Maxwell Technologies Management Presents at Canaccord Genuity 32nd Annual Growth Conference (Transcript)

Aug.14.12 | About: Maxwell Technologies, (MXWL)

Maxwell Technologies Inc. (NASDAQ:MXWL)

Canaccord Genuity 32nd Annual Growth Conference

August 14, 2012 9:30 AM ET

Executives

Kevin Royal – SVP, CFO, Treasurer and Secretary

Analysts

Jed Dorsheimer – Canaccord Genuity

Jed Dorsheimer

I thank everybody for coming today. My name is Jed Dorsheimer. I’m one of the senior analysts at Canaccord Genuity running the lighting, display and energy storage sectors for the company. We’re lucky enough or fortunate today to have with us one of the leaders in ultra-cap technologies. For those unfamiliar with ultracaps, it’s basically a way to replace the battery for energy storage giving quick charges as well as increasing the lifetime. From a housekeeping perspective, we won’t have any Q&A in here. We’ll be moving across the hall to the breakout session. And I’m told to point you to our important disclosures concerning Canaccord Genuity may be found in our seminar materials.

So, with that, I’d like to introduce Kevin Royal, CFO of Maxwell Technologies, and also point out that Mike Sund, Head of IR, is handing out some pamphlets there. So, with that, I’d like to turn it over to Kevin.

Kevin Royal

Thank you, Jed. Before we get into the main body of the presentation, I need to go through our forward-looking-statement disclaimer, and just quickly what this says to summarize is that we will be making forward-looking statements today. Our actual future results could be different than the forward-looking statements that we make today and for more information you can take a look at our SEC filings. There we filed our Qs and Ks filed with the SEC.

So, first of all, a little bit about Maxwell. Today the company consists of three different product groups, ultracapacitors, our microelectronics product group and our high-voltage capacitors. And we’ll spend just a little bit of time on microelectronics and high-voltage. But the majority of this presentation will be focused on our growth area which is ultracapacitors.

So first, our high-voltage capacitors, these are very large devices that are used in power distribution and transmission applications. These are designed and manufactured by our wholly owned subsidiary in Rossens, Switzerland, and our revenues for 2011 were just a bit north of $42 million.

Our microelectronics product group, these are electronics components in single-board computers that are designed and built to withstand the harsh effects of space environments. So, they’re basically radiation-mitigated parts that allow them to withstand the radiation effects of flying in satellites and other space applications. This is a niche product, very profitable for the company, and our revenues in 2011 were $18 million for these products.

So, as I mentioned, ultracapacitors will be the focus of the presentation. This is the growth area for the company. Today, we’re in many applications and that list continues to grow. We’ll cover some of these applications a little bit later in the presentation. Our revenues for this product group in 2011 were $97 million.

So first, I’ll spend a little bit of time on talking about ultracapacitor and what an ultracapacitor does. And as Jed mentioned, an ultracapacitor is an energy storage device. It stores energy, and it’s capable of releasing that energy rapidly. So, it can take a quick charge and a quick discharge. They’re ideally suited for high-cycling, long-life applications such as regenerative braking in hybrid buses.

So, first, this chart is designed to show some of the differences in the operating characteristics of ultracapacitors and batteries. On the horizontal axis, we’ve got the power density and on the vertical axis, we’ve got the energy density, which is storage capacity. And what this chart demonstrates is that batteries have a much higher energy density or storage capacity in comparison to ultracapacitors, which have a much higher charge-discharge rate.

Some of the other characteristics to keep in mind about ultracapacitors and some of the key differentiators compared to other energy storage devices, is that they’ve got a wide operational temperature range. So, when we look at some of the applications, you’ll note that these are very extreme operating environments. They do good down to negative 40C degrees and can function as high as 65C degrees.

They’re very highly efficient. You can get out 95% of what you put in. They’ve got very, very long life, up to millions of cycles. They’re very lightweight. If you get a chance after the presentation, you can come try this. This is our K2 Cell, 1,200 farad, very light in comparison to other energy storage devices and there’s no heavy metals. These devices are comprised of aluminum and carbon with a little bit of electrolyte.

So, the previous chart, we talked about the differences between ultracapacitors and batteries. And what this chart does is it shows how the battery – how an ultracapacitor can complement a battery. Upper left-hand corner of the chart shows the current and the voltage on a battery in a forklift application.

So, you can see there’s a lot of spikes on the current and the voltage in normal operation. The lower right-hand corner shows that same application paired with an ultracapacitor. And you can see that the ultracapacitor, it handles the spikes in the current and the voltage. Batteries don’t like those spikes. So, paired with an ultracapacitor, a battery will last much longer.

So, these are our current ultracapacitor cells. So, these are the cells that we make. In the upper left-hand corner are our K2 cells, and they range from 650 farad to 3,000 farad. These are high-volume products.

Moving around to the right, our D Cell, the size of D Cell flashlight battery, 310 to 350 farad. And then moving down to the lower right-hand corner, those are HC cells. They’re a lighter duty, lighter application product, and they range from 5 to 150 farad. And then in the lower left-hand corner is a very small, about the size of a piece of Chiclet gum, our 10 farad PC10, which are primarily used in solid-state drives.

So, the cells that we saw on the previous page, we sell 80% of those incorporated into these modules. We’ve got standard modules here that range from 16 volt to 125 volt. These are standard. These represent all of the modules that you see today, not a lot of different flavors and part numbers, and they allow the customers to take a standard module and incorporate it into their custom application.

So, a few years back as the company was driving to make ultracapacitors more widely accepted, we knew, as a company, that we need to get the cost down. And one of the steps in the cost reduction process was to move to offshore assembly. And we’ve got two of our contract manufacturing partners listed here. These are the most significant contract manufacturers we have. First is Belton Technology. They build the K2 Cell that we saw a few slides earlier, and then Lishen Battery Company builds the D Cell and the related D Cell modules.

So now, we’re going to cover some of the applications for ultracapacitor. Today, we’re in various applications within transportation and renewable energy as well as industrial and electronics, and we’ll cover a few of the more significant applications on the following slides.

So, first is wind energy. This was the first high-volume application for the company and the ultracapacitors in this application are used as backup power in the blade pitch control mechanisms. So, in the event of a power outage, the ultracapacitors would take over and they would provide the power to turn the blades out of the wind. Without a backup power source, you could have a runaway turbine and have significant damage and significant associated costs.

The next is backup power. Today, we’re in two backup power applications. The first is uninterruptible power supply, where the ultracapacitors are used as a bridge power source in the event of a power disruption. As the generators spool up, the ultracapacitors would step in and provide that bridge power until the power generators are able to take over and provide power.

These are used in hospitals and in data centers. And then the next backup power application is in solid state disk drives. It’s our PC10. The PC10s provide power to the solid state drives in the event of a power interruption. They allow data that’s in volatile memory to be written to non-volatile memory.

So, transportation; transportation in many forms really represents the highest volume markets today for the company, as well as future markets, and we’ll talk about some of those. The first is hybrid electric bus and rail applications. And these are both regenerative-braking applications.

So, first, the hybrid electric buses, the way that works is as the bus driver steps on the brake to slow the bus, it signals the electric motor to run in reverse and basically has a dragging effect on the bus, and it charges the ultracapacitor packs that are on the top of the bus. When the driver steps on the gas, the ultracapacitors drive the electric motor forward, allows the bus to go up to 20 to 30 miles an hour, and that results in about 25% to 30% fuel savings. And it also reduces particulate emissions by up to 90%.

The next is automotive. Today, the automaker PSA, which handles the Peugeot and the Citroën models, uses our ultracapacitors in a start-stop system. The ultracapacitors provide the starting power to the car when it’s shut off. So, you pull up to a stop light, stop sign, car turns itself off, take your foot off the break and the car starts. And the ultracapacitors provide that starting power. The system has been evaluated against other start-stop system by a leading German auto publication and was determined to be the superior system out of all those that were evaluated.

Next up is our Engine Start Module for heavy trucks. This is our first product in a number of engine-starting projects – products which we’ll be introducing over the next couple years. What this does is it provides a start in any condition. So, if a trucker is at a truck stop, turns his truck off, maybe he runs some of the hotel loads off his batteries. If the batteries don’t have a state of charge to start the vehicle, he’s got the Engine Start Module.

We introduced this late in 2011. We shipped a number of units for fleet trial and evaluation. We’re in evaluation with about 10 fleets at this point in time. We’re getting very positive feedback. As we move forward, we’ll introduce products for the delivery vehicle market for marine and military applications. And then we’ll slowly rollout the products into Europe and Asia as well, which require a different form factor, a 24-volt form factor.

Our electrode represents our core technology. It’s a patented, low-cost dry electrode process. It’s protected by not only the patents, which we mention here, but also trade secrets. We manufacture the electrode under lock and key, under our watchful eye in San Diego. We’re going to put a similar facility into Peoria but the manufacturing of our electrode, which we believe represents our advantage will always take place here in the U.S.

And then from a financial standpoint, we’ve got our results from our recently completed Q2 of 2012. We continue to improve in revenue and in earnings. For the most recent quarter, we’ve reported $40.9 million in revenues with a spike up in our gross profit to 42%. And our earnings per share in the non-GAAP basis will increase from $0.06 to $0.12 in the second quarter of 2012.

So, that completes our prepared remarks and our presentation. And I think what Jed mentioned is that we go to the breakout room from here in order to do Q&A.

Question-and-Answer Session

Jed Dorsheimer

We can probably take one or two questions...

Kevin Royal

Can we do two questions here? Okay. All right. Great.

Jed Dorsheimer

(Inaudible)

Kevin Royal

So, the question is who are our competitors in ultracapacitor market? There’s a number of companies that build ultracapacitors. When you look at the larger form factor which represents our highest volume, there’s only a handful. Most notable, there’s two Korean companies, LS Mtron and Nesscap. They compete in the larger form factors. And then there’s a French company by the name of batScap that also builds the larger form factor, ultracapacitors. Yeah, Jed.

Jed Dorsheimer

Kevin, (Inaudible)

Kevin Royal

So, the question has to do with ultracapacitors in the automotive application and why we haven’t had a quicker adoption cycle. And what I would say is I think historically, it’s been an issue of cost. It’s also been an issue of understanding the different safety factors, which I think the auto manufacturers now understand. And what we see is there’s a bit of sticker shock as it relates to an ultracapacitor versus a battery.

When you look at our total cost of ownership in a start-stop application, the calculations we do with some pretty good insight from some of our customers – our potential customers is that the ultracapacitor will provide a lower-cost solution. You’re not changing the ultracapacitor out where you would a battery, you don’t have that shop time. And so, it’s really working with the car companies and having them understand the total cost of ownership proposition. We’re in a number of trials, a number of projects with various auto companies, both – well, around the world, I would say.

And do I think it’s important to our industry? I think it is. Do I think that we’re well suited to now fulfill those applications? I think from a cost standpoint, we’ve driven the cost down from about $600 three years ago for the 3,000 farad cell down to $120 today. And so that’s a significant cost reduction with more to follow. And so, I think with those cost improvements, I think we’re at the point where these could be adopted in volume for various applications within auto.

Unidentified Analyst

Well, as an investor, I know in (inaudible) a metric that you can look at to (inaudible).

Kevin Royal

Yeah.

Unidentified Analyst

(inaudible) is there a similar type of trend in terms of (inaudible)?

Kevin Royal

There’s really not in part because the applications vary so widely, and then – if you look at the Coke can equivalent size of this. So, this is a 1,200 farad. And you say, okay, this is X, $0.01 per farad or whatever it is. When you go down to a 10-farad cell, there’s no way to sell that for $0.10.

I mean, today it’s a part that we charge about $2.50 for, and when you look at all the cost projections getting down to a $0.05 for manufacturing cost is just not – probably not going to be in my lifetime. So, I understand the question, but because of the difference in the products and the various applications, we don’t have that today.

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Kevin Royal

Yeah. So, the question is with hybrid electric bus customers, how do we go to market? Is that fair? Yeah. And so, today, we sell directly to the customers. And in China, for the majority of the customers, there may be a trading company that sits between us and the end customer. But it’s not a distributor. They literally just handle the import function for the customer and then we sell directly to them. We’ve got direct sales relationships with all of the Chinese bus companies who purchase our products. There’s about six. Yes?

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Kevin Royal

So, the question was related to our capital raise that we executed in February through – it was actually through the middle of March, we were able to raise $10.4 million on an announced plan of $30 million. It was raised at an average price of $18.60. At these levels, the program is still in place, but we’re not selling at these levels, nor do I think we would at these trading levels.

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Kevin Royal

Yeah. No, it’s certainly something that we’ve considered. I think at this point, again, with the trading levels, we felt that that just kind of spoke for itself. So, we had not elected to do that.

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Kevin Royal

The NOL? It’s, let’s see – I think, at the end of the year, it was roughly $130 million, $140 million range.

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Kevin Royal

No, that’s federal. State is similar number.

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Kevin Royal

Well, you wouldn’t – I mean, you wouldn’t look – you wouldn’t add them together. You just look at them separately. So, again it’s the income tax liability. Our taxable income for federal, it’s around $140 million. And for state, I believe, it’s around $120 million. But I need to refresh my memory.

They’re sizable. The key issue when you’ve got an NOL that is – is that significant is the preservation of the NOL and the current status and ownership changes over a three-year period looking backwards. And you want to make sure that, to the extent that the company can control that, that you don’t have an ownership change of more than 50% in a three-year period. We monitor that.

And we want to be aware of that in the event that we were to do an equity raise or, let’s say, an acquisition and issue shares, you want to make sure you don’t impair those NOLs and your ability to utilize those, if you can.

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Kevin Royal

That’s not – honestly, that’s not one I’ve looked at, so.

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Kevin Royal

Pardon me?

Unidentified Analyst

(Inaudible – Microphone Inaccessible)

Kevin Royal

It’s something that I’ve heard about, but, again, haven’t looked into.

Jed Dorsheimer

No other questions. So, why don’t we move down the hall...

Kevin Royal

To the breakout? Okay. Thank you.

Jed Dorsheimer

...to the breakout room. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!