Q2 2022 Microvast Holdings Inc Earnings Call

August 11, 2022

Thank you for standing by this is the conference operator.

Welcome to the micro <unk> second quarter 2022 earnings call.

As a reminder, all participants are in a listen only mode and the conference is being recorded after the presentation investment community professionals have the opportunity to participate in a question and answer session.

To join the question queue, you May Press Star and then one on your telephone keypad.

Should you need assistance during the conference call you may signal for an operator by pressing star and then zero.

I'd now like to turn the conference over to Sarah Alexander Micro vast general counsel. Thank you. Please go ahead.

Thank you John and thanks to the audience for joining US today, Sasha counter born our President and Chief revenue Officer, and Craig Webster, Chief Financial Officer will host todays call.

This call Microburst issued its second quarter 2022 earnings press release, which can be found on the Investor Relations section of our website at IR Dot Microburst Dot com.

In addition, we have posted a slideshow to our website to accompany tonight's call. As a reminder, please note that we will be making forward looking statements on this call.

These statements are based on current expectations and assumptions and reflect our views only as of today. They should not be relied upon as representative about views as of any subsequent date and we undertake no obligation to revise or publicly release the results of any revision to these forward looking statements in light of new IND.

Formation.

Or future events.

These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations.

For further discussion of the material risks and other important factors that could affect our financial results. Please refer to our filings with the SEC, including our annual report on Form 10-K filed in March and the 10-Q filed earlier today.

In addition, during today's call, we may discuss non-GAAP financial measures, including adjusted gross profit adjusted net loss and adjusted EBITDA, which we believe are useful as supplemental measures of Microsoft's performance. These non-GAAP measures should be considered in addition to and not as a substitute for.

For or in isolation from GAAP results.

These non-GAAP measures have been reconciled to their most comparable GAAP metric in the tables included at the end of our press release.

A webcast replay of this call will also be available on the Investor Relations section of our company website with that I'll turn the call over to Sasha for some opening remarks.

Thank you.

Everyone. Please turn to slide four of our presentation as I cover a few highlights from the second quarter.

We posted 93% revenue growth during the quarter delivered $64 4 million U S dollars and Q2 2022.

This revenue performance exceeded expectations, especially considering that our shipments they're very slow in April and the first half of May as a result of the Covid lockdowns in Shanghai and the surrounding region.

I want to thank our global team and especially our local team in China This quarter.

With many external challenges and situations that we are out of their control they rose to the occasion.

Maintaining production throughout the lockdown and put us in a position to deliver strong quarterly results asked with the pace of shipments begin to pick up pick back up in the second half of May when the lockdown restrictions, where east we had an outstanding months in June and we were able to make up the shortfall from the first half of the quarter.

On a regional node I.

I would highlight that our market share in India continues to increase and it was again a key reason for our revenue growth this quarter.

We ended the second quarter with a strong backlog of $105 $3 million driven by a healthy order intake of $47 8 million U S dollars.

Our forecast of contracted revenue remained at a solid $2 5 billion U S dollars, except backlog our forecasted contract revenue is compromised entirely of customers.

Located outside of China.

When we refer to forecast the contract revenue, we are describing backlog plus managements estimate for revenue, we expect to realize from existing contracts and relationships with customers.

Most of these contracts include estimate volumes requirements. However, they do not typically include a volume commitment we expect to realize current forecast of contract revenue figures between 2022 and 'twenty one.

The most prominent challenge in the second quarter continued to be.

Raw material prices, which remain at elevated levels as a result of supply chain disruptions as well as worldwide inflation.

Our unit cost across the board are tracking significantly higher than we anticipated at the beginning of the year. We are actively monitoring these trends and limited minting mitigation strategies, where possible, including optimizing long term supply contract identifying new or additional sources of supply and increasing our selling prices.

Where possible.

However, we expect raw material prices, especially for certain key mature likely assuming cobalt to remain elevated through 2022 and possibly into 2023.

Looking forward into 2023, we expect our auto volume to increase after we bring the new manufacturing capacities online in Hulu and we expect this additional volume to increase our production visibility, enabling us to lock in higher volume commitments.

Please turn to slide number five which highlights some of our key partnerships in the commercial vehicle market.

Thus far is a French bus OEM, which has a dedicated unit specializing in the renovation of passenger transport equipment in active in propelling clean and sustainable mobility.

That's our core strategy centers on the comps.

On the construction and marketing of hydrogen buses under the bus Inova and high City brand is the retrofitting of buses with hydrogen the renovation and maintaining of passive passenger transport vehicles as well as customer service Microburst. It's nominated are exclusive battery supplier and has signed the framework agreement up to <unk>.

10 years with suffer with a revenue forecast of over 150 million U S dollars.

Clean logistics is a 10th of a leader in the mobility Revolution within commercial vehicles transport microbiome has already delivered prototype systems for hydrogen buses and trucks for clean logistics.

We expect our volume forecast from 2023 to 2027 is approximately 1300 to 5000 vehicles.

Why should I power group is an international company with business segments, such as power system commercial vehicles, Aqua culture equipment, construction machinery, smart logistics and marine transportation equipment, its product export it to more than 110 countries and regions Mike.

Microsoft is in the process of delivering battery systems to Wifi power for its heavy truck tractor project with 4 million auto volume only in Q2.

Ex CMG is one of the most influential lab scale enterprises in China construction machinery industry. Its product portfolio includes various heavy duty construction equipment.

Truck cranes asphalt concrete paper graders.

Mining machines fire trucks, and Microsoft expects to deliver 52.

Tuesday of 49 tonne hydrogen heavy duty trucks with a total revenue of $1 $4 million in 2022.

Please turn to slide six which highlights some key wins during the second quarter.

Including an order from JV NGO for over 11 million U S dollars and another order from switch in excess of 8 million U S. Dollars. We also continue to benefit from ongoing customer relationships. As example, Oshkosh right.

King long and others and total order intake for Q2 was $47 8 million U S dollars.

I will now turn the call over to Craig to review, our financial performance of Q2.

Thank you Sasha.

I'll spend the next few minutes discussing our Q2 2022 financial results.

Please turn to slide eight and I'll summarize the main line items from our Q2 P&L.

First off revenue.

I am pleased to report strong revenue growth in the second quarter, which grew 93% to $64 $4 million from $33 $4 million in Q2 2021.

I will take you through the geographic breakdown in the latest slide, but I would like to highlight that this marks the sixth quarter in a row that we have shown substantial revenue growth over the same quarter in the prior year in fact on a percentage basis revenue has grown double or triple digits for each quarter since Q1.

One 2021.

On a year to date basis revenue was 101 $1 million up 109, 2% from $48 $3 million in the prior six months period.

We posted a gross profit of $4 $8 million in Q2, 2022 compared to gross loss of $6 $8 million in the prior period, an improvement of 171, 5%.

After adjusting for non cash settled share based compensation expense and our cost of sales.

<unk> gross profit was $6 $7 million in Q2 2022 compared to adjusted gross loss of $6 8 million in Q2 2021.

This translates into an adjusted gross margin of 10, 4% in Q2 2022 compared to negative 23% in Q2, 2021, a 37 percentage point improvement.

I was pleased to see gross margin improve at a faster rate than revenue during the quarter, despite higher raw material prices.

This result, underpins our efforts to improve our gross margin performance long term and it will continue to be an area of focus for us going forward.

Especially as we plan for significantly higher customer deliveries in 2023.

Operating expenses were $54 million in Q2, 2022 compared to $15 $8 million in Q2 2021.

The largest contributor to the increased operating expenses was share based compensation expense, which totaled $28 5 million in the quarter.

Operating expenses also increased as the company continues to add head count to support planned growth initiatives and also incurred additional expenses related to operating as a public company compared to the prior year period.

As I mentioned previously noncash share based compensation expenses were a significant contributor to both the increase in GAAP operating expenses and operating losses.

The large majority of share based compensation expense related to equity awards made in the years preceding our business combination last summer.

Accounting rules required that those awards be expense to our P&L over a three year period following the merger.

We believe a more accurate representation of our financial performance, especially as related to cash operating expenses and operating loss is as illustrated in slide nine.

After adjusting for noncash stock based compensation and SG&A, our adjusted operating expense in Q2, 2022 was $21 $7 million compared to $15 $8 million in Q2 2021.

GAAP net loss was $44 $2 million in Q2, 2022 compared to a net loss of $27 $1 million in Q2 2021.

After adjusting for non cash share based compensation expense and changes in fair value of warrant liability and convertible note. Adjusted net loss was $14 9 million in Q2 2022 compared to $23 8 million in Q2 2021.

Reconciliations of these non-GAAP metrics to the most comparable GAAP metrics are included in the tables at the end of our earnings press release.

Slide 10 shows the geographic breakdown of our revenue for the three and six month periods ended June 32022 compared to the prior year period.

I am pleased to report that all four of our key geographies posted growth in Q2 2022 compared to Q2 2021 as you can see the largest growth in revenues came from the Asia Pacific region, ex China equivalent to 231% growth compare.

Q2, 2021, and 310% growth for the first six months.

India continues to be the biggest driver of growth for us in the Asia Pacific region.

In addition, our China business continues to perform well posting 57% growth during the quarter.

Europe also posted a healthy 15% growth rate.

Even though Europe's growth is currently lagging the other geographies given the impacts from the war in Ukraine, we have some exciting projects coming up in the region and we expect the growth rate to increase beginning in the second half of 2022 and with a very significant pickup starting in 2023.

I will now take you through our funding position and the cash movement in Q2, 2022, which is on slide 11.

We started the quarter with $471 million in cash cash equivalents and restricted cash.

Net cash used in operating activities during the quarter was $39 million, which is primarily due to increased accounts receivables notes receivable and inventory juice, our highest sales in particular April and May were slow months for shipments due to Shanghai post operations being restricted with Covid Lockdown measure.

This meant the majority of our shipments occurred in June , which pushed many payment and collection dates into future quarters.

Our capex spend on the <unk> 3.1 o'clock. So one eight in Q2 2022 totaled $23 million and we also have capital expenditures totaling $4 million that mainly relate to improvements to our existing facilities and R&D projects.

Our current estimates all that capital expenditure for the second half will be in the range of $180 million to $220 million.

And we will primarily be used for our capacity expansion projects.

As our payments are determined by construction and equipment delivery milestones. It may be the case that some of these payments are brought forward all pushed out into 2023.

We closed the quarter in a very strong cash position of approximately $396 9 million in cash cash equivalents and restricted cash.

We expect to add modest levels of debt given the low leverage on our balance sheet and as a fixed asset base grows.

For example, with 99% of the huge building complete and this facility already backed by very strong cash flows from our customers. We have been in discussions with a syndicate of local banks to arrange a project finance facility.

We expect this will they be expensed to be available for drawdown from late August .

With the benefit of this debt financing, we expect to close the year with at least $250 million in cash.

As a class where construction progresses and receives equipment eight two will also support debt financing along the lines, we are putting in place for the huge expansion.

Accordingly, all of our capacity expansion projects are fully funded and the business is in a very solid balance sheet position to execute on its aggressive sales plan for 2023.

Lastly, please see slide 12 for an overview of our shoe show $3 one expansion project.

The new capacity. This brings on line for our new high power and high energy sales support 2023 grow targets with over half of the available capacity already allocated to customers across Europe Asia Pacific and China, we've entered into multi year framework agreements with us.

Who shall remains on schedule with the exterior of the building at 99% completion.

We posted drone footage of our social media accounts earlier this week with aerial views of the facilities.

We expect equipment to start being delivered this month with production ramp up beginning in Q4 2022.

We currently expect Clarksville began serial production in late Q3, 2023 and be well positioned to take advantage of the recently announced initiatives under the inflation reduction Act.

With that I'll turn it back to Sasha to review the outlook.

Thanks, Craig Please turn to slide 13.

We are reaffirming our guidance of 35% to 45% revenue growth compared to 2021, we continue to be optimistic about opportunities to grow forecasted contract as revenue. This year from its current level of $2 $5 billion and Theyre looking forward to the full deployment of our newly launched products to further drive.

Global sales growth, including nearby markets.

Accordingly, we have a good visibility on 2023 as a result of two large <unk> projects for deliveries to our customers in Europe , which we currently estimate at $80 million in revenue with potential upside.

We are therefore planning for a sustainable increase in customer volumes next year, and which truly sets the platform for future years of growth.

Executing its critics.

Critical and to achieve our targets, we will continue to focus our efforts on revenue growth through new multi year supply contract with existing as well as new customers to fill the new capacity coming online in 2023.

Completing the capacity expansion projects to serve increasing customer demands and swift.

Driving margin improvements as we scale the business model, we recently established a new subsidiary in Denver, Colorado called Microsoft Energy, Inc.

And have begun building a dedicated team to focus on energy storage solutions, which we see as a huge growth opportunity, especially in the U S market.

We believe energy storage with an attractive end market for our new 53 five P M.

Energy storage with valued at over $10 billion in 2020 and is projected to globally reached over 37 billion in 2027.

Further we expect U S inflation reduction act of 2022 to be important legislation advancing clean energy initiatives and helping to reduce carbon emissions in the U S helping to create even more exciting direct and indirect business opportunities for microburst going forward.

In addition, I am pleased to report that we have signed an LOI with a NASDAQ listed innovative E mobility commercially the heating platform provider and are finalizing right now a strategic cooperation agreement with them you will hear more about it finally as many of you are aware our annual stock meeting will help tomorrow.

At nine a M central time, if you have not done so already please vote. Your shares the polls are open until midnight Eastern time Tonight.

And if you would like to meet some of US in person. Please come to our booth at the IAA conference in Hanover, Germany and calendar week 38.

Full detail on the IR website, I will now turn the call back to follow.

Thank you Sasha.

The operator will now tune in to moderate the question and answer session.

Thank you at this time, we will be conducting a question and answer session.

If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.

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One moment, please while we poll for any questions.

Our first question comes from the line of Colin Rusch with Oppenheimer. Please proceed with your question.

Thanks, So much guys could you talk a little bit about how involved are your customers aren't in helping solve some of the raw materials. Obviously, there is a very dynamic environment.

I'm curious about how after their arm and leveraging some of their purchasing power and it sounds like that's what the supply chain.

Colin Thanks, a lot for the question. It's a very valid question. Yes, we are involved in now with our customers together in our strategic partnerships.

You know we have a strategic partnership with the with <unk> at the vehicles. We are involved in and finding solutions joint solutions in acquiring raw materials or other materials on the market jointly together in order to have a better bargain power. This is what we do as an example, we do that also with other strategic customers in order really to to narrow down the risk of <unk>.

<unk> sort of our increasing raw material prices.

Excellent.

The potential customer and landscape in.

You guys did a nice job of bookings from their business. This quarter, how many new folks are working through qualification right now that you might be able to convert over the next call. It three to six months.

We have various of customers or potential customers. We are working on right now.

A quick turnover in three to six months, it's always difficult to say, because we and automotive industries. This means we have normally if semi into winter test in a sample of b sample into see sample in case. It is a dedicated solution for customers and otherwise if it's and if its already existing solutions. It goes quicker. So this means.

We have already I would say at least 10 10 customers in alignment, which will where you will see revenue upcoming work in the next three to six months.

Great and then one of the things that we're seeing you know pretty substantially as we move away from fossil fuels on too.

Electrification of a variety of applications, there's enormous amount of demand.

Around energy storage and certainly a variety of supply constraints can you talk a little bit about the variety of applications you guys are considering right now.

AD markets in the bonds that you're getting from potentially new customers.

We will stay stay with our strategy. So one of our most important markets, we see commercial vehicle applications, which means everything from three five times all the way to 100 tons and then on the energy storage side. We will further go do a deep dive into that topic, we have the technology in hand, So we know we do not need to develop anything new.

We are in deep discussions right now with a couple of customers in regards to energy storage solutions and we will.

We will further later to have a further rollout in that market as well. So we are happy that it is now supported by the government and we worked through a deep dive into these different markets not only in the U S. But also in Europe , and Europe and other regions in Asia, because everywhere you see.

Big potentials on the on the end of the storage as well as in the commercial vehicles here.

Perfect. Thanks, so much guys.

Great. Thanks Colin.

Thank you and our next question comes from the line of Mike Smolinski from D. A Davidson. Please proceed with your question.

Hello, and thank you for taking my question.

I wanted to ask about the mechanism regarding your raw material costs.

When you look at companies like <unk>.

Some of those larger companies, we've been talking about they often have contractual.

Contractual clauses, which will allow you to raise your prices and raw material.

Levels oftentimes, there's a 30 to 90 day lag, but there is a way to pass it along and it's pretty much in writing.

Is that what you're experiencing in your current contracts, but I can tell something about.

How you're able to how you'll be able to pass along pricing.

What in your contract.

Hi, Mike.

It has to be contractual say if we're in a if we're in an existing program with.

With a customer.

We can only pass it only if it's per the contracts now.

A number of our multiyear contracts that provision is in there.

What we're faced with next year is that we're starting new production for.

The new cells.

So at this point, we don't know if we are in a price increase position what we need to do is deliver per those contract for at least a quarter and then we see what the unit costs come out versus what was in the works and how pricing terms.

And they said it.

And excavation event, then we'll talk through that with a customer, but we have to remember these are long term partnerships and he has got to work for everybody that we're making money and also them making money.

Got it.

That makes sense.

I wanted to touch also on the mix you had between hydrogen.

Battery power I guess, just in general, but Hudson truckload battery powered trucks.

Do any of those vehicles and the Hudson space have a different mix as far as how much you can make per vehicle.

We're usually using a smaller battery because of the heightened system.

Will there be any kind of mix issue as you start to ship.

One customer versus another or do you feel like you'll have pretty consistent gross margins quarter over quarter.

It doesn't matter, whether it's Hudson.

VEB is what you're shipping to.

Mark to give you give you an answer I think hydrogen is a is a technology, which is upcoming right now it started in Europe . It will it is.

Quickly picking up it's also now picking up in the U S market, so, but it's in the in the in the startup phase. So you have various mixtures you have hybrid trucks you have full electric practice you have hydrogen trucks. So at the end of the day, we have a good mixture in between so when we deliver and the hydrogen is mainly used.

For long distance and yes, you can you have a smaller battery in there, but you need a special battery in there which is a fast.

Fast charging capable so with high fee rates. So then you can use a smaller battery compared to other suppliers.

We tested our battery solution on a hydrogen truck just recently.

It went through the desert.

We made that announcement and everything was fine we performed perfectly. So this gives US also a solid base for our technology battery technology for hydrogen trucks and.

And I think all three technologies, if it's a hybrid if it's if it's a hydrogen or battery technology.

Full bev.

You will see them in the market long run so hydrogen for sure till 2035 as an example, because you can.

Reached longer distances as long as you have not enough fast charging stations available for commercial vehicle applications as an example.

Okay I'll leave it there guys. Thank you so much for the time.

Thanks, Mike Thanks, Mike.

Thank you at this time, we have reached the end of the question and answer session and I'd now like to turn the call back over to Sasha for any closing remarks.

Thanks, a lot. Thanks for your time, everybody I wish everybody a peaceful relaxing evening and thanks, a lot again for participating in our Q2 call.

This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.

Okay.

Yeah.

[music].

Thank you for standing by this is the conference operator, welcome to the micro <unk> second quarter 2022 earnings call.

As a reminder, all participants are in a listen only mode and the conference is being recorded.

After the presentation investment community professionals have the opportunity to participate in a question and answer session.

To join the question queue, you May Press Star and then one on your telephone keypad.

Should you need assistance during the conference call you may signal for an operator by pressing star and then zero.

I'd now like to turn the conference over to Sarah Alexander Micro vast general counsel. Thank you. Please go ahead.

Thank you John and thanks to the audience for joining US today, Sasha culture, born our President and Chief revenue Officer, and Craig Webster, Chief Financial Officer will host todays call.

This call Microburst issued its second quarter 2022 earnings press release, which can be found on the Investor Relations section of our website at IR Dot Microburst Dot com.

In addition, we have posted a slideshow to our website to accompany tonight's call. As a reminder, please note that we will be making forward looking statements on this call. These statements are based on current expectations and assumptions and reflect our views only as of today they should not be relied upon as representative about views.

As of any subsequent date and we undertake no obligation to revise or publicly release the results of any revision to these forward looking statements in light of new information.

Our future events.

These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations.

Or or in isolation from GAAP results.

These non-GAAP measures have been reconciled to their most comparable GAAP metric in the tables included at the end of our press release.

A webcast replay of this call will also be available on the Investor Relations section of our company website with that I'll turn the call over to Sasha for some opening remarks.

Thank you.

Everyone. Please turn to slide four of our presentation as I cover a few highlights from the second quarter.

We posted 93% revenue growth during the quarter delivered $64 4 million U S dollars and Q2 2022.

This revenue performance exceeded expectations, especially considering that our shipment they're very slow in April and the first half of May as a result of the Covid lockdowns in Shanghai and the surrounding region I want to thank our global team and especially our local team in China This quarter.

Faced with many external challenges and situations that we are out of their control they rose to the Occassion maintain.

On a regional note I.

I would highlight that our market share in India continues to increase and it was again a key region for our revenue growth this quarter.

We ended the second quarter with a strong backlog of $105 $3 million driven by healthy order intake of $47 8 million U S dollars.

Our forecast of contracted revenue remained at a solid $2 $5 billion, except backlog our forecasted contract revenue is compromised entirely of customers.

Located outside of China.

When we refer to forecast the contract revenue, we are describing backlog plus managements estimate for revenue, we expect to realize from.

The existing contract relationships with customers.

Most of these contracts include estimate volumes requirements. However.

Do not typically include a volume commitment we expect to realize current forecasted contract revenue figures between 2022 and 'twenty one.

The most prominent challenge in the second quarter continued to be.

Raw material prices, which remain at elevated levels as a result of supply chain disruptions as well as worldwide inflation.

Our unit cost across the board are tracking significantly higher than we anticipated at the beginning of the year. We are actively monitoring these trends and implementing mitigation strategies, where possible, including optimizing longer term supply contract identifying new and additional sources of supply and increasing our selling prices.

Where possible.

However, we expect raw material prices, especially for certain key mature like lithium cobalt to remain elevated through 2022 and possibly into 2023.

Looking forward into 2023, we expect our auto volume to increase after we bring the new manufacturing capacity is online and who we are.

This additional volume to increase our production visibility, enabling us to lock in higher volume commitments.

Please turn to slide number five which highlights some of our key partnerships in the commercial vehicle market.

Zafar is a French bus OEM, which has a dedicated unit specializing in the renovation of passenger transport equipment in active and propelling clean and sustainable mobility.

One of our core strategy centers on the.

On the construction marketing of hydrogen buses under the bus Inova and <unk> City brand is the retrofitting of buses with hydrogen the renovation and maintaining of passive passenger transport vehicles as well as customer service Microburst has nominated exclusive battery supplier and has signed the framework agreement up to.

10 years with software with a revenue forecast of over $150 million U S dollars.

Clean logistic is it 10 spot leader in the mobility Revolution within commercial vehicle transport Microbiome has already delivered prototype systems for hydrogen buses and trucks will clean logistics. The expected volume forecast from 2023 to 2020 is approximately 1300.

Third to 5000 vehicles.

<unk> power group is an international company with business segments, such as power system commercial vehicles, agriculture equipment construction machinery, smart logistics and marine transportation equipment, its product export it to more than 110 countries and regions.

Microsoft is in the process of delivering battery systems Wi Fi power with heavy truck tractor project with a $4 million order volume only in Q2.

Ex CMG is one of the most influential lab scale enterprises in China construction machinery industry. Its product portfolio includes various heavy duty construction equipment.

Truck cranes asphalt concrete paper graders coal mining machines fire trucks, and Microsoft's expected to deliver 50.

<unk> 49 tonne hydrogen heavy duty trucks with a total revenue of $1 $4 million in 2022.

Please turn to slide six which highlights some key wins during the second quarter, including an order from JV and group for over $11 million and another order from switch in excess of $8 million. We also continue to benefit from ongoing customer relationships. As example, Oshkosh right setup.

<unk> and others in total the order intake for Q2 was 47 8 million U S dollars.

I will now turn the call over to Craig to review, our financial performance of Q2.

Okay.

Thank you Sasha.

I'll spend the next few minutes discussing our Q2 2022 financial results.

Please turn to slide eight and I will summarize the main line items from our Q2 P&L.

First off revenue.

I am pleased to report strong revenue growth in the second quarter, which grew 93% to $64 4 million from $33 4 million in Q2 2021.

I will take you through the geographic breakdown in the latest slide but I'd like to highlight that this marks the sixth quarter in a row that we have shown substantial revenue growth over the same quarter in the prior year in fact on a percentage basis revenue has grown double or triple digits for each quarter since Q1.

One 2021.

On a year to date basis revenue was $101 $1 million up.

<unk> 109, 2% from $48 3 million in the prior six months period.

We posted a gross profit of $4 $8 million in Q2, 2022 compared to gross loss of $6 $8 million in the prior period, an improvement of 171, 5%.

After adjusting for non cash settled share based compensation expense and our cost of sales adjusted gross profit was $6 $7 million in Q2 2022 compared to adjusted gross loss of $6 8 million in Q2 2021.

This translates into an adjusted gross margin of 10, 4% in Q2 2022 compared to negative 23% in Q2, 2021, a 37 percentage point improvement.

I was pleased to see gross margin improve at a faster rate than revenue during the quarter, despite higher raw material prices.

This result, underpins our efforts to improve our gross margin performance long term and it will continue to be an area of focus for us going forward.

Especially as we plan for significantly higher customer deliveries in 2023.

Operating expenses were $54 million in Q2, 2022 compared to $15 8 million in Q2 2021.

The largest contributor to the increased operating expenses was share based compensation expense, which totaled $28 5 million in the quarter.

Operating.

Expenses also increased as the company continues to add head count to support planned growth initiatives and also incurred additional expenses related to operating as a public company compared to the prior year period.

As I mentioned previously noncash share based compensation expenses were a significant contributor to built the increase in GAAP operating expenses and operating losses.

The large majority of share based compensation expense related to equity awards made in the years preceding our business combination last summer.

Accounting rules require that those awards be expense to our P&L over a three year period following the merger.

We believe a more accurate representation of our financial performance, especially as related to cash operating expenses and operating loss is as illustrated in slide nine.

After adjusting for noncash stock based compensation and SG&A, our adjusted operating expense in Q2, 2022 was $21 7 million compared to $15 8 million in Q2 2021.

GAAP net loss was $44 2 million in Q2, 2022 compared to net loss of $27 $1 million in Q2 2021.

Reconciliations of these non-GAAP metrics to the most comparable GAAP metrics are included in the tables at the end of our earnings press release.

Slide 10 shows the geographic breakdown of our revenue for the three and six month periods ended June 32022 compared to the prior year period.

Q2, 2021, and 310% growth for the first six months.

India continues to be the biggest driver of growth for us in the Asia Pacific region.

In addition, our China business continues to perform well posting 57% growth during the quarter.

Europe also posted a healthy 15% growth rate.

I will now take you through our funding position and the cash movement in Q2, 2022, which is on slide 11.

We started the quarter with $471 million in cash cash equivalents and restricted cash.

Net cash used in operating activities during the quarter was $39 million, which is primarily due to increased accounts receivable notes receivables and inventory due to our higher sales in particular April and May were slow months for shipments due to Shanghai port operations being restricted with Covid lockdown measures.

This meant in the majority of our shipments occurred in June which pushed many payment and collection dates into future quarters.

Our capex spend on <unk> three one o'clock. So one in Q2 2022 totaled $23 million and we also have capital expenditures totaling $4 million.

That mainly relate to improvements to our existing facilities and R&D projects.

Our current estimates are that capital expenditures for the second half will be in the range of $180 million to $220 million.

And we will primarily be used for our capacity expansion projects.

As our payments are determined by construction and equipment delivery milestones. It may be the case that some of these payments forward all pushed out into 2023.

We closed the quarter in a very strong cash position of approximately $396 9 million in cash cash equivalents and restricted cash.

We expect to add modest levels of debt given the low leverage on our balance sheet and as a fixed asset base grows.

We expect this expense to be available for drawdown from late August .

With the benefit of this debt financing, we expect to close the year with at least $250 million in cash.

As our clients were construction progresses and receives equipment eight two will also support debt financing along the lines, we are putting in place for the huge expansion.

Accordingly, all of our capacity expansion projects are fully funded and the business is in a very solid balance sheet position to execute on its aggressive sales plan for 2023.

Lastly, please see slide 12 for an overview of our <unk> $3 one expansion project.

The new capacity this brings online our new high power and high energy sales support in our 2023 growth targets with over half of the available capacity already allocated to customers across Europe Asia Pacific and China, we've entered into multi year framework agreements with us.

<unk> remains on schedule with the exterior of the building at 99% completion.

We posted drone footage of our social media accounts earlier this week with aerial views of the facilities.

We expect equipment to start being delivered this month with production ramp up beginning in Q4 2022.

We currently expect Clarksville begin serial production in late Q3, 2023 and be well positioned to take advantage of the recently announced initiatives under the inflation reduction Act.

With that I'll turn it back to <unk> to review the outlook.

Thanks, Craig Please turn to slide 13.

We are reaffirming our guidance of 35% to 45% revenue growth compared to 2021, we continue to be optimistic about opportunities to grow forecasted contracted revenue. This year from its current level of $2 $5 billion and are looking forward to the full deployment of our newly launched products to further drive.

Global sales growth, including nearby markets.

Accordingly, we have a good visibility on 2023 as a result of two large <unk> project for deliveries to our customers in Europe , which we currently estimate at $80 million in revenue with potential upside.

We are therefore planning for sustainable increase in customer volumes next year, and which truly sets the platform for future years of growth.

Executing its critics.

Completing the capacity expansion projects to serve increasing customer demand and.

Driving margin improvements as we scale the business model.

We recently established a new subsidiary in Denver, Colorado Court, Microsoft's Energy, Inc.

And have begun building a dedicated team to focus on energy storage solutions, which we see as a huge growth opportunity, especially in the U S market.

We believe energy storage with an attractive end market for our new $53 five ampere hour energy storage with valued at over $10 billion in 2020 and is projected to globally reach over 37 billion in 2027.

Additionally, I'm pleased to report that we have signed an LOI with a NASDAQ listed innovative E mobility commercial vehicle platform provider and are finalizing right now a strategic corporation agreement with them you will hear more about it finally as many of you are aware our annual stock meeting will help tomorrow at nine.

I am central time, if you have not done so already please vote. Your shares the ports are open until midnight Eastern time Tonight.

And if you would like to meet some of US in person. Please come to our booth at the IAA conference in Hanover, Germany and calendar week 38.

Full detail on the IAA website, I will now turn the call back to <unk>.

Thank you Sasha.

Operator, we'll now tune in to moderate the question and answer session.

Thank you at this time, we will be conducting a question and answer session.

If you would like to ask a question. Please press star one on your telephone keypad.

Information tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing any star keys.

One moment, please while we poll for any questions.

Our first question comes from the line of Colin Rusch with Oppenheimer. Please proceed with your question.

Thanks, So much guys can you talk a little bit about how it Paul if your customers are in helping solve some of the raw materials. Obviously, there is a very dynamic environment very competitive I'm curious about how active they are leveraging some of their purchasing power to help you guys with the supply chain.

Colin Thanks, a lot for the question. It's a very valid question, yes, we are involved.

With our customers together in our strategic partnerships.

You know we have a strategic partnership with the <unk> at the vehicle group, we are involved in and finding solutions joint solutions in acquiring raw materials or other materials on the market jointly together in order to have a better bargain power visits will be due as an example, we do that also with other strategic customers in order really to to narrow down the risk of <unk>.

<unk> sort of our increasing raw material prices.

Excellent.

Ross the potential customer landscape.

You guys did a nice job of bookings from new business this quarter.

Any new folks are working through qualification right now.

You might be able to convert over the next call it three to six months.

We have various of customers or potential customers. We are working on right now.

Turnover in three to six months, it's always difficult to say because we are an automotive industry. This means we have normally if semi under winter test in a sample of be sampling to see sample in case. It is a dedicated solution for customers.

Otherwise if it's if it's already existing solutions. It goes quicker. So this means we have already I would say at least 10 10 customers in alignment, which will where you will see revenue upcoming in within the next three to six months.

Great and then one of the things that we're seeing pretty substantially as we move away from fossil fuels onto.

Electrification of a variety of applications, there's enormous amount of demand coming.

Around energy storage and certainly a variety of supply constraints can you talk a little bit about the variety of applications. You guys are considering right now from end markets and inbound so youre getting from potentially new customers.

We will stay stay with our strategy. So one of our most important markets, we see commercial vehicle applications, which means everything from three five all the way to 100 tons and then on the energy storage side. We will further go do a deep dive into that topic, we have the technology on hand, So we know we do not need to develop anything new.

We are in deep discussions right now with a couple of customers in regards to energy storage solutions and we will.

We will further later to have a further rollout.

That market as well so we are happy that it is now supported by the government and we will further deep dive into these different markets not only in the U S. But also in Europe , and Europe and other regions in Asia because everwhere.

The big potential on the on the end of the storage as well as in the commercial vehicles here.

Perfect. Thanks, so much guys.

Great. Thanks Colin.

Thank you and our next question comes from the line of Mike <unk> from D. A Davidson. Please proceed with your question.

Hello, and thank you for taking my question.

I wanted to ask about the mechanisms regarding your raw material costs.

When you look work with companies like <unk>.

Some of those larger companies as we've been talking about they often have contractual.

Contractual clauses, which will allow you to raise your prices with raw materials.

Levels oftentimes, there's a 30 to 90 day lag, but there is a way to pass that along and it's pretty much in writing.

Is that what youre experiencing in your current contracts can you tell us about.

How youre able how youll be able to pass along pricing that's not in your contract.

Yeah.

Hi, Mike.

It has to be contractual so if we're if we're in an existing program.

With a customer we can only pass that only if it's per the contracts now.

In a number of our multiyear contracts that provision is in there.

What we're faced with next year is that we're starting new production for new cells.

So at this point, we don't know.

A price increase position, what we need to do is deliver per those contracts for at least a quarter.

And then we see where the unit costs come out versus what was in the works and our pricing terms.

And they said it.

And escalation event, then we'll talk through that with a customer but we.

We have to remember these a long term partnerships and it's going to work for everybody that we're making money and also them making money.

Got it that makes sense.

I wanted to touch also on the mix you have between hydrogen.

Battery power I guess, just in general, but has been talking to high powered trucks.

Sure.

Do any of those vehicles.

The hygiene space have a different mix as far as.

Unless you can make per vehicle.

Often usually using a smaller battery because of the housing system.

Will there be any kind of mix issue as you start to ship.

One customers versus.

Or do you feel like Youll have pretty.

Consistent gross margins quarter over quarter.

Okay.

It doesn't matter, whether it's Hudson.

Okay.

Is what Youre shipping too.

Mike to give you give you an answer I think hydrogen is.

Acknowledged which is upcoming right now it started in Europe It will.

As for long distance and yes, you can you have a smaller battery in there, but you need a special battery in there which is.

<unk> fast charging capable so.

Hi C. Right. So then you can use a smaller battery compared to other suppliers.

We tested our battery solution on a hydrogen truck just recently.

It went through the desert.

We made that announcement and everything was fine we performed perfectly. So this gives US also a solid base for our technology battery technology for hydrogen trucks and.

And I think all three technologies, if it's a hybrid if it's if it's a hydrogen or battery technology.

Full bev.

You will see them in the market long run.

Hydrogen for sure till 2035, as an example, because you.

Can.

Reached longer distances as long as you have not enough fast charging stations available for commercial vehicle applications as an example.

Okay I'll leave it there guys. Thank you so much for the time.

Thanks, Mike Thanks, Mike.

Thank you at this time, we have reached the end of the question and answer session and I'd now like to turn the call back over to Sasha for any closing remarks.

Thanks, a lot thanks for your time everybody.

Wish everybody a peaceful relaxing evening and thanks, a lot again for participating in our Q2 call.

This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.

Q2 2022 Microvast Holdings Inc Earnings Call

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