Maxwell Technologies, Inc.
David J. Schramm
TWST: In a previous interview with us, you said Maxwell Technologies didn't have enough competitors and the company still was trying to educate and develop the marketplace for ultracapacitors. Have there been any new entrants in the marketplace to help educate customers?
Mr. Schramm: Well, there is one that actually is helping. Mazda recently announced that it is incorporating ultracapacitors from Nippon Chemi-Con, a Japanese competitor, in a start/stop system, idle elimination system for a new car Mazda is introducing. Although Mazda isn't using our products, we look at this as good news from the standpoint that it validates ultracapacitors as an enabling technology for fuel-saving start/stop autos.
In general, it's difficult for Maxwell or any non-Japanese supplier to win business in Japan, so we are concentrating most of our marketing and sales efforts on the rest of the world, particularly North America, Europe and China.
TWST: You previously told us Europe and China were the markets most ready for the technology Maxwell offers. I know the company recently entered into an agreement with Pana-Pacific to sell to aftermarket truck dealerships in North America. Would you tell us more about that?
Mr. Schramm: Yes, we have chosen Pana-Pacific to distribute our new engine start module for heavy trucks. Pana has relationships with more than 2,000 truck dealers and many of the major truck fleets in North America. We are also working with the truck OEMs, but we think the aftermarket will give us the fastest uptick because there are already something like 4 million heavy trucks on the road in the U.S., Canada and Mexico, and the product was designed as a drop-in replacement for one of the four Group 31 batteries these trucks carry. Basically it acts as an onboard jump start, virtually guaranteeing that a heavy diesel engine will start in any weather conditions and regardless of the age and condition of the batteries.
TWST: Is this an indicator of additional inroads you believe Maxwell Technologies is going to be able to make in North America?
Mr. Schramm: Yes, the North American market has ranked third for us in terms of sales, behind China and Europe, so we think it has lots of undeveloped potential. Over the past five years, wind turbines and hybrid transit buses have been the mainstays driving ultracapacitor sales growth in excess of 40% a year for Maxwell. The Europeans think greener than Americans, and the European Union and individual countries have enacted regulations that favor renewable energy and low-emission hybrid vehicles.
China needs more energy generation to support industrial development and improving lifestyles, but with so much of their energy coming from coal-fired power plants, their major cities have serious air quality problems, so they're also investing heavily in renewables and hybrid public transit vehicles. The beauty of the Chinese as customers is when they make a decision to do something, they don't go halfway. They do it with full force, so demand for our products there continues to be very strong.
In North America, we are going after applications such as engine starting, that we think will give us the quickest uptick, and our timing is particularly good with this product. It's the middle of winter, when batteries struggle to start trucks in very cold temperatures, whereas ultracapacitors function normally down to minus-40 degrees.
Over the past several months, we've been beta testing the engine start product with several potential fleet customers, and the feedback has been great. When we looked at how to take this product to market, we recognized that we don't have the dealer relationships and service capabilities and all those other things you have to have, so Pana is a perfect fit for us. We built 1,000 units during the fourth quarter and put them in Pana's hands, and we're now in the process of training the Pana sales force as to what this product does. Educating the marketplace is really important because potential customers don't know to buy an ultracap if they don't know what it can do for them. If we can't explain and demonstrate the value proposition, it's just a technology conversation, not a sale. So we continue to spend a lot of time doing what I call "technical preselling."
For heavy trucks, the value proposition is really pretty simple. This engine-start module works at 40 below zero, and it will supply enough power to start a truck multiple times on one charge, and then it recharges while the vehicle is running. This is particularly important for the over-the-road trucks that have a sleeping compartment for the driver behind the cab. It's equipped with heating and air conditioning, entertainment systems, a microwave - what the industry calls "hotel loads" - that can really drain the batteries during the night, often leading to a starting failure in the morning. One fleet operator told us they spent $1.2 million last year on jumpstarts. Couple that with the fact that with just-in-time deliveries, customers assign a time slot for trucks to unload, and if you're late you lose your spot, so delays like that are expensive too. That adds up to a compelling value proposition for truck fleets, so I think we will quickly get some traction there.
Over the next couple of quarters, we will have the initial sales results to see how well this new product is being accepted. Our strategy is really simple. Let's start selling to the people that are already in pain today, the fleet operators with hundreds or thousands of trucks on the road. Then we will work our way back through the food chain to the OEMs to get it established as a standard option for new trucks.
TWST: Are there any other new applications or potential new vertical markets for Maxwell's ultracapacitors you believe are particularly exciting that you would like the investment community to be aware of?
Mr. Schramm: Another one that is very similar in terms of its potential to deliver a quick sales uptick is supplying backup power for server farms, semiconductor fabs, hospitals and other installations that can't tolerate any power interruptions. Last year, we introduced a 56-volt module designed specifically to be integrated into uninterruptable power supply - UPS - systems. We designed it to meet specifications given to us by major UPS system integrators. The ultracapacitor module fits right into the equipment racks that were designed for the batteries that most UPS systems use today. This ultracapacitor-based UPS module provides what the industry calls "bridge power" to hold system voltage constant during a brief power disturbance, or in the event of a total power failure, to keep things operating while the primary backup power source, such as a generator or fuel cell, starts up and comes online. More than 90% of all power disturbances last a few seconds or less, and the ultracapacitors can handle those without having to start up the primary backup source.
Although batteries are the incumbent technology in this application, it's difficult to measure their state of charge and state of health as they age, so UPS system operators have to constantly monitor them and replace them regularly, whereas ultracapacitors require no maintenance and can be expected to last the life of the system.
A similar backup power application is with solid state drives - SSDs - the flash memory devices that are increasingly taking the place of hard drives in data centers and other server installations. SSD manufacturers have begun mounting our flat, postage stamp-size, PC10 ultracapacitor product right on the circuit board to provide an independent source of backup power to ensure that no data is lost if there is a power disturbance.
So backup power is another exciting new vertical for us, and we're already gaining traction in both the UPS and SSD markets. But educating the market is still the name of the game for us. On that point, I'll go back to what I told you last time we talked: We don't have that much competition, so we have to do most of this market education and market development ourselves. Two of our major competitors, Nesscap and LS Mtron, are based in Korea, and a couple of others - Nippon Chemi-Con, which I mentioned, and Panasonic - are based in Japan. We have one in Europe, batScap, which is based in France.
Our only competition in North America is what I would characterize as wannabes - companies that want to be in this market and talk a good ballgame, but don't have much sales volume yet. We sold nearly $100 million worth of ultracapacitors in 2011, so we feel justified in calling Maxwell the market leader in terms of market penetration and technology.
TWST: Europe is an important market for Maxwell, and Europe is in economic crisis. What has been the impact on the business?
Mr. Schramm: We haven't seen a significant impact so far. The emission reduction policies and regulations and the Europeans' green mentality are still pushing investment toward renewable energy sources and hybridization of public transit, where ultracapacitors are an enabling technology. In fact, since the Japanese nuclear disaster, Germany has begun shutting down nuclear power plants, so renewables will have to play a part in filling the energy generation gap that will create.
The EU has also been very aggressive in legislating CO2 emission reduction standards for the auto industry. Starting this year, 65% of all the new cars sold in Europe can emit no more than 130 grams of CO2 per kilometer, and all of the European automakers are turning to stop/start idle elimination systems to help them get under that threshold. In 2015, 100% of the new cars have to meet that standard, and in 2020, the threshold ratchets down to 95 grams of CO2 per kilometer, so the automotive opportunity for Maxwell and other stop/start enabling technology providers is going to continue growing rapidly.
All of the early stop/start systems have used batteries to provide the power required for repeated restarts, but these constant deep draws shorten battery life, so one automaker has integrated Maxwell ultracapacitors into its system to ensure more reliable emission reduction and fuel economy improvement and extend battery life. Since launching the system in two of its diesel engine platforms for the 2011 model year, the French automaker, PSA Peugeot Citroen, already has sold more than 300,000 cars using Maxwell ultracapacitors, and has said it expects that number to reach 1 million cars next year. PSA doesn't sell cars in the U.S., but it is Europe's second-largest car producer, so we expect this design-in alone to drive lots of additional volume for us, and Continental AG, the Tier-I auto parts supplier that designed the system for PSA, is actively marketing the system to other automakers in Europe and the U.S.
TWST: Although ultracaps are your primary business, Maxwell has other product groups in microelectronics and high-voltage capacitors. What have been some significant recent developments in those two product lines you would like the investment community to also be aware of?
Mr. Schramm: Our high-voltage capacitor products are all produced by Maxwell's Swiss subsidiary in a very efficient factory in Rossens, near Fribourg, in western Switzerland. This particular type of high-voltage capacitor has been used in electric utility infrastructure worldwide for over 50 years. Just recently, our research and development team there has developed a new line of these products that can operate reliably down to minus 60 degree Celsius. It's for the Siberian portion of a multibillion dollar grid modernization project in Russia. Our capacitive voltage divider products are being used in other segments of this massive project.
In general, the market opportunity for these high-voltage capacitor products is in developing countries where they are installing or expanding a grid. The good news about these high-voltage capacitor products is they are very, very reliable, which is also the bad news because they last for decades. So while the replacement market in developed countries is rather small, we have enjoyed strong growth in the developing world, mainly in the so-called BRIC countries - Brazil, Russia, India and China. Our products occupy a fairly small niche in the huge utility infrastructure market, and our high quality and solid performance as a supplier have enabled us to win a dominant position in that niche. Our guidance to the market over the past few quarters is to expect single-digit growth for this product line. It's about a $40 million a year business with good gross margins, good cash flow, and again, great technology.
The microelectronics products you asked about are radiation tolerant components and single-board computes for the space and satellite market. Sales of these products vary more quarter to quarter, but annual sales typically are in the range of $15 million to $20 million. It's basically a function of the number of satellite and spacecraft launches in the U.S. and Europe in a given year, and the amount of Maxwell content per launch. We use proprietary packaging technology and innovative designs to allow high-performance commercial semiconductors to be used in space, where environmental radiation, such as from solar flares, can cause electronics to fail. We have never had one of our products fail in space, so our customers will pay a premium for that failure-free performance, enabling these products to achieve very attractive gross margins.
TWST: We talked about the macro challenge of educating the marketplace, but what would you say is the biggest internal micro challenge Maxwell Technologies is facing right now? And what is your strategy to deal with that challenge?
Mr. Schramm: With demand for our ultracapacitor products growing so rapidly, one of our greatest challenges is staying at least one jump ahead of that demand. We have taken product assembly offshore with very large and capable contract manufacturers that have been able to add equipment and labor to keep up with increasing volume, but the critical ingredient of our ultracapacitor products is the electrode material that goes inside each ultracapacitor cell. The materials and process we use to make electrode is where most of Maxwell's most valuable intellectual property resides, so we aren't about to take that offshore.
To date, all of the electrode for all of our products has been produced in our highly secure San Diego facility. But we are now adding the final increment of increased capacity our San Diego building can physically accommodate, so the time has come to establish a second electrode facility to ensure that we can keep pace with growth going forward. We don't want to try to replicate the technical staff that has developed and advanced this proprietary manufacturing process, so we decided that our second facility would have to be within a reasonable travel radius of San Diego in case they are needed to troubleshoot.
After looking at other potential locations in California and surrounding states, we found what we consider an ideal location in Peoria, Ariz., a suburb of Phoenix. It's an hour flight from San Diego, and there are about 20 flights a day, so we can have an expert there very quickly if needed. We found a never-occupied, 123,000-square-foot building that will give us ample expansion space, and were able to negotiate very attractive lease terms. Among the other attractions of locating there were some local and state financial assistance based on job creation and much lower utility rates than we currently pay in San Diego. Another side benefit is that the cost of housing in the Phoenix area is much lower than we have in Southern California, so we can attract engineering talent from the Midwest and other areas that would be making more of a lateral move to take up residence in Phoenix. Arizona's state universities are also turning out lots of technical talent and there is an established technology corridor between Phoenix and Tucson from which we can recruit.
We are beginning work on tenant improvements and the equipment is on order, so we expect to be up and running with a new electrode production facility that will double our current capacity before the end of the year.
TWST: Would you comment on the overall strength of Maxwell's balance sheet at this time and the company's ability to continue to fund not only its product development but also its growth and extension?
Mr. Schramm: Yes, at the end of the third quarter we had a cash balance of about $30 million, and we have been generating cash from operations, so the balance sheet is in good shape. Because we are leasing the new facility, we estimate that it will only require about $14 million to $16 million to get up and running in Peoria. A couple of months ago, we announced that we have obtained a bank line of credit that includes $12.5 million of equipment financing and a $15 million operating line, and we only have about $5 million of other debt, so that gives us ready access to additional capital. By the way, unlike many of our clean-tech brethren, we haven't taken a single dollar of government loans. We also have an effective shelf registration on file with the SEC, so if we choose to access the capital markets, we can do that opportunistically from a position of strength.
TWST: What are the top three items on the company's agenda for 2012 - the most important goals investors should watch for Maxwell Technologies to make progress toward?
Mr. Schramm: Well, I would start off with the number one reason Maxwell is in business, which is to make money. And I think a lot of companies specifically in the green space or the energy space have lost track of that, but making money is number one by far. Everything else is an enabler to making money. So having great technology enables you to make money, having a work force that's fairly compensated and you treat well and it enables you to make money, having perfect quality that you deliver on time enables you to make money. So that's kind of how I put that together.
But it's executing for the plan we have is paramount. We have now achieved single-digit defective parts for million for ultracapacitor cells, and I want to stay there. That gets tougher as you get more and more volume. We got over 20 million ultracapacitors working around the world on a daily basis. I want that number to be 2 billion. It's interesting when you look at how you scale and we talk about market education. It's taken a while to get to the first $100 million year for ultracapacitor sales. It's going to take a lot less time to get to 200 million, 500 million and beyond with the momentum we have established.
And the markets are taking notice. Something like 15 analysts are now publishing research coverage on our stock, so we aren't the obscure little company that used to be confused with Maxwell House coffee anymore.
TWST: Yes, I saw you had a new analyst join the ranks.
Mr. Schramm: Yes, we did and again, keep in mind, I have a biased view, but they have picked up coverage when we're within a few percentage points of our 52-week high and they initiated coverage with a "buy" recommendation and a higher price target, so they think Maxwell has plenty of upside.
TWST: Is there anything that we didn't talk about that you would like to let people know?
Mr. Schramm: As you may know, we grew the total top line by nearly 30% in 2011, and our guidance for 2012 is that we expect to continue to grow at a similar rate this year. I think the execution is right on track. We have a very, very solid plan that, again, we're executing to create and strengthen the value proposition for our customers.
We publish an internal newsletter for our employees. In one of my recent CEO messages, I said if you want to emulate a company for marketing, I want you to think about Apple. It always amazes me that Apple announces a new product and people line up the night before and sleep on the sidewalk. And when you interview them and ask, "What is it you're buying?" the answer is, "Well, I don't know yet, but if it's something new from Apple, I have to have it." And so I have challenged my folks here. I say, "What do we have to do to give us a reason to clean the sidewalk outside our locations because people want to line up and sleep on them the night before we bring out a new product?" We don't make consumer products, so the analogy isn't quite there, but I want our customers to know that when Maxwell is to bring out a new product, it's going to be something they are going to want, something that will deliver real value to them. That's when I'll know we have made it. It's a pretty high benchmark. But I'll tell you what, can you think of another company that has created that kind of demand and consumer confidence? So if you come out and visit us here in California, you're going to find we've got clean sidewalks. We are setting the bar pretty high.
TWST: Thank you. (MES)
David J. Schramm
President & CEO
Maxwell Technologies, Inc. (MXWL)
5271 Viewridge Court
San Diego, CA 92123
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