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Maxwell Technologies, Inc. (NASDAQ:MXWL)

Q1 2014 Earnings Conference Call

May 1, 2014 5:00 PM ET

Executives

Mike Sund - VP, IR

John Warwick - COO

Kevin Royal - CFO

Analysts

Matt Dolan - ROTH Capital

Alex Potter - Piper Jaffray

Tyler Hojo - Sidoti & Company

Jinming Liu - Ardour Capital

Steve Marascia - Capitol Securities

James Ragan - Crowell, Weedon

Operator

Good day and welcome to the First Quarter Financial Results. All lines are currently in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session.

And it is now my pleasure to turn the conference over to Mike Sund, Vice President, Investor Relations. Please go ahead.

Mike Sund

Good afternoon. In a few moments, you’ll hear from John Warwick, Maxwell’s Chief Operating Officer; and Kevin Royal, our Chief Financial Officer.

First, we need to advise you that the following discussion will include forward-looking statements based on our current expectations and assumptions. These statements are subject to numerous risks and uncertainties and changes in circumstances and assumptions. Forward-looking statements in the following discussion do not purport to be predictions of future events or circumstances and may not be realized. For further information regarding such risks and uncertainties, please refer to the MD&A 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 these filings may be accessed by visiting the Investors section of our website maxwell.com, or via the SEC’s website. Printed copies may be obtained by contacting the company. We encourage all investors to read these reports and our other SEC filings.

Some of you are listening via the Internet and an archived replay of the call will be available online at our website. All information in today’s call is as of May 1, 2014. 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 Maxwell’s Chief Operating Officer, John Warwick.

John Warwick

Thank you, Mike, and good afternoon everyone. As our company announced earlier today, the board of directors has appointed Dr. Franz Fink President and Chief Executive Officer. I'm looking forward to helping lead Maxwell to greater success with our new CEO. I thoroughly enjoyed the opportunity to serve as Interim CEO and remain fully committed to growing Maxwell. We are extremely optimistic about our leadership position and future growth opportunities. I will provide an update on our business, then Kevin will review our financial results.

Overall, I'm extremely pleased with the rapid maturation of our team improving our commercialization capabilities, developing innovative products, increasing our intimacy with our customers and partners and building out our leadership team.

While our ultracapacitor outlook remains strong we continue to see softness in our high voltage products well into 2014 primarily due to the reduced electric utility infrastructure spending.

Our microelectronics revenue is being adversely impacted by the United States hold on granting export licenses to Russia. If the export license hold continues for the remainder of the year, we stand to lose up to $2 million of microelectronics revenue opportunity.

Based on our design wins and customer inputs we remain very optimistic regarding the longer-term ramp of the large urban plug-in hybrid buses in China. However, only one leading China bus manufacturer has delivered substantial quantities of plug-in hybrid buses this year.

New energy, we have been informed by many of our China bus customers that they believe in a few years new energy buses will represent the vast majority of new large urban bus production, up from approximately 10% this past year. Considering that in 2013 approximately 80,000 large urban buses supporting both domestic and international demand were manufactured in China significant growth opportunities are expected to materialize over the coming years. Therefore, we continue to be cautious about the near term ramp while fully prepared for the long-term market adoption of plug-in hybrid buses.

Revenue from our continental stop-start auto program with Peugeot Citroën is projected to remain strong. Based on direct customer inputs I remain highly confident that Maxwell will obtain multiple auto design wins across multiple applications in 2014.

We are excited about the rapidly developing billion dollar plus ultracapacitor rail market as our products are enabling operators to achieve 20% energy savings and reduce costly infrastructure requirements. One of our rail customers is reselling the captured breaking energy back to the grid providing additional financial returns.

We expect to announce rail wins this year adding to the Korean subway and ABB Philadelphia Light Rail System announcements we made this past quarter.

I'm pleased that we have launched and are producing our newly announced Ultra 31/900 engine start module which is design to serve medium duty class 3 through 6 trucks. This addition to our product line approximately doubles our served North American new and retrofit trucking market opportunity.

Our increased market development investments are accelerating the build out of our sales channel and install network while we are making significant progress with OEMs and dealers to enable fleets to purchase the ESM and new truck order.

Ultracapacitor sales in the wind pitch-control systems continue to gain momentum as we are seeing early production ramp of our 2013 design win. We remain excited about our growth prospects for offshore turbine requiring high power and low maintenance ultracapacitors.

New design wins that transports large offshore turbine and our customers' continuing to take share are why we are confident we will continue to increase our share in the win pitch-control market.

Lee and many customers believe Maxwell's high power on duty cycle ultracapacitor solutions can help solve the utilities solar and wind energy variable output problem. This renewable energy outfit firming market represents a significant opportunity for Maxwell. We are seeing a strong uptick in demand across Europe, the Americas and Asia for piloting production ultracapacitor based grid firming systems.

We entered the quarter with a handful of projects in the works and now we have more than a dozen opportunities for pilot and initial production systems slated to be delivered as early as later this year.

While the renewable energy firming application will take time to develop, we are excited by the rapid increase in customer activity.

Shifting gears, diesel generator starting and ramp performance has significantly improved requiring a shorter duration for backup and bridge power requirements. Therefore, we are seeing increased opportunities for our ultracapacitor solutions in mission critical facilities such as telecommunication base station, manufacturing facilities and new power datacenters.

The demand for our ultracapacitor solution continues to be propelled by the growing global demand for more power coupled with the mandate to reduce harmful emissions created by burning fossil fuel. These driving force megatrends coupled with our market leadership position, intellectual property, manufacturing scale, industry leading products and leadership team position Maxwell as the leader in the growing ultracapacitor markets we serve. I will now turn this over to Kevin to review our financial performance.

Kevin Royal

Thank you, John. I'm going to spend a few minutes providing some additional details on our financial results for the first quarter of 2014. Our revenues were $46 million for the first quarter of 2014 which is up 18% from revenues of $39 million reported in Q4 2013. Revenues for our ultracapacitor products were $32 million for the first quarter of 2014 compared with $26.3 million for the fourth quarter of 2013. This increase was primarily driven by the ramping demand for plug in hybrid transit buses in China that began late last year as well as increased sales to wind energy applications.

Revenues for our high voltage capacitor products were $10.1 million for the first quarter of 2014, up 12% from $9 million Q4 2013. Revenues from our microelectronics products were $3.9 million, up from $3.7 million in Q4 2013.

Our non-GAAP gross profit for Q1 2014 was $18.1 million compared with $14.7 million in Q4 of 2013. Non-GAAP gross profit is 39% of revenue for the first quarter of 2014 compared with 38% for the fourth quarter of 2013.

The increase in gross profit margin was primarily due to higher sales volume in the first quarter and higher average selling prices on ultracapacitor products. Total non-GAAP operating expenses for Q1 2014 were $16.6 million, which is up from $15.9 million for Q4 2013. This increase is mostly associated with growing our sales team to support expected sales growth.

We expect non-GAAP operating expenses in Q2 2014 to be similar to Q1 2014. Non-GAAP net income is $1.1 million or $0.04 per share for the first quarter of 2014 compared with a non-GAAP net loss of $1.5 million or $0.05 per share for the fourth quarter of 2013. This bottom-line increment is directly attributable to stronger sales in Q1. Our non-GAAP earnings before interests, taxes, depreciation and amortization or EBITDA is $4.2 million in Q1 2014 compared with $1.2 million in Q4 2013.

Now I would like to turn to the balance sheet. We ended the quarter with cash of $32.6 million, which represents an increase in cash and restricted cash of $1.9 million from the fourth quarter of 2013. We reported positive cash flows from operations of $258,000 for the quarter. During Q1 accounts receivable increased by $7.7 million associated with sales growth and shipment linearity patterns where sales are more heavily rated at the end of the quarter. While accounts payable and accrued liabilities increased $2.2 million associated with timing fulfillments at the end of the quarter.

During the first quarter we spent $2 million in capital investments primarily related to production and capacity expansions in our manufacturing facility in San Diego, our contract manufacturing operations in China in our new Peoria, Arizona manufacturing facility.

As of March 31, 2014, we have $10.6 million in debt obligations outstanding. This debt balance consists of $3 million under our revolving line of credit and equipment term loan of $1.8 million in debt to $5.8 million which is held at our Swiss subsidiary.

Now I will turn it back over to John to discuss other areas of the business.

John Warwick

Thank you, Kevin. As you may remember Corning and Maxwell have signed a memorandum of understanding outlining the relationship through the preplans and develop advanced technologies and join forces on market development activities for ultracapacitor products. As expected we are continuing to work on the agreements and we will not be providing any specific comments until the agreements are signed.

We remain excited about what this relationship can mean to Maxwell's future market opportunities. We are encouraged by the strong growth across multiple ultracapacitor markets and the rebound we are seeing in the China bus market. The smart way the china bus market provides only a small window of firm backlog therefore our visibility into solid demand remains very limited during this early stage and a plug-in hybrid bus ramp.

As stated in today's press release based on current customer flow and orders we expect revenue for the second quarter of 2014 to be similar to the revenue reported in the first quarter of 2014. Kevin and I will now take your questions.

Question-And-Answer Session

Operator

(Operator Instructions).

We will take our first question from Philip Shen with ROTH Capital. Please go ahead.

Matt Dolan - ROTH Capital

Hey guys, it's Matt on for Phil. Thanks for taking my question. Just wanted to start out with the China bus market. Can you share your latest thoughts in terms of the competitive landscape in China for ultracaps and buses and I believe thus far you guys have the dominant share, but how you expect that to evolve over time, who do you expect to take share and how quickly that share develop.

John Warwick

Matt we definitely do have the dominant share of the ultracaps and the China bus market. Clearly competitors are trying to get qualified with the bus manufacturers and eventually second sourcing will happen as the market matures. At the same time we have significant technology advantages with our products that give us better shocking vibration performance and so therefore better durability and life in the transit applications. So most of our customers are well aware of this and we continue to project that we will hold a very strong position in this market.

Matt Dolan - ROTH Capital

Okay. That's helpful. And then in terms of the inventory I know it came down a bit in terms of days on hand, but it's still that you guys are holding a significant amount of inventory. Are you holding some of this in anticipation of a potential ramp in China bus volumes later this year? How are you thinking about your ability to meet demand if and when it arrives in full swing?

John Warwick

Well yes we did build up inventory to support initially the China plug-in hybrid bus ramp and potentially a diesel hybrid bus subsidy. So we burnt through some of that inventory but we still have more inventory on hand to support any rapid change in demand. We do believe that the long-term ramp is going to be very robust in this market based on customer inputs and so we want to be prepared to ensure we can cover any and all demand that comes even it becomes very rapidly and unforecasted.

Matt Dolan - ROTH Capital

Okay. And then one more here if I may on the engine start module side of things, may be could you just compare and contrast for us the sales cycle we are getting that product into a truck OEM versus an automotive OEM. Are we talking design wins that could come sooner than sort of the typical sales cycle for an automotive OEM any color on that would be appreciated?

John Warwick

Yes, they can come faster and the key is full of a specific design-in solution from the large fleets into OEMs is our quickest path to getting in there and we are making progress with all four OEMs working with large fleets to make that happen.

Operator

Thank you. Our next question comes from Alex Potter with Piper Jaffray. Please go ahead.

Alex Potter - Piper Jaffray

I guess first of all historically you have given a little bit of color regarding forward-looking gross margins. I know that this quarter gross margin came up a bit, you commented part of that obviously was due to volume you also said pricing is that the result of a -- I guess a favorable mix shift or what's going on with that and what can we expect going forward?

John Warwick

Well first of all Alex so let me comment quickly on what we expect going forward. It looks like the basis will be down slightly in Q2. So may be down 0.5% if our forecast (inaudible). We expected the quarter in having stronger gross profit you mailed it, I mean it's a matter of mix shift to higher margin products and therefore overall we had higher ASPs during the quarter. So that drove the higher gross profit for the first quarter.

Alex Potter – Piper Jaffray

What were those higher margin products if I may?

John Warwick

We don't break that down from different models and the gross profit on the various products.

Alex Potter – Piper Jaffray

Okay. That's fine. I was wondering also there has been a fair amount of news in the media in China regarding purely electric buses, seems like some cities are moving in that direction. Just wondering as you guys are positioning ultracaps with a pure EV buses as well as to plug-in hybrids.

John Warwick

Yes, our goal is to remain energy source like NASDAQ and so the ultracaps capture the (inaudible) of breaking energy and provides a rapid acceleration far better than the battery stand unless really oversize the battery. So we do provide a better solution and do have to design wins with pure electric buses.

Alex Potter – Piper Jaffray

Okay. So I guess that basic takeaway is I mean, maybe it's not 100% of the electric buses that are being sold in China, but at least some material percentage of them should have ultracaps is that fair?

John Warwick

Yes, that's a fair statement.

Alex Potter – Piper Jaffray

Okay. Is it possible also just from a housekeeping standpoint to get revenues by sub-segment within the ultracap segment. I know that obviously you've got a couple of big buckets, there is hybrid buses, there is wins, there is auto, any sort of granularity if you will you give there would be helpful.

John Warwick

Yes, we've been breaking out about five different categories also providers just give you the percentage of the ultracapacitor revenues that each sub-segment represents excuse me. First of all the China bus market was 41% of ultracapacitor revenues. We then made up 20% of revenues for the quarter for ultracapacitors and heavy transportation which will include trains is 4%. Automotive represented 16% of capacitor revenues and the solid state drives are 4% for the quarter.

Alex Potter – Piper Jaffray

Okay. Excellent. And then I guess one other if I can squeeze it in here. On rail, it seems like obviously these can be pretty big ASP sort of projects and so looking forward trying to model it is potentially going to be a little bit challenging because presumably it's going to be quite lumpy, certainly if you would compare to say the automotive segment which is kind of a more stable run rate, it's higher volume lower ASP this is low volume high ASP. But a, am I thinking about things correctly and that it will be kind of project oriented kind of big slugs of revenue that come in on unpredictable basis. That's my first question and number two is when do you expect it to get to the point where it's may be making the same sort of contribution in terms of magnitude as say the auto or may be even the bus market.

John Warwick

First of all it's definitely a project based revenue source. We are seeing significant growth in the rail segment this year of course we're going off of a small base but we definitely see lots of interest and lots of growth from our customers going forward in the segment. So how quickly it's going to ramp is really anybody guess but we could be there in a few years.

Operator

Thank you. Our next question comes from Tyler Hojo with Sidoti & Company. Please go ahead.

Tyler Hojo - Sidoti & Company

Yes, hi, good evening. Just the first question on ESMs. I guess it's a bit of follow up. I think you guys indicated your expectations to deliver, I think it was 1500 ESMs by some point in early 2014. How you tracked relative to that bogie and maybe if I could get a little bit of additional clarity into how you expect kind of deliveries to ramp from here?

John Warwick

Regarding the ESM we guess about 1500 number is about correct about what was delivered by that timeframe. We do expect we are in the very early stages of a ramp. What we do see is the ESM is gaining significant attention and interaction with the fleets and with the OEMs. So we do expect great prospects on this product line. The exact counting of it, it is little too early to say.

Tyler Hojo - Sidoti & Company

And then just on the automotive space, I think that John that you kind of reaffirmed with you that you will get some design wins this year. Can you give us any sort of additional detail there are those for 2016 models are you working on kind of later dated models at this point?

John Warwick

The ones I'm referring to are the 2016 model year products that production will start in middle of 2015 timeframe.

Tyler Hojo - Sidoti & Company

And typically maybe you could educate me just in terms of kind of lead times. I mean is this something that could hit within the next couple of months or is this something that could really hit any time this year?

John Warwick

We will start making deliveries in the middle of next year.

Tyler Hojo - Sidoti & Company

Right, but what I'm asking specifically is just on when the actual design win occurs?

John Warwick

I mean we are very confident it will happen this year. We are way past the RQ stage. We've had lots of verbal discussions on it. We are in the process of doing the final starting the ice and costing the fees, in essence going through their final checklist before they can grant us the loan.

Tyler Hojo - Sidoti & Company

And then just a follow-up to somebody else's question in regards to competition within the China bus market. Certainly it makes sense that ultimately these OEMs will have a second source. How long does it typically take for an ultracap player to become qualified with these customers? I figure you guys probably would know best.

John Warwick

Approximately nine months.

Operator

Thank you. Our next question comes from Jinming Liu with Ardour Capital. Please go ahead.

Jinming Liu - Ardour Capital

My first question is about the bus market. I recently read some news regarding the 100% ultracapacitor bus in China. What do you see that the fate of that kind of a design using 100% ultracapacitor plug in hybrid or electric?

John Warwick

Right now we see that similar to their peer electric vehicle for the buses. It could gain some traction but it will be a small portion of the market at least for the next year or two.

Jinming Liu - Ardour Capital

I see, okay. I'd go back to your ultracapacitor sales. I understand that you also sell electrodes other ultracapacitor companies. What was the percentage of your actual sales in that total ultracapacitor sales in the first quarter?

Kevin Royal

Jinming, I apologize but we don't have that information available.

Jinming Liu - Ardour Capital

But that's on the higher level like whether that's a third or just a rough number if (inaudible) --

John Warwick

This will be, yes, it typically runs between $250,000 and $500,000 per quarter. They can be a little bit lumpy throughout the year but its sub $1 million in any given quarter.

Jinming Liu - Ardour Capital

Okay, that's what I'm looking for, okay. Switch to renewable firming applications, if I hear correctly you mentioned that there could be a certain demonstration projects going. Can you share with us maybe more color on the size of those projects and what kind of typical revenue from those demonstration projects for Maxwell?

John Warwick

The typical revenue can be in the range of $200,000 to $500,000 and it really depends on the size of the project and how many megawatts of firming they are requiring. So the size and the time of the duration, of how long they need to have the firming application from ultracapacitors operate.

We're seeing not just pilot projects but we are also seeing projects still under production, not just in Europe and some in North America. We're also seeing significant ramps in Asia and we're seeing activity out of Central and South America as well. So we've really seen a strong uptick in this market from an early demand point of view and early project interest point of view.

Operator

Thank you. Our next question comes from Steve Marascia with Capitol Securities. Please go ahead.

Steve Marascia - Capitol Securities

A quick question for you about Europe. You said you guys saw improvement on in the Europe side of the business. Can you tell us what areas? Was it automotive or just where exactly?

John Warwick

Yes, Steve, that was in automotive and wind primarily.

Steve Marascia - Capitol Securities

Are you seeing increased demand for the product in terms of just -- from increased auto production going on over there?

John Warwick

We saw strong auto demand this past quarter, correct.

Operator, we have time for one more question.

Operator

All right. We'll take your last question from James Ragan with Crowell, Weedon. Please go head.

James Ragan - Crowell, Weedon

Yes, good afternoon, thanks for squeezing me in here. Hoping we could go back to the China bus market, if you would. You'd mentioned about the just one major manufacturer had delivered products I'm assuming that's on the hybrid electric bus. Can you just go into a little bit and why you think that is? Are there other bus manufacturers are not going to be coming online soon?

John Warwick

It was the one manufacturer of plug-in hybrid buses that has been substantially supplying the plug-in hybrid buses in the China Market over the last two quarters somewhere with an 80% share. The other bus manufactures have been getting orders, they have their designs done, but the orders have been relatively small. And from our perspective, they've been burning down some of our inventory that they had from back in the summer times. And so, they are getting orders, but it’s just small quantities.

So there are lots of discussion going on with the customers about when they're going to see ramp and getting forecast or discussion without orders from the cities that may support, but we just lack visibility. Usually we will get an order and willing to deliver it within two or three weeks.

James Ragan - Crowell, Weedon

Great, and as you look at the full year potential in China for the bus market in 2014 do you respect the total ultracapacitor shipments into China bus could be up year-over-year?

John Warwick

Yes, we do.

James Ragan - Crowell, Weedon

Okay, great, thank you. Also just two more questions, could you a little update just on Peoria? I know I'm assuming that the first quarter of gross margin included some of the depreciation now in that plant. Is that going to continue now? I know you gave some comments on Q2. Could you talk a little bit may be about the second half, how you expect that to impact the gross margin?

John Warwick

Sure. Just quickly, the first quarter included one month of depreciation associated with Peoria facility. So Q2 align include a full quarter of depreciation and accounts with the decline in gross margin that I mentioned earlier.

James Ragan - Crowell, Weedon

Great, thank you. Just tell me with Mr. Fink coming on board; can you talk about just physically where he'll be located?

John Warwick

Yes. Dr. Fink will be in San Diego.

Okay. Thank you for the questions and being on the call. Thank you, Operator.

Operator

Thank you. This does conclude today’s conference. You may disconnect at any time and have a wonderful day.

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