Microvast - Q3 2022

Transcript

Operator (participant)

Thank you for standing by. This is your conference operator. Welcome to the Microvast third quarter 2022 earnings call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, investment community professionals have the opportunity to participate in a question and answer session. To join the question queue, you may press star then one on your telephone keypad. Should you need an operator assistance during the conference, you may signal by pressing the star and zero. I would now like to turn the conference over to Monica Gould, Investor Relations for Microvast. Please go ahead.

Monica Gould (Director of Investor Relations)

Thank you, Sherry, and thank you to the audience for joining us today. Sascha Kelterborn, President and Chief Revenue Officer, and Craig Webster, Chief Financial Officer, will host today's call. Ahead of this call, Microvast issued its third quarter 2022 earnings press release, which can be found on the investor relations section of our website at ir.microvast.com. In addition, we have posted a slide presentation to our website 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. It should not be relied upon as representative about views as of any subsequent date, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information 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 29th, 2022, 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 in isolation from, GAAP results. These non-GAAP measures have been reconciled to their most comparable GAAP metric in the tables included at the end of our press release.

A webcast replay of this call will also be available on the investor relations section of our company website. With that, I'll turn the call over to Sascha for some opening remarks.

Sascha Kelterborn (President and CRO)

Thank you, Monica. Thank you all for joining us. Everyone, please turn to slide four as I cover a few highlights from the third quarter. We posted a 4.7% revenue growth during the quarter, delivering $38.6 million in Q3 2022, despite continuing difficult market conditions in Europe, customer supply chain challenges, and currency headwinds, we ended the third quarter with a strong backlog of $140.6 million, driven by a healthy order intake of $81.9 million, led by a strong demand in China. Some key wins during the third quarter included an order from SAIC for over $24 million and an order from Bazan in excess of $10 million. We also continue to benefit from ongoing customer relationships with Oshkosh, Iveco Group, ZF, Shell, and others.

Raw material prices remain at an elevated level as a result of supply chain disruptions as well as worldwide inflation. Our unit costs across the board continue to track significantly higher than we anticipated at the beginning of the year. We are actively monitoring these trends and implementing migration strategies where possible, including optimizing longer-term supply contracts, identifying new and/or additional sources of supply, and increasing our selling prices where possible. However, we expect raw material prices, especially for certain key materials like lithium, to remain elevated through the end of 2023 and possibly all the way into 2024. Looking forward into 2023, we expect our order volume to increase after we bring the new manufacturing capacity online in Huzhou. We expect this additional volume to increase our production visibility, enabling us to lock in higher volume commitments.

Please turn to slide five, which highlights some of our key partnerships in the commercial vehicle market. Microvast joined a mining industry consortium led by Shell, whose goal is to offer an end-to-end modular truck solution for the mining industry. Microvast is developing a custom high-powered battery solution with ultra-fast charging capabilities. This ultra-high voltage LTO battery system will have an extremely high C-rate capability and long life of up to 20,000 cycles under normal operation conditions, which will be critical to enable the high-power, ultra-fast charging, and heavy-duty use solution that the consortium is targeted to deliver. Kalmar is part of Cargotec, which offers a wide range of cargo handling solutions and services to ports, terminals, distribution centers, and heavy industries across the globe, extended their supply and purchase agreement with Microvast through 2026.

Kalmar will use our new MV-B and MV-C Gen 4 packs to power their full electric and hybrid portfolio. Shaanxi Automobile Holding Group Co., Ltd, a commercial vehicle OEM, formed a partnership with Microvast to support a 49-ton hybrid truck tractor with anticipated deliveries of 23 MWh in Q4 2022. SinoSynergy, the leading fuel cell battery system manufacturer in China, is collaborating with Microvast for its 49-ton hydrogen truck tractor with anticipated deliveries of up to 5 MWh in Q4 2022. I will now turn 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 Q3 2022 financial results. Please turn to slide seven, and I'll summarize the main line items from our Q3 P&L. First off, we achieved third quarter revenue growth of 4.7% to $38.6 million from $36.9 million in Q3 2021. I will take you through the geographic breakdown in the later slide, but I would like to note that this marks the seventh quarter in a row that we have shown year-over-year revenue growth. This came despite some challenges we encountered during the quarter that Sasha noted earlier, along with some currency headwinds. On a year-to-date basis, revenue was $139.7 million, up 64% from $85.2 million in the prior nine-month period.

We posted gross profit of $2 million in Q3 2022 compared to gross loss of $35.9 million in the prior period. After adjusting for non-cash settled share-based compensation expense in our cost of sales, adjusted gross profit was $4 million in Q3 2022 compared to adjusted gross loss of $33.6 million in Q3 2021. This translates into an adjusted gross margin of 10.2% in Q3 2022 compared to -91.1% in Q3 2021, a 101.3 percentage points improvement. Operating expenses were $39.6 million in Q3 2022 compared to $78 million in Q3 2021. The largest contributor to the decrease in operating expenses was the decline in SBC expense, which totaled $17.3 million in the quarter, compared to $56 million in Q3 2021.

The higher SBC in the prior year quarter was the result of recognizing $39.2 million of SBC expense upon accelerated vesting in connection with the business combination. As I mentioned previously, non-cash SBC expense was a significant contributor to both GAAP operating expenses and operating losses. We believe a more accurate representation of our financial performance, especially as it relates to cash operating expenses and operating loss, is as illustrated in slide eight. After adjusting for non-cash SBC expense in SG&A, our adjusted operating expense in Q3 2022 was $22.3 million. GAAP net loss was $36.5 million in Q3 2022 compared to net loss of $116.5 million in Q3 2021.

After adjusting for non-cash SBC expense and changes in fair value of our warrant liability and convertible notes, adjusted net loss was $17.4 million in Q3 2022 compared to $65.1 million in Q3 2021. Reconciliation to these non-GAAP metrics and the most comparable GAAP metrics are included in the tables at the end of our earnings press release. Slide nine shows the geographic breakdown of our revenue for the three- and nine-month periods ended September 30, 2022, compared to the prior year period. As you can see for the third quarter, our China business showed a 35% increase year-over-year. This was partially offset by a decline in other Asia-Pacific markets of 39% as potential customer orders linked to the success of their tender bids did not materialize, and some confirmed orders were pushed out to Q4.

As a result of the challenging market conditions in Europe we noted earlier, revenue in the region declined 30% compared to Q3 2021. However, we have some exciting projects coming up in the region, especially in anticipation of our new 53.5 Ah cell, and we expect the growth rate to pick up starting in 2023. Our balance sheet remains solid, as you'll see on slide 10. We ended the quarter with cash equivalents, and restricted cash of $415.7 million. Net cash provided by operating activities during the quarter was $4.9 million, which was primarily due to cash collections from customers, reducing our accounts receivable and those receivables.

Negative free cash flow of $11.9 million was mostly as a result of our CapEx spend on Huzhou 3.1 and Clarksville 1A in Q3 2022, which totaled $12.8 million. We also had capital expenditures totaling $4 million from improvements to our existing facilities and ongoing R&D projects. Our current estimates are that capital expenditures for the fourth quarter will be in the range of $90 million-$120 million and will primarily be used for our capacity expansion projects. As our payments are determined by construction and equipment delivery milestones, it may be the case that some of these payments are pushed out into 2023.

In our last call, I explained that as we de-risk the construction phase of our capacity expansions and have multi-year orders in place from our broad and growing customer base, especially those in Europe and the US, we would add leverage to our balance sheet. I'm pleased to report that during the quarter, we completed a $111 million project finance facility to support our Huzhou expansion with a syndicate of banks. This is a four-year amortizing loan with a December 2026 maturity, and the current interest rate is 4.8%. With the benefit of this debt financing, we expect to close the year with at least $250 million in cash equivalents, and restricted cash.

The Huzhou capacity expansion brings our new high-power and high-energy cells online and supports our growth targets for 2023 and beyond. Manufacturing equipment deliveries and installation began in the third quarter, and our efforts are focused on ramping up production to meet very strong orders, especially for our new LBC cells. We currently expect Clarksville to begin serial production in Q4 2023, and be well-positioned to take advantage of the recently announced initiatives under the Inflation Reduction Act, or the IRA. Please turn to slide 11, which details some of the most significant benefits of the IRA to Microvast. The most notable of which is a tax credit of $35 per kilowatt hour per battery cells, and $10 per kilowatt hour per battery modules, both of which will be produced in our Clarksville facility.

This translates to a potential tax credit of $45 million per GWh of cell and module production, with the initial phase at Clarksville supporting 2 GWh. Given the level of customer interest in this facility across our energy storage and commercial vehicle solutions, we are already planning to increase this to 4 GWh. Aside from the clear technological advantages of the 53.5 Ah cell that is produced at Clarksville, there is the added benefit of this qualifying as domestic content under the IRA, which allows some of our customers to obtain an incremental 10% investment tax credit. With that, I will turn it back over to Sascha to review the outlook.

Sascha Kelterborn (President and CRO)

Thanks, Craig. Please turn it to slide 14. We are tightening annual revenue guidance for the full year, which is expected to be in the range of 35%-40% for 2022. Our forecasted contracted revenue remains strong as our business with Western customers is poised for further growth. We continue to be optimistic and about opportunities to grow market share and penetrate new markets, both geographically and with future innovative products. We look forward to the full deployment of our recently launched products, which are expected to drive sales growth in 2023 and beyond, as they are incorporated into much anticipated upcoming vehicle launches.

Accordingly, we have a good visibility on 2023 as a result of two large SOP projects for deliveries to commercial vehicle customers in Europe, which we currently estimate at $80 million in revenue with potential upside, and as well cross our new energy storage business, which will add further positive momentum to our 2023 outlook. We are therefore planning for sustainable global increase in customer volume next year, which truly sets the platform for future years of growth. Execution continues to be critical. To achieve our target, we are focusing our efforts on, first, revenue growth through new multiyear supply contracts with existing and new customers. Second, completing capacity expansion projects to service increasing customer demands. And third, driving margin improvement as we scale the business.

We are very excited to begin planning our new state-of-the-art polyimide separator facility in collaboration with General Motors, for which we recently received a $200 million grant from the U.S. Department of Energy. This not only validates our leading-edge technology, but also sustainably expands our addressable market. As our team works hard to execute, significant progress has been made over the last few months with multiple new U.S. government funding programs. We expect the Inflation Reduction Act of 2022 to be important legislation, advancing clean energy initiatives and helping to reduce carbon emissions in the U.S., 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 have been and will be a competitive advantage of Microvast.

I would like to thank personally 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)

Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. We have one moment while we poll for questions. Our first question is from Colin Rusch with Oppenheimer & Company. Please proceed.

Colin Rusch (Managing Director and Head of Sustainable Growth and Resource Optimization Research)

Thanks so much, guys. Can you give us a little bit of a sense of the cadence on gross margin improvement? Really happy to see the progress that you made during the quarter, even at lower revenue levels. Curious how you see that playing out through the balance of 4Q and into the early part of 2023.

Craig Webster (CFO)

Thanks for that, Colin. I'd say, look, we're starting to see, you know, 'cause a lot of interest in the products is, we're increasing prices. Customers are expecting this. Those negotiations have gone well. It really underpins, like, our forecasts, you know, for next year. Tied into that as well is that we have a lot of visibility around this 53.5 Ah cell, it incredibly helps with production planning, so we get the scale effect, volume effect, and we really see that playing out into 2023.

Colin Rusch (Managing Director and Head of Sustainable Growth and Resource Optimization Research)

Excellent. Then in terms of customer engagement around medium and heavy duty, you know, obviously some of these ramps have been, you know, mixed in terms of timing, given any number of issues around supply chain. But I'm curious what you're seeing so far in terms of, you know, the move into production on these programs and the ability of these customers to take product in anticipation of their production ramps.

Sascha Kelterborn (President and CRO)

Colin, you probably have heard on the IAA this year in Hannover, on the biggest global commercial vehicle trade show. The CEO of Iveco announced the start of production of the Iveco eDaily. As everybody knows, we are the battery supplier, so the SOP starts already in December, and we have further upcoming SOP project, as I mentioned already in that field at beginning of next year. Electrification is starting. There was a delay through the pandemic, and now it's moving ahead. That's the reason why we really have a positive outlook into the future.

Colin Rusch (Managing Director and Head of Sustainable Growth and Resource Optimization Research)

You're seeing real live activity right now, you know. Are they going through in kind of a measured slow start here so far, or are you seeing them really go full force out the gate?

Sascha Kelterborn (President and CRO)

You have in every SOP a classical ramp-up phase. They are ramping up, 2023 will be the ramp-up phase, moving ahead, moving forward, backed up by a lot of governmental projects. They need every commercial vehicle manufacturer has to improve his CO2 footprint, so everything plays into our cards. We are very confident in that case over the next years that there will be a quick ramp up in that area.

Colin Rusch (Managing Director and Head of Sustainable Growth and Resource Optimization Research)

That's super helpful. Then the final one from me is just, you know, with this DOE grant, which is, you know, obviously went through a fairly competitive process, can you talk a little bit about the customer engagement since that announcement? You know, obviously, I think it's an important validation of what you guys are up to, you know. Curious to how that response has been so far.

Craig Webster (CFO)

Colin, it's been super positive. You know, my colleagues, Dr. Mattis and Shane, did an awesome job with DOE. That grant, it's a grant, we don't have to pay it back. It's a huge validation of Microvast, the technologies that we have. They wanna have these technologies exclusively in the U.S. GM's collaboration with us, again, they've been very close at the development of this technology. We're looking forward to and exploring ways how we move this business forward. You know, what we're hearing from them so far is that they like this as a very much a standalone entity, that they wanna be very close to this technology. Other investors are also interested.

If we do it like that, it really tees itself up, and that becomes a, you know, we run it separately, and it'll be spun off at some point.

Colin Rusch (Managing Director and Head of Sustainable Growth and Resource Optimization Research)

Perfect. Thanks so much, guys.

Operator (participant)

As a reminder, just star one on your telephone keypad if you would like to ask a question. We will pause for a brief moment to poll for questions.

Monica Gould (Director of Investor Relations)

While we wait for additional questions to come in, I'll just read one that we received through the IR email. This is about our recently announced energy storage division. If you could talk a little bit about how that is being received and what kind of feedback you're getting from customers.

Sascha Kelterborn (President and CRO)

Sure. Zach and his team did an incredible, great job to develop that product solution. It's based on our 53.5 Ah cell. Just classical product highlights. Yeah. Industry-leading energy density rate of 4.3 MWh, long battery life of more than 10,000 cycles, easy transportation, installation, and maintenance on a 20-foot container. This is market-leading. You can see already the customer feedback is there. They are highly interested in our solution, and you will soon hear more about that. Thanks again to Zach and his team. They did an incredible job. It was a big success so far, what we received as market feedback.

Monica Gould (Director of Investor Relations)

Great. Going back to the large DOE grant that we received, can you talk a little bit about the selection process and how, you know, Microvast was able to secure such a large grant?

Craig Webster (CFO)

Sure. It's really down to the technology. It's a polyimide separator. It took Microvast 10 years to perfect that technology. The separator is the most critical component in the battery for safety. You know, Microvast is a safety-first, you know, company. Its most critical part of the battery. We have large and extensive patent protection on that. I think it was just a true recognition of, one, that we can develop technologies, but importantly, we can also commercialize them, and that's why we received such a significant grant.

Monica Gould (Director of Investor Relations)

Thank you. That looks like, that's it for the questions that we've received. Sascha, do you have any other closing remarks before we close up the call?

Sascha Kelterborn (President and CRO)

Yeah. I would like to thank the audience for participating today. I wish everybody a great evening. We will report soon again with further positive news. Thanks a lot for being with us today.

Operator (participant)

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.