struggling at the moment. Electrovaya is not one of them. Our highly differentiated technology has no shortage of demand. Development, validation, and scale takes time, and as observers, it is sometimes difficult to gauge progress. But it's there, and the timing for this ripening is in 2025. Now I'll take the, we'll open the call for questions and answers.

Operator (participant)

At this time, we'll be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. We do have our first questioner, Eric Stine, with Craig-Hallum.

Eric Stine (Senior Research Analyst)

Hi, Raj and John.

Raj DasGupta (CEO)

Hi, Eric.

John Gibson (CFO)

Eric.

Eric Stine (Senior Research Analyst)

Hey. Maybe just starting with the guidance. I'm just curious, is this—I know you alluded to this early in the year, so not necessarily a surprise, but, would you characterize this as multiple customers doing this? Is it, is it concentrated? I guess I'm just trying to get at, you know, how we should view that $45 million. Is that a, is that a number that, that, you know, we view as a baseline, or are there still some projects that potentially the timing could move?

Raj DasGupta (CEO)

Do you mean on the $45 million?

Eric Stine (Senior Research Analyst)

Yep.

Raj DasGupta (CEO)

Given that there's 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.

Eric Stine (Senior Research Analyst)

Okay.

Raj DasGupta (CEO)

for this fiscal year.

Eric Stine (Senior Research Analyst)

All right.

Raj DasGupta (CEO)

The movements that took place were really, actually, I'd say three major customers with multiple warehouses that were responsible for the, for the movement.

Eric Stine (Senior Research Analyst)

Got it. Okay. I guess strengthens the view of 2025. Okay, that's helpful, just to have an idea around that. And then just on Sumitomo, sounds like first shipments in early fiscal 2025. In the past, you've mentioned discussions with multiple other parties on the construction side, and also in some other applications. So just curious, you know, if you can update on those. Do you feel like fiscal 2025 is a year where we do see expansion to some other customers and applications?

Raj DasGupta (CEO)

Yeah. I so I mentioned the construction equipment, though, we'll start making shipments for that OEM, and that's, that's a fairly major OEM. You've probably seen their equipment in Minnesota or anywhere else. We do also expect to start making some shipments of high voltage battery systems to a number of customers in fiscal 2025. For instance, we've been making shipments of small numbers of batteries to a defense contractor. We expect to make shipments to, for instance, a rail customer, potentially, and there are a few others.

Eric Stine (Senior Research Analyst)

Got it. Okay, maybe last one for me, just on the financing side. I mean, do you kind of view... Correct me if I'm wrong, but I think, at least my thinking has been that these two financings are kind of tied together. That the Jamestown financing is maybe not dependent, but the process would be helped quite a bit if you're able to refinance the current debt. Is that, is that a fair characterization or, or not, I guess?

Raj DasGupta (CEO)

I mean, all financing is somewhat interrelated. However, they're, they are separate parties and will have limited interaction with each other. So in one case, it's a large bank, and that refinancing is really to take out our existing working capital facilities, add further capability to grow our working capital with them, and of course, lower the cost of that debt. That's a big portion of it. So we're very excited about that opportunity. John and I are working quite hard in getting that over the line. The Jamestown financing is, of course, it's dependent on the strength of the business overall, right? They wouldn't be looking at providing this capital if Electrovaya was in a position where we're unable to service their facility.

So in that sense, they're related, but it is purely focused on equipment and construction in Jamestown, New York. The terms of that type of facility are quite, I would say, unique to government agencies. Banks typically cannot achieve some of the terms that they can, and this has been a long process for Electrovaya, but we're nearing the end of the tunnel. I mean, there's light at the end of the tunnel at this point, but of course, with anything like this, there remains to be some risks in getting this over the line.

Eric Stine (Senior Research Analyst)

Right. Okay. Thanks a lot.

Operator (participant)

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

Craig Irwin (Managing Director and Senior Research Analyst)

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 working on actively. Can you maybe help us sort of rank the different opportunities there from a potential materiality standpoint? You know, if we are looking at things you're possibly doing in Japan with Sumitomo, or some of the other mining equipment producers, you know, and then some of the other high voltage products that you're introducing, you know, which one of these do you think could potentially make the largest contribution to revenue in 2025 or fiscal 2025? And are there other market opportunities you would call out as material that we should pay attention to and watch closely?

So there are quite a number of, and this is, of course, dynamic. It can change on a dime. But as it stands right now, we have quite a breadth of applications our high-voltage battery system can go into. So the same battery can go into a rail application, that same battery can go into a defense application, that same battery can go into a vehicle application. Where we see things in 2025 will be, you know, I'd say, the rail side of things can be quite substantial next year, surprisingly. The defense sector is, we have batteries with four defense groups right now, all small numbers that can become larger, depending on their schedules. We don't really have a clear idea of that, so that one's a bit of a unknown.

Then we see opportunities even somewhat adjacent to the material handling business, which would be, we're looking at airport ground equipment a little bit. We previously shied away from that market, but we do see some opportunities there. And then, which one have I missed there? In terms of mining, mining is really going to be the largest opportunity, I would say, mining construction, but that will take 2025 is more gonna be development, engineering development projects, which we've slated. There'll be some revenue, but it's really 2026 where that starts to take off. In the long run, I'd say mining is going to be a big opportunity for Electrovaya, but in the short run, 2025, of course, material handling is still gonna dominate. Some of these other sectors are gonna become meaningful, but, in the long run, mining is gonna be a terrific sector for us.

That's very good to hear. That's very good to hear. Gross margins, you know, you were, you were again, very strong, similar to last quarter. There seems to be, you know, a continuous improvement in the character of the customers you're serving, the way you're pricing things into the market, and, obviously, execution in Mississauga. Can you maybe talk to us a little bit about what's going right on the gross margin side? Is there any potential volatility that you're seeing right now, that could impact margins sequentially in the fourth quarter? How should we think about potential margin development over the course of 2025? Should we expect margin expansion from here?

Raj DasGupta (CEO)

Yeah, I would, I would expect margins to improve. And the volatility is highly unlikely, given that the material cost is more or less baked in for the next 12 months. So we have a very good understanding of that material cost. In some cases, it may be coming down. So overall, and we're getting more efficient at manufacturing and... So overall, I would expect our margins to continue to improve quarter-over-quarter, over the next 12 months.

Craig Irwin (Managing Director and Senior Research Analyst)

Excellent. Then last question for me, I guess, is around the EBITDA. So this is your sixth sequential quarter where you've been solidly EBITDA positive. You know, obviously, if you're gonna go out there for loans from a lending institution, be it a bank or some government agency, it's a nice thing to have, right? They're gonna wanna see profitability. But customers, very often, people forget that they like to also see companies make a little bit of money and still feel comfortable that there's clear pricing and sustainability in the business. Can you maybe unpack for us what this profitability means for you as far as your customer relationships?

You're picking up a number of Tier 1s, high-profile customers that, you know, I would think would be sensitivity to long-term staying power. You know, I was hoping you might be able to explain a little bit about how they're happy or how they might perceive the profitability of Electrovaya and, and your growth profile.

Raj DasGupta (CEO)

For sure. So, you know, years back, companies had to take a big risk to work with us. And thank heavens they did, and that's why we are where we are today. But as you mentioned, we've had six straight quarters of positive EBITDA. That's why this large North American bank is coming in to refinance our working capital. They're doing so actually without any other guarantees or third parties there. So it's really a testament to this to the business. So overall, that's a good sign of support. In terms of customers, yes, I would tend to agree with you. We are seeing the impact of that, where we are seeing some customers specifically approaching us because they are worried about their existing vendors.

We'd like to say it's because we're, we're the best, but that too, but we're, we're seeing some of that take place right now. They're in the battery space, in the climate tech space in general, you'll probably have noticed there are many companies who are struggling, and that definitely in the short term, you know, doesn't work in our favor because obviously our share price goes down with the market, and we've seen some of that take place. But overall, the strong hands are going to succeed, and Electrovaya is most definitely gonna be one of those companies.

Craig Irwin (Managing Director and Senior Research Analyst)

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

Raj DasGupta (CEO)

Thanks, Greg.

Operator (participant)

Before our next questioner, a reminder that if you would like to participate in Q&A, to press star one on your telephone keypad at this time. We now have Amit Dayal from Wainwright.

Amit Dayal (Managing Director of Equity Research)

Thank you. Good afternoon, everyone. So, Raj, with respect to sort of the non-material handling, you know, side of the business going into fiscal 2025, are these orders, you know, still sort of pilot-level orders? If you could give us a sense of, you know, what your expectations are, you know, for sort of the revenue mix in fiscal 2025. You know, we are at $45 million in revenues for fiscal 2024. Should we expect growth on that $45 million plus non-material handling to drive revenues for fiscal 2025?

Raj DasGupta (CEO)

Yeah, I'd say still, you're gonna see growth in material handling, for sure, and material handling is gonna be over, you know, back of the envelope, over 90% of the revenue. However, 10% of revenue from non-material handling is significant, especially given the larger top line. So that's sort of what we're expecting, and starting to, I would expect to see the impact of that start really fiscal 2025 Q2, and ramp from there. Up until that point, yes, it's really development orders, things that don't really stick out in our financial statements. But Q2 fiscal 2025, I would expect something meaningful to pop out in that quarter and then carry on, going forward from that.

Amit Dayal (Managing Director of Equity Research)

I mean, the brand picture for you looks, you know, pretty strong. You know, industry trends are very favorable, regulatory trends are very favorable. Is it maybe the financing aspect that is holding you back a little bit from, you know, really capturing the growth you could potentially have? And in that context, is there some sort of, you know, timeframe within which, you know, let's say by the end of calendar 2024, you could have the financing, aspects lined up that could position you for the next 18, 24 months in a much more solid position?

Raj DasGupta (CEO)

Yeah, I'd say financing has been part of it. First, on the working capital facility, we're expecting that to be closed by the end of the fiscal year, so end of September. So that's gonna be key. On the Jamestown front, we anticipate, you know, things are moving very quickly right now with the U.S. government agency that we're working with. You know, in fact, you know, they're visiting us day after tomorrow here and in Jamestown. So that's moving quickly. Let's say we're aiming to form an agreement with them by the end of the fiscal year as well.

Of course, there's many factors that can come in on that. And the objective is to have battery production out of Jamestown, New York, in 2026. So overall, I'd say, you know, the market, while the demand for our batteries is substantial, and I expect it to grow significantly, it takes time for companies to validate, test, and get our systems into production programs. Just one example is this OEM project, which we mentioned in our call, that project has been in development for over a year. We've spent significant resources on it for a day, but it doesn't go into production until 2025. So that's sort of the time horizons these things typically take, and I'd say that's an expedited development program.

John Gibson (CFO)

Well, a lot of it to that, while the general, the financing is, you know, kind of held us back, we have been able to do a lot with the very little. So we did, you know, we did more than double our revenue last year, and then we sustained it this year. So increasing the working capital is really gonna help us step up to that next level.

Amit Dayal (Managing Director of Equity Research)

Understood. That makes sense. There's a, you know, in the press release, you have, you're indicating some co-investment for new product development. I'm not completely sure what this is about, but if you could provide some clarity, I would appreciate it.

Raj DasGupta (CEO)

Yeah. So, maybe that's a little confusing. So basically, there's this, we're doing a project with our, one of our main OEM partners, and, there's been a significant co-development of that system. So, we've obviously spent significant engineering resources on it. We've been spending our own cash on certification, testing, et cetera, and so has that OEM. They've been cost-sharing many of these activities. So and, and that's the pro- one of the products which will go into production next year.

Amit Dayal (Managing Director of Equity Research)

Is this for sort of construction end market or storage or something else?

Raj DasGupta (CEO)

Well, actually, we're, we're also doing some co-development with the, with the Japanese construction vehicle OEM. That's at a much smaller scale, so it doesn't turn up. But this particular project's in the material handling space. It's for a new industrial material handling vehicle.

Amit Dayal (Managing Director of Equity Research)

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

John Gibson (CFO)

Thanks.

Operator (participant)

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.

Raj DasGupta (CEO)

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

Operator (participant)

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

Raj DasGupta (CEO)

I think we'll leave it for today, but 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.

Operator (participant)

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