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Edited Transcript of UQM earnings conference call or presentation 28-Mar-19 2:30pm GMT

Q4 2018 UQM Technologies Inc Earnings Call

Frederick Apr 12, 2019 (Thomson StreetEvents) -- Edited Transcript of UQM Technologies Inc earnings conference call or presentation Thursday, March 28, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David I. Rosenthal

UQM Technologies, Inc. - Treasurer, Secretary & CFO

* Joseph R. Mitchell

UQM Technologies, Inc. - President, CEO & Director

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Conference Call Participants

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* Alexander S. Cushner

Robert W. Baird & Co. Incorporated - MD

* Chris Witty

Darrow Associates Inc. - MD

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the UQM Technologies' Fourth Quarter and Year-end Conference Call. My name is Jessie, and I will be your coordinator for today. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Chris Witty, the moderator for today's call. Please go ahead, sir.

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Chris Witty, Darrow Associates Inc. - MD [2]

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Good morning and thank you for joining us for UQM's fourth quarter earnings conference call. On the call with me today is Joe Mitchell, President and CEO; and David Rosenthal, CFO. Before getting started, I would like to review our safe harbor statement. This conference call may contain forward-looking statements within the meaning of the federal Private Securities Litigation Reform Act of 1995. These may include statements regarding our plans, beliefs, current expectations or otherwise, including those of our officers and directors with respect to, among other things, gaining access to global markets, gaining required certifications, new product development, the merger with Danfoss, future orders to be received from our customers, sales of products from inventory, future financial results, liquidity and the continued growth of the electric-powered vehicle industry. Important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements are contained in our Form 10-K, which is available on our website at www.uqm.com or at www.sec.gov.

I will now turn the call over to David Rosenthal to review the company's fiscal fourth quarter and year-end financial results. David?

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David I. Rosenthal, UQM Technologies, Inc. - Treasurer, Secretary & CFO [3]

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Thanks, Chris, and good morning, everyone. My comments will reflect results for the fourth quarter of 2018, unless otherwise stated. The 3 months ended December 31, 2018 was an excellent quarter in terms of sales, reflecting strong shipments across a number of key customers. Revenue for the fourth quarter was $5.5 million compared to $2.2 million in the same period last year. For the full year, we posted total sales of $14.2 million versus $7.8 million in 2017. We also noted significant growth in engineering service revenue in 2018, which reached $1.8 million versus about $600,000 in the prior year, reflecting continued development work with our long-term partner Meritor, along with several other customers.

Gross margin was 23.8% for the 2018 fourth quarter versus 36.8% last year, with the decline reflecting product mix, pricing pressure as well as the impact from tariffs. For the year as a whole, our gross margin was 23.8% in 2018 versus 40.2% in 2017, again, largely reflecting changes in product mix and pricing pressure. We expect that as we scale the business, higher margins will result due to operating leverage, and we anticipate growth to accelerate once we're part of the Danfoss organization.

Operating expenses for the quarter were $2.2 million compared to $2.1 million in the same period last year. Our net loss for the quarter was $1 million or $0.01 per common share compared with a net loss of $1.3 million or $0.03 per common share last year. For 2018 as a whole, our net loss was $6.5 million or $0.12 per share versus $4.8 million or $0.10 per share in the prior year.

Note that in fiscal 2017, a $600,000 gain from the sale of land was recognized. Our operating cash balance as of December 31, 2018, was $1.9 million, and we had $1.7 million of accounts receivable outstanding reflecting shipments made during the period. At the end of the year, we had borrowed $4.6 million under our bank line of credit. We still have $1 million of availability on the line. In early March, we renegotiated the maturity date on the line of credit, and the debt is now payable on or before September 15, 2019.

In summary, the fourth quarter was another strong one for UQM with great sales and a positive outlook on order trends. We believe the pending merger with Danfoss, as Joe will discuss in a moment, will position us for faster growth and improved operating performance going forward. 2018 was an excellent year, and we will look forward to continuing our progress with Danfoss.

With that, I will turn the call over to Joe for an in-depth review of our current operations and outlook. Joe?

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Joseph R. Mitchell, UQM Technologies, Inc. - President, CEO & Director [4]

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Great, and thank you, David, and good morning, everyone, and welcome to our fourth quarter conference call. On today's call, I will provide you with an update on key developments for the quarter and an overview of our business areas, propulsion systems, auxiliary products and engineering services. But first, let me talk about the pending merger with Danfoss about which we're very excited. And let me remind our listeners that we provided a thorough description of the transaction and its benefits during a special conference call in January just after it was announced.

We continue to believe that the acquisition by Danfoss at $1.71 per share is in the best interest of our shareholders as well as the company. The valuation incorporated a detailed analysis of our future business plans, including capital requirements, to arrive at the $100 million purchase price.

With the Danfoss partnership, UQM will be on a much stronger path to succeed going forward. As I said during the call in January, competition in the industry is becoming more intense and consolidation is accelerating. As such, it is imperative to partner with a company that has an understanding of our markets, a strong balance sheet and a global presence. Danfoss brings all of those to UQM, and we're excited about working with them in the future.

Furthermore, it is our firm belief that pricing pressure in the industry will further intensify even as demand accelerates. So we must take advantage of this opportunity to maximize shareholder value, while strengthening the company's ability to effectively compete.

Danfoss' goal is to be #1 or #2 in every market it serves with a strategic vision to be an innovator and leader within the cleantech propulsion field. And it goes without saying, with billions in sales and significant cash on the balance sheet, Danfoss will bring the necessary capital to support our growth plans by funding new business development initiatives and product R&D.

We believe Danfoss is an excellent partner for UQM and hope that our shareholders vote in favor of this transformative transaction. Our special shareholders meeting will be held on April 23, 2019 to finalize the vote. We are concurrently applying for approval from CFIUS and are optimistic about the merger being approved and closed in the second quarter.

Now let me review some of the highlights for the fourth quarter. Another solid period of growth that certainly justified our valuation. Not only did we report very good revenue, but showed the capacity of this organization to execute according to plan. We shipped products to a number of different customers during the period, but growth was primarily driven by fuel cell compressor orders to China. While such shipments were large, we anticipate steady growth across our entire product portfolio this year, even as there remains volatility in sales quarter-to-quarter.

During the fourth quarter, we also announced an award with a major fuel cell supplier in China for UQM's fuel cell compressor systems. Our FCS was selected as a high-performance cost-effective solution after this customer purchased several units early in 2018 for demonstration purposes.

The contract will cover deliveries this year, and the initial order is valued at approximately $1.8 million. It is estimated that more than 50% of fuel-cell vehicles operating in China today are equipped with this customer's fuel-cell engines. So we are very pleased that they have the confidence to work with UQM.

We also continue working with Meritor on E-axle rollout plans in the fourth quarter both from a product development and sample delivery perspective. We noted further progress with Lightning Systems and Proterra and as I'll review in a moment as well as plans to launch our China Service Center and operating structure in Shanghai to support UQM's growth initiatives.

Overall, it was a very productive quarter, which, along with our Danfoss announcement, has resulted in even greater confidence about our customer capabilities for 2019 and beyond. Now I'd like to talk about some of the highlights of our propulsion systems and auxiliary product sectors as well as our growing presence in engineering services.

Let's start with propulsion systems, where we posted a strong quarter supporting our customers in growing the business. We made additional deliveries to Ashok Leyland in India during the period, supporting their launch and remaining upbeat about the -- about future orders. The company's first buses are still in the commissioning stage and once plans for this year are solidified, we'll work with Danfoss on the appropriate localization strategy for India.

With regard to Meritor, we continue to provide developmental samples of E-axle drive systems for demonstration on Meritor's test vehicles. Meritor continues to promote its Blue Horizon brand with expectations for launch later this year, and we'll be delivering more prototypes as well as discussing design enhancements for this and other applications. We also continue to ship various products to ongoing customers, such as Proterra, Zenith and Lightning Systems, the latter of which has won a number of new contracts.

As a reminder, Lightning Systems retrofits existing buses by installing our electric drivetrains, which we see as a large and growing field, and these buses cost the customer roughly half of what a new EV bus would run. We are currently working with them on Zeem electric Class 6 truck and are excited to see this opportunity further develop. Additionally, we are actively talking with other potential new customers across the globe about our portfolio of products, with most firms supportive of our pending alliance with Danfoss.

For that matter, I'd say that the only area of disappointment lately have been the lack of progress with Sinotruk. While our relationship with CNHTC and Sinotruk remains a strong one, the activity level in China has slowed down substantially. This situation has affected many companies in our space, and I believe represents various factors, such as ongoing trade issues with the U.S., economic factors in China, and stalled capital deployments, along with for Sinotruk, changes in senior management.

Having said that, China continues to assert its desire to lead the race for vehicles powered by fuel cells and batteries. This year it's expected that China will build around a million electric vehicles, which would represent roughly half of all electric vehicles produced worldwide. So we believe the slowdown is temporary and that Danfoss will assist in our penetration of this important market.

With regards to Sinotruk, specifically, we've shipped samples and the commissioning process continues. As a reminder, Sinotruk has 3 platforms in the testing and development phase using our drives with their transmissions. Overall, we're optimistic about working with them after the Danfoss merger but the near-term outlook is a bit uncertain due to their restructuring activities as well as the general Chinese issues I just discussed. That said, we remain very upbeat about the propulsion market as a whole and continue to experience high levels of bid activity. Once the transaction with Danfoss is complete, we anticipate our growth may accelerate, given their help in opening doors to new customers and establishing our position across many overseas markets.

And now moving on to our auxiliary product sector. This sector continues to provide a strong contribution to the company, particularly with our Fuel Cell Compressor business. We're committed to the auxiliary market through our integrated Fuel Cell Compressor System that's customized for this application and saw a good deal of interest in our technology at the Hydrogen Energy and Fuel Cell Technology Expo last November in Foshan, China. We continue to enhance our design to meet specific customer requirements that can cover the vast majority of fuel cell applications from the 30 kilowatts up to 150 kilowatt stacks. As of now we're working off discrete orders, but we see a future of mass commercialization for which localization in China will be key.

With serial production and larger orders, we anticipate reductions in size and cost will make our application even more attractive. In the meantime, the Chinese government continues to offer incentives and future demand will be driven by decisions on the rules and regulations covering the new platforms for the fuel cell market. Finally, moving on to our engineering services sector. I'm pleased to point out that we had a very strong quarter in engineering services compared to prior years, due to funded programs, primarily to support Meritor, along with some other customers.

Going forward, the goal of this business is to seek out funded engineering and design work that supports our product road map, just as the E-axle work for Meritor has done. We also have internally funded programs to help achieve cost and performance improvements, primarily in the inverter area and the integrated Fuel Cell Compressor Systems. Before turning the call over to questions, let me reiterate how pleased we are with the company's many recent accomplishments. We just completed an excellent year, which greatly assisted us in getting a very good valuation for our shareholders as part of the Danfoss merger transaction.

We're focused on completing the merger in the weeks to come, and as we prepare for the April 23 shareholder meeting, are concurrently working with CFIUS on obtaining all the necessary government approvals. And we do not expect any major delays or impediments at this point. As I said earlier, teaming with Danfoss will bring much-needed growth capital, access to markets around the world and put UQM in a better position to face off against the intense and increasing competition of tomorrow.

In addition, the $100 million valuation offered excellent premium to our shareholders and represented the best outcome after months of talking with potential partners or considering a dilutive offering, which none of us thought was very attractive. We continue to believe the merger is in the best interest of our shareholders, customers and the future of UQM.

And with that, now I'll open it up to questions. Operator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Alex Cushner with Baird.

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Alexander S. Cushner, Robert W. Baird & Co. Incorporated - MD [2]

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No question, just wanted to say, thanks, and congratulations on the transaction with Danfoss, clearly, in the best interest of the shareholders. And been a shareholder for a long time, so I wanted to pass on the thanks for consummating the transaction. Almost consummating, from my perspective, consummating since I sold my shares, but thank you, guys.

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Joseph R. Mitchell, UQM Technologies, Inc. - President, CEO & Director [3]

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We appreciate your support over the years, Alex.

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Operator [4]

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(Operator Instructions) Your next question comes from [Jim Worth], who's a private investor.

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Unidentified Participant, [5]

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I'm curious as to whether or not if the shareholders vote down this Danfoss deal, whether that will cost UQM any kind of premium paid to Danfoss?

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Joseph R. Mitchell, UQM Technologies, Inc. - President, CEO & Director [6]

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No, if the shareholders vote it down, [Jim], there is not a penalty pay to us other than the transaction costs that we're continuing to incur. We do not expect that. The results so far have been very, very positive, and the key is getting the 2/3 of the shareholders to vote, and that's really the key point because it's a large threshold and we definitely expect that. We've seen in the past, we typically get about 90% of shareholders to vote on various items, but in regards to your question, no, there is not a penalty if it is voted down.

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Unidentified Participant, [7]

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Okay, my next question is really a comment. I see this as -- transaction may be good for management, good for everybody, maybe, except for the shareholders, definitely not the shareholders. The $1.71 price for what seems to be an ongoing company that is starting to work the way we'd all hoped it was going to and now, right before it seems as though things are going to go our way, we're selling the company for what seems like a very inadequate price. And there's no reason to comment on it, it's just my opinion and I'm thinking that there are many shareholders that hold that same view.

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Operator [8]

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Your next question comes from [Jerry Levine], who's a stockholder.

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Unidentified Shareholder, [9]

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Gentlemen, I have been a stockholder for over 10 years believing in this company. And you have come through in proving that this company has the technology and the know-how to get things done. However, I'm taking a big loss, thanks to you, and your -- and I agree that shareholders are the victims. Any long-term shareholder has lost money in this situation, and that we have been robbed of the potential in this company is apparent. So I wish you had been a little more sensitive to shareholders, instead of worrying about raising a little money along the way to do what you're doing now. First of all, your stock would be a lot higher today with these announcements than it is right now. So gentlemen, you've made a big mistake at the expense of all long-term shareholders who believed in this company and you've let everybody down.

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Joseph R. Mitchell, UQM Technologies, Inc. - President, CEO & Director [10]

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Yes, [Jerry], I appreciate your comments, but I really need to comment back that we -- through this we're definitely looking out for the best interest of the shareholders. As we talk -- many times about -- you look over the years, the number of contracts that have come in for prototypes and large customers, and we said, one of the biggest risks is, they don't want to deal with a company that doesn't have that global presence. And we're seeing that increasing even more. So that was one of the factors going in. When we look at the valuation of the company, and again, I can't go back, I can only speak for the last few years since I have been at the helm that the stock price has, for an essence, tripled from where we were. So there really was at the $1.71 a significant premium paid, and you look at again at all the valuations of the various companies that are not profitable that are in this space, and it's typically the way they're valued is on a multiple of revenue. Danfoss on a trailing 12 months paid almost triple to what the market is in the 9 to 10x. And if you look even at our last results, they're still over 7. And you can take those numbers out, looking at all the different companies and the transactions where the average was about 3.5 as a multiple of revenue. So if we were to go and execute on the plan going further again with some of the risks that we've mentioned, there would have been another significant capital raise that would have been even further dilutive, and for us to get back to that point, to say that there was certainty that we're going to get there, those were all the factors that we looked at when we made this decision. So trust me, it was not taken lightly and it was not taken to do anything to damage the shareholders. It was really done to maximize the value to the shareholders and make sure that the company can succeed going forward. So those were all the factors that were considered, and there's no way that we would apologize as we truly believe we've made the right decision in the best interest of the shareholders and all the stakeholders involved.

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Operator [11]

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There are no further questions at this time. I turn the call back to Mr. Mitchell for closing remarks.

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Joseph R. Mitchell, UQM Technologies, Inc. - President, CEO & Director [12]

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Okay, great. So well, again, I want to thank everyone for your time today. Again, it's been great getting to know our many investors over the years, and I'm happy to say that the company is in very good shape going forward. Given the increasing demand for our innovative technology and the pending Danfoss merger, we are well positioned for continued growth and increasing market share as the world moves towards the mass acceptance of electric vehicles. We appreciate your passion and support during the journey and look forward to seeing you at the shareholder meeting on April 23. Thank you, again, and have a good day.

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Operator [13]

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Thank you, Mr. Mitchell. A webcast audio replay will be available starting today March 28, 2019 at 1:30 p.m. Eastern Standard Time. The link can be found on the UQM website at www.uqm.com, click on Investors, then on earnings webcast. This concludes today's call.