Greenland Technologies - Q2 2023

Transcript

Operator (participant)

Good day, ladies and gentlemen. Thank you for standing by, and we warmly welcome you all to the Greenland Technologies second quarter earnings conference call. Currently, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will follow at that time. As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. Now, I turn the call over to Josh Centanni, Investor Relations Director of Greenland Technologies. Mr. Centanni, please proceed.

Josh Centanni (Director of Investor Relations)

Thank you, operator. Hello everyone. Welcome to Greenland Technologies second quarter 2023 earnings conference call. Joining us today is Mr. Raymond Wang, Chief Executive Officer, and Mr. Jing Jin, Chief Financial Officer. We released results earlier today. The press release is available on the company's IR website at gtec-tech.com, as well as from Newswire Services. A replay of this call will also be available in a few hours on our IR website. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company's public filings with the SEC.

The company does not assume any obligation to update any forward-looking statement except as required under applicable law. Also, please note that unless otherwise stated, all figures mentioned during the conference call are in US dollars. With that, let me now turn the call over to our CEO, Mr. Raymond Wang. Please go ahead, Mr. Wang.

Raymond Wang (CEO)

Thanks, Josh. Good afternoon, everyone, and thank you for joining us today. I'd like to start by thanking our global team for their dedication, persistence, and passion to stay focused in a volatile global market and continue to drive the business forward to success. Our results emphasize my position that our industry has recovered and normalized from the global pandemic, with OEMs ramping up production to meet pent-up demand. We posted $24 million in revenue with over 38,000 drivetrain units delivered, which represents a year-over-year increase of 14% and 32%, respectively. Further, our efforts towards a more efficient operation continues to bear fruit as our gross margins improved by 590 basis points year over year, resulting in a 29.4% gross margin, generating $2.9 million in net income.

I anticipate this trend will continue with strong results in our component business through the second half and remainder of 2023. If not for the weakening Chinese Yuan, our results would have been even stronger. The Chinese market has been very volatile, and we have been actively monitoring and engaging. It is worth noting that our component sales in China represents over 98% as we report sales in the region that we deliver. However, an increasing number of our clients are exporting our components overseas as they begin to shift operation to regions such as Europe, South America, and North America, particularly in Mexico. As a result, the growth of our component business is not reliant solely on the performance of the Chinese economy, but global demand as a whole. HEVI continues to make progress as we pioneer the electric heavy machinery market in the United States.

The sales process has proved longer than anticipated, but I am confident that we are on the right path based on the demand and feedback we continue to see. We have been executing on our strategy to educate the heavy machinery industry on the opportunities and advantages that electric machinery offer through product demos, trade shows, and conferences. Our sales team has been progressing well through existing leads while actively pursuing new opportunities. This is strengthened by our efforts to lobby consumer incentives for off-highway electric heavy equipment. We passed the nation's first off-highway electric heavy machinery incentives last year in Maryland. Other states have quickly begun embracing similar policies.

Currently, over a dozen different states provide consumer incentives for off-highway heavy machinery that will heavily support our sales efforts, with incentives that range from 20% all the way up to 75%. Interest remains strong with new brand names exploring our product line, and I'm confident that HEVI will post meaningful revenue this year. One hurdle we solved in 2022 was the development of our mobile DC chargers for our electric-heavy machinery that opened the door to allow our products to be usable on any job site in the United States. Reception for these chargers have far exceeded our expectations, not just for our heavy machinery, but for other applications as well that we did not originally anticipate. Most new electric products and EVs are relying more on DC power, but traditional DC charging stations are very expensive and can take months to deploy.

Our clients are turning to our mobile charging, chargers as a solution to meet their needs, and to appropriately meet this demand, Greenland Technologies will be creating a new business unit called HEVI Energy. The mission of HEVI Energy is to address the needs of the growing DC-powered electrified product industry with HEVI Energy's unique offering of power solutions. You can expect more details about HEVI Energy through press releases that will be released in the very near future. I am extremely proud of the work that the GTEC team has accomplished. We still have much to do and milestones to achieve, but I believe we're on the right track to hit these goals and succeed for the company and for our shareholders. Let's dive into the details of our financial performance. I will hand the call over to my CFO, JJ. JJ, go ahead.

We might have some mic issues. JJ, are you still there?

Jing Jin (CFO)

Can you hear me? Hello?

Raymond Wang (CEO)

Yep. Yep, we can hear you now.

Jing Jin (CFO)

Oh, okay. Sorry.

Raymond Wang (CEO)

Actually, I apologize, everyone. It seems we may be having some technical difficulties. Just for the sake of everyone's time, Josh, would you read through the financial performance for HEVI? Then when JJ gets set up, we can bring him back online.

Josh Centanni (Director of Investor Relations)

Sure. For the full details of our financial results, including the first half 2023 results, please refer to our earnings release that was issued today. For the second quarter, our revenue was $23.6 million, up 14% from $20.6 million a year ago. The increase was driven by a 32% increase in our sales volume. In Q2, we shipped 38,256 units of transmission products, compared to 28,939 a year earlier. On a constant currency basis, excluding the negative foreign exchange impact from a stronger dollar, revenue increased by about 19% from the previous year. Further, as Ray mentioned, our strategic focus on higher value transmission products, such as hydraulics, continues to pay off.

In Q2, our gross margin improved by 590 basis points, marking a record high in the last three years. The stellar performance demonstrates our leadership in the industry and the effectiveness of our business strategies. Total operating expenses rose 34% to $3.5 million. The increase was primarily due to the company's focus on R&D investment, as well as advertising, marketing, general and administrative activities related to the expansion of our HEVI division. The combination of these results drove strong profitability throughout the quarter. Our Q2 income from operations was $3.4 million, up 54% from the same quarter last year. Net income was $2.9 million, up 24% year-over-year from $2.4 million a year ago.

Moving on to our balance sheet, we ended the quarter with cash and cash equivalents of $15.2 million, which is up over fourfold from $3.2 million last year. This strong cash position gives significant flexibility in our operations and enables us to continue to invest in our HEVI division. Looking into the remainder of 2023, we anticipate demand for our transmission products to remain strong. Our goal remains on leveraging on our industry leadership in our transmission products business, while continuing to advance first mover advantage of our HEVI division in commercial, all-electric, industrial heavy equipment vehicles. That concludes our prepared remarks. Now let's open the call for any questions. Operator, please go ahead.

Operator (participant)

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star one one on your telephone. Again, to ask a question, please press star one one. One moment for our first question. Our first question comes from the line of Theodore O'Neill of Hill Research. Your line is open.

Theodore O'Neill (CEO and Senior Equity Analyst)

Thank you very much, and congratulations on the good quarter.

Raymond Wang (CEO)

Thank you, Theo.

Theodore O'Neill (CEO and Senior Equity Analyst)

In your prepared remarks, you talked about how gross profit margin was better on improved product mix, and you cite here higher value products. Can you give us a sort of range of what these higher value products are that helped margins in the quarter?

Raymond Wang (CEO)

Absolutely. The increase in margin is actually part of a multi-year strategy for our Zhongchai Machinery, our components business, to simplify our product offering and focus more on higher margin, newer product lines in our series. In 2019, just to put that into context, we had over 70 series of different drivetrain units, each with at that time, almost a dozen plus models amongst them. To meet the demands of our clientele, who were mostly Tier 1 operators, we were making many custom solutions. This, as we scaled, further complicated our manufacturing process and ate into our margins. For the past near five years now, we've actually been simplifying our product offering.

Now, we only offer about 40 different series of transmissions and drivetrains, each probably only about six to nine different models. We're focusing on and pushing more higher margin products, such as our integrated drivetrain and some newer components as well.

Theodore O'Neill (CEO and Senior Equity Analyst)

Okay, and on the, on, can you give us an update on the HEVI division in terms of product demos, number of demos, length of demos, and, and training customers, on your equipment?

Raymond Wang (CEO)

Absolutely. Absolutely. We've dedicated our entire HEVI inventory right now to support the demand for demos. Since last quarter, we've actually added on another five units, three of our larger front loaders, two of our smaller loaders, to try to meet the demand that we've been given. We've also shortened our demo time. Before we were deploying our product to job sites for a week to two weeks to give a client a good feel for our products, but just based off of demand, we've actually brought that down to one to three days, max.

Our products are continuing to go from job site to job site, driving up a lot of interest, and this is part of our strategy to really address and demystify a lot of the assumptions about electrification, and get first-hand experience to operators that will eventually become clients.

Theodore O'Neill (CEO and Senior Equity Analyst)

My last question is on the, the mobile DC chargers. I'm on the website now. I see that you've got two different products. One is a portable and one's for single-phase, one's for three-phase, and I'm wondering as you think about expanding that business, will there be more products? Will you sell them, rent them, lease them?

Raymond Wang (CEO)

Mm-hmm.

Theodore O'Neill (CEO and Senior Equity Analyst)

What's the thought here?

Raymond Wang (CEO)

Great question. So at a very high level, we will be selling our new mobile DC chargers. We will be creating new chargers, specifically catered towards the market demand that we've been identifying. The ones that we have were originally designed just for our product use, but for our demos, when we're sending them out, folks couldn't help themselves but plug that into everything electric that they had. They've been loving it, enjoying it, and trying not to give them back to us. We've actually been very aggressively doing some product R&D on a mobile DC charger, specifically catered to the needs for this market demand. I can't get into too many details just yet.

Don't want to spill the secrets too soon, but I can say that the mission for these chargers is they will be... They are being fully R&D'd and designed here in the United States. They will have U.S. IP. They will satisfy all U.S. certifications from UL to the appropriate ISO certifications, and they will be made in the USA, starting off in our Maryland facility.

Theodore O'Neill (CEO and Senior Equity Analyst)

That, that sounds pretty good. Thanks very much.

Raymond Wang (CEO)

Of course. Mm-hmm.

Operator (participant)

Thank you. One moment, please. Thank you. Our next question comes from the line of Rommel Dionisio of Aegis Capital. Your line is open.

Rommel Dionisio (Head of Research)

Thank you. Good afternoon. You know, during the economic downturn, during the COVID period, as a result of the lockdowns, obviously, there was a downturn in that segment of the industry, but I know you guys were capturing market share very successfully, and I wondered if you could just characterize this year, you know, as the sector overall comes back, are you still able to, you know, were you able to maintain and lock in those market share gains? I wonder if you could comment on that. Thank you.

Raymond Wang (CEO)

Yes, absolutely. It has been a very volatile field. We have been able to expand our market share with new clientele, a few Tier 1 brands, actually, that wish to remain unannounced, but we actually have been expanding our client portfolio, which we're extremely proud of. However, the volatile environment that I alluded to earlier, is right now on a global scale, there is a massive challenge, a massive redefinition for supply chains and logistics, that we're keeping a very close eye on. Primarily, countries are looking to try to nationalize their supplies chains as much as possible, but depending on markets, depending on countries, and depending on presence, it's easier said than done for others.

This is actually one of the things on that I mentioned in my remarks, where we actually are seeing a larger, a significantly larger amount of components being shipped overseas to manufacturing facilities that they have been actively opening up overseas. It's something that we're keeping a close eye on because we saw something similar during the pandemic. This is when our sales went from about 95%+ China-based to about 90%. Even in just one or two years, we saw a decrease. We saw a reversal of that because though the aspirations were optimistic, countries found it very challenging to ramp up manufacturing so quickly, and the quality impacts were very devastating to some companies, and they reverted back to us or adopted us new.

Yes, we have been expanding our clientele, we have been expanding our market share, but it's still something that we are keeping a close eye on, exactly how that shakes out.

Rommel Dionisio (Head of Research)

Okay, that's very helpful. Just as a follow-up question, I wonder if you could just share with us an update on the Maryland facility. Any lessons you may have learned, any unforeseen challenges, and how the, you know, now that it's been up and running a little while, what, what, you know, how it's all going? Thank you.

Raymond Wang (CEO)

Absolutely. The Maryland site itself is coming along extremely well, and it's ready to go for production right now, both for our heavy equipment and we're expanding on manufacturing for mobile DC chargers as well, to support HEVI Energy. We have the full capability right now to be able to assemble the heavy equipment at the Maryland site, and from a capability standpoint, we are still on target and on track to deliver that first unit assembled in beginning of Q3. However, our production goals and plans were predicated on a sales model that may have been a little too aggressive from a time standpoint. As I mentioned, we did underestimate the overall sales cycle for brand-new electric heavy equipment.

When we compared to our air-quoted "peers in the industry," trying to pioneer electric school buses, electric garbage trucks, and tractor-trailers, non-incentive-based purchases was over a 14-month sales cycle for them. Our original estimates were nine. This does present a challenge for us. This is why we moved our first assembled product from Q2 to Q3, because we didn't want to ramp up that site just to turn it down if the sales weren't there. We have the capabilities, the site's ready to go, we just need the sales to drive it.

Rommel Dionisio (Head of Research)

Great. Okay, congratulations on the quarter. Thanks.

Raymond Wang (CEO)

Thank you very much.

Operator (participant)

Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star one one on your telephone. Again, to ask a question, please press star one one. One moment for our next question. Our next question comes from the line of Graham Mattison of Water Tower Research. Your line is open.

Graham Mattison (Senior Research Analyst)

Hi, good afternoon, everyone. great question. It's great that there's more progress going with the demonstration, and you've got more, more out there. Would you say the, the second quarter versus the first quarter, and maybe even where that is today?

Raymond Wang (CEO)

I'm sorry, Graham, you might have cut out there. I, I heard, would you say... and then it cut out from there. I apologize.

Graham Mattison (Senior Research Analyst)

Oh, no, I'm sorry. Apologize. Don't know. I was actually just asking, is this better? Actually.

Raymond Wang (CEO)

Oh, much better. Yes.

Graham Mattison (Senior Research Analyst)

Okay, good. Sorry about that. In terms of the demos that you're doing, how's the pace of that compared to the prior quarters? Are you seeing an acceleration of that, or is it leveling off, or is there room to even push it further?

Raymond Wang (CEO)

The demand is actually growing, especially as we conduct more proactive sales campaigns and more incentives are introduced into the field. The demand's been growing. Our pace has been rapidening significantly. We're doing three demos, where in the past few quarters it would have been one, just because of the duration of our demos. The room to grow is significant. We would anticipate we would need probably another six to 10 more units to be able to meet the needs of the demand as we receive them. That's been extremely strong. The chargers and the incentives are expanding our sales process for the next steps from those demos, which we were extremely happy to see. A lot of times with the demos, the interest was there.

However, getting them to pursue a sales agreement was met with some hesitation as they wanted to conduct further research to look at other options for sustainability in the sector, and really just validating our statements, efforts in terms of, is there any other players in the field, things of that nature. We still keep good contacts, it just extended this timeframe. Now, with our mobile DC chargers solving that infrastructure problem, with incentives addressing the financial concerns with deadlines as well, that's actually been changing the game for us, and we're having very meaningful post-demo conversations as well.

Graham Mattison (Senior Research Analyst)

Great. Do you still plan on using the authorized service centers? Are you still working to develop those, and if that, has that helped anything on the, on the sales front?

Raymond Wang (CEO)

Yes, we have. We actually have already signed, right now it's about three companies right now that are officially signed on board with the authorized service provider network, primarily in New Jersey. It's something that we continue to expand on as well, and once we actually have a solid footprint, we were gonna do a announcement along that. It is no secret, we actually already have signed on board some companies that range from truck repair and rental sites all the way towards heavy equipment rental companies.

Graham Mattison (Senior Research Analyst)

Great. Last question, is there any update? Last quarter, you spoke about the United Rentals program you had, and then I think you were still talking with some other sort of fleet management or large rental companies. Any updates you can give us there?

Raymond Wang (CEO)

Mm-hmm. Yep. The United Rentals pilot demo is still ongoing. We completed a demo for our larger unit, the GEL-5000, and now we're about to initiate a new demo with the smaller loader, the GEL-1800. They want to go through our product line just to get a better comfortability with the product line and to better understand the marketability as well through their sales teams. That's still active and progressing very nicely. In addition to that, both on a large fleet standpoint, we are making significant process and demos with other national rental organizations and brands, port operations, agriculture, waste management, and public work yards as well. However, at this stage, they actually prefer to remain unnamed.

I can assure you that we are making some significant progress there, and we're very optimistic that that will bear fruit.

Graham Mattison (Senior Research Analyst)

All right. just in terms of how those programs typically work...

Raymond Wang (CEO)

Mm-hmm.

Graham Mattison (Senior Research Analyst)

You, you start with a, sort of a demo, and then they shift to a pilot before making an order.

Raymond Wang (CEO)

Mm-hmm.

Graham Mattison (Senior Research Analyst)

Is that the right way to think about it?

Raymond Wang (CEO)

Yep. That's correct. It typically goes with the product demo, over to a purchased pilot phase. Then, if the product performs to their expectations, from both a performance, maintenance, and financial standpoint, then they'll pick up larger adoption.

Graham Mattison (Senior Research Analyst)

Got it. All right, great. I'll jump back into you. Thank you very much.

Raymond Wang (CEO)

Thank you, Graham.

Operator (participant)

Thank you. I'm showing no further questions at this time. Let's turn the call back over to Mr. Wang for any closing remarks.

Raymond Wang (CEO)

Well, everyone, thank you so much for attending our second quarter earnings call. It is a very exciting time for us here at Greenland, and I am having trouble keeping my mouth quiet for everything that we have working on here. I do appreciate everyone's support in the company, your patience as a shareholder, and I truly, honestly believe that our hard work will pay off, and we will be able to provide some very, very exciting news in the very near future. I hope everyone has a fantastic evening and a wonderful rest of your week.

Operator (participant)

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.