We scheduled an interview with two representatives of EnWave Corporation (ENW), a company that offers industrial-scale dehydration technology for commercial applications in the food and pharmaceutical spaces.
EnWave's Radiant Energy Vacuum ("REV") platforms are becoming the new global dehydration standard: faster and cheaper than freeze drying, and with better end product quality than air drying or spray drying.
So we sat down with Mr. John Budreski, the Executive Chairman and Mr. Brent Charleton, the Senior Vice President Corporate Affairs to discuss this high potential company.
Smallcaps Investment Research: Welcome everyone to a new interview on Smallcaps Investment Research. We're excited to have not one but two representatives from EnWave Corporation with us today. First, we have Mr. John Budreski, the Executive Chairman and secondly, we have Mr. Brent Charlton, the Vice President Corporate Affairs. EnWave offers industrial-scale dehydration technology for commercial applications in the food and pharmaceutical sectors. The Company is listed on the TSX Venture Exchange with ticker symbol ENW. John and Brent thank you very much for joining us today. Welcome.
John Budreski: Thank you for having us. We look forward to chatting with you.
Smallcaps Investment Research: John, as this is our initial interview, can you please give us an introduction of EnWave and its activities?
John Budreski: I would be happy to. EnWave is an advanced applied technology company. We have a dehydration technology that is quite novel and which is superior to other methods of dehydration in that it doesn't freeze, oxidize or cook organic matter. So we have the ability of removing water in precise amounts from organic materials without creating much other effect on it, making it a pure form of dehydration.
Our activities as a company are to maintain and expand this technology. We build and sell equipment, and we receive a small amount of profit on the sale of equipment, but we also receive a long term royalty on the throughput that goes through the sold machines.
Smallcaps Investment Research: Well, thank you. Now, in order for our listeners to completely understand the Company's business model, can you provide more details about its three revenue sources?
John Budreski: There are three revenue sources for the company. The smallest one, and one likely to remain smaller, is Binder, which is a German subsidiary that manufactures traditional drying equipment and functions sort of as our European operation.
Our second revenue line is from a business that we created in the United States called NutraDried, which is a cheese dehydration company with a special purpose product. That business was developed to propagate our technology through the dairy industry and through other industries as well.
Our primary revenue source however is the royalties that will come in from the machines that we will manufacture for our clients and which will provide income to the company for hopefully many decades to come.
Smallcaps Investment Research: Okay. Now, thanks to the Company's excellent technology you've been able to attract many well-known clients over the past years. Before we discuss who those clients are, would you first describe the process from the initial contact with a potential client all the way to the signing of a commercial agreement?
John Budreski: Companies will seek us out when they hear about our technology through the industry or by way of referral. Sometimes we'll meet them at trade shows that we attend and sometimes the initial contact will be us reaching out to the prospective partner and explaining our technology to them.
Typically the second step is that they ask us to do some dehydration of their particular material, which we'll do for free to demonstrate the superior attributes of our technology. The next phase is a research collaboration where they'll continue to dehydrate their material and do more research upon it. That research can either occur at their own facilities with them renting a machine from us, or them booking time and renting capacity from us at our facilities here near Vancouver.
After a period of research collaboration where they have honed to the product and we have worked with them to hone the product, the next step is for them to buy a machine and go into commercial production.
Smallcaps Investment Research: Excellent. Now, EnWave has several commercial royalty-bearing agreements in place. Who are those clients, and can you explain the agreement that you have with them a bit more? And also, how does EnWave generate income from these agreements?
John Budreski: The entire list of our clients is a bit too long to summarize, but I advise to take a look at that list on our website.
Some of the larger clients however are companies like Hormel Foods, which is the owner of the SPAM and Skippy peanut butter brand; Bonduelle, which is a Paris, France based organization that produces frozen vegetables and through our technique will come out commercially this year with a very superior frozen quality vegetable; Milne Fruits, a US based concern; NutraDried LLP which is our U.S. cheese manufacturing business; and we also have an agreement with Merck Pharmaceutical and some other companies.
The agreement that we have with our clients, is that we typically charge them a percentage based on the value of what the machine is producing and what the machine is selling. If that doesn't lend itself to a mutually satisfying agreement, we can charge on a per unit basis or per kilogram basis.
Smallcaps Investment Research: Now, in addition to commercial agreements, EnWave has many more ongoing research agreements with some well-known companies. Can you describe some of them for us?
John Budreski: We have some agreements that we are doing privately, without announcing the name of the company and some where we do announce the name. But basically, these companies are conducting research to improve their products.
Hormel is an example of one that now has signed a commercial royalty agreement. They spent the last two years using our equipment to refine their product, and also to do some product testing with customers.
Smallcaps Investment Research: Well that's great. The Company also has two subsidiaries. First, is it possible to tell some more about the activities of the 86.5% owned Binder Maschinenbau from Germany?
John Budreski: Sure. Binder is a 50-year-old company. It was a family owned business that manufactures traditional air drying equipment. We bought the 86.5% of the company a couple of years back.
I wouldn't say that the prior year has been easy, as Binder was suffering from a lower sales level. But, I'm happy to report that Binder has done some extensive marketing and has refilled their order book. So we are very happy with the way that they are going forward. Their manufacturing facility in Germany is pretty much full at this time, and it seems to be working quite well.
Smallcaps Investment Research: Okay. Furthermore, EnWave is a 51% stakeholder in NutraDried LLP, which produces 100% natural dried cheese products for the snacking industry. How did this subsidiary come about?
John Budreski: We believe that products dried using REV technology are for most parts superior. So we wanted to make people more aware of what the technology can do, without competing with prospective buyers of our machinery. Because there wasn't a dry cheese snack product on the market, we started producing it.
As a result, we're now making money with this product, and at the same time it demonstrates what's possible with our technology. A third and final advantage is that we can take other potential clients to watch the machinery in action in our facility and make them comfortable with how well it works.
Smallcaps Investment Research: What are the two subsidiaries' current financial contributions to EnWave, and what's their potential in your opinion?
John Budreski: The NutraDried cheese business is just starting, and it currently only has a small financial contribution. But it's growing rapidly and we think that it has good potential to contribute to our operations in the coming years.
Binder is probably a $5 to $8 million a year revenue business. We don't expect Binder to grow drastically, as it's already a mature business in traditional air drying equipment.
Smallcaps Investment Research: Now that we're talking about financials, can you shed some light on EnWave's fiscal year that ended September 30, 2014 and the Company's balance sheet?
John Budreski: The light that I would shed on the prior year's financial statement is that we don't think that those types of returns will occur again. Binder went through a tough period, and it was also a time when the cheese business was starting up, so that it had expenses without really adding meaningful revenues. In addition, we're just at the front end of deploying machines to earn royalties.
So, let's call it a tougher year during the last part of the conversion from a technology that is interesting to a technology that is commercial. We are expecting much, much more in the years to come.
In terms of the company's balance sheet, we have about $6 million in cash and securities. We think that's ample for our needs to continue on building out our business plan of constructing, selling, and starting to collect royalties from our REV machines.
Smallcaps Investment Research: Okay, very interesting. With the additional royalties and the income from the two subsidiaries, is it safe to assume that EnWave will become cash flow positive in 2015?
John Budreski: That's what we are driving for. That is the target for us and we think that is reasonably achievable.
Smallcaps Investment Research: To give us an idea, what's the market size of the global dehydration market and are there specific segments of the market that EnWave focuses on?
John Budreski: I am going to turn this question over to Brent Charleton who is much better equipped to answer it than I.
Brent Charlton: In terms of the market verticals that are addressable with our technology, there is approximately $400 billion worth of dried food and pharmaceutical products that are sold on an annual basis. And typically around $2 billion worth of new freeze drying equipment is purchased per year.
Those are two incredibly large markets that we are trying to penetrate both with the use of the technology for the end consumer product, the industrial product, and also the deployment or replacement of incumbent technology.
Those sectors include meat products, cheese products, pharmaceutical products that include monoclonal antibodies, vaccines and other vial materials such as enzymes. In addition, we see that potentially expanding into other industrial products in the future.
Smallcaps Investment Research: Would you mind sharing a bit about EnWave's management team?
John Budreski: I am glad you used the word 'team' because this is not a hierarchical organization. My leadership style is very inclusive and I find that the best companies are led when you have a group of three, five, six people who work cooperatively like a team. And so that's what we have.
My background is a little bit of engineering, and mostly management and financial related positions. Tim Durance, our CEO and sort of the master of our technology is a very strong technology person. Beenu Anand leads our sales effort and he spent the last 15 years with EnWave. Our CFO Salvador Miranda has broad experience in early start and startup companies. And then Brent, who is with me here today, is just a natural business and entrepreneurial person.
So with that five person team we work very well collaboratively and we have a breadth of skills and experiences that take the company forward.
Smallcaps Investment Research: Before we go, what would you say are the two or three most compelling reasons for a long term investor to consider EnWave today?
John Budreski: It is very simple. We're going to deploy a large fleet of equipment that will create a portfolio of diversified royalties that will come back to us. It is our target to use the capital that we have for machine construction and the profits from that to pay for our overheads.
The royalty income that we will receive will pay some taxation, it will go to our bottom line and we will pay that out as dividends.
So, we consider ourselves to be a highly scalable dividend paying growth investment opportunity.
Smallcaps Investment Research: Fantastic. John and Brent, we really appreciate the time you've taken to speak with us today. All the best to you and EnWave, and I look forward to talking with you again soon.
John Budreski: Well, thank you very much. We really appreciate the opportunity to speak with you today.
Disclosure: The author is long NWVCF.