Q2 2023 Microvast Holdings Inc Earnings Call
Thank you Stan for standing by this is the conference operator.
We welcome you to micro that second quarter 2023 earnings call.
As a reminder, all participants are in a listen only mode and the conference is being recorded after the presentation investing community professionals have the opportunity to participate in a question and answer session.
Join the question queue. You May Press Star then one on your telephone keypad should you need assistance. During the conference you may signal, an operator by pressing star Zero I would now like to turn the conference over to Rodney word then microburst director of Investor Relations. Please go ahead.
Thank you operator, and thank you everyone for joining us today.
Joining me on today's call are Mr. Yang Liu founder Chairman, President and CEO Mr.
Mr Sasaki Chief revenue Officer.
Mr Craig Webster Chief Financial Officer.
Ahead of this call microbiome issued its second quarter 2023 earnings press release, which can be found on the Investor Relations section of the company's website at IR Microburst Dot com.
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.
Our views only as of today.
They should not be relied upon as representing our views for subsequent dates and we take undertake.
No obligation to revise or publicly release the results of any revision to these forward looking statements and the likes of new information 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 SEC.
Our annual reports 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 Microsoft's performance.
These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results.
These non-GAAP measurements have been reconciled to their most comparable GAAP metrics 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 will turn the call over to Mr. <unk> for opening remarks.
Thank you Rodney.
And thank you all for joining us today.
I would like to start off with a high level overview of the quarter.
Before providing some operational highlights.
I will then turn the call over to Sasha Ted Baun, our Chief revenue Officer.
Who I'll discuss some of our key wins in the quarter.
Followed by Craig Webster, our Chief Financial Officer, who will discuss the financials in more detail I will then address our outlook for Q3 and as a full year 2023 before opening the call up to questions.
Please turn to slide four as a cover a few highlights from our second quarter.
We posted a 16% revenue growth in Q2 2023.
Delivering a revenue of 75 million.
This increase came from growth in our European business, along with a strong demand from customers in China.
We once again achieved the double digit gross margin with an adjusted gross margin of 17, 3%.
A seven percentage point increase year over year.
We ended the second quarter with record backlog of $675 9 million driving by a strong order intake of $271 3 million from our commercial vehicle business.
This growing backlog demonstrates the rapid adoption of our new 53, empower sound technology across commercial vehicle and E. S. S applications.
Turning to slide five our most significant operational achievement in Q2 was our phase 3.1 expansion, you know who Joe.
For our $53 five impasse L.
This has now transitioned from a child production to shipping qualified paybacks to our customers.
Since Q1.
Our parents have.
Capacity for deliveries of our 53 point.
Five empower cell from a huge all through Q2 2024 has increased from 50% to 75%.
We expect.
Customer orders and deliveries to increase further.
As the year progresses.
Especially for deliveries to the United States and Europe .
We would also like to provide an update on our USS container Assembly operations as you will see from slide six.
Due to the rule change.
Related to how domestic content these volume as a part of the inflation reduction at <unk>.
We have decided to locate Oh, yes, as container assembly operations in the United States.
Because this change could have adversely impacted our customers.
We expanded our Colorado footprint and well no longer base in a zoo the operations the Mexicali.
This company.
One the facility in Windsor, Colorado has a capacity to assemble 1000 containers annually.
We are preparing Windsor to startup assembly operations and expect to begin shipments all finishing the full three megawatt hour, yes as containers in early Q4, two customer job sites.
We had originally planned to start shipments in Q3 and is therefore, we expect some pushout in rats.
Recognizing revenues from our E. S S business this year.
This short term impact on booking revenues. This year is far outweighed by ensuring our assembly facility put out of customers and partners in a best position to claim the domestic content bonus credit.
I would now like to turn the call over to our Chief revenue Officer, Sasha, Bonnie who I'll discuss some of our key cells partnerships and achievements in the quarter.
Thank you Mr. Hu and thank you all for joining us today.
First I would like to provide a bit more how long all of backlog and that's the whole mentioned all backlog increased six times year over year, driven by both rapidly expanding and as he starts.
A strong commercial vehicle demand in Europe .
80% of a record $675 9 million U S. Dollar backlog compromised, Nevada bought 53.5 pumping hours tell from customer in the U S and Europe .
We also saw increasing demand in South Korea, and India, where we successfully secured several important projects.
Now please turn to slide seven as I cover a few highlights from the second quarter.
During the quarter, we received the first purchase order from a leading U S commercial vehicle OEM deliveries contractual starting in 2024.
We received an order from a leading European coffee OEM for new heavy duty part application most project sort of expand our footprint and solving commercial vehicle customers.
We also signed a general purchase agreement for 1000 units well what 'twenty one on power Gen. Three pack with JV NN group, the leading Indian bus OEM delivery, starting in May and extends through the second quarter of next year.
Jamie I'm cool, it's a global automotive come from Iraq with operations in more than 25 locations.
One concrete and Michael that's presenting we present the main supply out lithium technology put Danielle.
Turning to slide eight.
We subsequently increased our backlog for one of our largest customer is equal group during the quarter.
This year, we announced an initial contract for a new kitchen suite.
Our battery pack, which will empower venue crossway low entry study and intercity bus.
Furthermore, we are providing why psi, a leading multinational industrial equipment company with all of Gen. Four I power battery for the hybrid truck platform why site is operating globally with a focus on the new energy vehicles and strategies, such hybrid and fuel cell technologies.
Microsoft is also extending our partnership with refi, leading hydrogen technology company to clip over 100 units. After a 4.5 ton hydrogen truck with our Gen three packs.
Refi is a long term partner of ours focused on R&D and product development for advanced fuel cell systems.
Microburst, it's the nature of supply of batteries to both why try and refi with a hybrid and fuel cell product offerings, and we are proud to support them in the global transition to an agile clean energy.
Another positive benefit here is that we strengthened our technology of references for fuel cell applications, which presents opportunities for future development and partnerships.
We had another excellent quarter and building up our European business, our European revenue increased 19, 1% year over year in the second quarter and accounted for 13% of our total revenue up from 8% of revenue a year ago.
This growth was driven by a continuously ramp up of several customer projects. In addition to a vehicle group Lasalle and re entering their real deliveries most of the customers have placed more to get contracts.
Looking ahead to the next quarter, we expect to add significant multiyear contracts to our backlog for European commercial vehicle customer is dedicated to both existing and new technologies.
I will now turn the call over to our Chief Financial Officer, Craig Webster to review, our financial performance in the quarter.
Thank you Sasha.
I'll spend the next few minutes discussing our Q2 2023 financial results.
Please turn to slide 10, I will summarize the main line items from our Q2 P&L.
We recorded another strong quarter with Q2 revenue of 75 million, an increase of 16% from $64 4 million in Q2 2022.
<unk> is primarily driven by an increase in sales volume led by strong sales in China, and increasing deliveries in Europe , as our OEM customers ramp up that production volumes.
On a year to date basis revenue was $121 9 million up 21% from 101 1 million in the prior year six month period.
Our gross margin improved to 15, 3% in Q2 2023 compared to seven 5% in Q2 2022.
After adjusting for non cash settled share based compensation expense and cost of sales.
Gross margin increased to 17, 3% in Q2 2023 compared to 10, 4% in Q2 2022, a 6.9 percentage point improvement.
The increase in gross margin was due to a combination of improved economies of scale more favorable product mix and lower raw material prices.
Operating expenses were 39 million in Q2, 2023 compared to $50 4 million in Q2, 2022 <unk>.
Consistent with the past few quarters, the largest contributor to the decrease in operating expenses was the decline in our share based compensation expense, which totaled $16 3 million in the quarter compared to $28 6 million in Q2 'twenty to 'twenty two.
After adjusting for noncash SBC expense and SG&A, our adjusted operating expenses in Q2, 'twenty to 'twenty, three with 22.7 million compared to 21.7 million in Q2 2022, an increase of 1 million with an increase in head count costs.
As we extend out business being the largest contributor.
GAAP net loss was $26 1 million in Q2 2023.
That's a net loss of $44 2 million in Q2 2022.
After adjusting for noncash SBC expense and changes in fair value of our warrant liability.
Net loss was $8 3 million in Q2 2023 compared to an adjusted net loss of.
$14 9 million in Q2 2022.
On a year to date basis.
<unk> net loss was $19 9 million compared to an adjusted net loss of 44 million in the prior year six month period.
You can see the impact of these adjustments and 511.
Reconciliations of these non-GAAP metrics to the most comparable GAAP metrics.
In the tables at the end of our earnings press release.
Slide 12 shows the geographic breakdown of our revenue for Q2 2023.
The prior year period as you can see our European business showed a strong 91% year over year increase.
The 13% of our revenue up from just 8% a year ago as key customers begin their vehicle ramp up.
We continue to expect growth in our European revenues throughout the second half.
Especially for the 53.5 empower fell in line with vehicle build plans from our customers.
Although our U S revenue increased a modest 1% year over year, we continue to expect U S revenue to rise this year as we begin deliveries on a 1.2 gigawatt hour E. S. S project in the second half of the year.
As Mr. <unk> mentioned, there is a near term impact so when we recognized those revenues after making the strategic decision to make Windsor, Colorado, our dedicated E. S. S Assembly hub.
Looking ahead, we expect U S revenue growth to pick up in Q4 and to continue to accelerate next year is Clarksville comes online.
Turning to slide 13, we ended the quarter with cash cash equivalents restricted cash and short term investments of $195 8 million.
Net cash used in operating activities during the quarter with $29 8 million, which was primarily due to operating loss and working capital.
Negative free cash flow in the quarter of $87 6 million resulted from these net operating cash outflow as well as all accomplished for investment program. The majority of this capital expenditure in Q2 was to fund our capacity expansions in Clarksville, and who show which totaled $52 5 million.
We also have Catholics like expenditures totaling $5 2 million.
To improvements to our existing facilities and ongoing R&D projects.
Looking ahead, we estimate full year capital expenditures will remain in the range of 180 to 210 million.
Will primarily be used for the Clarksville phase one expansion.
As Mr. Hu mentioned, we are pleased to report that I'll close the facility remains on track for a Q4 start a trial production.
Turning to slide 14, we show you the financial resilience of Microsoft.
Our total debt outstanding of $93 million is very involved as you can see that the maturity profile requires only $6 5 million to be repaid in the second half.
Looking further out total debt repayments of up to 31 December 2025 already very manageable $33 6 million.
All of this debt is for our China operation and none of it has any recalls to our U S holding structure or asset.
Turning to the U S operations. These currently remain free of leverage and we are making solid progress on the debt financing, which is likely to be secured by the phase one expansion.
We expect that facility to be in place during Q3.
As outlined on slide 15, we closed the second quarter with record backlog of $675 9 million up from $486 7 million in the first quarter.
And then over six times increase year over year.
The third 70% sequential growth in our backlog was once again driven by commercial vehicle projects in Europe .
Our solid backlog underpins our expectations of multiple yet fast growth.
The rapid and accelerating adoption of 53 point in time that impella. So the commercial vehicles and E. S. S project.
Currently the $53 five that empower still accounts for over 80% of total backlog.
Turning to slide 16 based on our backlog, we anticipate high utilization rates for our phase one expansion in Clarksville.
Full utilization on phase one eight clubs will have an IRA section 45 ex potential up around 80 million per year.
With the ability to monetize these credits aley clubs, sometimes the capacity to self fund these additional expansions.
If we fill phase one a it generates IRA credits and they face when they have no spare capacity than we need to expand which generates additional IRA credits.
Would only expand if we have obtained custom equipment, that's the Golden rule.
You can see from slide 17 that we are targeting adjusted gross margins in the 20% range next year as we scale, our business and putting us on a path to profitability over the next two to three years.
We're already starting to see that gross margin expansion this year.
We expect to achieve continued margin improvement through our T leave us all industrialization automation utilization and relentless innovation with that I will turn it back over to Mr. Doyle to review our outlook.
Thanks, Greg.
Please turn to slide 19.
We maintain guidance for our full year revenue to be in the range of 348 million to $368 million.
Representing a year over year revenue growth of 70% to 80%.
Even with a near term delay in a shifted to Windsor in Colorado. We are very encouraged you to borrow on a continued backlog growth.
Which greatly increased our visibility into 2024 and beyond.
For the second quarter, we expect our revenue to be in the range of 72 million to $80 million.
97% from Q3, a year ago as a midpoint.
Driving by the continued ramp of our European commercial vehicle projects as well as orders from customers in Asia Pacific.
As we continue enhance our substantial backlog position.
We'll retain clarity into the second half of Tucson, twenty-three propellants by our commercial vehicle segment and expansion of our energy storage bins in the United States.
We see strong demand trajectories for Microsoft's batteries solutions across the globe and anticipated that gross and then momentum to carry forward as customer orders remain robust as throughout this year and into the next.
We are proud of what we have achieved thus far in the first half of the year, whereas a who do phase three one successfully ramping up to quantify production of our 53.5 Amp ourself.
It's production well continue ramping up in the second half.
Additionally.
We succeeded to you in securing a new company owned facility in Colorado to begin Assembly, our complete U S made E S S solution for customer across the country.
As we look to second half.
Our focus shifts to bridging our personal face want a operation online and at beginning timeframe to actually in Q4. So we can hit the ground running as we enter 2024.
Why are we must continue to execute well I encourage you to buy our backlog gross gross margin improvement and a customary excitement as our new and upcoming capacity expansions begin to fulfill orders around the world.
I would like to take this moment and in person and sank.
The <unk> team for their tireless work and commitment to our mission.
Our focus on our results and our ability to execute.
<unk> been and well continue to be a competitive advantage for Microsoft.
And then now I will turn the call back over to the operator to start the Q&A session.
Thank you.
We'd like to ask a question. Please press star one on your telephone keypad.
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Our first question is from Colin Rusch with Oppenheimer. Please proceed.
Thanks, So much can you speak to the key drivers of the cost savings at the gross margin line and how much was driven by the supply chain, how much from utilization improvement and in how that likelihood balls for the balance of the year.
Helane I'll take that one and some of it is definitely coming from product makes which is just more 53.5 and power them.
As that ramps up throughout the year, we expect your utilization is going to increase and you can see that in the <unk>.
Trajectory for future quarters.
Suddenly that's.
Theres been benefits in raw material prices has helped them as well.
And some of it's also saw that geographic shift as well more revenue is being recognized in Europe .
That's super helpful. And then when we look at the backlog number you know at the Analyst day, you talked a little bit about some of the awards that are you've gotten you know could you give us an update on where you're at in terms of incremental awarded contracts and which end markets those might be coming from.
It's sascha do you want to deal with the first fit in there now in terms of the additional backlog and then I'll give a bit more color in terms of money pool yeah.
Sure sure correct I will thanks, Colin for the question. So generally speaking here, we will increase our Oh, our backlog purely dedicated and then on the on the commercial vehicle right. This means and the bus section meaningful the truck sector.
So the 53.5 ampere hour with dedicated for that and we see a couple of significant wins upcoming and be in the next quarters and we already increased due to the fact that the European Oems are now doing that start of production rollout, we increased existing contract and we were able to to gain put a ban.
Walk into this contract as well.
In our call and I'll, just add a bit more.
Context, as well so you saw that over 80% of the backlog.
City 3.5 M powers, so which.
We're just starting to ramp that up as.
As we do that that's one that's going to help us with that gross margin expansion because we just hit.
The higher utilization.
Hum.
And then in terms of production planning.
Oh, 60% of the backlog is the 24.
And the backlog is at two really big areas of comes but it.
It underpins the numbers for this year and we know we've got to have a big Q4, and that's not a sales challenge right. The sales are there they're in backlog, we just got to produce as much as we can.
Everything that we can produce he's got a home for.
And then as we look out to.
24, we can see already that we're gonna have already had a significantly bigger year than you. This year and that's all again based on 53.5 and power.
Excellent.
Thanks, So much guys and then the last one for me is just you know how are you seeing the competitive landscape evolving for commercial vehicle batteries.
Obviously, the 53 and a half hour our empower sellers have been really well received by the market are you seeing other Oems start to follow your lead on that.
Okay.
That's a good question Collyn. So we were not only produces at 53 five but this is one of the leading future product of ours and we see that's where the Oems are adopting a cell technologies that he clearly the advantage of lifecycle.
And a fast charging capability and we place a very important role in Quebec total cost of ownership calculation. So I would report.
Like in the next tender in Q3 and Q4 about some for the bedroom a very nice you.
You know updates on the 53.5, especially on the on the commercial vehicle side. So you will see that there. We are right now in the process of getting these things moved to hot and you can see that the fishing coupon prices not only at EM and at rising and in Europe that we have also interesting demands if it you can see on that.
The slides also with J D M in India.
So they're not only dedicated for 'twenty one up here, but they are also moving towards 53.5. So it's picking up in general the U Z technology play for major local costs into the commercial vehicle application, but we have also the 48, which is the same spend that same L. D. C. L. A which would also play a big role, especially on the fuel cell side.
Which which we talked about so this would be also a topic, which we'll where we will see more increasing demand on the commercial vehicle side.
Yeah, some clarification, but not but I'll take it offline. Thanks, so much guys.
Okay.
Our next question is from Amit Dayal with H C. Wainwright. Please proceed.
Thank you good afternoon, everyone.
Hmm.
With respect to sort of the margin outlook you know it looks like some revenues are being pushed out from Q4 Q1.
What does that impact.
The margin performance next quarter few days gross margins.
Hi, Amit.
It's only going to be a little bit of revenue out of pushout them next year.
Does the chance that we can recover it because you know what we don't include in backlog is a lot of China, rather than <unk> seen from previous quarters Q4 is always super strong the China that could make up some of that.
And you know, whether it's going to be for energy storage of commercial vehicle customer.
Now what we're ramping up with 53.5 M power, so pushing a little bit out is not going to impact them is not going to impact margins.
Okay. Thank you for that I mean, it's good to see the execution on that front continue to come through and then on the operating expense side is this sort of where we will be for the rest of the or Craig.
Uh huh.
Total opex.
What are your thoughts about Q2.
What'll happen is particularly on like sales side the minutes, we will probably going to get very close to doubling revenues from where we are today. In Q4. So you can have some more sales expense around that R&D expense is not going to increase significantly.
Throughout the year G N as manageable and I think we've guided you before that where we're trying to manage this year is around sort of.
20 to 25 in in in cash Opex and it's still the target.
I think.
No.
We've got all of the we got all the infrastructure in place to light deliver these increasing revenue. So I just don't see.
I don't see you know much impact.
What we'll be focused on them you know really Q3 Q4, that's going to impact margins is just improving yields and as we improve yields will improve margin.
Okay. Thank you just one last one for me on the <unk>.
British side, maybe any updates.
You know with respect to how U S.
Setting you know timeline and expectations for that offering.
You just broke up right at the start.
What was the first bid on.
The separate or product any update on the timeline on the timeline for commercialization in opposed to developments.
Last quarter I, just wanted to see how the timeline for bringing the product to market might have changed.
This is jong woo and separated right now we are focusing on you know all our China you know the 10 year on square meter.
A small production nine.
We want to make this wrong and I sent a sample. So the first thing that we are still in the planning to build it bigger factory.
Later years.
Yeah.
Okay. Thank you that's.
That's all of them.
Our next question is from Sean Milligan with Janney. Please proceed.
Yeah.
Hey, guys.
Nice quarter and thanks for taking my questions.
Craig I was trying to.
Got it back in your you gave a total backlog of $676 million you talk about China, having 370 million contracted volumes and then did you say.
Like 80% of backlogs the $53 five anchor ourselves.
Can you clarify like how much backlog you have for Clarksville at this point.
Yeah.
Okay. So the just the you might call them either misspoke, but the does very little backlog for China are in there so and China is much more short term market. So these are the this is the beauty of the backlog right. So it's over 80% is.
63.5 empower.
Backlog is about 10%.
China market and the balance is split roughly 50, 50, Europe with AR and then U S. A.
The way, we look at backlog for clocks, though is like whatever we can produce for an energy storage customer that could come from the U S.
But right now the only production we have.
His clocks is race, who show so all 53.5 am power cell production. This year is going to come from who's yoke, because that's what's available.
Does that answer your question.
Yeah, that's helpful and.
And then.
You talked about a thousand units per year for the <unk>.
Or.
Manufacturing or assembly facility I'm, just trying to think like.
That's above that.
That in.
<unk> for a phase one b of Clarksville is it's more than.
The output you'll have right.
Yeah, Yeah, nope shown them good question I suppose.
The easy way to think about it is.
A thousand containers is about is about a $1 billion a year in revenue.
Phase one a is roughly like fun.
Excluding IRA phase one he's going to be about a 500 million phase won't be would be the same with another 500. So the this is the beauty about Windsor is at its sized for the phase one and phase won't be.
Okay, that's really helpful.
And and then I guess like one last question, if you can take it but and in terms of.
I mean for the.
Yeah, the larger utility scale storage projects.
Are you waiting on some of the domestic content revision clarity like what what are your customers telling you in terms of what they're waiting to put in additional firm orders there.
I'm sure we're not waiting for or we are we are you know working so hard to increase the capacity as much as possible and right now the purchase order is the more than what are we can make.
And it is a good problem to have.
Okay, great. Thank you guys and a nice quarter.
Thanks, a lot Shuang you.
There are no more phone questions at this time I would like to turn the call back over to Rodney to address questions that have come in via email.
Thank you operator.
We'd like to take just a couple of questions on from your online for the management team.
In relation to the backlog growth can.
Can you give a bit more color onto what is happening and where you see the backlog going from here.
Yeah.
Okay.
Both at its demand from commercial vehicle customers, a super strong I think fishkin, such a bit more on that and then.
<unk> energy storage system as well you know, which is U S. The XOMA just mentioned them.
It's more of a like what we've got available than the than sales.
Our expectation is that it.
The club so one as going to be Super high utilization as soon as it's running and based on.
You know orders.
We've got customers that want a book cow twenty-five capacity.
Already.
And as we get that twenty-five capacity booked them, we have to take we have to take prepayment like cash comes in early and then we can use that to then fund you know the additional capacity expansion needed. Sasha do you do you want to add anything else on on to most of it.
Backlog growth yeah.
Yeah, let me add to our suite things crack. Thanks, a lot. So in general we are gaining also toward the volumes in other markets like South Korea, Taiwan, we are increasing our our backlog in India. So we are probably increasing backlogs for projects, which are dedicated to a 25.
26 onwards with.
The commercial vehicle side also in Europe , and will be clearly see is that similar to the development of Europe , we're getting more and more prototype orders into the U S. So also here, we will see over 'twenty four 'twenty five upcoming for the protocol towards our backlog increase also on the commercial vehicle side, we see that European customers, which we have.
I'm moving to the U S winning there electrification projects and they're using as well the same technology. What's that you have in Europe today already with the 53 five so they are taking vector technology ultra to the U S market.
Yeah.
Yeah.
Alright.
Yes.
I'll turn it back over the operator.
Thank you this will conclude the question and answer session.
Like to turn the conference back over to Mr. <unk> for closing remarks.
Yeah. Thank you all and thank you all joining us today, you know yeah take your time.
And I Hope you guys, you know everybody's, saying, Michael Russ Morrow is your beautiful dreams.
Thank you.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
Yeah.
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