Microvast Holdings Inc. Q1 2023 Earnings Call

Thank you for standing by this is the conference operator.

Welcome to Microburst first quarter 2023 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.

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I would now like to turn the conference over to Monica Gould Investor Relations for micro Vas. Please go ahead.

Thank you operator, and thank you for joining US today, joining me on today's call and Mr. Yang will founder Chairman President and CEO .

Sasha Khalsa Brien, Chief revenue Officer, and Craig Webster, Chief Financial Officer.

Ahead of this call them micro vast issued its first quarter 2023 earnings press release, which can be found on the Investor Relations section of the company's website at IR Dot Microsoft's dotcom.

In addition, we have posted a slide presentation to accompany management's prepared remarks.

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 our 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 or future.

Vince.

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

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 on March 16th 2023, 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 micro vast performance.

non-GAAP measure should be considered in addition to and not as a substitute for or in isolation from GAAP results. These non-GAAP measures have been reconciled to their most comparable GAAP metrics in the tables included at the end of our press release, a web cast replay of this call will also be available on the investor.

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And with that I'd like to turn the call over to Yang Lu for opening remarks.

Thank you Monica and essentially you all for joining us today.

I'd like to start off with a high level overview of the quarter.

Before providing some operational highlights.

I would always and turn the call over to Sasha can upon our chief revenue officer, who I'll discuss some of our key wins in the quarter.

Followed by Chris Webster, our Chief Financial Officer, who will discuss our financials in more detail.

I will then address our outlook for Q2 and is it full year 2023 before opening the call up to your questions.

Everyone.

Please turn to slide four as I cover a few highlights from the fourth quarter.

We posted 28%.

0.1% revenue growth in Q1 2023.

Delivering revenue of 47 million.

This exceeded our expectations as our European commercial vehicle customers began initial production.

Supply chain issues began to abate.

We achieved double digit to close market.

With our more than eight percentage points year over year increase.

We ended the first quarter with a record backlog.

$186 7 million driving by our healthy order intake of six $2.

$7 million led by a significant ramp in sales to European customers.

Our most significant achievement in Q1 was a completion of our phase three one expansion in food.

China, We started the trial production of the 53.

Five empower Sal.

We continue to increase our production rate in line with delivery schedules provided by our customers, especially in the U S and Europe .

We estimate.

This initial two gigawatt hours of cell module and pack capacity gives us an incremental 500 million in revenue potential as you can see from our backlog numbers.

There is already a significant customer demand for our new product and over 50% of the full year capacity, either who do is already contracted.

We expect customer orders and deliveries to getting increasingly strong as the year progresses.

And for that to be broad based across the U S Europe , China and Asia Pacific regions.

Well, who do expansion now completed our remaining capacity expansion plans for the year.

On our new U S facility in Crossville, Tennessee.

This will initially have an annual capacity of a two gigawatt hour. It is in full construction mode with startup of production targeted for Q4 of this year.

We would also like to provide a quick update on the Mexico Esf's container Assembly hub, we mentioned our Q4 'twenty two earnings call.

We have leased a new facility in Mexicali, which is very close to the U S border and we are currently working on installing a container Assembly line.

We expect to ship finished the full three megawatt hour containers directly from our Mexicali facility starting in Q3, two customer project sites in the U S.

As many of those being located in the southwest Sunbelt.

I would now like to turn the call over to our Chief revenue Officer, Sasha <unk> who'll discuss some of our key wins and achievements in the quarter.

Thank you Mr. Hu and thank you for all joining us today first I would like to provide a little bit more color on our backlog a record $486 7 million backlog includes orders for more than 80 customers representing a wide array of commercial vehicle platforms, many of which are or will be multi year projects.

Approximately 22% of our backlog is for European customers and 69% for U S, including E. S. S project.

This gives us the confidence that we will see significant growth in both regions over the coming quarters.

Now please turn to slide seven as I cover a few highlights from the first quarter.

Following our initial contract announcement in January of last year, we were very pleased to signed significant new orders with the vehicle one of our largest customers, while our new $53 five ampere hour battery pack, which will power the new Crossrail low entry city and intercity bus platforms.

Our high energy density battery packs on the bus ranges from 400 to 466 kilowatt hours, depending on operated mission requirements and they set new standards in terms of energy density and charging capacity.

Furthermore, we provide the crossword with up to 10 years of battery life.

We received an order for over 350 units of our $17 five ampere hour battery pack from <unk>, a leading global OEM of construction equipment for the hybrid truck.

We also received major orders from Gustavo for the U S business, where we supply our new 53, five hour battery pack to their full electric logistic vehicles.

On the back of our announcement earlier this year with re we began SLP delivery of our 53 five hour pack, which will power the company's full electric P. Seven skateboard platform. The <unk> seven is the industry flatus EV platform and it's suitable for applications such as commercial trucks school buses.

Walk in vans and delivery box trucks.

And lastly, we start deliveries of our 'twenty one on power battery pack to see AMC. This Chinese leading heavy duty truck OEM for their 49 tons per hectare.

Our initial order calls for the delivery of more than 50 system units.

We continue to expect auto volumes to increase over the course of 'twenty three as we ramp up production of about 53, five ampere hour cells on a new fully automated line in Hulu to meet customer commitments.

Please turn to slide eight which highlights the significant growth in our European commercial vehicle business.

Our European revenue almost tripled year over year in the first quarter and accounted to 22% of our total revenue up from 7% of revenue a year ago.

This growth was driven by the initial ramp of several customer projects, some of which I mentioned earlier and edit by and improving supply chain.

Going forward, we expect governmental initiatives such as European Green deal you always plan to ban combustion engine vehicle sales by 2035, along with U S I right.

This continuing to be a significant driver of electrification initiatives for example on the commercial vehicle side. The total of 27 governments have already pledged to achieve 100% zero emission bus and truck sales by 2040.

With that I will turn now the call over to Craig to review our financial performance.

Thank you Sasha.

Then the next few minutes discussing our Q1 2023 financial result.

Turning to slide 10, and I'll summarize the main line items from our Q1 P&L.

So we recorded our highest ever Q1 revenue of $47 million in.

An increase of 28, 1% from $36 7 million in Q1 2022.

Year over year growth was primarily driven by increase in deliveries by European customer base.

You just covered.

Our gross margin rose to 10, 3% in Q1 2023.

Zero percent in Q1 2022.

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

Gross margin increased to 13, 5% in Q1 2023 compared to five 2% in Q1, 2022, and eight three percentage points improvement.

The increase in gross margin was largely due to production efficiencies and more favorable product mix and one third with the R&D.

Operating expenses were $36 2 million in Q1, 2023 compared to $43 4 million in Q1 2022.

Similar to previous quarters, the largest contributor to the decrease in operating expenses with a decline in our share based compensation expense, which totaled $16 4 million in the quarter compared to $26 2 million in Q1 2022.

After adjusting for noncash SBC expense in SG&A. However, adjusted operating expense in Q1, 2023 was $19 8 million compared to $31 1 million in Q1 2022.

GAAP net loss was $29 6 million in Q1, 'twenty three compared to net loss of $43 8 million in Q1 2022.

After adjusting for noncash SBC expense and changes in fair value of our warrant liability adjusted net loss was $11 7 million in Q1 2023.

<unk> to an adjusted net loss of $29 1 million in Q1 2022.

You can see the impact of these adjustments in 511 and reconciliations of these non-GAAP metrics to the most comparable GAAP metric.

In the table at the end of our earnings press release.

Slide 12 shows the geographic breakdown of our revenue for Q1 2023 pump head to the prior year period.

As you can see our European business showed a strong 270% year over year increase and accounted for 22% of our revenue.

From just 7% a year ago.

Key customers began serial production of that vehicle.

As we outlined last quarter, a large percentage about commercial vehicle backlog is from European customers, who are launching electrified models for the first time.

Continued volume growth in our European segment.

Actually it was a 53.5 and pilot though.

As they expand production.

Our U S revenue increased 52% year over year, we continue to like the U S revenue to rise this year as we begin deliveries on our one two gigawatt hour, yes that project in the second half of the year.

In 2024 and beyond we expect U S revenue growth remains strong as we begin to the opportunities in the U S market smell Clarksville facility.

Once online we expect clock supposed to have high capacity utilization based on current and anticipated orders.

We should be in a position sooner rather than later this year, but we will need to start planning for additional capacity.

Our investment decisions to further expand capacity always predicate some confirmed customer orders.

Turning to slide 13, we ended the quarter with cash cash equivalents restricted cash and short term investments of $285 8 million.

Net cash used in operating activities during the quarter was $11 2 million, which was primarily due to our operating loss.

Negative free cash flow of $47 1 million with mostly as a result of our capex spend on the <unk> 3.1.

So why in Q1, 2023, which totaled $31 4 million.

We also had capital expenditures totaling $4 5 million from improvements to our existing facilities and ongoing R&D projects.

With new show three well now completed we will be drawing down on the remaining balance of around $67 million project finance facility to meet final milestone payment contractors and equipment suppliers.

We believe the old remaining payments will be satisfied from that facility.

We closed the quarter with.

With record backlog of $486 7 million.

From $410 5 million in the fourth quarter.

The 19% sequential growth and our backlog was driven by commercial vehicle project in Europe .

This once again underpins our strong conviction in our full year guidance and our belief that 2023 is just the thought of a number of high growth yet the microbiome.

This sales growth is already allowing us to access more financing options. In Q1, we added a 17 million credit line $9 5 million of which remains undrawn.

<unk> continued to increase quarter over quarter, we expect to add additional working capital credit lines and our current estimate is that we would at a fed that $20 million to $30 million by the end of Q2.

Looking ahead, we estimate that full year capital expenditures will remain in the range of $180 million to $210 million.

Primarily be used for ongoing construction in Clarksville.

As we have mentioned before we believe Clark, who can easily support the modest debt financing.

Growth in backlog, the additional margin and cash flow uplift from IRA.

Proven experience and bring it online capacity will clearly resonate with Atlanta.

With that I'll turn it back over to Mr. William to review our outlook.

Thanks, Craig.

Turn to slide 15.

As a result of our outperformance in the first quarter, we are raising our annual revenue guidance for the full year from a range of 336 million to 358 million, representing a year over year revenue growth, 65% to $75.

<unk> to a range of 348 million to $368 million, reflecting growth of 70% to 80%.

For the second quarter, we expect our revenue to be in the range of 63 million to $67 million.

Up slightly from Q2, a year ago at the midpoint.

Driving by the continue ramp up our European commercial vehicle projects as well as orders from customers in Asia Pacific.

With a strong and growing backlog, we continue to have good visibility into 2023 driving by European commercial vehicle projects interim.

Production phase and as they ramp up for our energy storage business.

We are seeing strong demand for our products globally and expect that our momentum will continue as customer volumes ramp throughout the year and beyond.

On last quarters call. I noted is that execution will remain critical to our ability to achieve our targets.

Okay.

We're very pleased with the progress we made in the fourth quarter.

Sat or raising both revenue and backlog growth.

Completing our capacity expansion project, who do aimed at driving substantial gross margin improvement.

We continue to expect.

The inflation reduction act of 2022 to be important legislation advancing clean energy initiatives and are helping our reduced carbon emissions in the U S.

While creating even more exciting direct and indirect business over 24 micro robust going forward.

Our global Microbus team.

Our focus.

<unk> culture, and our ability to execute has been and it will be a competitive advantages over <unk> and I would like to personally stands the microbus team for their tireless work and commitment to our mission before turning the call back over to the operator to start.

The Q&A session.

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

It will be placed into the queue in the order received.

Please be prepared to ask your question when prompted.

Once again to ask a question. Please press star one on your keypad now.

Okay.

And our first question comes from Colin Rusch from Oppenheimer.

Your line is open.

Thanks, so much guys.

And congrats on the gross margin improvement here.

I wanted to dig into that just a another layer deeper can you talk a little bit about the yield trends you're seeing on the capacity as you ramp up the 53 and a half half ourselves and your ability to drive some incremental margin as you get up to some of the higher revenue levels.

Clearly you under this question or you want me to answer this question.

I'll take it calling good to hear the voice yeah, what we're expecting to see later in the year as we move from Q1 with no fully automated production lines.

And we were not getting big volume discounts on $53 five.

So as we move forward and later into the year, we're going to be producing all this is a fully automated lines volume discounts.

I also want to utilization and we expect that to feed through to gross margin improvement.

<unk> Q.

Q3, Q4, because that's when the production schedules they've got from customers really kick in this year.

Excellent and then with the U S facility can you talk a little bit about equipment procurement and any sort of headwinds or progress that youre, making in terms of buying that equipment and get it into the country.

That's Cornell did this or that I can answer this question.

Hey, U S vicinity actuary is.

Is the 100% of marrow with China, you know the equipment censor prior year stem system, yes.

Different the certification that you know U S require UL certification.

And that's why we slightly behind of China, China, you claim that installation and.

With the you know.

The maturity of China, Tidying up racing experiencing installation experience.

We have overcome the all of the.

The problems in China.

You know, we think the USD is going to be a much smoother and also we send our U S crew to China, you know for the.

But the operation and our installation training as well you know that's why I expect that you know you are.

I would say, it's going to be much much smoother and.

We're still on the track.

The plan to build this factory before end of this year, that's our plan, but still remain.

Excellent and then just a final one on the sales process.

Great to have the backlog number out here and I appreciate that.

But I'm curious about your ability to move customers through the sales pipeline.

Closed incremental T OS for the balance of this year I assume some of that backlog is not.

For 2020 for them, but just want to get a sense of how much book and ship business, you've got and how those customers are moving through the pipeline.

Okay.

Okay.

A quick question okay. Okay.

Great to hear you generally speaking around the backup behalf is probably 'twenty three 'twenty four.

Finally, we will have ongoing tests ongoing deep customer.

Customers testing, all new battery solutions, so and that will be but there will be backlog increases within this year for sure. So we started with a lot of testing already in 2022, if you actually you probably remember.

We'd have to go to the subtests, sometimes by being a customer through summer and winter.

And this will feel the effects in Q3 and Q4 for sure.

Thanks on the backlog side.

Okay.

Thank you and our next question comes from Amit Dayal with H C. Wainwright.

Your line is open.

Thank you good afternoon, everyone. Good to see the execution come through I'm just on the Capex guidance is at $35 million, primarily targeted towards the Clarksville facility.

That's right.

I mean, all the spend going forward now is clarksville so.

As you saw in the slides who show is done.

We've got the remaining milestone payments to.

Contractors, but they'll get funded from the Undrawn facility.

And then what's really good about club so there's the.

The level of engagement that we're getting from customers, which you're seeing feed through into that backlog increase.

And then.

In terms of lenders, there's a lot of lender interest because you.

What we're proving out is that we can we can grow the backlog.

The backlog in the U S gets the IRA credits in.

The benefit of the Max is seeing that we were experienced at this to be closed the the huge capacity expansion.

And in a pet Collyns question on equipment, and they say exact same equipment coming into the into the U S, which we've just shown that we can bring into ramp phase. So.

It's very derisked.

And puts us in a really strong position closed the club and the close yeah.

Cashback Alan.

We're really raising capital on the debt to the balance sheet.

<unk> be in the equity market mm mm.

We're able to do that because we're clearly growing revenues and growing backlog this year.

Thank you.

Hmm the capacity in China.

Uh huh.

Separately I mean.

And it May go.

You're breaking up can you repeat the question.

Okay.

Okay.

Right.

No. The 90 is not good.

I call on them.

This is the conference operator, Mr. Doyle I assume you're on a cell phone, maybe you can get to a window or or kind of a clear line of sight and try again.

Okay.

Okay.

As the operator is there anyone else ready for a question.

I think reviews Mr. Dino.

Oh, Hi, this is Katherine <unk> from the Investor Relations team, we've gotten some questions that I can pose in the Meanwhile, we'll wait for them to come back.

The first is beyond what commercial co projects do you have in the U S and when should we expect them to begin to ramp.

Okay.

Cassidy, that's a great question, which came from the audience. So generally speaking.

We have a couple of upcoming promotional vehicle and special vehicle projects.

Projects, which are coming as I mentioned already to Collyn, mainly in Q3 and Q4, we are we're still under NDA, but we think that we will be able to do it.

It was to disclose quite soon also be project names with all our customers together.

Okay, perfect and one more that we have received is can you talk us through what the competitive market is for your $53 five empower style and where are the competitor burst and you and in the process of ramp up.

I canceled his question you know the $53 five empower cell is dedicated to the commercial vehicle you know when we designed this.

And that we developed for over three years, you know they take a very long time to tax and a.

Or do you find this battery.

This battery get too.

You know a much longer lifespan and are they like a cycle life. You know this batteries two to three times longer than the competitors battery.

And it still remains a very high energy density.

Two powers the commercial vehicle commercial vehicle needs much longer life battery, you know everybody know it compare with the passenger car like a three times longer distance to drive.

That's why you know this battery dedicated that we use this battery too, yes, that's projected sand batteries that module.

And.

He's going to get yes, you know the system much longer.

No the life.

And that which give the much better you know the.

Total investment.

Our return.

And to compare with that with competitors.

Oh, we haven't seen all the.

Which wage competitor you know that reach to our performance we haven't seen it.

Perfect. Thank you and I'll turn it back to the operator.

As a reminder, if you do have a question. Please press star one on your Touchtone keypad now.

Okay.

I'm seeing no further questions I'll turn it back to Mr. <unk> for closing comments.

Okay. Thank you all for joining today's meeting.

I wish everybody have a good day and good night good dream.

Thank you.

Yeah.

That concludes our conference call.

Thank you for joining and have a pleasant evening.

Yeah.

Thanks.

Hey, thanks.

The host has ended this call goodbye.