Dynetek Industries Ltd. (DNK)
Interview with: Robb Thompson, President and CEO
Business News, Financial News, Stocks, Money & Investment Ideas, CEO Interview
and Information on their
Advanced Lightweight Fuel Storage Systems.

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Dynetek Industries has moved beyond a simple R&D facility and has begun manufacturing and selling their light-weight cylinders in Canada and Europe, while working on projects for several OEMs

Industrial Products
Fuel Storage Cylinders

Dynetek Industries Ltd.

4410 – 46th Avenue S.E.
Calgary, AB, T2B 3N7
Phone: 403-720-0262

Robb Thompson
President and
Chief Executive Officer

Interview conducted by:
Lynn Fosse
Senior Editor

September 2003

Robb Thompson is the President and Chief Executive Officer of Dynetek Industries Ltd. He joined Dynetek Industries as Chief Financial Officer in March 2000 and played a key role in taking Dynetek public. Mr. Thompson was subsequently appointed Chief Operating Officer in December 2001. He was appointed to his current position in September 2002.

Mr. Thompson’s responsibilities include investor relations, strategic planning, globalization of business operations and processes and developing new markets and strategic alliances. From 1992 to 1999 Mr. Thompson was a partner with a large international services organization. Mr. Thompson received his Bachelor of Commerce degree from the University of Ottawa and is a member of the Canadian Institute of Chartered Accountants

Company Profile:
Dynetek Industries Ltd. (DNK - TSX) is a leading international company engaged in the design, production and marketing of Advanced Lightweight Fuel Storage Systems, fueling systems and high pressure components including valves and regulators. The key component of the storage system is the DyneCell cylinder, capable of storing high pressures gases including compressed natural gas (CNG), hydrogen, and various industrial gases. Dynetek’s DyneCell® cylinder and fuel storage systems applications include the transportation industry, including passenger automobiles, light and heavy-duty trucks, transit and school buses, the bulk hauling of compressed gases and stationary storage or ground storage refueling applications.

The DyneCell cylinder is a lightweight composite cylinder designed for the storage of compressed gases such as hydrogen and natural gas. It is built from a seamless 'thin wall' aluminum liner with a full carbon fiber overwrap. The liner technology guarantees ultra light weights, high storage capacities and non-permeability while the corrosion resistant overwrap maximizes strength-to-weight ratios and operation performance under the harshest of automotive environments. The high performance design materials selected for the lightweight fuel cylinder reduces the weight of the cylinder by two- to- fourfold over conventional designs without compromising structural integrity and quality. Selling worldwide to major automotive, commercial and transit manufacturers, the DyneCell is the most preferred lightweight composite cylinder on the market

As the manufacturer and developer of the DyneCell® cylinders, Dynetek Industries Ltd. was incorporated in 1991 by a group of private investors. The Company invested four years of intensive research and development on fuel storage cylinders and introduced the DyneCell cylinder to the market in 1995. After a successful market introduction, it was imperative that Dynetek expand its production facility to meet the demands of the growing market. In September of 1999, Dynetek moved into its new state-of-the-art production facility in Calgary, Alberta, Canada. In February 2001, Dynetek incorporated a wholly owned subsidiary, Dynetek Europe GmbH. Located near Dusseldorf, Germany, the production facility will support the marketing, sales and manufacture of Dynetek’s cylinders and fuel storage systems for the European, United Kingdom and Middle Eastern markets. Today thousands of Dynetek’s products are in use in over 20 different countries around the world.

CEOCFOinterviews: Mr. Thompson, where was Dynetek Industries when you became its CEO and what changes did you orchestrate?

Mr. Thompson: “I became involved with Dynetek in the spring of 2000. I am a Chartered Accountant and was with a large public accounting firm for about nineteen years and was looking for something else. I was approached by a merchant banking group, and was asked if I would be interested in coming along to help Dynetek and take them public with my experience. In the spring of 2000, we started the IPO process and the markets disappeared for Dynetek at that time and eventually the whole marketplace could not raise money. We needed the money at that time to meet the business plan that we were entering into, which was expansion of our production facilities here locally, to open our facility in Germany and also to expand our R&D programs. We went the private placement route in the summer of 2000 and raised some money through that and then in the fall of 2000 the window for the opportunity to raise money in the Canadian marketplace came back. We raised forty million dollars at that time and went public in the fall of 2000 and this is when the TSX was at much higher levels than they are today. We put that money in the bank and went forward from there to meet our business plan.”

CEOCFOinterviews: What are you working on today and what do you need to change?

Mr. Thompson: “Over the last two years what we have done is expand the production facility here in Calgary, put more key individuals into the management group and even on the production floor. It was really almost an R&D type of facility prototyping the product. We had not really taken it to the market. We also had to get our European market set up and that was really the request of an OEM in Europe that said they wanted us closer to service them. That was a lot of the money that was spent over the last two years and that is in place now. We have people in place, machinery in place, a sales force in place in the global markets that we entering, which have historically been Europe, Japan and the U.S. market. Now it is just a case of selling the product. When you look at what the strategy is now, and understanding our business, we really have two lines of business. There is the compressed natural gas business line, which is where we sell our storage product, whether it is automotive, stationery or transportation applications. The compressed natural gas side is 95% of our revenues today. The other side is strictly on the R&D prototypical work with some production sales on the hydrogen side. What the future holds is we need to increase that penetration in the CNG (Compressed Natural Gas) market. We are looking at further joint ventures and other strategic equity partners. We will continue to work with our partners to reduce our costs. The two biggest inputs to our product are aluminum and carbon fiber. Mitsubishi, who is an equity partner at 12.2%, provides our carbon fiber at below market prices. We have managed to design fifteen different hydrogen projects over the last 24 months and continue to expand our R&D programs because that is really the future for us; to keep developing these projects with our major OEM customers and providing them with what they need.”

CEOCFOinterviews: What are you supplying to your customers and who is using your products?

Mr. Thompson: “A number of years ago, the founder Heinz Portmann, recognized in the market place that the only real storage solutions for natural gas, hydrogen or any kind of compressed gas, whether it was nitrogen, oxygen, or helium, was steel storage. It is very heavy and it has issues with hydrogen in terms of EMBRITTLEMENT. For an automotive application, the range is not there and the amount of gas you can put in is not available because of the wall thickness. He recognized that and developed the machinery to build what we have today. What we build is storage systems and the storage systems begin with the tank. The tank is an aluminum and carbon fiber light-weight cylinder that we build right here in our facility and in Europe. It is everyday aluminum; we buy it at Alcoa Inc. in the United States. On a global basis, this business is very regulated and subject to certification in every country. The point to be made is that it is not something you can build in your garage and sell it the next day. It takes anywhere from twelve to twenty-four months to gain these certifications so you can actually begin to sell these products in the market place. We see ourselves and our product as a market leader for light-weight containers, which is really due to our proprietary process to thin the wall of our liner. The thinner wall means lighter applications, so in some cases we can use three cylinders where our competitors use four or five, which is then more costly and more weight. That is the value proposition that we provide to our customers.”

CEOCFOinterviews: Is there much competition in the industry in general?

Mr. Thompson: “It is an interesting industry; there are not a lot of manufacturers and the steel side still holds about 80% of the global market. The big players are like Faber Industrie out of Italy, ULET in France, Luxfer Group, which is a global entity and you have some others in the U.S. At the end of the day there are only a hand-full of cylinder manufacturers. Everybody has their niche, and what we are trying to do is get ours and our niche is clearly in the light-weight, higher pressure and hydrogen side. We are one of the few with the aluminum that provides that solution that takes care of the hydrogen issues for storage.”

CEOCFOinterviews: How do you compete price-wise?

Mr. Thompson: “If you look at the type of cylinders, there is one that is aluminum like ours and the plastic cylinder and we are competitive in price. The ones that are cheaper are the steel, and they are about a third of the cost of ours, so we have a ways to go on our cost but we will never get as low as steel. When you measure on a per liter or gallon basis, we are competitive with steel. In some markets of the world we are never going to be there because they are willing to pay the cheap dollar to get the cheap product and we just do not go into those markets.”

CEOCFOinterviews: How do you reach the potential customer?

Mr. Thompson: “Usually, you are trying to displace something and in most cases, it is steel. From a technical point-of-view, we never have a problem getting by the engineers and the technical side; it is when you get to the purchasing side and they see that our product may be a little more expensive than the steel. Then you have to explain to them about the savings on operating costs, and reduced maintenance and repairs, basically the value proposition.  We have our customers and they become repeat customers. We get referrals, and when you deal with buses and trucks that need six or seven of these cylinders on their roof; right away steel cannot compete because they cannot deal with the weight of that on their roof. That is when those markets open up to us.”

CEOCFOinterviews: You mentioned raising money is problematic in the global market today. How has it affected the selling of your products?

Mr. Thompson: “So far we have shown over the last three years almost a 40% revenue growth. We have shown annual growth year-to-year-to-year and we are looking to maintain our costs. We managed to keep our gross margin in that 20-24% range over the last three years. At the same time, we did see a blip on our G&A and marketing costs, mostly because of the increase in the infrastructure; we needed to increase sales and commence the German operations. They have been leveling off now and the idea is to hold those while we grow our revenue line and take that forward to get to the point where we will be at positive cash flow by the first quarter of 2004.”

CEOCFOinterviews: Will you tell us about the manufacturing facilities in Germany, and do you have enough capacity or are there other expenditures to be expected in this area?

Mr. Thompson: “I would say we are probably at about 40-50% capacity on our production. We have lots of room for growth within these two facilities right now. There are many opportunities and there is still a lot of capacity for growth in the facilities. In the near future, we will probably have a facility in the U.S., which will be in the next 24-36 months. We are looking to expand globally and increase our revenue stream.”

CEOCFOinterviews: Will you tell us about some of the joint ventures and partnerships?

Mr. Thompson: “One of our biggest partners is Mitsubishi in Japan. They have been with us since 1998 and have been a tremendous partner. We are trying to develop new carbon fiber with them, to be cheaper, stronger and lighter; we are working on our R&D side to do that. We are the only one able to use the carbon fiber we get from them now. Kokan Drum Co. is another Japanese partner. To deal in the Japanese market, you need an agent, and Kokan Drum Co is our agent. They are the ones that get you into the Nissans, Hondas and Toyotas. The Japanese market probably makes up about 40% of our market place. Ford has warrants in our company, which they acquired in the summer of 2000; they are convertible into about 6% equity of the company. What we received for that is that we are exclusive to them on their fuel set program for hydrogen storage. We have a very good relationship with Ford, and hopefully that will continue into the future. As far as other OEMS, we work with seven others and fifteen other projects. We continue to work with them in terms of some kind of relationship whether it is strategic or equity. We are looking at some of the big gas players on a global basis to see what relationships we can create as we go forward.”

CEOCFOinterviews: What are your challenges?

Mr. Thompson: “The biggest challenge on the hydrogen side is is the acceptance of compressed hydrogen and how it fits in the market place. The OEMs on the technical side are completely convinced that compressed gas hydrogen is the way to go, certainly for Fuel cell or internal combustion engines. That is not the bread and butter of what we do in terms of revenue but it is the warrant of the future so we continue to do it and we will do that because it is a very big part of our business. We need to continue to grow our revenue side, which we continue to do from year-to-year. We get new customers on a monthly basis and that is where our focus is, to get to the point where we are cash flow positive and positive earnings. People want to see a company that can show increased revenues, good customer base, good partners, positive cash flow and positive earnings, and that is what we are working towards.”

CEOCFOinterviews: What should potential investors know that perhaps they don’t realize when they take a look at the company?

Mr. Thompson: “What people need to understand is that we already design, manufacture and commercially sell into the market place, so we are not an R&D company. We have an R&D side, but we are a commercial manufacturing facility here and in Europe, and we sell into a very significant market place. When you look at the competitors that we compare to, our burn rate in terms of our cash out the door is not near what these other people are doing. We may lose $2-3 million on an average basis, where these other people are losing $15-20 million on a quarterly basis. From that perspective, I think we have our costs under control and we are financially responsible. We have global production facilities in Europe and Canada. We do not rely on government incentives to keep our business going. People often make an analogy that alternative energy is driven by government incentives and to a degree that is true in terms of funding and you have seen that with Bush’s announcements and other things that are going on right now. We also look at market places where the price of gas is about three times more expensive than the price of natural gas. Places like South America are very good markets, and we look at these prices and that is where we try to sell our products. We have very good respected strategic partners in Ford, Mitsubishi, and Kokan Drum Co. We are not just going to last a year or two; this is a business that is going to grow and we are going to grow to the point of being profitable by 2004.”


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