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Axion Power International, Inc. (NASDAQ:AXPW)

Q4 2009 Earnings Call

March 30, 2010 11:00 am ET

Executives

Thomas Granville – CEO

Joe Allen – Allen & Caron Inc.

Analysts

Lyle Margolis – Fridson Investment Advisors

Marco Rodriguez – Stonegate Securities

[Paul DeMasi] – Axion Shareholder

Operator

Good day ladies and gentlemen, and welcome to the year end 2009 Axion Power International, Inc. earnings conference call. (Operator Instructions) I would now like to turn the call over to Mr. Joe Allen, of Allen & Caron; please proceed sir.

Joe Allen

Good morning everybody, and welcome to the Axion Power International investor conference call to discuss financial results for the company’s year-end 2009. I’m Joe Allen, of Allen & Caron Investor Relations.

Before we start this morning’s call, there are a couple of items I need to cover. Many of you have received a copy of the press release announcing the Axion Power year-end results. It was released this morning before the market. If you did not receive a copy of the press release and would like to have one, it is posted on Axion Power website at www.axionpower.com and in the client section of our website at www.allencaron.com.

You can also call our office in New York at 212-691-8087 and we’ll email it to you right away. It is also posted on Yahoo Finance and many other financial sites. As mentioned earlier this call is being recorded. A replay will be available shortly after the call for three months and may be accessed from North America by calling 888-286-8010 and entering pass code 87823892, international callers can dial 617-801-6888, and all of those numbers are in today’s press release as well.

This call is also being broadcast live over the internet and may be accessed via the Axion Power website or via the Thomson Reuters webcast site. A replay of the webcast will be available immediately following this call and will continue for three months.

Before we begin this call, we’d like to remind everyone of the Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Some of the statements made during this call may contain forward-looking statements. The company’s actual results may differ materially from such statements and we advise you to read the cautionary note regarding forward-looking statements in Axion Power’s most recent earnings release, and the risk factors section of the company’s Form 10-K filed this morning with the Securities and Exchange Commission.

And now I’d like to turn the call over to CEO, Thomas Granville. Good morning, Thomas.

Thomas Granville

Good morning Joe, and thank you. And good morning ladies and gentlemen. Thanks for taking the time today to listen to more of the Axion story. In 2009, it was quite a year for us. For those of you that were with us for last year’s April 10-K discussion, you will recall that we were in quite a different place, especially with regard to our cash position.

But as it turns out, April was a game changing month for us. On April 8 we signed a four-year supply agreement with Exide Technologies, that calls for Axion to first provide batteries to Exide and then PbC electrodes and then PbC electrode components in the out years of the agreement.

Exide as you may know is the second largest lead acid battery company in the world and operates in more than 80 countries. This was quite a coo for us and Exide is pleased with the agreement as well. Just two weeks later in April, the European Union announced the passage of CO2 emission standards that will require emission reductions of 20%, reduction to a fleet average of 130 grams of CO2 emissions per kilometer driven.

This after more than two years of discussion in the European Union is particularly significant to Axion because it virtually provides a made to order market for our carbon products. Our price point, our cycle life, and our ability to achieve much greater charge acceptance served to immediately open the doors of large European vehicle manufacturers.

We began serious discussions and testing with them last summer and that testing has continued to ratchet up. I wish I could share more information with you but NDAs prevent us from doing so. Suffice it to say that the micro hybrid stop start market is a very large market beginning in 2012. Compliance comes with an increased percentage up to 100% fleet average required by 2015.

The size of the market estimated by the [Valehos] and First Deutsche Bank reports take the 2013 stop start micro hybrid market at 10 million plus vehicles in Europe alone. That’s for one application in one market, micro hybrid stop start. The US won’t be far behind because 2016 goals of 35 miles per gallon will require the same levels of CO2 emission reductions.

CO2 reduction equates directly with increased miles per gallon. But hybrid vehicles were not the only good news for 2009, we completed the first phase of our supply agreement with Exide Technologies, and began shipping them product last summer. We received a grant from the Pennsylvania Energy Development Authority to be used in deployment of our proprietary PowerCube.

That award was enhanced by an additional $300,000 CFA grant awarded to us early this year that will allow us to incorporate solar storage and electric vehicle charging into the project. We also received an award in the form of an alternative fuels incentive grant from Pennsylvania. The award proceeds will be used to demonstrate the advantages of the Axion proprietary PbC battery technology in a variety of electric vehicle types including ATVs, such as the popular Toyota Prius, plug-in ATVs used in commuter delivery and other vehicles, and in EVs and in EVs converted from combustion engine operation.

Culmination of a critical equity raise took place on 12/22/2009. We were able to raise $26.2 million in this offering. This money provides funding for additional automated electrode production lines. The automated production line is a very important part of our strategy moving forward. We have engaged a large engineering and fabrication firm as the next step in improving automated electrode production.

Our prototype [initial] line, that’s in operation now in Newcastle, is being improved by this engineering and fabrication firm in two stations that will allow greater through put of this line. But we’re not stopping there. We’re engaging them to develop a whole new automated process line that we hope to replicate and add to, to meet the requirements of an application that we presented to the DOE.

We will announcing in the next couple of days important additions to our executive team. Our already well established is being enhanced with veterans of the industry. You may recall that we received a judgment award in our [Marcadess] lawsuit. In February we received the first $490,000 from one of the defendants in that lawsuit.

We have an additional $1.5 million judgment against one of the other defendants and several other defendants including a large brokerage firm are also in discussions with us. Now that one of the group has broken and admitted culpability I expect it will be easier to obtain additional settlements going forward.

If not, we will just push forward in court against the deep pockets. These are exciting times ahead for Axion. We once again thank you for your participation today. And with that I’d like to open the floor to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Lyle Margolis – Fridson Investment Advisors

Lyle Margolis – Fridson Investment Advisors

Can you remind us how many phases there are in the Exide agreement, when the current phase started and how long it is expected to go for.

Thomas Granville

There are actually four phases all together in that contract, four phases kick in over a period of four years. We completed the first phase with the specification qualification and agreement and we are in phase two. That phase two is a 10 month, has a 10-month term to it. And we have four months remaining in that first phase.

Lyle Margolis – Fridson Investment Advisors

And is it just time based, the phase will last 10 months or are there certain milestones that have to be hit in order—

Thomas Granville

Well it was originally drawn up as a time based, it was the time that both parties felt that they would need to develop and test the product and we are on schedule with that time frame. So we fully expect phase three to kick in at the end of June this year.

Lyle Margolis – Fridson Investment Advisors

And what does phase three entail.

Thomas Granville

Phase three entails a larger number of product being shipped on a monthly basis. Again NDA prevents us from, we’ve discussed, [inaudible] to the actually numbers associated with this but they’re substantial.

Lyle Margolis – Fridson Investment Advisors

But is this still a testing phase, phase three.

Thomas Granville

It’s a development phase. Its really a demonstration project phase.

Lyle Margolis – Fridson Investment Advisors

And how long is that phase supposed to last.

Thomas Granville

That is a six-month phase.

Operator

Your next question comes from the line of Marco Rodriguez – Stonegate Securities

Marco Rodriguez – Stonegate Securities

I was wondering if you could talk a little bit more about the process development on the new production lines, looking at implementing here, maybe like time lines or something of that nature.

Thomas Granville

Yes, our time lines, let me start by saying that our goals for 2010 can be completely fulfilled by the existing line in the stage that its in right now. But of course that’s naturally not where we want to go with this thing. We want to push a second line and we’ve moved into that process with our new engaged engineering design and fabrication firm.

That second line will come with quality control built into the line as opposed to our first line where its been added. As you can appreciate the prototype line comes with all of the bruises and all of the things that it takes to develop an automated process. We are going to incorporate a large percentage of that first line into the next line and the line after that but we’re also going to change some things.

We’re going to change some stations, we’re going to get better through put, we’re going to get better quality control. So we expect to have line two up and running before the end of 2010 even though our current projections don’t really call for that second needed line.

Marco Rodriguez – Stonegate Securities

And then just kind of a housekeeping item if you will, can you quantify for 2009 kind of a revenue break down from specialty car versus your flooded.

Thomas Granville

Specialty car was probably accounted for about 30%, 30% to 35% of our overall revenue in 2009.

Marco Rodriguez – Stonegate Securities

And then it would be fair to say that the rest was just a flooded.

Thomas Granville

Well no we also have some PbC in there as well but we’re not prepared to talk about those numbers that relates to our strategic contract agreement with Exide. So for the first time we’ve produced PbC batteries for resale, or I should say for sale, to a strategic partner as opposed to just using them in our own test processes and we are also in the middle of producing PbC batteries for our first cube project.

Marco Rodriguez – Stonegate Securities

And then lastly without obviously giving guidance here, can you talk about how you are thinking about like revenue or top line progression for 2010.

Thomas Granville

Well we’ve, if you look at where our sales have been in the past, we’ve had some significant growth from 2006 forward, naturally I can’t give guidance on these numbers, but we certainly expect the pattern of increased sales to continue and we expect the multiples to be somewhat similar to what we’ve seen in the past.

One other point that I should make, we had 157% increase in sales in 2009 when compared to 2008. We also were able to reduce operating expenses by nearly 12% while achieving that. We increased our expense in R&D because we feel that’s a very important part of who we are and where we need to be in the future.

We need to continue to improve our product. We need to continue to attract talent and we will do so by putting money into R&D. That’s not an area that, where we’ll be skimping. So I just wanted to make that point as well.

Operator

Your next question comes from the line of [Paul DeMasi] – Axion Shareholder

[Paul DeMasi] – Axion Shareholder

I was curious as to your relationship with Exide and how much of Exide’s business is in the United States as compared to the US, is it like 50/50 or something like that.

Thomas Granville

Exide is the second, actually the third largest supplier of batteries in the US as opposed to being the second largest worldwide. They have a substantial share of the US in the North American market. I know that it was announced that you were with Axion Power, but what they probably meant to say is that you’re an Axion shareholder—

[Paul DeMasi] – Axion Shareholder

Yes, I am.

Thomas Granville

Because I certainly don’t recognize you from the plant here.

[Paul DeMasi] – Axion Shareholder

So its more in the United States or in Europe.

Thomas Granville

I mean they are a very large player in both areas. They have global reach, they operate in 80 countries but they’re also a significantly large player in the US here as well, the third largest lead acid battery company in the United States.

[Paul DeMasi] – Axion Shareholder

And other question, how far would you say Europe is ahead of the United States as far as with global warming or like CO emissions, as far with the United States. Are we like 10 years behind.

Thomas Granville

Unfortunately we are significantly behind the whole thought process in Europe, both in terms of efficiency, miles per gallon. Right now our fleets are averaging somewhere around 23 miles per gallon. They’re averaging 50% more than that. They’ve keyed on CO2 emissions which equates directly with MPG, so not only are they doing good things for the planet regardless of what the arguments might be about is there global warming. Is there not global warming.

They are reducing emissions and at the same time they’re reducing dependence on foreign oil. Very important to them, certainly very important to us. I think its more in the limelight over there if you will because fuel prices of $6, $7 per gallon are staring them in the face whereas we’re still in the high 2’s, maybe going to $3.

[Paul DeMasi] – Axion Shareholder

Do you feel that that’s because in Europe they have, they’re more cautious of what they’re breathing as compared to the United States and is it Congress here that’s stopping this or just our public attitude do you feel.

Thomas Granville

I’m not really sure what it is that drives them but I’m sure it, if you step back and look at it one could make a calculated guess there, that its probably some of each. It hurts them in the pocketbook and it hurts them health wise. So why wouldn’t you do it. Let’s step forward and the automotive companies have been dragging their feet forever but now they’ve come up with a solution for this stop start and the solution is literally only a few hundred dollars if you accept our application.

If you go to lithium ion nickel metal hydride, something like that, you’re talking about thousands of dollars but you don’t need to do that. We are in the process of proving that our PbC lead carbon product can do that for a few hundred dollars. So you’re adding a few hundred dollars to the sticker price.

You’re getting that money back in fuel savings and you’re also doing good things for the environment as well. So you can see why the European OEMs are excited with us.

[Paul DeMasi] – Axion Shareholder

As far as your technology, is that incorporated into the Exide battery or do you build your own batteries, is that how that works.

Thomas Granville

Well we will, it will be both. Right now we are building our own product, building our own battery, taking it to third party end users and then coming back to the other lead acid battery companies like Exide, like East Penn, and providing that proprietary electrode to them, to make their batteries better.

That’s part of the strategy in the four year supply agreement is that in the early years we’ll be providing batteries only to them and then we’ll be providing electrodes to them that they will put into their batteries.

[Paul DeMasi] – Axion Shareholder

I live in South Florida, what would be the closest plant to me and do you have tours of your plants.

Thomas Granville

Well the closest plant to you is where I’m sitting right now and that’s in Newcastle, Pennsylvania. We have two locations here that we operate out of. Exide of course operates out of several other locations. But yes, I mean as a shareholder, we try to accommodate shareholders. In fact we have several investors coming over to the plant tomorrow.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Thomas Granville

Thank you, and my final remarks really are just a reiteration of what I’ve already said. Its an exciting time to be at Axion. Its an exciting time to be developing a product that we think will have significant effect in the marketplace. We’re looking at applications that include hybrid trains, that include ATV micro hybrid vehicles, that include applications for potential products for the military in conjunction with a $1.2 million DOD grant.

We are exploring putting our product into vehicles for the silent watch program and also into marine corp assault vehicles. So I’d to once again thank you for participating with us today and we look forward to talking to you in the future.

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