Microvast - Q1 2023

Transcript

Operator (participant)

Thank you for standing by. This is the conference operator. Welcome to Microvast 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.

To join the question queue, you may press Star, then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing Star and zero. I would now like to turn the conference over to Monica Gould, investor relations for Microvast. Please go ahead.

Monica Gould (Investor Relations)

Thank you, operator, and thank you for joining us today. Joining me on today's call are Mr. Yang Wu, Founder, Chairman, President, and CEO. Sascha Kelterborn, Chief Revenue Officer, and Craig Webster, Chief Financial Officer.

Ahead of this call, Microvast issued its first 1/4 2023 earnings press release, which can be found on the investor relations section of the company's website at ir.microvast.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 and reflect our views only as of today.

They should not be relied upon as representative of 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 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 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 Microvast performance.

These non-GAAP measures should be considered in addition to and not as a substitute for or an 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'd like to turn the call over to Yang Wu for opening remarks.

Yang Wu (Founder, Chairman, President, and CEO)

Thank you, Monica, and thank you all for joining us today. I would like to start off with a high-level overview of the 1/4. Before providing some operational highlights, I will then turn the call over to Sascha Kelterborn, our Chief Revenue Officer, who will discuss some of our key wins in the 1/4, followed by Craig Webster, our Chief Financial Officer, who will discuss our financials in more detail.

I will then address our outlook for Q2 and the full year 2023 before opening the call up to your questions. Everyone, please turn to slide 4 as I cover a few highlights from the first 1/4.

We posted 28.1% revenue growth in Q1 2023, delivering revenue of $47 million. This exceeded our expectations as our European commercial vehicle customers began initial production and as supply chain issues began to abate.

We achieved Double-digit gross margin with a more than 8 percentage point year-over-year increase. We ended the first 1/4 with a record backlog of $486.7 million, driving by a healthy order intake of $62.7 million, led by significant ramp in sales to European customers.

Our most significant achievement in Q1 was the completion of our Phase 3.1 expansion in Huzhou, China, which started the trial production of the 53.5Ah cell. 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 that this initial 2 GWh 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 significant customer demand for our new product and over 50% of the full year capacity at Huzhou is already contracted. We expect customer orders and deliveries to get increasingly strong as the year progresses. For that to be broad-based across the US, Europe, China, and Asia Pacific regions.

With the Huzhou expansion now completed, our remaining capacity expansion plans for the year are centered on our new US facility in Clarksville, Tennessee. This will initially have an annual capacity of 2 GWh. It is in full construction mode with start of production targeted for Q4 of this year. We would also like to provide a quick update on the Mexico ESS container assembly hub we mentioned our Q4 2022 earnings call.

We have leased a new facility in Mexicali, which is very close to the US border. We are currently working on installing a container assembly line.

We expect to ship finished 4.3 MWh containers directly from our Mexicali facility starting in Q3 to customer project sites in the US, with many of those being located in the Southwest Sun Belt. I would now like to turn the call over to our Chief Revenue Officer, Sascha Kelterborn, who will discuss some of our key wins and achievements in the 1/4.

Sascha Kelterborn (CRO)

Thank you, Mr. Wu. Thank you for all joining us today. First, I would like to provide a little bit more color on our backlog. Our record $486.7 million backlog includes orders from 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 US, including ESS projects. This gives us the confidence that we will see significant growth in both regions over the coming 1/4s. Please turn to slide 7 as I cover a few highlights from the first 1/4.

Following our initial contract announcement in January of last year, we were very pleased to sign significant new orders with Iveco, 1 of our largest customers, for our new 53.5Ah battery pack, which will power their new Crossway low entry city and intercity bus platforms.

Our high energy density battery packs on the bus ranges from 400-466 kWh, depending on operator's mission requirements, and they set new standards in terms of energy density and charging capacity.

Furthermore, it will provide the Crossway with up to 10 years of battery life. We received an order for over 350 units of our 17.5Ah battery pack from XCMG, a leading global OEM of construction equipment for the hybrid truck.

We also received major orders from Gaussin for their US business, where we supply our new 53.5Ah battery pack to their full electric logistic vehicles. On the back of our announcement earlier this year with REE, we began SOP delivery of our 53.5Ah pack, which will power the company's full electric T7 skate pod platform.

The T7 is the industry's flattest EV platform, and it's suitable for applications such as commercial trucks, school buses, walk-in vans, and delivery box trucks. Lastly, we start SOP deliveries of our 21Ah battery pack to CAMC, the Chinese leading heavy duty truck OEM, for their 49 ton tractor. Our initial order calls for the delivery of more than 50 system units.

We continue to expect order volumes to increase over the course of 2023 as we ramp up production of our 53.5Ah cells on our new fully automated line in Huzhou to meet customer commitments. Please turn to slide 8, which highlights the significant growth in our European commercial vehicle business. Our European revenue almost tripled year-over-year in the first 1/4 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 aided by an improving supply chain. Going forward, we expect government-led initiatives such as European Green Deal, EU's plan to ban combustion engine vehicle sales by 2035, along with US IRA initiatives continuing to be a significant driver of electrification initiatives.

For example, on the commercial vehicle side, a 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.

Craig Webster (CFO)

Thank you, Sascha. I'll spend the next few minutes discussing our Q1 2023 financial results. Please turn to slide 10, and I will summarize the main line items from our Q1 P&L. First off, we recorded our highest ever Q1 revenue of $47 million, an increase of 28.1% from $36.7 million in Q1 2022.

The year-over-year growth was primarily driven by increasing deliveries to our European customer base that Sascha just covered. Our gross margin rose to 10.3% in Q1 2023, compared to 0% in Q1 2022. After adjusting for non-cash settled share-based compensation expense and cost of sales, adjusted gross margin increased to 13.5% in Q1 2023, compared to 5.2% in Q1 2022, an 8.3 percentage point improvement.

The increase in gross margin was largely due to production efficiencies and more favorable product mix and one-off service fees for R&D. Operating expenses were $36.2 million in Q1 2023, compared to $43.4 million in Q1 2022. Similar to previous 1/4s, the largest contributor to the decrease in operating expenses was a decline in our share-based compensation expense, which totaled $16.4 million in the 1/4 compared to $26.2 million in Q1 2022.

After adjusting for non-cash SBC expense in SG&A, our 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 2023 compared to net loss of $43.8 million in Q1 2022.

After adjusting for non-cash SBC expense and changes in fair value of our warrant liability, adjusted net loss was $11.7 million in Q1 2023 compared to an adjusted net loss of $29.1 million in Q1 2022. You can see the impact of these adjustments in slide 11 and 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 12 shows the geographic breakdown of our revenue for Q1 2023 compared 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, up from just 7% a year ago as our key customers began serial production of their vehicles.

As we outlined last 1/4, a large percentage of our commercial vehicle backlog is from European customers who are launching electrified models for the first time. We continue to expect volume growth in our European segment, especially for the 53.5Ah cell as customers expand production. Our US revenue increased 52% year-over-year.

We continue to expect the US revenue to rise this year as we begin deliveries on our 1.2 gigawatt hour ESS project in the second 1/2 of the year. In 2024 and beyond, we expect the US revenue growth to remain strong as we begin to meet opportunities in the US market from our Clarksville facility. Once online, we expect Clarksville to have high capacity utilization based on current and anticipated orders.

We should be in a position sooner rather than later this year where we will need to start planning for additional capacity. As you know, our investment decisions to further expand capacity are always predicated on confirmed customer orders.

Turning to slide 13. We entered the 1/4 with cash equivalents, restricted cash and short-term investments of $285.8 million. Net cash used in operating activities during the 1/4 was $11.2 million, which was primarily due to our operating loss. Negative free cash flow of $47.1 million was mostly as a result of our CapEx spend on Huzhou 3.1 and Clarksville 1.8 in Q1 2023, which totals $31.4 million. We also had capital expenditures totaling $4.5 million from improvements to our existing facilities and ongoing R&D projects.

With Huzhou 3.1 now completed, we will be drawing down on the remaining balance of around $67 million from our project finance facility to meet final milestone payments to our contractors and equipment suppliers. We believe that all remaining payments will be satisfied from that facility. We closed the 1/4 with record backlog of $486.7 million, up from $410.5 million in the 4th 1/4.

The 19% sequential growth in our backlog was driven by commercial vehicle projects in Europe. This once again underpins our strong conviction in our full year guidance and our belief that 2023 is just the start of a number of high growth years for Microvast. 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. As sales continue to increase 1/4-over-quarter, we expect to add additional working capital credit lines, and our current estimate is that we would add a further $20 million-$30 million by the end of Q2. Looking ahead, we estimate our full year CapEx will remain in the range of $180 million-$210 million and will primarily be used for ongoing construction in Clarksville.

As we have mentioned before, we believe Clarksville can easily support some modest debt financing. The growth in backlog, the additional margin and cash flow uplift from IRA and our proven experience in bringing online capacity will clearly resonate with lenders. With that, I will turn it back over to Mr. Wu to review our outlook.

Yang Wu (Founder, Chairman, President, and CEO)

Thanks, Craig. Please turn to slide 15. As a result of our outperformance in the first 1/4, we are raising our annual revenue guidance for the full year from a range of $336 million to $358 million, representing year-over-year revenue growth 65%-75% to a range of $348 million to $368 million, reflecting growth of 70%-80%.

For the second 1/4, we expect the 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 continued ramp of our European commercial vehicle projects as well as orders from customers in Asia Pacific.

With a strong and a growing backlog, we continue to have good visibility into 2023, driving by European commercial vehicle projects, entering the production phase and the 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 1/4's call, I noted that execution will remain critical to our ability to achieve our targets. We are very pleased with the progress we made in the first 1/4, accelerating both revenue and backlog growth, completing our capacity expansion project in Huzhou and driving substantial gross margin improvement.

We continue to expect that the Inflation Reduction Act of 2022 to be important legislation advancing clean energy initiatives and helping our reduce carbon emissions in the US, while creating even more exciting direct and indirect business opportunities for Microvast going forward.

Our global Microvast team, our focus-oriented culture, and our ability to execute has been and will be a competitive advantages of Microvast. I would like to personally thank the Microvast 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.

Operator (participant)

If you would like to ask a question, please press star and 1 on your touchtone keypad now. You 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 and 1 on your keypad now. Our first question comes from Colin Rusch from Oppenheimer. Your line is open.

Colin Rusch (Managing Director and Senior Research Analyst)

Thanks so, thanks so much, guys. You know, congrats on the gross margin improvement here. Can, I wanna dig into that just another layer deeper. Can you talk a little bit about the yield trends you're seeing on the capacity as you ramp up the 53.5 amp hour cells and your ability to drive some incremental margin as you get up to some of the higher revenue levels?

Yang Wu (Founder, Chairman, President, and CEO)

Colin, you want to this question or you want me to answer this question?

Craig Webster (CFO)

I'll take it. Colin, good to hear the voice. Yeah, what we're expecting to see later in the year as we move from, you know, Q1 was not fully automated production lines. We were not getting big volume discounts on 53.5Ah.

As we move forward later into the year, we're gonna be producing of, as I say, fully automated lines, volume discounts, high utilization. We expect that to feed through to gross margin improvement, particularly Q3, Q4, because that's when the production schedules we've got from customers really kick in this year.

Colin Rusch (Managing Director and Senior Research Analyst)

Excellent. Then with the US facility, can you talk a little bit about equipment procurement and any sort of headwinds or, you know, progress that you're making in terms of buying that equipment and getting it into the country?

Yang Wu (Founder, Chairman, President, and CEO)

Thanks, Colin. This is the I can answer this question. You know, the U.S. facility actually is 100% a mirror with China, you know, the equipment. You know, same supplier, same system, just a different certification. You know, U.S. require UL certification. That's why we slightly, you know, behind of China equipment installation.

With the, you know, the maturity of China side, you know, operation experience and installation experience, we overcome the all the problems, you know, in China. You know, we think the U.S. is going to be much smoother. Also we send a U.S. crew to China, you know, for the operation and the installation training as well, you know. That's why I expect, you know, U.S. is going to be much, much smoother.

We're still on the track, on the plan to build this factory before end of this year. That's our plan. It still remain.

Colin Rusch (Managing Director and Senior Research Analyst)

Excellent. Just a final 1 on the sales process. You know, it's great to have the backlog number out here, and appreciate that. I'm curious about your ability to move customers through the sales pipeline and close incremental POs for the balance of this year. I assume some of that backlog it's for 2024. Just wanna get a sense of how much book and ship business you've got and how those customers are moving through the pipeline.

Yang Wu (Founder, Chairman, President, and CEO)

Thank you.

Craig Webster (CFO)

Can I take the question? Okay. Okay, boss. Colin, great to meet you. Generally speaking, the backlog we have is probably for 2023, 2024, and, mainly we have ongoing tests, ongoing key customers testing our new battery solutions. There will be backlog increases within this year for sure. We started with a lot of testings already in 2022, as you probably remember.

Sascha Kelterborn (CRO)

We have to go through certain tests sometimes by bigger customers through summer and winter tests. This will show effects in Q3 and Q4 for sure.

Craig Webster (CFO)

Thanks.

Sascha Kelterborn (CRO)

On the backlog side.

Operator (participant)

Thank you. Our next question comes from Amit Dayal with H.C. Wainwright. Your line is open.

Amit Dayal (Managing Director and Senior Technology Analyst)

Thank you. Good afternoon, everyone. Good to see the execution come through. Just on the CapEx guide, is $35 million primarily targeted towards the Clarksville facility?

Craig Webster (CFO)

Amit, that's right. I mean, all the spend going forward now is Clarksville. As you saw in the slides, Huzhou is done. We've got remaining milestone payments to contractors, they all get funded from the undrawn facility.

You know, what's really good about Clarksville is the level of engagement that we're getting from customers, which is seeing feed through into that backlog increase. You know, in terms of lenders, there's a lot of lender interest because, you know, what we're proving out is that we can grow the backlog.

The backlog in the US gets the IRA credits and the benefit of them actually seeing that we're experienced at this. We close the Huzhou capacity expansion.

You know, per Colin's question on equipment, it's the exact same equipment coming into the US, which we've just shown that we can bring it to ramp phase. It's very de-risked, and, you know, puts us in a really strong position in the close of the year. Heavy cash balance. We're only raising capital on the debt side of the balance sheet. We don't have to be in the equity market. We're able to do that because we're clearly growing revenues and growing backlog this year.

Amit Dayal (Managing Director and Senior Technology Analyst)

Thank you for that. The capacity in China.

Craig Webster (CFO)

Amit, you're breaking up. Can you repeat the question? Sorry?

Yang Wu (Founder, Chairman, President, and CEO)

No, the line is not good.

Craig Webster (CFO)

I can't.

Operator (participant)

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

Craig Webster (CFO)

Is, operator, is there anyone else ready for a question?

Operator (participant)

I think we've lost Mr. Dayal. I'll turn it over-

Amit Dayal (Managing Director and Senior Technology Analyst)

Hi, this is Cassie from the investor relations team. We've gotten some questions that I can pose. Meanwhile, we'll wait for him to come back. The first is, beyond ESS, what commercial vehicle projects do you have in the US, and when should we expect them to begin to ramp?

Sascha Kelterborn (CRO)

Cassidy, that's a great question which came from the audience. Generally speaking, we have a couple upcoming commercial vehicle and special vehicle projects which are upcoming, as I mentioned already to Colin, mainly in Q3 and Q4. We are still under NDA, we think that we will be able to disclose quite soon also the project names with our customer together.

Amit Dayal (Managing Director and Senior Technology Analyst)

Perfect. 1 more that we have received is, can you talk us through what the competitive market is for your 53.5Ah cell. Where are the competitors versus you in the process of ramp up?

Yang Wu (Founder, Chairman, President, and CEO)

I can answer this question. You know the 53.5Ah cell is dedicated to the commercial vehicle. You know, when we designed this and we developed for over three years, you know, they take a very long time to test and certify this battery. This battery give to the, you know, much longer the lifespan and like a cycle life.

You know, this battery is 2 to 3 times longer than the competitor's battery, and it still remain the very high energy density, you know, to power the commercial vehicle. Commercial vehicle needs much longer life battery. You know, everybody know it compare with the passenger car. You know, like a 3 times longer distance to drive. That's why, you know, We use this battery to ESS project, you know, same battery, same module.

It's going to give ESS, you know, the system much longer, you know, life and which give you know the much better, you know, the total investment return. Compare with competitors, you know, we haven't seen, you know, which competitor, you know, they reach to our performance. We haven't seen it.

Amit Dayal (Managing Director and Senior Technology Analyst)

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

Operator (participant)

As a reminder, if you do have a question, please press star 1 on your touch tone keypad now. Seeing no further questions, I'll turn it back to Mr. Wu for closing comments.

Yang Wu (Founder, Chairman, President, and CEO)

Okay. Thank you all for joining the today's meeting, you know, today. I wish everybody have a good day and a good night. Good dream. Thank you.

Operator (participant)

That concludes the conference call. Thank you for joining, and have a pleasant evening.