Maxwell Technologies, Inc. Q4 2008 Earnings Call Transcript

| About: Maxwell Technologies, (MXWL)

Maxwell Technologies, Inc. (NASDAQ:MXWL)

Q4 2008 Earnings Call

February 19, 2009 5:00 pm ET

Executives

Mike Sund – Vice President of Investor Relations

David Schramm – President and CEO

Tim Hart –Chief Financial Officer

Analysts

Craig Irwin – Merriman Curhan Ford

Theodore Kundtz – Needham and Company, LLC

Richard Baxter – Ardour Capital Investments LLC

Mark Tobin - Roth Capital Partners LLC

Michael Horwitz – Stanford Group

Pretesh Munshin - Piper Jaffray

Steve Sanders – Stephens, Inc.

William Gibson – Nollenberger Capital Partners, Inc.

Bryce Dillie - JMP Securities

Operator

Good day, everyone, and welcome to today’s program entitled Maxwell Technologies financial results conference call. Later you will have the opportunity to ask questions during the question and answer session. (Operator Instructions)

It is now my pleasure to turn the call over to Mr. Mike Sund.

Mike Sund

Good afternoon. In a moment you’ll hear from David Schramm, Maxwell’s President and CEO, and Tim Hart, our Chief Financial Officer. Before we begin, I need to advise you that the following discussion will include forward-looking statements that are based on management's current expectations and assumptions which are subject to numerous risks and uncertainties. Actual results could differ materially because of factors such as our history of losses and uncertainty about our ability to achieve profitability or to obtain sufficient capital to continue operating successfully.

Another risk factor would be disruption of financial markets and reduced credit availability, development and acceptance of products based on new technologies, demand for original equipment manufacturers’ products reaching anticipated levels, general economic conditions in the markets served by our products, cost effective manufacturing of new products and the success of outsourced manufacturing, the impact of competitive products and pricing, risks and uncertainties involved in foreign operations, including the impact of currency fluctuations, and product liability or warranty claims in excess of our reserves.

For further information regarding risks and uncertainties associated with Maxwell's business, please refer to the management's discussion and analysis of financial condition and results of operations and risk factor sections of our SEC filings, including our most recent Form 10-Q and our annual report on Form 10-K.

Electronic copies of those filings may be accessed by visiting our investors section of our website at www.maxwell.com and hard copies may be obtained by contacting the company by e-mail or telephone. Some of you are listening to this call via the internet and an archived replay of the call will be available at our website.

All information in today's call is as of February 19th, 2009. The company undertakes no duty to update our forward-looking statements to conform the statements to actual results or changes in the company's expectations.

It is now my pleasure to introduce David Schramm, Maxwell’s President and CEO.

David Schramm

Thank you, Mike. Good afternoon, everybody. I am pleased to report that Maxwell’s total revenue of $23.5 million for the fourth quarter ending December 31 gave us a seventh consecutive quarter of sequential top line growth.

As stated on our press release, this growth continued to come from all three of Maxwell’s product lines, each of which posted double digit year-over-year sales growth. So even as consumer spending fell of a cliff in Q4, in many other industries it was hit hard. Key markets for our products such as utility infrastructure, renewable energy, public transportation, and space programs, have been relatively stable.

Signals from Washington and other capitals around the world indicate that some of our key end markets appear likely to benefit from government stimulus programs. Looking back at Q4, BOOSTCAP ultracapacitor revenue came in at $9 million, establishing a new quarterly record for the third consecutive quarter.

This growth was driven mainly by new orders for energy storage solutions for wind turbine blade bit systems and braking energy recuperations systems for hybrid and electric transit buses and electric rail vehicles, along with the miscellany of backup power, wireless communications, and other applications, whereas in 2007, we had one wind turbine customer, InterCon, located in Germany. We now have several, thanks to the license we purchased from InterCon to their patent covering the use of ultracapacitors in turbines.

We continue to actively pursue additional wind energy customers. We expect wind energy to be a major contributor to ultracapacitor sales again this year. In this application, ultracapacitors help to increase the consistency and efficiency of wind turbine output and ensure orderly shutdown in the event of high winds that could damage these large, expensive systems.

Global demand for low emission hybrid and electric public transit vehicles and more energy efficient electric rail systems also continue to contribute to ultracapacitor sales growth in Q4. We’re working with both existing and new customers on additional programs that we expect to go into production in coming quarters.

We have announced supply relationships with leading heavy vehicle OEMs and hybrid and electric drive train integrators in North America, Europe, and Asia and we expect to announce additional heavy transportation customers this year.

The European Union has taken the lead in legislation that requires carbon dioxide emission reduction targets and leveling penalties for vehicles whose emissions exceed mandated thresholds. The Obama administration has signaled its intention to increase Federal investments in greener transportation technologies and the Chinese government is funding development and production of hybrid and electric public transit vehicles to address severe urban air quality problems there.

The ultracapacitor’s efficiency in absorbing braking energy, their ability to operate reliably and safely in extreme temperatures, and their life of the vehicle durability are enabling our BOOSTCAP products to serve as a standalone energy storage solution in many heavy vehicle drive systems or to complement the batteries of others.

Those same attributes have also opened up opportunities in lifting applications such as with cranes used to handle cargo in port facilities and hybrid and fuel cell powered lift trucks. Here again, ultracapacitor based systems capture and store energy from braking that otherwise would be dissipated as friction and heat and that stored energy is re-used to reduce the amount of fuel required for lifting, thereby reducing carbon emissions.

The EU carbon dioxide emission reduction legislation I mentioned mandates that 65% of new cars produced in Europe must emit no more than 120 grams of carbon dioxide per kilometer by 2012 and that threshold is set to ratchet down to 95 grams per kilometer by 2020. With many cars currently emitting as much as 200 grams per kilometer, even in this current environment, the European automakers are preparing to produce and launch micro and mild hybrid vehicles that include stop-start systems which turn off the internal combustion engine as the car slows and don’t restart the engine until the driver touches the accelerator.

That repetitive cycling has proven to be very hard on batteries in early start-stop models, so several automakers and the Tier One suppliers who developed these systems for them are designing ultracapacitors into next generation models that are expected to begin moving into production in the next couple of years.

Penetrating stop-start, electrical system stabilization, and other high volume automotive applications is critical to capturing an appropriate return on the significant investment Maxwell has made in ultracapacitor technology. We have announced relationships with leading auto industry players such as Continental, Valeo, [El Coa FL] and Mercedes, and there is more in the works with other automakers and Tier Ones.

As noted in our last call, qualifying Maxwell as an automotive supplier has required us to make significant front end investments well ahead of collecting any significant automotive revenue. These include our new customer service and support office in Munich to serve the European auto industry, the ISO TS certifications required of auto suppliers, and the extensive factory audits of ultracapacitor production facilities in China, the US, and Switzerland. Those TS and factory audits have generated long to do lists ranging from additional automation to increased quality management and customer support staffing.

In a few moments, I will touch briefly on our other two product lines, and comment on Maxwell’s prospects for 2009. But I’m going to break here and ask Tim Hart, our CFO, to provide more detail on Q4 financial results.

Tim Hart

Thanks, David. I’ll discuss some of the significant items from our financials for Q4 starting with a year-over-year revenue comparison, total revenue for Q4 2008 increased from Q4 2007 by about 39%. As David mentioned, this is the seventh consecutive quarter that total revenue has increased.

We see strong order activity for Q1 2009 and as we said in our press release, we are confident that revenue will come in significantly higher than Q1 2008; however, the recent volatility in the global economy makes predicting Q1 revenues challenging.

The overall gross margin percentage increased to 41% in Q4 2008 compared to 29% in Q4 2007. Sequentially gross margin percentage increased from 30% Q3 2008 to 41% in Q4 2008, primarily due to improving BOOSTCAP gross margins in Q4.

There were several non-recurring items that improved the gross margin in Q4, including $500,000 of a forfeited deposit for the purchase of some manufacturing equipment and another $500,000 of non-recurring engineering revenue. We continue to take action to further reduce our manufacturing costs for our BOOSTCAP products and expect further cost reductions in future periods.

Operating expenses for Q4 2008 as a percentage of sales were relatively flat when compared to Q4 2007. SG&A and R&D for Q4 2008 were both relatively flat as a percentage of sales when compared to 2007. We expect operating expenses in Q1 2009 to be less than those in Q4 2008 operating expense levels.

The company is working hard to manage and control all operating costs but actions required for Maxwell to qualify as an automotive supplier have generated significant expenses. Some of this increased spending relates to the requirements of our prospective automotive customers for automation and other process enhancements for BOOSTCAP products based on their factory audits at our offshore assembly facilities. Other CapEx expenditures were required to increase capacity and through put for our high voltage capacitor products which are generating record volume.

As we drive to achieve profitability, we will continue to review all operating costs to make sure we operate as effectively and efficiently as possible. The Q4 2008 net loss from operations of $1.2 million was significantly improved compared to the $2.6 million loss in Q4 2007. As we prepare for future automotive orders, we will continue to invest in research and development and other marketing activities.

We continue to put the infrastructure in place now to allow us to secure significant automotive business in the future. This means we are incurring the costs now for this infrastructure and will not receive the benefits until the business is obtained and products are delivered to customers.

Inventories decreased by $500,000 from Q3 2008 to Q4 2008 primarily from increased customer demand for BOOSTCAP products. Fixed assets increased $900,000 from Q3 2008 to Q4 2008 primarily due to the purchase of key BOOSTCAP production equipment to increase the capacity or improve the efficiency of the manufacturing process.

Capital expenditures in 2008 were $7.1 million and we expect CapEx in 2009 to be less. We consumed about $1 million of cash during Q4 2008 well below our net burn rate in earlier periods. Our cash, investments, and restricted cash totaled $20.6 million at December 31, 2008.

As we announced in our last call, we launched an equity distribution program during Q3 2008. This program allows Maxwell to offer to sell shares of our common stock from time to time at opportunistic prices. Through this program we raised net cash of $1.9 million during Q4.

As reported in our filings, we have made principal payments on convertible debt in stock, [floor] stock, and cash in each of the pas four quarters and we can elect to use either cash or stock or cash and stock again in Q1 2009.

The outstanding balance on that note which was originally $25 million now stands at $14 million. Cash usage will be impacted by our results from operations in the time of certain capital expenditures as well.

Obviously, the current global economic conditions are highly volatile and will effect the terms and conditions of any capital raise but as we have demonstrated in the past two quarters, we believe we will continue to have the ability to raise sufficient capital to fund operations of the company. These are exciting times for Maxwell as we drive to achieve profitability. We will also strive towards cash neutrality and then to be a net cash generator.

David Schramm

Thanks, Tim. Obviously we are very encouraged by the seventh consecutive quarter of top line growth, particularly in view of what’s happening in the global economy. In this environment we’re going to guide one quarter at a time. As noted in our release today, Q1 ‘09 revenue is on pace to come in well above Q1 ’08, so we are off to a good start in the new year.

We’ve talked mainly about ultracapacitors so let’s spend a couple of minutes on Maxwell’s other products. Our high-tension products consist mainly of grading and coupling capacitors and capacitive voltage dividers, large, high voltage capacitors that are used in the electric utility grid and other applications involving the transport, distribution, and measurement of high voltage electrical energy.

Although the name suggests some relationships to our ultracapacitor products, the high-tension technology and materials, the know-how involved in making them, and the applications in which they are used are quite different. Our high-tension customers are the large prime contractors who built power plants and electric utility infrastructure. Our products enjoy a dominant position in a well-defined niche and our sales trend with spending on utility grids around the world.

New electrical energy generation capacity and grid expansion to meet the growing power needs of China and other developing countries that are industrializing and raising their standard of living continue to be major drivers for high tension product sales which established another record in 2008.

Investment in the North American grid has slowed since deregulation reshaped the industry a few years ago. That underinvestment can’t go on forever and we believe it represents pent up future demand. The new administration has indicated that modernizing the US grid will be a focus of its stimulus package and Federal energy policy going forward which bodes well for Maxwell over the longer term.

Sales of our microelectronics products also have been growing steadily and that growth could accelerate over the next couple of years as the signal board computer product we introduced in 2005 gains traction. Our customers are the large satellite and spacecraft OEMs in the US and Europe and our sales track with the number of satellite and spacecraft launches each year. That means that microelectronics revenue is program driven and can vary quite a bit quarter to quarter.

Our goal is to increase the volume and value of Maxwell content per launch and he high value single board computer product has been a huge factor in our recent success. In addition to driving growth, high profile wins such as with Northrup Drummond for the next generation US weather satellite program and with Astrium in Europe for the European space agencies’ guy at science mission are attracting attention across the industry and creating new and larger signal board computer opportunities.

Now let’s take a look at the big picture. Particularly in today’s environment, we are asked about Maxwell’s path to profitability. As Tim told you, Q4 demonstrated further progress in that direction. Efficiency and cost reduction initiatives such as moving assembly of our larges selling D cell product to China are on track and will enable us to continue to improve operating performance, but our crystal ball isn’t any better than yours in terms of predicting how worldwide economic problems will affect our customers and their plans for the balance of the year.

In the nearly two years since I joined Maxwell, my mantra has been profitable growth. As many of you know, in years past, the company entered into strategic which means below cost supply agreements with customers that management believed would become market leaders. Those supply agreements were seen as investments in market creation at the time, but we are now focused on other investments such as capacity expansion, product development, and qualifying as an automotive supplier.

We have our sales organization focusing on market verticals where ultracapacitors value proposition allows us to generate appropriate margins. Operationally we continue to focus on cost reduction through design enhancement and moving material sourcing and ultracapacitor cell and modular assembly to low cost countries. But to be clear, we are keeping fabrication of our proprietary electromaterial property inside Maxwell and outsourcing only the cell and module assembly.

With volumes increasing, we have improved logistics and planning and are taking advantage of low cost ocean freight to get our products from where they are assembled in Asia to our customers elsewhere around the world. As a result of those actions, overall ultracapacitor gross margin, although still negative, improved significantly in 2008 and that trend will continue in 2009 if market conditions remain stable.

To predict that our sales will be unaffected by global economic conditions would be counterintuitive, but some macro factors appear to be working in our favor. While some seem to think that lower oil prices might work against us, the fact is that the demand for greener, more efficient, and reliable energy storage solutions continues to create opportunities for ultracapacitors.

As mentioned earlier, in Europe, where gas prices have been high for many years, it is carbon emissions, not oil prices, that are driving innovation and resulting opportunities for the ultracapacitors. Others worry that the problems facing the US auto industry threaten Maxwell’s growth prospects. The fact is, virtually all of our current automotive activity and the only programs we expect to launch within the next two years are with European automakers and Tier Ones.

The new administration has identified renewable energy generation as in wind and solar and energy storage technologies to power low emission, energy efficient, hybrid and electric transit vehicle automotive drive systems as funding priorities. We are currently in contact with identified funding sources in Washington and are now preparing technology and product dvelopment funding proposals that will be formalized within the next few weeks.

Through our announced relationships with the Johnson Controls-Saft lithium ion battery joint venture, and with Lishen battery in China, and some as yet announced activities with others, we continue to pursue application of our proprietary dry electrode fabrication process in battery production.

It’s a green solvent-free process that has demonstrated potential both to reduce manufacturing costs and improve battery performance and operating lifetime. Development and testing programs with the Argon Natiaonl Laboratory and the National Renewable Energy Laboratory continue to produce data demonstrating the synergy between batteries and ultracapacitors in integrated energy storage solutions. These solutions take advantage of loose [capsability] to perform over a wide temperature range for millions of charge and discharge cycles extending battery life and allowing the battery to become smaller and lighter.

This work with battery manufacturers and national labs and internal programs to continuously improve our own technologies and products has required significant research and dvelopment, so obtaining some development funding would be very beneficial.

So in conclusion, we’re working on several fronts to create new opportunities and to continue executing our business plan. We appreciate your interest and your support and I’d now entertain your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Craig Irwin with Merriman.

Craig Irwin – Merriman Curhan Ford

My first question is really the upside on the ultracaps. You’re about 1.5 million ahead of what I was looking for and obviously something really went well for you in the quarter. Can you speak a little bit about sort of how things came through and whether or not this was ahead of what you were expecting when you started the fourth quarter?

David Schramm

Craig, I always run the risk of trying to hit the analyst forecasts for revenue against what I think I’m going to do, but to comment on that, we’re just getting better gaining in the market acceptance of the product itself. As I’ve stated in the past, we don’t have enough competition out there helping us educate the market as to what an ultracap can do, but some of our education is starting to pay off and I think the license to the windmill patent has helped us significantly, as well as the transit bus getting penetration with us, [le keepay] and then with Golden Dragon, so we’re seeing a lot of traction there.

We’re also seeing a lot of traction with new applications in the cranes and things like that. So it’s not one event that actually happened to help that growth. The other thing, frankly, that helped the growth a lot is that we are getting ourselves out of strategic pricing and again we all know what that means, and we’re taking profitable growth, so as those old contracts come off the table and we can replace them with profitable growth, that’s at a fair market value, then of course our upside goes up and the bottom line gets better.

Craig Irwin – Merriman Curhan Ford

I was hoping you could frame out for us a little bit more about your success in the wind market. Could you maybe discuss the number of customers, the breadth of potential design wins there, and maybe speak at LTI potentially the same size or bigger than InterCon yet.

David Schramm

The difference with LTI is they only make pitch control systems and so they’re working with windmill manufacturers whereas InterCon builds the whole thing. I visited InterCon in November and they gave me a lifetime opportunity to climb to the top of one of these windmills to see my BOOSTCAPS in action and I can now check that off as something I don’t have to do again, but it’s quite a ways up there. But again, LTI is selling pitch control systems using a little different configuration than what InterCon uses but that was revenue that we did not have access to without the license to the patent.

Craig Irwin – Merriman Curhan Ford

I was hoping you could walk us through the financial implications of Maxwell offshoring diesel ultracap manufacturing, really what this means for margins, also what the radial to AP seal transition really means and how you see this unfolding over the next couple quarters.

David Schramm

Let me take it from design first. The AP seal to radial, the AP seal basically is the D cell, looks like a flashlight battery, and the positive and negative would be just like a flashlight battery, one on each end of the access. The customers have requested that we change that design to radial to where the positive and the negative would both be on the same end and the reason they want to do this is as they plug this into a circuit board, it saves them one circuit board, so the customer sees some cost reduction now they’re doing this.

We took advantage of the fact that we had to make the change fro axial to radial as also a way to implement some cost reduction so we’ve redesigned the interfaces, we’ve made the D cell more robust, and we’ve also tried to take out as much variability as we can. The goal is to get this down to under single digit PPM from a quality perspective. Costwise, the costs in Switzerland are very similar to those in Southern California. So there’s definitely a cost reason as to why we’re moving the assembly to China, and again it’s going to with the Lishen battery company, they have built over 200 million lithium ions a year, so they’ve got a lot of good history, they’ve got a lot of technology on how to do this and it does bring that product to where it should have the capability to make very acceptable margins for us.

Craig Irwin – Merriman Curhan Ford

I guess that’s a good segue onto my last question. Pretty dramatic margin improvement, even if we back out the $1 million in one time items that Tim mentioned, 30% to 37% sequentially, I mean that’s pretty amazing. You mentioned the pricing changes, rolling off contracts, and really pricing them up so they’re profitable. Can you give us a little color on whether or not you see this as sustainable over the next couple of quarters? Should we possibly be looking for maybe a little bit of a downtick as we head into the first quarter or is this something that really we should just see continued improvement upon?

David Schramm

Craig it’s really driven by volume. As I can dilute my overhead costs, that helps my margin significantly. But one thing that I have to give a lot of credit to, the purchasing and material folks have done an outstanding job here at Maxwell getting us cost reductions we have to have. Couple that with what the design engineers have done to design a product that’s more robust, that actually takes material out. For instance if we can take out parts that were machined and replace them with parts that are stamped, you take out significant amount of money, and all of that goes right to that gross margin line. So it’s not just one thing that does it, but if I could pick one thing, it would be the volume.

Operator

Your next question comes from Theodore Kundtz with Needham.

Theodore Kundtz – Needham and Company, LLC

Just going back to the gross margin issue. Was the entire improvement in gross margins due to the ultracap side of the business?

Tim Hart

No. We also had because of product mix in macroelectronics as well as high tension, those margins were higher than previous quarters as well.

Theodore Kundtz – Needham and Company, LLC

They had been, okay.

Tim Hart

[Inaudible] during the fourth quarter.

Theodore Kundtz – Needham and Company, LLC

What caused the increase in their margins?

Tim Hart

Again it was product mix. We don’t have… there are some products that have higher margins than others –

Theodore Kundtz – Needham and Company, LLC

Within those segments.

Tim Hart

That’s correct.

Theodore Kundtz – Needham and Company, LLC

Okay. Was there any FX in the quarter, any currency impact in the quarter, Tim?

Tim Hart

There was some and as you may or may not know, the FX seems to be a pendulum that swings back and forth over the last six months in both directions, so it can help us and hurt us, depending on which way it’s going in each quarter.

Theodore Kundtz – Needham and Company, LLC

What did it do in Q4?

Tim Hart

Q4 on the gross margin, I don’t have that specific number what it did. That did have some positive impact but I don’t know what that is off the top of my head. I will have that for you at a later time if you’d like.

Theodore Kundtz – Needham and Company, LLC

Yes, it kind of goes back to the question of do you see continued improvement in gross margins from these levels, taking the 36.5% as the gross margin in the quarter ex those one time items.

Tim Hart

There were some other things David mentioned as well. We also had some freight improvements and there’s also a price increase a year ago that is fully implemented now on BOOSTCAP products and so that helps as well when you look at year to year.

David Schramm

One thing that… and again where the volume comes in to help that significantly, you need volume to put your product on the ocean because the tradeoff is, I have to add inventory because the boat goes a little slower than an airplane, but the cost is substantially less. So the inbound freight of getting the electrode from here to our assembly sites went down significantly and then how the customer gets the product from us, that also has a nice impact, so freight had a nice positive impact for gross margin.

Theodore Kundtz – Needham and Company, LLC

I think you had talked earlier about repricing the InterCon contract in Q1?

David Schramm

I don’t believe so. Not repricing. That contract is set. That contract is designated in pieces and based on their going rates sometime in ’09 we will have completed that contract and then InterCon will be one of our first customers to cut over to the radial D-cell.

Theodore Kundtz – Needham and Company, LLC

Can you go back to what you think you could do in wind this year? Is it just in terms of orders of magnitude over ’08?

David Schramm

The only thing I could comment on is read the same things, and I’m sure you aren’t reading what I’m reading, but the Chinese have got a very large forecast out as to how many windmills they’re going to build. President Obama has sort of hinted we’re going to have renewable energy, we’re going to have wind, so windmills roughly two-thirds of them have electric pitch control systems and we have I believe the only license from InterCon to apply ultracaps for electric pitch controls, so I think we’re positioned really well. Now it’s going to be a question of how fast does the $787 billion hit people that want to finance wind farms that need to buy pitch systems that need to buy BOOSTCAPS?

Theodore Kundtz – Needham and Company, LLC

So it’s hard for you to tell at this point how fast that’s going to affect your business this year.

David Schramm

It is because I want to stick with the mantra. I want to under promise and over execute and I can’t promise you how many windmills because I just don’t know what they’re going to do yet. All I can tell you is I think directionally the number is going to go up, not down based on what I see in the market.

Theodore Kundtz – Needham and Company, LLC

Can you talk a little more detail about the order trends you’ve seen so for this year?

David Schramm

The order trends… again there’s a lot being played with the stimulus package as to what we’re going to do for green. I think the biggest trend that’s probably got the most significant impact is that the European Union even though they’re automobile industry is also in pain and agony, they have dug their heels in on this grams of carbon dioxide per kilometer. There’s a German website that I’ve gone to and it talks about what the charge is going to be and it’s pretty significant. But they’re going to charge the car makers so many euros per gram of carbon dioxide that they’re over the limit by year and then they step through that they have to have 65% of the cards by 2012 and then it goes up 70, 75, and finally by 2020, they have to get down to the 95 grams and it’s got to be 100% of the fleet and the wrap there is that the car maker has to pay so it would be equivalent today to what we see as a gas guzzler tax and then as we understand it, the consumer would have to pay with higher license fees. So I think that drives the start-stop systems that are almost independent of what’s going to happen here in he economy. They won’t make as many cars but the ones they are making will have to have something to address the carbon dioxide.

Theodore Kundtz – Needham and Company, LLC

Can you tell us what your automotive revenues were in ’08?

David Schramm

Pretty close to zero.

Theodore Kundtz – Needham and Company, LLC

So they’re still just prototyping type thing and onesies and twosies types of things.

David Schramm

Yes, it’s still into the… We’re on track because again, the automobile industry, it takes three or four years once you start to design something and we’re just coming to the end of that, the end of this year and early next year is when things really take off and run.

Theodore Kundtz – Needham and Company, LLC

So you would expect some production orders in ’09 of this year?

David Schramm

It would be very late at the best because again, the automobiles are slowing down a bit. The C02 legislation is going to force them to do something, so now it’s a question of how fast.

Theodore Kundtz – Needham and Company, LLC

Could you answer the same question on the heavy duty transportation, the truck and bus market?

David Schramm

I think that’s a little different because most of the buses that are purchased are purchased with government funding. So my sense is that that may get funding a lot quicker than the car guys do.

Theodore Kundtz – Needham and Company, LLC

Could you tell us what percent of revenues of the BOOSTCAP revenues the truck and bus sector was?

David Schramm

Not really. I don’t have it off the top of my head and I don’t know if we’ve broken that down because a 3000 [ferret] sell looks the same to me whether I put it I a truck, a bus, or any other application. I don’t know Tim if you had any visibility on that.

Tim Hart

I don’t have any.

Theodore Kundtz – Needham and Company, LLC

But again you think this ’09 will be a very kind of a rapid growth year for you in this sector, or steady growth, how would you characterize the growth prospects for that market?

David Schramm

I never look backwards. I always try to look forwards. I’m pretty optimistic. Again, if anybody can help me with what’s gong to happen in this global economy, I look over my shoulder every day I walk into Maxwell because we had a good quarter in Q4 and I keep wondering what impacts are going to hit us and frankly all I see right now relative to government funding here, in Europe, and in China is that they’ve all got positive signs for us, but I really had a hard time quantifying it. But frankly I don’t see a lot of negative right now but we’ve got to keep our eyes open.

Operator

Your next question comes from Richard Baxter with Ardour Capital.

Richard Baxter – Ardour Capital Investments LLC

Maybe a little more detail on how you might benefit from the new Chinese government rebate program for hybrid buses? They have a target out for ’09?

David Schramm

We’ve got an announced relationship with Golden Dragon. They’re one of the largest bus manufacturers in China and what they’re doing is they’re using our ultracapacitors in a module form for regenerative braking and again the numbers we have from others in that industry is that is a 25% improvement in fuel efficiency and about a 90% reduction in emissions and again if you’ve been to China, they need a lot of help in reducing emissions. So the only thing I get cautious about is the experience I’ve had in China is you get very, very large estimates that could or could not happen. It’s hard to put a confidence factor on them.

Operator

Your next question comes from Mark Tobin with Roth Capital.

Mark Tobin - Roth Capital Partners LLC

Real quick housekeeping, what was the stock comp for the quarter?

Tim Hart

I had that number in front of me yesterday and I didn’t bring it into the room with me. I’ll have to get back to you on that one, I apologize.

Mark Tobin - Roth Capital Partners LLC

David, as far as the guidance goes, it’s directional relative to a year ago. Can you provide any commentary on the sequential growth and then also what’s driving the variability, what segments are more difficult to predict?

David Schramm

The one that’s been always hard for us to predict is our microelectronics. That’s a very lumpy business because it’s program driven. The high tension business tends to be a little more stable because we’re dealing with basically ABB and Sieman’s on big power plants and those move… they’re pretty predictable, if you will.

The ultracap as I said I think a lot of it is market acceptance of the technology and we’re just getting some what I feel very comfortable with is some good traction on accepting the product as to what it can do. Some of the things that have helped us a lot in this last quarter is a report put out by the Argo National Labs that suggest that an ultracap can make a lithium ion battery live 30% longer. That’s the kind of advertising that we need.

Mark Tobin - Roth Capital Partners LLC

But as far as drilling down to the ultracap segment, are you in a position where you can provide directional guidance just within that segment, is that up or down from Q 4?

David Schramm

It’s up from Q1 of ’07, that I’m comfortable with, but I really don’t… I just can’t tell at this point. Frankly, we don’t break out by products as to which is going to go where. I can only do it basically on --

Tim Hart

Historically Q1 has typically been down a little bit and certainly last year or in 2008 we did bump that trend but historically Q1 [inaudible] but not always. Q1 is shaping up nicely right now though relative to Q1 of last year.

Mark Tobin - Roth Capital Partners LLC

Okay. Final question, shifting gears a little bit, I thought I remembered as far as the transition to production of the D cells to [Alesion], is that still end of first quarter, early second quarter type of timing?

David Schramm

That’s still the time frame we’re in. Again, what we’re going to do because the volumes on that can be so high, I am going to make sure that we have got that down in the single digit PPM before we ship any product, so we’re going to go through some exhaustive testing. I’ve had a couple of our VPs, [Paulie] and the ops guys, [George Criggler] and [Earl Wiggins] were over there just last week and it’s make sure that that process is capable of making perfect parts every time.

Operator

We’ll go now to Michael Horwitz – Stanford Group.

Michael Horwitz – Stanford Group

Nice quarter. I just want to be clear, because there’s a lot of conversation about these margins of sustainability. It would appear to me that as you continue to offshore products, the InterCon situation rolls off during the year, but at the same time, you’re bringing down your [cog]. You have a couple of things working in your favor to allow for sustainability of margins going forward, at least until we get to heavy automotive shipments which may be a different margin profile. Is that a fair colorization of how this might work?

David Schramm

That’s a real fair. We’ve just got to keep beating up the cost on a daily basis. We’ve got to get rid of strategic contracts as they run out, and don’t ever take another one; and get that volume.

Michael Horwitz – Stanford Group

So even some time in this year, you could have costs below this nasty pricing that you had with InterCon, and then reprice with InterCon and have expanding margins in that segment, it would seem.

David Schramm

That’s a correct statement. The first goal is to get this new radial product out at such a quality level that it drives high value. Again, the cost reduction from going from Switzerland assembly to the Lashen assembly drives an awful lot of cost.

Michael Horwitz – Stanford Group

Sticking with ultracap for a moment, dual sourcing – how is the competitive landscape looking on dual sourcing out there? It appears that the competitive landscape has eased up quite a bit over the last couple of years. So maybe how that’s working in your various segments, and then of course I imagine you’re preparing for that in the automotive segment?

David Schramm

Help me with that Michael, are you talking –

Michael Horwitz – Stanford Group

Dual sourcing by customers for ultra capacitors.

David Schramm

You know, frankly, we see that because obviously most customers want to have two sources. I mean, I would like to have two sources here – we do here. But it gets to be a volume issue, and once you get the volume you can look at it, but it really gets very design-specific.

Michael Horwitz – Stanford Group

I guess what I’m getting at, it looks like your market share is increasing, and while we probably expect dual sourcing to happen in the future, it appears you guys have a pretty big lead right now.

David Schramm

I would like to think we do. Again, the matter we’ve got here is perfect quality and perfect delivery, and that tends to buy customer allegiance faster than anything else does.

Michael Horwitz – Stanford Group

Last question about high voltage, which seems to me over the last four years, high voltage continually always has a good year, and then we expect, ‘well it’s got to fall off sometime’. But it hasn’t – and you have great market share there, as everybody knows, and the margins continue to get better. You just said a moment ago that your visibility is actually pretty good given ABB and Sieman so we can continue to see 20% grower out of that business, and then maybe we get a kiss if some stimulus helps that business?

David Schramm

Well, I’m looking for the kiss first. When you take a look at the US grid, that is one of the negatives we have in this country – how do you get wind and solar energy, because the grid is just not amenable to that. Part of the problem is when you get into Europe, they tend to have more centralized electricity control. We’ve got over 1000 power companies and nobody wants to pay for the grid. I think President Obama’s push on we’ve got to do something with the grid – that’s nothing but positive for us. The Chinese are building the grid, and that’s nothing but positive for us; and the European business I think is pretty steady.

We were making some inroads – I’ve got to keep looking at India and Russia, as well as China. It’s the developing countries where I think we’ve got the biggest opportunities, so it’s a question of when we get the funding, and when the project start.

Michael Horwitz – Stanford Group

And the US business in that segment has historically counted for what – 20% of the total high voltage business?

David Schramm

It’s about in that range, yes. It’s not been the dominant.

Michael Horwitz – Stanford Group

And then last question – might be impossible to answer. Given your payments that are required on a quarterly basis through the end of the year to your convert holder, and then your desire to go out and fund some of your R&D with the government – how are you going to be able to juggle the timing of that so you don’t have to necessarily come to market? And remind me: am I correct in saying that this is the light at the end of the tunnel, we’re basically done with this through the end of ’09?

David Schramm

Yes, that’s the way it’s written. The note comes due the end of ’09, and there’s some extended payment terms that the owner of the note can do. Our intention is to pay that off, and keep running our business. Again, as we look at ’09, the goal I’ve got is to make this a cash positive business that we sell products more than the cost to make it. It’s a novel concept, but we’re going to try to do that.

Michael Horwitz – Stanford Group

And the timing of giving government dollars, I guess you guys have been asked to submit plans to the government for some of these dollars already? You already have submitted your paperwork to the government – is that correct?

David Schramm

Yes, we’re in that process. We just had people there this week talking with the department of energy about how you do this, and what’s the scope of it. I tell you, right now, as we all know, you’re reading a paper, $787 billion, but it’s counted what are we going to do with it, and how do you spend it? We’re getting in line as fast as we can to make sure we get the right contacts, and see where we can pry the most value.

Michael Horwitz – Stanford Group

Okay, great. Nice quarter, thanks.

Operator

We’ll go next to Pretesh Munshin - Piper Jaffray.

Pretesh Munshin - Piper Jaffray

Hi David, hi Mike. Congratulations on a great quarter. Most of my questions have been answered, but just to draw on the wind and turbine subject a little bit – I’m sure you must be talking to all the guys that use hydraulics, and those that don’t use ultracapacitors. Where are you in your discussions with these folks, and what are they thinking in terms of moving to ultracapacitors?

David Schramm

That’s a good question. As InterCon owns that patent – we just acquired that license last year – so that even precluded us from talking to those people, because nobody wanted to violate the InterCon patent. There’s two things we’ve been doing. We’ve been knocking on the doors of everybody who’s got an electric pitch system today, and we are making contacts with those that use hydraulics. Of course, there’s some big ones out that that use hydraulics. That’s somewhere between 25% and 30% of the total wind market. Again, we’re having good discussions with them. We want to be in line that when they change their mind to go to hydraulic to electric, that we’ll be their first choice.

Pretesh Munshin - Piper Jaffray

I understand that you’re the only one that has licensed the InterCon – are you worried that someone else might pursue that given you’re doing so well with it? Given of course you have a great lead if someone does, but are you seeing any of that happening; are you worried about that at all?

David Schramm

I haven’t seen that, but I will tell you: we don’t have an exclusive license; it’s just a license. Could a competitor – I don’t know; they’d have to talk to InterCon about that. Right now we have the only license that I’m aware of.

Operator

Our next question is from Steve Sanders – Stephens, Inc.

Steve Sanders – Stephens, Inc.

Sticking with the high tension business for a minute, can you just talk a little bit about the level of visibility you have, and what signals you’re getting from your customers, directionally in terms of that business being able to continue grow at a decent clip at least for the start of ’09?

David Schramm

You know, the biggest thing that I think we’ve seen is do the big power plants have the funding, and if they have the funding are they going forward? I haven’t seen a lot of change in that just yet. Again, I look at the same crystal ball that everybody on the phone looks at – if that funding is not available then these programs get slowed down. I don’t think they go away. I haven’t seen that yet.

Steve Sanders – Stephens, Inc

Okay, and then in terms of the US opportunity; as this investment starts over the next, say year or so, how long before it starts to impact your business?

David Schramm

I guess that’s a good question, but I don’t know if I know the answer to that. Typically, I could take a supposition here, but typically you’ve got to get the money approved and then you’ve got to get the design. We would be a component that would go into the design of the grid change. I would daresay that says 6 month and longer window. The good news is once we get that visibility, typically that’s pretty firm. You don’t turn those projects – you don’t stop and start those very quickly.

Steve Sanders – Stephens, Inc.

Right, okay. So at this point, it’s fair to say that the drivers of the business over the past few years still feel pretty good, and the opportunity in the US is incremental starting somewhere in the 6 to 12 month time frame. Is that a fair way to look at it?

David Schramm

Yes, I think that’s a fair way, and I’ll also tell you that I think the Chinese opportunity continues to be a good one for us, because they don’t have the infrastructure in place, and so it’s a start and a new build.

Steve Sanders – Stephens, Inc.

Okay, and moving over to the ultra capacitor side, the wind, the buses, the rail systems – obviously the primary growth drivers here; not a surprise there’s been a lot of news flow there; you’ve diversified your customer based, etc. Again, talking a little bit about visibility, are you getting more comfortable that there’s a base level because of the breadth in your customer base and in your product line, of revenue and margins going into 2009? I know we’re going to get quarter to quarter lumpiness, but have we reset the floor at a $7 or $8 million number in the margins at a reasonable level? What kind of light can you shed on that?

Mike Sund

I think I’d start with I think the ultracap is becoming a little well known as a technology, and what we’ve done from our side of the fence is we have reduced the number of SKU’s and what we’re trying to do is provide customers with a custom solution using standardized components which helps my costs significantly. 9 million for Q4 is a new high mark, and a lot of the stars lined up pretty well for us in Q4. The opportunity is still there, so it’s really hard to say how much growth we can get out of that in Q1 or Q2 coming up. I think the opportunities – we keep finding them every day. Now it’s a question of how do we gather that opportunity; how do we engineer it, and how do we make sure we make our customers successful.

Steve Sanders – Stephens, Inc.

Within the ultracap segment, how much gross margin variability is there for a train customer versus a bus customer, versus a wind customer? In other words, does mix within that segment cause a big swing in margins, or are you tightening those up across the different applications?

David Schramm

What I’d tell you is in that product, there is a big variety of margins. We still have a couple of strategic customers that we’ve got to move on, and we’re trying to get to some steady state. As I’ve said in the past, I’ve got a personal goal; this is not a commodity, this is a technology that we’re in the market with, and technology should command a fair premium to the gross margin over a commodity.

Steve Sanders – Stephens, Inc.

Okay, and then Tim, just to clarify – I’m not sure I fully understood your operating expense comment. Did you say that ’09 quarterly expenses should be below Q4 ’08 levels; did you say ’09 operating expenses should be flat with ’08 levels? What was that comment?

Tim Hart

We usually tackle a quarter at a time; we said that Q1 ’09 total operating expenses would be below the Q4 2008 level of operating expenses, is the comment that we made.

Steve Sanders – Stephens, Inc.

Okay. Thanks very much.

Operator

A follow-up question from Ted Kundtz – Needham and Company, LLC.

Theodore Kundtz – Needham and Company, LLC

David, just going back to the gross margin question one more time. In ultracap, you mention you were still uncomfortable, you still had negative growth margins in that group?

David Schramm

Yes.

Theodore Kundtz – Needham and Company, LLC

And could you tell us, could you give us a road map as where you get to break even levels, and what your goals on gross margins might be in the next year or two years?

David Schramm

Well, my goal is it’s going to be this year, Ted. If you look at the ultracap, in the last year the biggest customer of pieces was InterCon. As a transition that D Cell from Switzerland to China, that changes that scenario completely. That’s really a big driver, and again my goal is that by the end of this year, we are profitable and generating cash.

Theodore Kundtz – Needham and Company, LLC

Positive growth margins – do you have a longer term target for growth margins in that sector?

David Schramm

December of ’09 looks like a long way away right now.

Theodore Kundtz – Needham and Company, LLC

No, I’m just looking at a number; a percentage of what a gross margin target would be – not whether it’s positive or negative, just assuming that you’ve got a target to have a positive number.

David Schramm

Well, I guess we’d like to see it continually improve. That’s not raising prices to customers, but that’s by improving the design; getting the volume out, and dropping the costs. We’ve got a [demarket] price, and I know that.

Theodore Kundtz – Needham and Company, LLC

Right, so it’s a combination of getting the manufacturing over in China and getting rid of the strategic contracts that you set up, and having them expire?

David Schramm

That’s correct. That’s a big driver.

Theodore Kundtz – Needham and Company, LLC

And those two things will happen by mid-year?

David Schramm

They’re going to happen some time during this year, because again some of those purchase orders are in pieces; they’re not in time. It’s when I finally shift the pieces that the contract is over.

Theodore Kundtz – Needham and Company, LLC

Okay. Thank you.

Operator

I have no further questions at this time.

David Schramm

Very good everybody; I thank you very much for your time today and I can hardly wait to talk to you again in 90 days. Thank you.

Operator

This concludes today’s conference.

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