VLNC 3Q Conference Call Transcript:
Kevin M started off by reiterating what was released after close regarding earnings.
He then went on to mention the following:
- Steady growth in demand for N-Charge. Therefore they expect the category to grow.
-Ended the quarter with 7.4 Million in cash on the balance sheet, of which 1 Million relates to funds held by the joint partnership with Feng. Also, they have access to an additional 14 Million from Berg and others via equity transactions. Berg has agreed to fund in equity transactions at the market value of the stock, at the time of the transaction.
-During Q they began to consolidate facilities.
-NI facilities have been transitioned to APL in China and have successfully begun production of cylindrical cells with PETC in Taiwan.
-4th Q, ending March 31st, 2004, is to be a product transition quarter.
-Next week, at Demo 2004, and over the ensuing weeks, VLNC will be launching several new products that will fuel the development of the company over the next fiscal year.
-One of these products will be a direct replace for their current N-Charge model.
-Customers have shown great interest in the product, and potential new retail customers have decided to wait until this new product is available in April 2004.
-With this they still expect Q4 revenue to increase 10/15 percent over Q3.
He then turned the call over to Stephen G. His comments follow:
Q3 marked the completion phase I of their business plan. The objective of Phase I was to demonstrate, thru the N-Charge and Saphion products, that VLNC could become a creditable battery vendor in the industry, and doing this by launching the product across multiple channels and customers. This objective has been accomplished.
Phase II of VLNC’s business plan, now officially underway, is signified by the launch of the cylindrical products, and 2nd generation Saphion technolog. Over the past 3 to 5 months they’ve made “great strides” in the cylindrical and 2nd generation Saphion technology which now allows them to roll out new products, and new product families, with great potential. These technologies are the core foundation of the revenue growth over the quarters to come.
2nd, they have completed the transition of their NI operation to Asia. This was a major accomplishment in their business model (from a internal to a leveraged, high cost to low cost model). He then mentioned VLNC’s sales funnel is growing. He then walked the listener through key areas for VLNC:
PRODUCT FRONT:
They’ve begun mass production of 1st generation Saphion cylindrical cells primarily for use in the K-Charge product designed for the telecom and utility industries.
Last month (January 2004) they began delivering samples of their 2nd generation cylindrical Saphion technology for use in consumer applications.
Next week (Demo 2004) they will be launching their 2nd generation N-Charge system. This product integrates the cylindrical Saphion technology and smart chip technology from Mobility Electronics. The new N-Charge, as a result, is a more compact and versatile product and will serve as a “truly universal battery. And this is the first one in the industry.” Not only will it provide power to those with a PC, but it also may be used to charge a cell-phone, a PDA, a MP3 player, a DVD player or a digital camera. The new N-Charge system offers a modular design for greater flexibility. It’s basically includes a base system that provides up to 5 hrs of additional notebook run-time, and then a snap-on expansion pack to double the energy capacity. In addition, this new product will be compatible with the 90 and 120 Watt notebook computers that have been introduced since the original N-Charge went on sale. They’ve already received support for this product from the current retail partners, but they also expect other retail partners to take on this product as they enter their fiscal new year.
Later this Spring VLNC plans to launch a new family of products called the U-Charge. This product family will be developed and launched with both 1st and 2nd generation Saphion technology, in its cylindrical construction. This product family will be a direct replacement for existing lead-acid, and NiMhd batteries in large format applications. It is “an ideal solution for a vast array of markets currently served by lead-acid technology, including motive applications such as wheel-chairs, scooters, and marine vessels.” The product actually uses the traditional form factors of lead-acid batteries, the results of which is a “simple drop-in into the customers existing application and that in turn will allow it to grow and be adopted much faster into these applications.”
Additionally, VLNC expects the U-Charge products to have a “significant impact in the Military and Vehicular sectors, which rely heavily on NiCad and NiMh solutions. All of these markets are seeking legitimate performance in a safe package, which is at the heart of the Saphion position.
It is important to note that as they launch these products the 1st and 2nd generation Saphion technology will coexist. Both offer a foundation of safety, advantage and differentiation that will be the primary selling tool for the Saphion family of products. But additionally, there are attributes specific to each generation which allow it to target different markets with these products. The first generation Saphion technology has demonstrated a cycle life that is “unprecedented in the industry.” Beyond today 1500 cycles at 90% capacity. A comparison. Current cobalt oxide batteries from competitors are rated at an average of 500 cycles at 80% capacity.
The 2nd generation Saphion, has demonstrated a rate capability never imagined by manufacturers, and that is a critical factor for all the markets currently using NiCad and NiMh batteries. And since customers have heard about this 2nd generation in the cylindrical construction VLNC’s sales funnel has “dramatically increased with a lot of consumer appliances because of the benefits they see in the performance and rate capability the 2nd generation can deliver.”
OPERATIONS FRONT
Stephen stated the transition from an internal to a leveraged manufacturing model is the “most crucial step this company has taken on the road to profitability.” First, moving the polymer production from NI to ATL Asia has had a 3x positive impact on costs. 2nd, thanks to the PETC partnership VLNC expects cylindrical manufacturing to yield another 2x $ improvement from a dollar/watt hour of cost. 3rd, by transition the systems manufacturing from Mexico to a new partner called Sinbaum in Taiwan VLNC has yielded additional cost savings and improvements. Finally, all of their partnerships are having a positive impact on their working capital requirements. They now have all the elements in place to be competitive in the segments they serve.
In summary, Q3 & Q4 are the cornerstones of the company. They have proven they’re a credible provider. They have transitioned operations to partners to Asia, and they have established and broadened the sales channels for both small and large format products, and continued building the Saphion brand. Thru-out stage 2 they will launch new products based on cylindrical cells and 2nd generation Saphion technology, and will be positioning the products as the only safe lithium-ion technology for large format applications.
Q&A SECTION
Bob A at Mauntauk: You currently have 2 contract manufacturers in the form of ATL and PETC. If you were given a large order from an existing customer would you be able to fill it, and/or are or are you currently looking for other manufacturers?
SG responses: The short answer is yes, we would be able to fill any sizable orders we may receive from those customers, but we are also planning to add 2nd sources to our cylindrical and large format construction.
Bob A: Can you give me a little more color with regard to the progress you are making with the automobile industry and the Hybrid Vehicle market?
SG: In the US we’re engaged with the USABC and this is going as planned. But we’ve also decided to engage directly with some of the largest US manufacturers. In Europe we’re engaged with every single top manufacturer of vehicles in Europe, and that is going very smoothly. Every one of them has expressed strong interest in the technology. We are also engaged with one Japanese manufacturer.
Greg K at AG Edwards: A question on the gross margins trends. Now that manufacturing has moved to Asia, what kind of improvement in gross margins can we expect? A sharp improvement in gross margin, or gradual as revenue ramps?
Kevin: It’s going to be a gradual process, we’re working through the final bit of inventory from the NI facility as we transition to ATL. Certainly the new product, the new N-Charge, has a better margin, that’s one of the primary drivers behind that product. As we get it up and running in April it should begin to come to fruition at that point. ATL does have better costs as well. So as we work thru this quarter you’ll see some improvement, and that will gradually improve as we work thru the year as we get more and more cylindrical into the mix.
Greg K: On the Op-x side should we see some improvements there, maybe a steady R&D, etc.?
Kevin: Yes, that’s exactly right. From a fixed cost standpoint certainly closing the NI facility helps tremendously. We’ll see that improvement as early as this quarter, though there’s still some wrap-up there that will occur this quarter, with the full impact in Q1.
SG adds: And to add, I think the swing you’ll see over the next quarter will be dramatic from where we are today, as the gross margin will continue to improve over the following quarters as our volume ramps and costs for the product continue to go down.
Dale F at CIBC World Markets: Could you go thru your cash flow in the 3rd quarter, source of used funds and operating cash, and you made a statement that you’d be profitable and cash flow positive in the next fiscal year, can you tell us how much cash you’re going to need to reach that point?
Kevin responses: We used about 7.3M of cash during the 3rd quarter, and that still had a lot of the NI facility in the numbers, so that will come down as we work into Q4. We have a little over 20M in cash available to us as we work thru this year. The cash expenses on a qtr by qtr basis should start to go down as well, because of the closing of NI and the transition of working capital to our partners we expect those numbers to go down as we work thru the year.
Dale F: Do you expect that negative cash flow…you’ve burned 7M is it going to go down linearly, or are we going to see a step-function down….how rapidly can we see that cash burn drop?
Kevin: It’ll go down in a kind’a step function because you’ll have a drop off this quarter, it’ll drop off some more as we look into Q1, and then start to settle as we work into the middle of the fiscal year.
Dale F: Without NI what are your revenues to get you to cash break-even and what are your revenues to get you to profitability?
Kevin: The expectations to reach cash-flow break-even and profitability with our mix of licensing as well as product margin improvements as we work thru the year certainly depend on that mix in a given quarter. We believe our cylindrical construction really offers us the opportunities to aggressive pursue licensing opportunities both at the cell and pack level as well as the end customer level. We think we have some good opportunities there, and again, that’s a hard question to answer from a specific number standpoint because of that mix.
Mike H at Solomon Smith Barney: Can you tell me how ya’ll plan on getting more of Wall Street or more of the institutions aware of VLNC and its success stories?
Kevin: We are beginning to talk to more and more people on Wall Street from an Institutional standpoint by making visits even last December to the analyst community. I plan on getting back out in the March timeframe with a conference in New York as well as visiting with a few people while I’m there. And that will continue over the year. I have another conference scheduled in May, and will pursue people in California at that time. I expect to also get back to New York a couple of times during the year. I think you’ve begun to see some slight up-ticks in institutional holdings over the prior quarters and hopefully what I plan to do this year will improve those numbers.
Bob A again: This is to SG. When you first joined VLNC you believed there to be a very large market opportunity for the technology now called Saphion. Do you still believe that the same market exists for the product?
SG: Yes. Absolutely. And we’ve covered in the call just a few of the things we think we can address. I never want to advertise the numbers, because they’re very large, but if you look at the market potential in aggregate it’s far in excess of 10B for lith-ion in large format applications, and also with the consumer segment integrated into that. What I’m looking into is to make tangible progress witn the funnel we have, with continual improvement to get there, but I still believe the market potential is there.
Bob A: You stated with the 2nd generation rate capability you were going to attack lead-acid applications in coordination with automobiles. Are we talking drop-in start up batteries?
SG: No. Right now, as I mentioned, we’re going to be launching in the Spring a new family of products called the U-Charge. This is a system, and within this system we’re going to use our standard cylindrical cells and they will be either 1st or 2nd generation. Now the U-Charge is a form factor from an ENCLOSURE standpoint, using the enclosure for a lead-acid type battery, but this is not for starter batteries but for the batteries you’ll find in wheel-chairs and scooters and marine vessels that are energy or power batteries, or that you would find in electric vehicle applications. To give you an idea in the vehicle segment we think we’ll sale the K-Charge and the U-Charge product, the Saphion I because of its long life-cycle will actually go primarily into EV applications and Saphion II will go into HEV applications because of its power capabilities, which is one of the criteria for HEV’s.
James G: Would you comment on the progress of FenFang at the moment?
SG: The joint venture is moving on plan; we have hired the entire management team and the building has been erected so we are moving forward. One thing I want to mention FenFang is going to be one of our partners in Asia and one of our modes of manufacturing that are going to be focused on the large format and long cylindrical but we will continue to add partners in Asia for our U-Charge and small format small cylindrical cells as well. As I said before; our current partners can satisfy our planned demand for the next fiscal year.
John T at Edward Jones: Could you take the next couple of quarters and give us a timeline or milestones and tell us what to look forward to:
SG: Thru-out the Spring period you will see a launch of the new N-Charge product, the new U-Charge and 2 additional K-Charge products. This is a key milestone for us when we’re able to complete it which should be done by end of Spring beginning of Summer.
From a customer and business allotment standpoint as soon as the new N-Charge product is launched and available in quantities, which we expect to occur during the months of April you should expect to see new retailers to come in and existing retailers rolling over to the new N-Charge product. At the same time as soon as we are able to announce new customers on the large format we will do so, but this might take some time because…for 2 reasons, 1) they’re going to be in the process of qualifying the technology, but more importantly many of them have stated they want to keep themselves confidential because they see the products as a significant competitive weapon.
The third thing you should watch is the gradual improvement in our gross margins.
John T: Could you expand a bit on the licensing and the revenues you see coming up in it?
SG: This is going to be a moving target. But the reality is we’ve already received interest from customers to license the technology, and unfortunately those are some we cannot talk about. The way we plan to license the technology is to license to the manufacturer of the end product and that will give us the benefit because, 1) we could potentially charge an initial fee for the technology license and then royalties from the products they sell. We always believed cylindrical would be the time we’d begin to see interests in licensing and, it’s happening…
John T: You mentioned earlier that you expect to be see cylindrical deals in the next two weeks , can you expand on that?
SG: I don’t think I mentioned cylindrical deals in the next 2 weeks, but what I can tell you is we will be using the cylindrical cells in the K-Charge product, and in the new N-Charge. I think what you may be referring to is I did say we will start shipping K-Chargers including our cylindrical cells to existing customers over the next few weeks.
Pat M at Raymond James: How much do you guys think you can net off the NI facility cash-wise after you pay off the note on it?
Kevin: At this point the market value, based on what our market evaluators have said, appears to be in the 5-6M range after we pay things off.
Pat M: Do you think this is something that can happen within the next 3 to 6 months or is that further out:
Kevin: Certainly I think it could happen in that timeframe. It’s a large facilities, but we don’t see any issues there, and we’re getting a lot of interest.
Kevin: SG, can you give us a flavor on the power tool companies you have mentioned last quarter? If it’s one, or if it’s multiple customers…?
SG: As I said we are working on the consumer appliance front but I can’t go into details/names for the reasons I’ve mentioned earlier. What I would say, though, is we are working with different customers in the consumer appliance sector and working with the leaders in that space, but at this point I can’t be specific with the actual customers, etc..
Quincy L at Teatime Capital: I’m having trouble figuring out what the fully diluted share count would be under like a treasury stock method and assuming a conversion of all the preferred shares?
Kevin: If you add in the Preferred shares there’re about 75M outstanding right now. If you add in ALL of the Preferred that’ll add in another 2M I believe to the number. If you also include stock options…depending on what’s in the money 2 to 8M depending on what’s in the money at the time.
Quincy L: So you haven’t done the treasury stock where you’d d….you know..do..
Kevin: No because that would be antidilutive in our case.
QL: So is there 8M options total outstanding?
Kevin: Uhmm…I don’t have that number right in front of me but it will be in the Q when we file it this week.
QL: So you can’t tell me 8.5M or something like that?
Kevin: Yeah.
Charles S at Cybertech Research: May I go back to operating expenses for a moment? I’m a little unclear. It seems to me that the marketing expenses will continue to grow perhaps at revenue, perhaps at a rate greater than revenue, but everything else should be reasonable well fixed…research…G&A…depreciation should probably go down…or stay as it is over the current quarter. Is that a good view of what will happen to operating expenses over the next 4 or 5 quarters:
Kevin: Yeah..I think as you look at it depreciation will begin to go down as facilities continue to wind down and we don’t have those on our books any more. R&D will stabilize…there was a bit of an uptick this past quarter because of development of the new U-Charge product and things, but those should stabilize as we work into the next fiscal year. Marketing dollars could have a tendency to go up with revenue; we continue to look at that. You can tell we haven’t spent a lot of money on marketing to date and the U-Charge product isn’t going to be one of those commercial, consumer marketable-type products so…we don’t have to do too much there..and overall G&A..yeah..we should be able to stay pretty stable..
Paul W at Sellingman (last question): Can you tell us when you expect to get to positive cash flow?
Kevin: Well…the timing of that…the basis of that…is that it will come when we have licensing and the full product portfolio working for us; and that will more than likely be in the 2nd half of this year. Licensing opportunities could, however, come sooner than that….that is why we are hopeful it will occur in the upcoming fiscal year…but it’s very difficult to pin-point a date….but with the cylindrical activity we have going on, and the people who are looking at it..we feel good we really have the opportunity to make this happen this year.
Paul W: Could you touch on the headcount of the company and how it’s changed as you’ve closed down these manufacturing facilities, and where it’s going to?
SG: The head count has been cut by half, roughly, and we don’t expect it to grow any further…and again…if you think about our model everything should indicate to you we are targeting…or going for…a leverage model which by definition means we’re going to try to continue to reduce internal resources of the company. Head count’s a bit north of 100 right now.
(He then basically summarized, thanked everyone and closed the call…)
***********
My apologies in advance for any typo's, mis-statements or errors of fact, etc. I ask that you consider the skills of the typist. ;-) I will say this...man they were a chatty bunch this time 'round...more later...time for some dinner here.
John~ |
