Quantum Fuel Systems Technologies Worldwide's CEO Discusses Q3 2012 Results - Earnings Call Transcript

| About: Quantum Fuel (QTWW)
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Quantum Fuel Systems Technologies Worldwide, Inc. (NASDAQ:QTWW) Q3 2012 Earnings Call November 8, 2012 4:30 PM ET


Brian Olson - CEO

Brad Timon - CFO

Bonnie Poyer - Executive Assistant


Michael Legg - Roth Capital Partners


Good afternoon. My name is Christine and I will be your conference operator today. At this time, I would like to welcome everyone to the Quantum Third Quarter 2012 Financial Results Conference Call. All lines have been placed on-mute to prevent any background noise. After the speakers’ remarks, there will be question-and-answer session. (Operator Instructions) Thank you.

Mr. Olson, you may begin your conference.

Brian Olson

Thank you. Good afternoon ladies and gentlemen. Thank you for joining us today on behalf of Quantum Technologies. We appreciate the opportunity to report the financial results of third quarter 2012. Joining me today are, Brad Timon, Chief Financial Officer and Bonnie Poyer, Executive Assistant. Before we get started, I will turn it over to Bonnie Poyer to read the Safe Harbor statement.

Bonnie Poyer

Certain statements made during this call may constitute forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1985. Forward-looking statements often addressed are expected future business and financial performance and often contain words such as may, could, will, should, assume, expect, anticipate, plan, intend, believe, predict, estimate, forecast, outlook, potential or continue or the negative of these terms, and other comparable terminology.

Examples of forward-looking statements made during this call include our expectations regarding future revenues, cost reduction, production capacity and the future growth of the CNG market. Various risks and other factors including those discussed in the Risk Factor sections contained in our transition report on Form 10-K filed with the SEC on March 28, 2012 and our subsequently filed quarterly reports on Form 10-Q could cause our actual results to differ materially and adversely from those contemplated by the forward-looking statements.

Forward-looking statements are based on current market conditions and management’s reasonable expectations and assumptions as of the date of this call. The company disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements made during this conference call to reflect any change in management assumptions, beliefs or expectations or any change in events, conditions or circumstances upon which any forward-looking statements are based.

Brian Olson

Thank you, Bonnie. Before jumping into the quarterly results, I want to take this opportunity to make a few opening comments. In addition to highlighting our financial results today, we will continue to emphasize our automotive focus and share the development of our strategic planning around growing this business and reaching profitability. We will talk a lot about CNG, the reason being as clearly the catalyst in our business plans.

I spoke of this last quarter and just want to make sure our stockholders are clear on our direction. CNG revenues were up during the quarter, both year-over-year and sequentially compared to the second quarter of this year. Actually, during the current quarter, we produced and sold nearly as many CNG systems as we sold in the entire prior calendar year.

For the year-to-date period ending September 30, 2012, we received new purchase orders that represent a 230% increase compared to the orders received in the same period last year. For the quarter ended September 30th, we recognized a 94% increase in tank sales compared to the prior year third quarter. It’s being driven by the underlying economics of CNG and more importantly, our ability to offer time tested and proven CNG solutions and technologies.

We have a valuable portfolio of storage and fuel system products, technologies and services and provide unique integration solutions that create value in the marketplace. We continue to go after market shares through innovation and hard work. We are selling CNG systems into a vibrant market which is marked by a growing customer base, strong end user demand and attractive CNG pricing. Most importantly, and I will discuss this after Brad covers financials, we now have a clear path for direction of this company and are able to chart our own course, chart our own destiny.

I'll now turn it over to Brad for the third quarter review.

Brad Timon

Thanks Brian and good afternoon everyone. Before I get into the details of our third quarter results, I just wanted to take a brief moment to discuss the status of our 100% owned subsidiary, Schneider Power Inc. In August, the management team committed to a plan to sell the Schneider Power Unit and we initiated steps to locate a buyer. We anticipate that we will be able to complete the sale over the next three or four months.

Schneider Power is an operator and developer of wind farms and represents the entire operations of our renewable energy business segment. As a result, of our intent to sell the business, the historical activities and balances of the renewable energy business segment are reported as discontinued operations, held-for-sale in the financial information that we're presenting today and in our 10-Q filing that we expect to release tomorrow.

So with that let’s get to the operating results for the third quarter and the first nine months of 2012. On a consolidated basis, the company’s revenues from continuing operations amounted to $5.8 million for the third quarter of 2012 and amounted to $17.1 million over the first nine months of 2012. This represents a decline in revenues compared to the prior year amount which were $10.3 million for the third quarter and $24.1 million over the first nine months of 2011.

The decrease in revenue is primarily due to lower contract revenues recognized in 2012 partially offset by increased shipments of our CNG fuel storage systems. Our company’s consolidated operating loss for continuing operation amounted to $3.2 million for the third quarter and amounted to $13.1 million over the first nine months of 2012. This represents an increase in operating loss as compared to prior year amounts which were $2.4 million for the third quarter and $8.8 million over the first nine months of 2011.

On a positive note, we did realize an improvement of $2.7 million in the level of the operating loss in the third quarter versus the second quarter of this year. This improvement is primarily a result of certain severance and impairment charges taken in the previous quarter that did not have to be repeated and also due to lower corporate and administrative costs in the third quarter including lower executive salaries and related employee benefit costs.

Moving to the results for our Electric Drive & Fuel Systems segment. Product revenues of this segment amounted to $4.2 million for the third quarter and amounted to $11.9 million over the first nine months of 2012. This represents a decrease in product revenues compared to the prior year third quarter amount which was $6.7 million and an increase of $0.7 million over the first nine months of 2011. Although products revenues from CNG fuel storage tanks and systems have increased significantly over the levels of the revenues we generated back in 2011, these improvements in the fuel storage business have been offset by a disappointing reduction in product sales to component shipments of fiscal automotive in the current year.

With that said however, I want to focus on a couple of positive trends as it relates to our CNG fuel storage sales. First, we shipped a record number of tanks during the third quarter; specifically our sales in the third quarter alone were 43% higher than our sales in the second quarter of this year.

Further, as a result of our expectations for continued growth for CNG tank business, we have implemented a plan to expand tank manufacturing capacity. The planned capacity expansion is designed to doubled our current production capacity be setting up state-of-the-art manufacturing lines at a 60,000 square foot building adjacent to our existing 30,000 square foot manufacturing facility located in Lake Forest California. The scheduled expansion is expected to provide additional capacity starting in the first quarter of 2013 with continued incremental capacity coming on line throughout the first six months of 2013.

And finally, in connection with the planned expansion, we just closed a $3.25 million capital lease financing arrangement yesterday. The proceeds of which will be used in part to fund the purchase of new equipment related to the expansion.

Next I’ll provide some comments on contract revenues segment. We continue to see a decline in our customer funded engineering contract with revenues for this segment during 2012. Contracted revenues amounted to $1.6 million for the third quarter of 2012 and amounted to $5.2 million over the first nine months of 2012. This represents a decrease in contract revenue as compared to prior year amounts which was $3.6 million for the second quarter and $12.9 million over the first nine months of 2011.

The higher contract revenue in the prior year was mainly due to the level of pre-production engineering services that we provided to Fisker during the first nine months of 2011 prior to and just after Fisker’s launch of the Fisker Karma vehicle leaving calendar 2011. Although, we continue to provide engineering services to Fisker under an existing contract to develop advanced features for the Fisker Karma vehicle, the levels of activity in 2012 have significantly declined compared to those in 2011.

Further, although we continue to perform development services for OEMs with respect to hydrogen storage systems, General Motors recently informed us that they plan to at least temporarily suspend activities under our contracts with them related to the development of hydrogen storage technologies. This suspension may negatively impact our future contract revenues depending upon the duration of the program’s suspension.

So moving on to the overall operating losses of the segment, the Electric Drive & Fuel Systems segment had an operating loss of $1.5 million in the third quarter of 2012 and an operating loss of $5.3 million for the first nine months of 2012. This compares to an operating income of $0.8 million for the third quarter of 2011 and an operating income of $0.9 million for the first nine months of 2011.

The decline in operating income for this segment was partially due to an increase in expense associated with our internally funded programs which include engineering efforts to advance and integrate our hybrid control strategies and proprietary software into existing vehicle platforms. The increase during the 2012 period was primarily due to increased engineering activities related to our F-150 PHEV program.

Let’s move into the results of our corporate segment, our corporate expenses amounted to $1.7 million in the third quarter of 2012 and amounted to $7.8 million for the first nine months of 2012. This represents a decrease in corporate expenses as compared to the prior year amount which were $3.2 million for the third quarter and $9.7 million over the first nine months of 2011.

Our current year periods are showing an improvement primarily as a result of lower levels of impairment charges in 2012 and due to low executive and other administrative costs incurred in the third quarter of 2012.

The next business segment that I will discuss is the renewable energy segment. The net loss from the operations of the renewable energy segment which is classified as discontinued operation held for sale was $0.4 million in the third quarter of 2012 and $1.7 million for the first nine months of 2012. This represents an improvement compared to prior year amounts which was $0.7 million for the third quarter and $0.2 million over the first nine months of 2011.

The net loss reported for the renewable energy business segment included a recognition of $0.8 million of revenue from energy sales in the first nine months of 2012 as compared to only $0.2 million for the first nine months of 2011. Energy sales in 2012 include activities with a 10 megawatt Zephyr Wind Farm which Schneider Power acquired on April 20, 2012.

Okay, so moving on to the results of our non-reporting segment line items. These represents line items below our operating loss line. I want to focus my comments on activities related to our Asola affiliate. Asola is a solar manufacturing company based in Germany that we own at 25% ownership stake. Asola manufactures standard solar panels in addition to manufacturing the automotive solar roofs for The Fisker Karma. Asola has continued to experience operating losses in the first nine months of calendar 2012 and has experienced declines in year-over-year revenues.

In addition, European based solar manufacturers continue to experience significant competition from Chinese based manufacturers that have a significant cost advantage over the European based companies. This competition is eroding opportunities for Asola to remain competitive or to be a viable enterprise without a significant restructuring of its operations. These continuing trends along with other indicators that emerged during the third quarter of 2012 indicated that our investments in Asola were potentially impaired. The overall carrying value of fee payments, ownership investments and loans that we have made to Asola as of September 30, 2012; amounted to approximately $8.9 million.

As a result of the indicators impairment I mentioned, we performed a detailed impairment assessment that factored in probability related potential outcomes for their solar business. Based on this assessment, we recognize an estimated impairment of approximately $5 million of that total of $8.9 million, which has been reported as a separate line item on the statement of operations.

Further, we recognize the loss of $0.4 million for the third quarter of 2012 and $0.8 million for the first nine months of 2012 related to the net equity in earnings up or losses of our affiliates that we account for under the equity method of accounting. The losses recognized in the 2012 period is substantially also associated with our equity share of the operating losses of Asola.

Moving on to overall net loss of the company, the company’s consolidated net loss amounted to $9.4 million for the third quarter of 2012 and amounted to $24.3 million over the first nine months of 2012. This represents an increase in net loss as compared to prior year amounts which were $3.9 million for the third quarter and $13.5 million over the first nine months of 2011.

I just want to make a quick comment regarding the consolidated balance sheet. As of September 30, 2012; we had total consolidated assets of approximately $66 million. Of those assets, $34 million relate to Schneider Power and thus are reported separately as assets and discontinued operations held for sale.

As for our total consolidated liabilities, which amounted to $46 million at September 30, 2012, $27 million of those liabilities relate to Schneider Power and thus are reported separately as liabilities and discontinued operations held for sale.

And finally, a brief overview of consolidated cash flows. Over the first nine months of 2012, the company has generated net cash flows from financing activities at $14.5 million and has used $11.2 million of cash for its operating activities and has used $4.6 million of cash for its investing activities.

And with that, I will turn it back over to Brian.

Brian Olson

Thank you, Brad. So Brad’s review highlighted several positive developments during the quarter, first and foremost our growth in our CNG business 137% growth for the nine month period. We continue to receive orders from existing and new customers who are supplying our industry leading ultra light weight carbon composite compressed natural gas storage tanks for a variety of transportation application.

Secondly during the quarter, we also demonstrated significant sequential reduction in cost structure approximately $2.4 million improvement some related to one-time charges in Q2, but still a significant improvement but this is only the start, we expect continued reduction in Q4 and especially as we move into 2013. And perhaps most importantly during the six months we have made significant technology advancements for our industry leading light weight storage technology.

We have been delivering advanced CNG storage products and technologies to the market for year with a penchant for a light weight solution. The market has responded and we continue to develop and advance our Type 4 light weight composite storage technology. These advancements include lighter weight material, lower cost solutions and added range all equally important factors. Our innovation advancement is evidence from our recent introduction and announcement of Quantum’s next generation of proprietary fuel storage technology Q-Lite which incorporates state of the art materials and innovative designed characteristics.

Our new enhanced ultra lightweight storage technology includes the unique one piece, lightweight liner system that maximizes the storage capacity in a highly optimized corrosion and fatigue-resistant structural shell that incorporates high strength lightweight aluminum fittings.

Our new Q-Lite tanks provide dramatic weight reduction, increase fuel storage capacity and the capability to integrate on vehicles with simple lightweight brackets resulting in an overall reduction in fuel system way which is extremely important in the marketplace.

In addition the new CNG technologies, our business plan as Brad pointed out includes a significant plant expansion that will allow us to significantly increase our production capacity in 2013.

As disclosed in today's earnings release and we will make further disclosure in the morning in a separate release, we just entered into an equivalent financing range that will provide us with capital to expand, enable this expansion. CNG is the center piece of our business plan in 2013, there will be a year clearly mark by continue growth in our CNG business.

We planned to triple our CNG revenue production in 2013 and combined with CNG development contracts, we expect CNG revenues in excess of $30 million in 2013 and reaching operating income. Our CNG product revenue projection is based solely on tank sales. We are currently building a foundation to deliver on a broader based CNG business plan.

Currently, we are working on several complete CNG fuel system and integration development programs at the OEM and after market levels. This will enable us to sell not only our storage products but also recognized revenues for a complete fuel system which can represents three times the revenue from the sale of just the storage tank. We are carving relationships beyond just customer supply relationships. We anticipate making announcements in the next several months in early 2013 related to the partnerships and providing specific details on how the strategic relationships enable commercialization of CNG vehicles and enable Quantum to chart its own course in the advancement of our business goals and diversification across double CNG business segments.

Just last week we announced CNG orders and growing business opportunities in the medium duty market. We are working on several medium duty programs all the way from tank module sales to completely integrating the packaged fuel system solutions. This is tactical blocking and tackling that generates CNG tank sales, but also strategic in terms of aligning and positioning Quantum as a complete system provider leveraging our tier one OEM CNG systems integration experience.

We are also pushing forward with several after-market opportunities representing over 3 million Class 7 and 8 heavy duty after market vehicles on the road today. This is an emerging opportunity within the CNG industry and we plan to capitalize on it starting in the fourth quarter of 2012 and then moving into 2013.

Our CNG business plans in 2013 will be centered on Class 7 and 8 heavy duty OEM and after-market vehicles and medium and light duty trucks. We are reemphasizing a one-stop shopping solution for our CNG customer base, which will enable us to maximize quality and minimize system costs. We will continue to provide faster market solutions yet completely certified and validated systems to OEM and after-market specifications.

Just real quickly in addition to CNG and on Fisker, we continue to support Fisker on their Karma production program and ongoing development efforts as Brad had pointed out. We anticipate supplying a proprietary hybrid dry system to control software and related components with Fisker at volume levels beyond what we experienced in 2012. These product sales at any level generate positive cash flow in our business and are expected to contribute positive operating income to our plan in 2013.

Moving into the F150 programs in terms of our F150 PHEV programs, due to delays on final battery pack validation and production vehicle validation and our need to utilize engineering and integration resources in light of these delays another program especially customer funded and expanding CNG programs activities on the PHEV F150 programs have been suspended.

Due to additional investment needed to bring the vehicle to market, we believe that the continued advancement of the F150 program will require strategic partnership funding and collaboration. We have been assessing potential opportunities along these lines and will pursue pathways that provide for funded commercialization. Brad had mentioned the renewable energy business segments, with respect to that, we are currently undergoing a process and make sure we will realize the most value for this asset with the expectation that we will complete this process within the next three to four months.

In light of where we are at in the process I cannot provide any additional or further details at this time. Brad had also mentioned Asola as we all are aware the solar industry especially in Europe remains troublesome and the Chinese dumping policies have negatively impacted Asola’s traditional solar business. It is difficult to fully determine a final outcome of newly implemented European and (inaudible) tariff, but we did make provisions during the quarter as a result of the difficult operating environment and continued losses at Asola.

I do want to emphasize we have no commitments to fund Asola and do not have any plan to advance any form of cash to Asola (inaudible), and we will continue to assess Asola’s business plans and work with a Asola management on identifying any strategic and/or financial opportunities that may materialize.

In addressing the solar and wind aspects of our business, and even the consolidation of focus activities within our automotive business, please recognize, these are challenges in the business we need to work through and unfortunately, these things take time. In certain respects, we're going through the eye of the needle in order to take necessary decisions and take the appropriate actions that will make a meaningful and positive difference to the future of this company.

But be assured we're diligently working on getting this business completely on a pathway to success. The company’s employees are committed and energized to deliver on stockholder value. We have so many positive developments on the CNG front, I’ve never been more optimistic about our future.

This concludes my prepared comments and we will now open the call up to questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from the line of Michael Legg.

Michael Legg - Roth Capital Partners

I wanted to talk, I might have missed it, a little bit of storage tanks obviously doing very well, exceeding what I have in my model for next year by our guidance. The F150 program, can you touch on that a little bit?

Brian Olson

Yeah, really the nature of my comments related to, you know, we've been completing final battery pack validation and production vehicle validation and just the incremental additional resources, both from a Dow Kokam standpoint and a Quantum standpoint currently right now in terms of evaluating the economics and the existing viability what we are suspending the program, we are realigning our certain internal, engineering, development and integration resources in the CNG program. We would be looking going forward for some form of strategic partnership funding or collaboration which is a distinct possibility and there are some opportunities that could potentially materialize we just don’t have any specific details nor could we at this stage, but that program is officially being suspended for kind of the reasons I delineated.

Michael Legg - Roth Capital Partners

Okay. And then just let’s talk about the wind farm and the sale, I think you mentioned you expected completion in three to four months and that’s completion not just an announcement of the sale.

Brian Olson


Michael Legg - Roth Capital Partners

Okay. And if we tie that into the cash position can we discuss, you mentioned you were raising 3.25 million for the build out. How do you expect the debt associated with Schneider what type of magnitude are we going to be able to cover with the sale. How do you look at that?

Brian Olson

Yeah, just so we clarify. We did officially close on that 3.25 million, so we have concluded that transaction. So that is the capital for expansion of the tank production facility. The potential sale and hopeful sale of Schneider Power would include, it would be an equity type sale which all the debt associated with Schneider Power would go to purchaser. So there would be a significant reduction on our balance sheet debt position.

Michael Legg - Roth Capital Partners

Okay. And you did say, you expect the CNG to be three times this year or greater than $30 million in revenues next year with operating income, where the excise gone away. What type of expense reduction on the corporate side does that bring?

Brian Olson

Yeah, there will be in a reduction because we do anticipate some funded CNG contracts that we are currently working through and working on, and so we are going to see a transition of integration and design engineering resources that have not been funded up to the stage, transferred into certain funded development programs. So that could help. I know if we can specifically quantify on this call, but it will have the meaningful impact, if the CNG contracts are covering that engineering resource based.

I just want to clarify as well, F-Drive is not going to way. The underline technology and the F-Drive specific platform is still a viable platform and could potentially be commercialized in a period of time that we just can't clearly identify this point, we just want to be straight forward and use a word suspended because we think that's a fair assessment of where we are on the process. But there is a possibility, we can't put a timeframe out of it that there will be some collaborative effort maybe some partnership aspect to it that would potentially enable us to move the F-Drive and the F150 platform going forward.


Question comes from the line of [J Randell].

Unidentified Analyst

A quick question about the new Fisker contract that I read about you guys touching briefly on that. Is that anything that you guys get from that? Is that in addition to the existing contracts you had or is it an amendment to the existing contract and what can you share for specifics on that one?..............

Brian Olson

Yeah, that was a new development contract so it was in addition to our other contracts but it was for development only. So that's in addition to our supply agreement.

Unidentified Analyst

Okay, I'm not sure if you can share this or have the information but is there any discussions or potential to have something similar when they eventually get the development with (inaudible)?

Brian Olson

Yeah, it’s possible; we continue in dialogue with Fisker you know we think we have a good relationship. We are working through some issues but we do think that we will be working with Fisker as we go forward, that's our best estimate right now so yeah.

Unidentified Analyst

In regard to your comments so far seen you are confident the direction of the company, I know when you guys took over or specifically you Brian you (inaudible) market is that something you guys would consider to grab the opportunity in some of these (inaudible) pretty depressed right now are you guys still gulping up the shares whenever you can?

Brian Olson

Yeah, I think there's, I think there's an across the board willingness and interest including myself, other executives, our Board of Directors was very supportive in making some purchases at the appropriate time or we could actually do that and yeah due to the Schneider Power situation and due to some other developments that are happening on the CNG side of our business, it would be very difficult at this stage but yeah I would actually very much embrace the opportunity to continue to take an equity position in the company with my own capital and continue to show support and belief in the future of this company so yes absolutely.

Brad Timon

And I echo those comments of Brian’s.

Unidentified Analyst

And along those lines if the 180 day extension expires which hopefully the share price is well above $1 before it comes to that, do you guys have any contingency plans on the back burner should that negative aspect arise.

Brad Timon

Yeah, there's still certain aspect that the company's Board of Directors would have to consider in terms of potential reversed share split and other things that we would consider and possibly look into. But we are still at a point right now where we remain very hopeful that where we see the business going over the next six months that we clearly hope it’s not an issue, but there are some contingency type things that we will be able to look at as well.

Unidentified Analyst

And one final thing, I know on the last couple of calls you guys have (inaudible) profitability on the horizon and I'm sure you can give me exact specifics but do you guys have a rough kind of a last quarter you mentioned at some point in 2013 are you still pretty confident that at some point in 2013 you guys will be profitable.

Brian Olson

Yeah in terms of what we've outlined, in terms of where we see revenue continuing to grow and the catalyst behind that revenue growth that we've outlined on this call, we did hit upon the cost reduction that occurred from Q2 to Q3. We would expect to continue to see some of the cost structure items that we had identified as we are really trying to pursue and go after, we are seeing those things materialize there’s a couple of major significant ones that we could see materialize here that could positively impact 2013.

So everything on the cost side we believe is coming to fruition. There’s additional cost structure things we're looking at, we're in the midst of going through a very detail 2013 plan which includes cost reduction activities, and we would see between that revenue growth and reduction in our cost size that we're targeting a level of profitability in 2013 and then obviously in the second half of 2013, we see the heighten opportunity of even more profitability but the improvement even in Q1 and Q2 compared to where we are today, we see the improvement in the business is going to show up in the financials even early in 2013 as well.


There are no further questions.

Brian Olson

Okay, thank you. Just want to express our continued appreciation for your interest in the company and participation on the call today. So, thank you very much.


This concludes today’s conference call. You may now disconnect.

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