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Maxwell Technologies, Inc. (NASDAQ:MXWL)

Q2 2012 Earnings Call

August 2, 2012 5:00 PM ET

Executives

Mike Sund – IR

David Schramm – President and CEO

Kevin Royal – SVP, CFO, Treasurer and Secretary

Analysts

Ben Schuman – Pacific Crest Securities

Chris Godby – Stephens

Michael Lew – Needham

Matt Phil – Roth Capital

Josh Baribeau – Canaccord

Tom Daniels – Stifel Nicolaus

Chris Kovacs – Robert Baird

Colin Rusch – ThinkEquity

David Schramm

Operator

Good day and welcome to Maxwell Technology’s Second Quarter Financial Results. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the Q&A session. (Operator Instructions)

And it’s now my pleasure to turn the conference over to Mike Sund. Please go ahead.

Mike Sund

Good afternoon. In a few moments you will hear from David Schramm, Maxwell’s President and CEO, and Kevin Royal, our Chief Financial Officer.

First, we need to advise you that the following discussion will include forward-looking statement based on our current expectations and assumptions. Such 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 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 investor section of our website, 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 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 August 2nd, 2012. The company undertakes no duty to update our forward-looking statements to conform the statements to actual results or changes in the company’s expectation.

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

David Schramm

Very good, Mike, and thank you. Good afternoon, everybody.

We’re pleased to report that Maxwell recorded total revenue of $40.9 million of the second quarter into June 30th, 2012. Well, that’s 12% sequentially from the first quarter and up 6% from the same quarter a year ago.

Ultracapacitor sales totaled $24.2 million, up 10% sequentially from the first quarter, but down slightly from the second quarter of 2011 due mainly to continuing soft demand in Europe. Second quarter sales of microelectronics and high voltage capacitor products came in at $16.7 million, down a bit from the unusually high sales posted in the first quarter, but up 19% from last year’s second quarter.

A particular note is that despite the challenging global economic environment, a favorable revenue mix and careful expense control enable the company to post net income of $2.7 million or $0.09 per share for the quarter. That compares with the loss of $0.04 per share in the same period last year. On a non-GAAP basis, net profit for Q2 was $3.5 million or $0.12 per share compared with $0.06 per share in Q2 last year.

Now, this was the ninth consecutive quarter the company has been profitable on a non-GAAP basis. And Kevin is going to provide you more financial details on all of this in a few minutes.

As noted in our press release, ultracap sales continue to be impacted by economic conditions in Europe and elsewhere. But that softness is being offset by growing demand in China driven mainly by ongoing infrastructure investments in both public transit and wind energy.

Wind turbine deployments in China continue to rebound from the government post slow down, we experience in the second half of last year. In fact, wind-related sales in the first quarter totaled more than the two previous quarter combined and increased further sequentially in Q2.

Looking ahead, China’s five-year plan calls for wind energy to account for 3% to 5% of the country’s total power generation by 2020. So we anticipate same demand for our products. Ultracapacitor sales for hybrid bus drive systems haven’t missed a beat as the Chinese central government and many regional and local governments continue to provide subsidies and policy support for hybridization of public transit vehicles to both improve fuel efficiency and to reduce urban air pollution.

We’re well aware that headlines predicting slower growth for the Chinese economy and the upcoming change in leadership raise questions about the sustainability of Maxwell sales into China. But there’s every indication that these infrastructure investments will continue to be a high priority. Information we received recently indicates that the subsidized transit bus privatization program for 25 major cities, has been so successful that the government intends to extend it to a number of additional cities.

And with the experience that they have gained through policies supported programs and their advantageous cost position versus competing OEMs in Asia, Europe, and North America, are Chinese wind and bus customers are beginning to win on substantial export business around the world.

There was a report a couple of months ago that one of our contract manufacturers, we selling its own branded ultracapacitor products to Maxwell customers directly. And the implication was that this was being done without our knowledge. Maxwell sells electrode to all of our contract manufacturers, and then purchases the completed cells for our own consumption.

We have an agreement with the contract manufacturer, referenced in this report. It’s a private label, and sell the product locally, to customers that Maxwell may not be able to gain. This agreement dates back to 2009, and has proven successful in increasing our sales for our proprietary electrode which was produced only within the secure facilities located in the US. Further, Maxwell sells electrode on a global basis to competitors, and our electrode is recognized as a premium product.

Moving on to Europe, although soft automobile sales across the board have tampered our near term expectations for sales growth with the ultracapacitor base stop, start, idle elimination system, continental has developed for PSAs, Fuzio and Zitron cars.

That program continues to account for a meaningful share of ongoing ultracapacitor sales. With about half million of PSAs ultracapacitor equipped micro hybrids now in the road, questions about ultracapacitor’s reliability in performance, and Maxwell’s capabilities as a supplier have been answered in the affirmative.

We have nothing new to report on the long awaited next automotive program wind, but additional OEMs, including one in Detroit are evaluating the continental system. In addition, other tier one automotive suppliers, and automakers, are working on their own designs employing ultracapacitors. So we remain confident that it’s not whether, but when, for the penetration of the auto market will happen.

As reported earlier, the BARTA transportation is a leader producer of rail vehicles, and rail transportation equipment, systems and services, has designed Maxwell ultracapacitors into its energy store, braking energy recuperation system for light rail vehicles. These are stationary energy storage units that capture and store energy that otherwise would be wasted in conventional friction based braking systems.

In network on these units, can enable rail system operators to reduce grid power consumption, but 20% to 30%. They also serve as a backup energy source to provide enough power to get trains to the next station in event of a power outage.

The BARTA and other rail vehicle OEMs, also produce on vehicle systems. They use ultracaps for energy storage. So we expect to have some good news on electric rail design.

A number of other applications have begun driving meaningful volumes that are helping us grow ultracapacitor sales. These include postage stamp size, PC-10 cells, they go into data storage devices, called solid state disk drives, or SSDs. Our products are used in SSDs for enterprise level computing installations such as data centers.

The ultracaps are mounted right on the circuit board where they stand ready to provide a few seconds of instantly available back up power to allow work in process to be saved in the event of a power interruption. PC-10s also provide power for wireless transmitters that allows smart utility meters to transmit data, and to be read remotely.

Last year, we launched an ultracapacitor module designed specifically to handle brief power disturbances, and provide short term bridge power to hold voltage constant until primary backup power source within an integrated uninterruptible power supply system takes over. This UPS module has been designed in the systems going into hospitals and other new installations that will come online in the next few months.

Another new ultracapacitor product, an engine start module that access an onboard jumpstart power source for hard to start diesel trucks is field trials with several large truck fleets. The feedback has been uniformly positive, and some of the fleet operators have taken additional units to expand their trials.

We also entered into a distribution agreement with Pana-Pacific which specializes in truck products. Pana has relationships with more than 2,000 truck dealers, OEMs, and OE part distribution centers in the United States, Canada, and Mexico. This module is the same size and shape as the Group 31 batteries that heavy trucks carry. So it’s an easy to install, drop-in replacement for one of the trucks four existing batteries.

It addresses a growing problem with trucks’ starting failures due to cold weather and overworked batteries as a result of anti-idling laws in more than 30 states. With more than 2 million heavy trucks currently on the road in North America. We are focusing initially on the aftermarket, while simultaneously working with the truck OEMs to get our engine start module qualified and designed in as a standard for new trucks.

Engine starting is also an issue for delivery vans, military vehicles, boats, backup power generators and construction and mining equipment. So we’re in the process of developed variance of this initial product to address what we think can become a much broader global engine starting module.

In a few minutes, I’ll discuss recent developments with our other two product lines and comment on future prospects. But first, our CFO, Kevin Royal, will provide additional detail on first quarter financial results. Kevin?

Kevin Royal

Thank you, David. I’m going to spend a few minutes providing some additional information on our second quarter 2012 financial results.

Our revenues were $40.9 million for the second quarter of 2012, up 4% from Q1 2012. The higher revenues in the second quarter were driven by a 10% sequential increase in ultracapacitor product sales. It generated $24.2 million in revenues for the quarter. Continued strong demand for ultracapacitor products for hybrid electric vehicles in wind turbine blade fit systems were the main drivers of this quarter’s growth.

We continued to experience slowing demand in Europe during the quarter, which we believe may continue for the foreseeable future. Revenues from our microelectronics business were down slightly this quarter, while our high-voltage product revenues were essentially flat compared to Q1 2012. Based on current order flow and customer forecast we now expect revenue for the full year to be in a range of 15% to as much as 20%.

Non-GAAP gross profit was $17.3 million in the second quarter of 2012 compared to $16.4 million in Q1 of 2012. As a percentage of revenue, non-GAAP gross profit was 42% of revenues for the second quarter of 2012 compared to 41% of revenues for the first quarter of 2012. The increase in gross margin is due primarily to product mix as well as continuing cost reductions for ultracapacitor products.

Total non-GAAP operating expenses for Q2 2012 were $12.9 million, down from $13.7 million for Q1 2012. Although we had anticipated non-GAAP operating expenses to grow by a range of $800,000 to a $1 million in Q2 2012, expense control measures have allowed us to decrease our overall spending. We expect a quarterly run rate of $14.5 million for non-GAAP operating expenses for Q3, increasing to approximately $15.5 million in Q4 in support of our forecasted revenue increase in those quarters.

Non-GAAP net income was $3.5 million or $0.12 per diluted share for the second quarter compared with non-GAAP net income of $1.9 million or $0.07 per diluted share for the first quarter of 2012. These non-GAAP measures exclude stock-based compensation expense and amortization of intangible assets. Our earnings before interest expense, taxes, depreciation and amortization or EBITDA was $5.2 million in Q2 compared to $3.2 million in Q1.

Now I’d like to turn to the balance sheet. We ended the quarter with cash of $22.3 million, which represents a decrease in cash of $8.3 million from Q1 2012. The significant components of our cash activity for the quarter included increase in accounts receivable, a $5.6 million in capital spending of $4.2 million. The increase in accounts receivable is primarily attributable to shipment linearity, where a significant portion of the quarter sales were shipped in the third month of the quarter and also to a few significant customer accounts that are past due but which we expect to collect.

We expended $4.2 million in capital investments during the quarter as we continue to invest in capacity expansion and product development for ultracapacitor products. As of June 30, 2012, we have $10.3 million in debt obligations outstanding. This debt balance consists of an equipment, term loan of $4.9 million and debt of $5.4 million held by our Swiss subsidiary, which has favorable borrowing terms.

In addition, we continue to have access to a $15 million line of credit facility and the full balance of this line is currently undrawn and available to us. Although we do not have any plans to draw in line to meet our cash requirements in the near term, the availability of the line provides for additional cash resources to supplement our operating cash flow in the future, if necessary.

Now, I’ll turn it back over to David to discuss other areas of the business.

David Schramm

Very good, Kevin. Thank you.

I’ve already covered ultracapacitors, we’ll turn our attention to Maxwell’s other products. Our Swiss subsidiary develops in markets, high-voltage capacitor products that are used in electric utility grids and other applications involving the transmission and measurement of high voltage electrical energy.

We sell mainly to large global prime contractors that build power plants and install electric utility infrastructure around the world. Maxwell is the world’s leading supplier of high-voltage capacitors for the grid and our sales are driven by global spending on electric utility infrastructure.

Developing countries, such as China and the other Brit countries are major consumers of our products. And we also service the maintenance and replacement markets in Europe and North America. Last year, we won a major contract to supply capacitive divider products for a multi-billion dollar renovation and modernization of Russia’s utility grid. And we are delivering a new product that functions reliability in minus 60 degree temperature conditions in Siberia.

We are also looking at opportunities for both high-voltage capacitors and ultracapacitors in smart grid applications around the world to determine how and where our products may fit.

Our high margin of microelectronics product include radiation hardened components and single-board computers that we supply through satellite and spacecraft OEMs in the US and Europe. Microelectronic sales have been higher than normal through the first half of the year contributing to a higher than usual gross margins for the company as a whole.

Space programs typically span several years and our deliveries are tied to program schedules and funding cycles. So, our volumes vary quarter to quarter, but we don’t expect much growth year to year.

Ultracapacitor sales accounted for about 59% of total sales in the second quarter. As we reported earlier, we have double ultracapacitor production capacity over the past couple of years and we’re moving ahead with additional investments in capacity expansion in research and development and other resources to support further growth.

Last year, we moved into a new expanded technology center here in San Diego and we are in the process of outbidding a second electrode production facility in the Phoenix, Arizona area. When we bring it online next spring, it will double electrode production capacity in 123,000 square foot building we have leased there provides ample growth space for further capacity expansion and other engineering and manufacturing activities going forward.

Educating the market on ultracapacitor technology has been a strategic thrust for Maxwell for the last several years. And we are seeing significant interest in our ESN and UPS systems. Both of which are aimed at the US market.

Coupled with the other systems already launched, we are prepared for the economic turnaround in the US and in Europe but will not take our eye off at China.

As we stated in our press release, we expect sales in the third quarter to increase by 7% to 10% sequentially compared with the second quarter. For the full year, we are maintaining our total topline growth forecast of 15% and still seek potential for up to 20%. That should enable us to generate cash from operations and be solidly profitable.

Now, despite those healthy and improving vital signs, our tapered growth expectations and uncertainty about how global economic turmoil and government policy may affect our business have driven Maxwell stock price down the level not seen since 2009.

Every Maxwell employee from the corner office to the factory floor is a stockholder. So, this has been a painful experience we’re all concerned. You may have noticed that I and several members of our board of directors have been buying stocks through this downturn as have many other employees whose purchases aren’t reported in SEC filing. We are believers, this is a growing profitable company, and a world leader in energy storage products and technology.

Maxwell’s best days lie ahead, so we’re going to keep our heads down, keep our spirits up, and continue executing and the tremendous opportunities are people and our products are creating.

I want to thank you for your attention, and we like to now open up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Ben Schuman with Pacific Crest Securities. Please go ahead.

Ben Schuman – Pacific Crest Securities

Hi, thanks. So just to be clear, you guys soften the language a little bit around the top end of the guidance range, and didn’t mention non-GAAP profitability at least in the press release although you just alluded to it a minute ago. I mean are these subtle changes to guidance language a function of lower conviction, or am I just reading too much into that, and kind of what end market will be driving that lower conviction?

David Schramm

Yes, so I think the change – in the language related to the guidance is softening the top end as you can see from our results for this quarter, we have a little bit more deterioration in Europe than we anticipated, and we came in below into the guidance of 4%.

As far as non-GAAP profitability, at this point, our forecast has us continuing the profitability that we had this quarter, I should say increasing it, and we would be profitable not only on a non-GAAP basis, but a GAAP basis as well for each of the third and fourth quarters and for the full year.

Ben Schuman – Pacific Crest Securities

Okay, great. And then it looks like PSA just looking through some of its filings has almost double the amount of cars available with the EHDI, start stop system which I would think would help offset some of the declining overall sales that they’re seeing.

Do you have a sense of what the uptick is, of that system kind of within PSA, and how can we think about that just relative to the overall macro weakness that those guys are seeing?

David Schramm

All the feedback, Ben, that we’ve gotten so far from PSA, they’ve been very satisfied with the continental VSS system. And you’re right, they have expanded the number of vehicles that they put it into, at the same time, their sales, as you’ve seen in the paper have soften.

So the whole effect of Europe right now, is impacting our business. The automobile business as long as PSA is adding models, it kind of keeps us flat.

What we’re looking forward to is when the second, third, fourth, and fifth car customer sign on to buy the continental system.

Ben Schuman – Pacific Crest Securities

Okay, and just one more from me. Do you know anything with regards to their timeline in terms of when they would want to update that technology or re-evaluate suppliers or anything like that?

David Schramm

I’m not aware. All I can tell you is my experience of work in the automobile industry, it’s typically when you put into a model, it lasts at least five years before you’d have a significant model change.

Ben Schuman – Pacific Crest Securities

Great. Thanks a lot.

David Schramm

Sure.

Operator

Thank you. We’ll go next to Zac Larkin of Stephens. Please go ahead.

Chris Godby – Stephens

Good afternoon, this is Chris Godby in for Zac Larkin, thanks for taking my call.

David Schramm

Sure, Chris.

Chris Godby – Stephens

First of all, can you give us a little bit more color on the improvement in the wind market? Are the improvements you are seeing their broad base or are you seeing any pockets of weakness, still?

David Schramm

What we’ve seen there, is we’ve increased the number of customers that we have. And again, the wind market uptick we’ve seen is specific to China. So we’ve seen the number of customers increase, and again, the business got so soft in the last half of 2011.

And as I commented, Q1 was bigger than the last two quarters last year, and Q2 is bigger than Q1. So we’re seeing a comeback. We don’t think it’s going to come back at the growth that we saw the first half of 2011, but at least it’s starting to stabilize. And as we add more customers, we should be able to show some growth in that field.

Chris Godby – Stephens

Okay, great. Thanks a lot. And then also, looking at SG&A, it’s down quite a bit both looking at last quarter and looking at the prior year, can you maybe talk a little bit more about your cost reduction efforts?

Kevin Royal

Sure. We were very selective with our hiring, and basically focused on areas that would drive future growth such as R&D. We also had during the quarter lower bonus expense as we reduce the accrual rate in light of the lower outlook from the previous quarter. And then on a positive note, we had lower administrative fees associated with legal and audit and tax fees that accounted for about $600,000 to $700,000 of that decline.

Chris Godby – Stephens

Okay, great. Thank you very much. Thanks for taking my question.

Operator

Thank you. We’ll go next to Michael Lew with Needham. Please go ahead.

Michael Lew – Needham

Thanks. Hi, David.

David Schramm

Hello, Michael.

Michael Lew – Needham

A couple of questions. The high-voltage capacitor business turned in another solid quarter. Should we expect this level of growth to carry through for the remainder of the year?

David Schramm

I think, as we’ve commented earlier, we look at this as a single-digit growth and this year has been a little bit better than that. But no, we don’t see this as a really the growth engine. It’s really the ultracapacitors that we’re going to see that double-digit growth.

Michael Lew – Needham

Okay. And you also mentioned an opportunity with the electric grid. Do you have anything on, any ongoing initiatives in India?

David Schramm

We’ve been talking to global players on the smart grid and the answer is, yes, we’re going to be everywhere. And again, when you take a look at where the most opportunity is for us, it’s Brazil, Russia, India and China. It’s where they’re developing a grid, because the sense we see from the people we work with is putting in a new grid is probably going to be a lot faster than trying to retrofit the ones that already exist. So we think the uptick is going to be a little quicker there.

Michael Lew – Needham

Yes. Have you sized that opportunity in India currently or how large you could be just given the recent issues they’ve had?

David Schramm

That’s a good question. Timing is everything, but we have not sized that opportunity

Michael Lew – Needham

Okay. And can you provide like a geographic mix by region for the ultracap hybrid bus business and like what comment on what the growth rates were or declines during the past quarter?

David Schramm

It’s been China-driven, Michael. We don’t see again with the European softness. That softness is about every sector that we’re in and, of course, the hybrid bus has not really taken off in North America. So there’s both opportunities for us in the near future with North America as well as Europe and we want to maintain our significant presence we have in China.

Michael Lew – Needham

That’s pretty much all China, you’d say?

David Schramm

China predominates the market for us, yes.

Michael Lew – Needham

Okay. And as you mentioned before, the government has announced intentions to support EV type of growth. Since that’s been announced, have you see an acceleration in quotation activity? And the same for the French government, which recently announced plans too.

David Schramm

Yes. The Chinese government, we read – it was online article thought up by the Chinese state department that says that the hybrid buses have been so successful that they’re going to expand that program past the initial 25 cities that they originally announced. We don’t have a firm number what that is. But right now, the bus companies we work with are very, very aggressive, if you will, on what they see coming for the rest of this year.

In Europe, we see that just not catching on just yet. And like I said, the US market really hasn’t embraced hybrid buses.

Michael Lew – Needham

Okay, great. Yes, I’m all set. Thanks.

David Schramm

Sure. Thanks, Michael.

Operator

Thank you. We’ll go next to Philip Shen with Roth Capital. Please go ahead.

Matt Phil – Roth Capital

Hi, guys. This is Matt Phil. I’ll send his regards. First of all, nice job in the quarter. And just had a couple of questions. First, we wanted to get a sense for the progress that you guys had in the truck ESN business. How is it ramping relative to what you guys had expected?

David Schramm

The way it’s ramping, Matt, is we have got fleets now taking their second tranche of doing more and more depot work. So we’ve been working with some major truck fleets. And as we’ve had success with two or three other depots, they’ve now ordered extra parts to go into several more other depots. And we’re highly confident that there had such good success that we’re going to end up having some good news here within the next couple of quarters

Matt Phil – Roth Capital

Okay, great. And I think it might have been touched on before, but can you guys comment a little bit on – last quarter, you said you’re seeing some daylight in the sales efforts in the wind market in China. I just wanted to see sort of how your H2 is tracking. Is it looking more Q4 weighted? I mean, is there going to be some volume in Q3 as well?

David Schramm

I think as I said in the comments, Q1 was bigger than Q3 and Q4 last year and Q2 was bigger than Q1 of this year. So we’re starting to see that market come back.

Matt Phil – Roth Capital

Okay, great. That’s all for me. Thank you.

Operator

Thank you. We’ll go next to Jed Dorsheimer with Canaccord. Please go ahead.

Josh Baribeau – Canaccord

Hi. Thanks. It’s Josh Baribeau for Jed. Just a couple for me. Just doing the math on your guidance of 15%, maybe 20%, for the full year and then I think 7% to 10% for Q3. That indicates a pretty large ramp in Q4. So can you provide a little bit more – oh, I know I guess it’s China wind and China hybrid that we drive at. But if you could provide a little bit more comfort, I guess, around why you think Q4 is going to be so large or maybe the answer is, are you just being more conservative with Q3?

David Schramm

I think the answer lies in the state department. The one we saw from China that says they’re expanding the bus market and we’re starting to see more and more activity in our hybrid bus business.

So, Q3 was a great quarter for us on busses, our Q2, excuse me. And we look at Q3 as continuing that effort and Q4 to finish out really strong. So, right now we’re pretty optimistic that the hybrid bus business is going to be a growing business, specifically in China for the rest of this year.

Josh Baribeau – Canaccord

Okay. And I understand that a lot of these new markets are a bit of a missionary sale whereas your product is a little bit higher upfront but leads to longer life and all the other benefits. So, it’s really a cost of ownership story.

What are some of the things that you can do to take that cost out of the ultracap to make it more competitive on an apples-to-apples basis? Or if you kind of reach the limit there and you really have to sell the cost ownership story.

David Schramm

Yes. Well, and again when you say apples to apples, it’s what’s the other apple you want to look at because –

Josh Baribeau – Canaccord

Well, say, batteries.

David Schramm

Okay. And a battery is an energy generator. We’re an energy storage device. And the only way we could look at this is through a value proposition. And a value proposition is through the warranty or the lifetime of the application. We’ve got a lot of data that suggest that the ultracap really can do a better job.

As we stated in the past, we’ve got an awful lot of data that shows that if you put a battery in conjunction with the ultracap, you can generate a better systems that lowers your overall system cost. The data we’re working on, we’re looking at what happens to battery life if you don’t cycle the battery and you let the ultracap do the cycling and the battery do the energy.

And we believe you’re going to extend the battery life as well as have a more effective power system. And that’s exactly what’s happening with the PSA system that they’re using with the Continental. The VSS system, the voltage stabilization system. It’s using two ultracap to supplement the battery. And they’re seeing great improvements in lifetime and the affectivity of the system.

Josh Baribeau – Canaccord

Okay. And then finally, have you changed the acceleration or the rate of the expansion and the new electrode facility as a result of either just access the capital or the slowdown in Europe? Or is that still going ahead of plan?

David Schramm

It’s not an access to capital issue at this point. It’s strictly the European has – the European economic situation has slowed down the overall market force, which is why we changed the guidance last quarter. Europe is just not doing what we thought two years ago we’d be enjoying in Europe.

We also didn’t think it would be in $1.20 range on the euro a year and a half ago.

So, a lot has changed. So what we’ve been doing is fostering ourselves so that when Europe finally does turnaround, we’re going to be prepared for it.

So, Phoenix right now, we’re probably a quarter away from what we thought a year and a half ago. But the equipment is still coming in. Financing is not an issue. And we will be completing the building and installing the equipment and going early next year.

Josh Baribeau – Canaccord

Okay. That’s it for me. Thank you.

Operator

Thank you. We’ll go next to you, Tom Daniels with Stifel Nicolaus. Please go ahead.

Tom Daniels – Stifel Nicolaus

Great. Thanks for taking my question.

Just in regards to the HP capacitor business in the Russian grid project, do you guys think this could sequentially grow throughout the year?

David Schramm

Actually, it’s a project as you said there, Tom. We work with major contractors, and as they put in the new grid systems and they put in the infrastructure, we are basically with them.

So, as they put in more systems throughout the world, and again, it’s the Brit nations that we see this. But it’s a pretty steady business. It seems like as they put in one grid, another one pops in.

So, we still see that as a high-single digit growth business for Maxwell for the next year.

Tom Daniels – Stifel Nicolaus

Okay. Do you think that can last in the 2013, from what you can tell right now?

David Schramm

I don’t see any reason why it won’t continue to be a single digit type growth business.

Tom Daniels – Stifel Nicolaus

Okay. Great. And then the pricing on your truck starters, I believe maybe at 1.8. You said it was $1,300. How do you expect that pricing to trend kind of as we go forward and as that product matures? Do you think they can stay around there? Is it going to get priced down pretty aggressively?

David Schramm

Well, the thing that I was working on is we’ve got to get the cost down before you get the price down. And we are taking the cost down. We are reducing the cost of our electrode. We’re reducing the cost of our assembly. We’re reducing the cost of how we put modules together and all the parts to go into the module.

It’s probably the biggest driver, of course, like in any business is volume is a great contributor. So as the volume goes up, our cost goes down. And as our cost goes down, those are – I call them very elastic markets which means that we have got to match the pricing with the volume. So the lower the price, the more volume to get, the more cost we drive out, and that’s the Utopian answer for us on that product line.

Tom Daniels – Stifel Nicolaus

Okay. Can that really grow by fourth quarter this year? Or do you think that’s more of a 2013 opportunity?

David Schramm

I think with both the evaluations going on right now, it’s definitely a 2013 operation, and I think we’ll see a little bit of an uptick in the latter half of this year, but the significant growth can start next year.

Tom Daniels – Stifel Nicolaus

Okay, great. That’s it for me. Thank you.

Operator

Thank you. We’ll go next to Chris Kovacs with Robert Baird, Please go ahead.

Chris Kovacs – Robert Baird

Hi guys, thanks for taking my question. So obviously now we’re in Q3, and I’m sure you have pretty good visibility into the upcoming quarter with the guidance you gave, but do guess it’s more comfortable with Q4 – can you give us a sense of what amount of that potential revenue you need to achieve in the fourth quarter that you already have some sort of visibility into your – essentially have contacted to be delivered?

David Schramm

I guess the best way to look at that is the confidence we have in what’s going on the hybrid bus and the wind business. The assumption we’re making right now is that there probably won’t be a whole lot of growth in Europe for the rest of this year.

And our North American presence has never been as high as we think it’s going to be here in the next year. So it’s how well China is going to grow. And right now, everything we see, says it’s going to continue the growth cycle through the rest of this year.

So we’re going with what our customers are telling us, and what they’re seeing, and everything we’re reading. So our confidence is with that announced in the press release today.

Chris Kovacs – Robert Baird

Okay. And can you give a commentary about how wind has trended the last couple of quarters. You’re saying Q1 was better than Q3 and Q4 of last year combined. How has the hybrid bus been trying to trend over that same period?

David Schramm

It’s been going up steadily.

Chris Kovacs – Robert Baird

Okay.

David Schramm

The beauty of that is we’ve been adding more and more customers. And as the state has gotten more and more comfortable, they’ve added more cities that require these buses.

So we’re seeing – we’re enjoying a very nice growth cycle right now on hybrid buses.

Chris Kovacs – Robert Baird

Can you kind of quantify for us the average of the CAGR on that or quarterly growth rate? Or ballpark even?

David Schramm

That’s really difficult to do it this time. All I can tell you is on a macro level, it’s going to continue to grow throughout the year. Part of the problem is, this is a pretty lumpy business. It’s actually easier to predict what’s going to happen on a year basis, not a quarterly basis.

But again, right now, as we reiterated in the press release, 15% for the year, and there’s still a potential to get that up to 20%.

Chris Kovacs – Robert Baird

Okay. And just a last question. Did you expect the somewhat elevated levels of HBC in microelectronics revenue to continue the rest of the year? Or should that kind of normally sort of go away this quarter?

David Schramm

Well, those are both – the microelectronics business is historically lumpy. And what we’ve said is, that year over year, it’s going to be single digit growth. And the high voltage looks, year over year, it’s going to be a high single digit growth.

So I think we’ll see a little bit more throughout the rest of the year, but the real growth engine is going to be the ultracapacitors.

Chris Kovacs – Robert Baird

All right. Thank you guys.

Operator

Thank you. We’ll go back to Colin Rusch with ThinkEquity. Please go ahead.

Colin Rusch – ThinkEquity

Good afternoon gentlemen. The cost of engineering here is actually pretty impressive. Can you talk a little bit of what’s going on in the manufacturing portion of your business, and then also the SG&A segment, and a little bit more detail on how we should think about that going forward?

David Schramm

Yes, we’ll take that in two parts here. On the cost reduction side, I tell you, I get a lot of applause to our engineering groups. The engineers have figured out how we get cost out, and as we get more volume up, we see more opportunities as you how you get cost out.

Material sourcing is one that gives us a little cost volume, gives us a lot of cost, in designing the product with better component has given us a lot of cost.

So we’re on track to continue our cost reduction. I tell you, five years ago, it was easy to take a $10 bill out of a product, and now it’s looking like the nickels, dimes and quarters are where we got to aim.

But we still see some cost reduction, we got to look at redesign efforts. At some point in time, you reach your volume level that you can afford to take a look and redesign your complete product line. And that will get us to the next layer of cost reduction.

At this point, I don’t see an end in sight as to where we run out of cost to take out a product. And I’ll let Kevin comment on the SG&A, and what’s been happening there.

Kevin Royal

Yes. So on the SG&A, if you recall, you go back to last year, and the first quarter of this year, we have had significant legal expense, we solved many of those issues in the first quarter, so we saw the lower legal expense in Q2, and we expect that to carry through the remainder of the year.

We also had some lower administrative type expenses such as audit and I mentioned the lower bonus accrual rate. Now, as we move forward, we’re forecasting for Q3 total SG&A with R&D on a non-GAAP basis of $14.5 million for the Q3 and then for the fourth quarter, we’re forecasting $15.5 million. That really reflects hiring, so adding resource primarily in the R&D area but also some in the sales engineering departments as well and also reflects project materials as we develop new products for the company.

Colin Rusch – ThinkEquity

Great. And then can you just talk about the number of engine start customers you have at this point and then what the sales vol looks like on that product?

David Schramm

It’s several fleets at this point. I would dare say if add them all up, it’s at least seven of them and we’ve got quite a few different depots. So one customer may have four or five different depots they’re evaluating. And so, pretty pleased right now that we’re getting good footprint on the start of the CSM.

Colin Rusch – ThinkEquity

Great. Thanks a lot, guys.

David Schramm

Sure. We want to thank everybody for participating today and we look forward to talk to you again in three months.

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Source: Maxwell Technologies' CEO Discusses Q2 2012 Results - Earnings Call Transcript
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