Question-and-Answer Session

 

Operator

 

Certainly. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question for today is from Eric Stine with Craig-Hallum.

 

Eric Stine

 

Hi, Raj and John. Good morning.

 

John Gibson

 

Hey, Eric.

 

Rajshekar DasGupta

 

Good morning.

 

Eric Stine

 

Hey. So maybe just starting on gross margins, 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

 

Yeah. 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 threw (ph) off the margins we -- 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 DasGupta

 

Yeah. 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

 

No. That’s great. 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

 

Yeah. 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 with our control and a lot of times it's out with 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 told otherwise.

 

Eric Stine

 

Okay. Maybe last one from me. Just good development there with Sumitomo. Just curious, I mean, obviously, spreading out to other applications, you've mentioned the one main OEM -- Japanese OEM, that you've been selected by, but now talking about others. Maybe you could just talk about those others, what those other applications are, how potentially big those applications are, and other details.

 

Rajshekar DasGupta

 

Yeah. Great question, Eric. So, yeah, the first Japanese OEM that we signed up with Sumitomo is in the construction space. There are -- there's at least one other player also in the construction place which we're in discussions with. However the -- another big opportunity we see that we're working on jointly with Sumitomo is in the mining sector. And the mining sector has a lot of commonality with the material handling business that we're very familiar with.

 

Essentially, these are vehicles very sensitive to downtime. They operate 23 hours a day. They are looking for the very best electrification in the market, and that's what we can serve with our product line. So that's one very good target market we're looking at and we're tackling that jointly with Sumitomo.

 

Eric Stine

 

All right. Thank you.

 

Operator

 

Your next question is from Craig Irwin with ROTH Capital Markets.

 

Craig Irwin

 

Good morning. 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 3 times the typical life of competing product?

 

Rajshekar DasGupta

 

Yeah. 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 (ph) of the -- of this 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

 

Yeah. 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 DasGupta

 

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 four (ph) 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, this is 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 -- which we 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, as 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 product -- prepare to launch products for these -- 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, in the long-term, a good opportunity for providing high-performance, high-rate batteries for hybrid long distance trucking.

 

Craig Irwin

 

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 DasGupta

 

Yeah. 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 are 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 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 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

 

Excellent. 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

 

I don't think -- it's John here. I don't think you're going to see a significant increase through the last two quarters of the year. What we -- we're trying to keep our overheads down, we're trying to keep our costs down, we're trying to be as efficient as possible to push as much profit to the bottom line. It's -- we're not in a position and we don't want to be in a position where we're fruitlessly incurring cost for no reason. So we're being very strategic with what we do. Keeping as lean as possible while also being efficient and hitting your targets and managing everyone's expectations as a company.

 

Craig Irwin

 

Great. Well, congratulations on the progress. I’ll hop back in the queue. Thank you.

 

John Gibson

 

Thanks.

 

Operator

 

Your next question for today is from Amit Dayal with H.C. Wainwright.

 

Amit Dayal

 

Thank you and good morning, everyone. 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

 

Yeah, Amit. We have some pricing improvements will be hitting the later half of the year and into fiscal 2025. But I think the most important thing we've done is we've 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 cost 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 making sure 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 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 to kind of solidify our ability to maintain margins and go from there.

 

Amit Dayal

 

Thank you, John. Appreciate that. 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

 

Absolutely. So we are -- the way we're kind of operating right now is for fiscal '25, we don't need Jamestown to increase our revenue output. We're only running one shift here in Ontario, we can increase that. So we really can get up to our total capacity here for 2025 without the need for Jamestown. In terms of what you mentioned with Jamestown becoming operational in 2026, we are still planning on having it open essentially and go live mid-2025.

 

But what we really want to say is that that process isn't required for any revenue targets that we set for 2025. Everything can come out of Mississauga. So we want to make sure we've got Jamestown up and running so that when capacity does increase, it's ready to go. But from a revenue perspective, everything will come out of Canada.

 

Amit Dayal

 

Understood. That’s very helpful. Thank you. Yeah. Good to hear that. 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 DasGupta

 

Yeah. 2025, as we’ve said all along, is still going to be dominated by material handling revenue. That said, there is a growing amount of other verticals in there, which are mostly will still be at the seed stage. Some of them moving into higher rates of production. For instance, the construction OEM I mentioned earlier in the call, we’re already seeding – we’re already shipping them sort of well, pre-production battery parts, and then it goes into mass production by 2026. So a lot of these programs will scale 2026 onwards.

 

Amit Dayal

 

Okay. Understood. That’s all I have, guys. Thank you so much.

 

Operator

 

Your next question is from Graham Price with Raymond James.

 

Graham Price

 

Hi. good morning. Thanks for taking the question. I saw that you provided a little teaser for the Analyst Day, an update on the solid-state battery development. Just wondering, obviously I'm sure you'll save the details for the Analyst Day, but just what topics we should expect to be discussed and kind of frame -- what kind of details will be provided that day?

 

Rajshekar DasGupta

 

Yeah. So as a solid-state battery, we've been very quiet about it for quite a period. About a year ago, we took a different -- we changed some things in our research and development direction. Those changes have led to some positive outcomes. And one of the things we did was we started to make a proprietary ceramic ionically conducting material. And it's getting -- the idea was to make this in-house so that you could make the ceramic separator in-house at a better cost and more control.

 

And using third-party materials, what we found is the material that we're making in-house is significantly better than anything we can purchase. The separator is looking good. We've started actively reaching out to potential partners again after that hiatus. In fact, yesterday, we had a call with a major car company. And so we'll go over more details at the Battery Technology Day, but I'm pleased to see the progress that the team has made at Electrovaya Labs.

 

Graham Price

 

Got it. Great. Certainly, looking forward to that. For my follow-up, maybe related to some of the gross margin questions, we've obviously seen Asian 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 DasGupta

 

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 Rate, 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

 

Graham Price

 

Got it. Understood. Thank you very much. I’ll jump aback in the queue.

 

Operator

 

Your next question for today is from Orin Hirschman with AIGH Investment Partners.

 

Orin Hirschman

 

Hi. Good morning. How are you? Yes. Thank you. 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 DasGupta

 

So we've been -- we are working with two bus OEMs. Now, we were hopeful -- we wanted to get into immediate production with them. And we are instead in an R&D program for their next generation vehicles, which is a good thing. I mean, it sets us up for volumes. It's just those volumes will be later than we had initially hoped. That said, the bus segment overall is not as great a vertical as we had envisioned just one year or two years ago. If you look at the market, you'll see a number of OEMs who are actually dropping out of the market entirely. There have been three in the last 12 months or so.

 

And on the startup side, they're generally all very shaky. And part of the reason for this is the -- it's on the demand side. The demand side, the cities aren't purchasing these electric buses unless they're having substantial subsidies to do so. It's not a natural market at this point. And while the other verticals I've mentioned, they are natural markets for our products, so it's less of -- if someone else -- if elections change, policies, things can change on a dime with regards to government procurements.

 

Orin Hirschman

 

Got it. And without stealing anything, any of the show that you want to -- I mean, last question kind of set a little bit of line in some of the progress in the solid state. There were two programs. One was a solid-state, one was liquid-solid. Are we talking -- which program are we talking about? Are we talking about both? Have you decided to focus on one?

 

Rajshekar DasGupta

 

It's a -- it would be a solid-state battery. It's got a ceramic ionically conducting separator. Of course, there potentially are some, what you define as a liquid can be a little bit vague, but there is a catholyte in there that we have developed as well. Probably very similar approach to what you would see from other groups like QuantumScape who have something probably in a similar direction.

 

Orin Hirschman

 

Just again, without stealing the thunder, the last update, the cycles -- charge to source cycles, was so far away from a commercial product. Again, that update was a while ago, was a long while ago. Are you implying -- again, without saying anything, say, right now, are you implying that we've seen significant progress because of some of the changes you've made in things like the ceramic doing it yourself?

 

Rajshekar DasGupta

 

Yeah. We've seen improvements. I mean, we were hitting a bit of a wall in the previous approach. And we have reapproached this with -- I'm getting into too much technical detail, but we -- I've seen -- the results haven't gotten far enough to confirm whether we've reached the cycle life targets, but definitely it's -- and that's just because of the timing thing. We've -- these new cells are relatively new. But I'm optimistic they will have the right performance.

 

Orin Hirschman

 

Okay. Great. Thank you.

 

Operator

 

We have reached the end of the question-and-answer session, and now I'll turn the call over to Raj for closing remarks.

 

Rajshekar DasGupta

 

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

 

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