Earnings Call Transcript - CBAT Q2 2023

Operator, Operator

Good day, ladies and gentlemen. Thank you for standing by. And welcome to CBAT Energy Technology's Second Quarter and First Half 2023 Earnings Conference Call. Currently, all participants are in a listen only mode. Later we will 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 will turn the call over to Thierry Li, Investor Relations Director of CBAT Energy. Mr. Li, please proceed.

Thierry Li, Investor Relations Director

Thank you, operator. And hello, everyone. Welcome to CBAT Energy's second quarter and first half of 2023 earnings conference call. Joining us today are Mr. Yunfei Li, our Chief Executive Officer; Mrs. Xiangyu Pei, our Chief Financial Officer; Mr. Xiujun Tian, our General Engineer; and Jennifer, our interpreter. We released our results earlier today. The press release is available on the company's IR website at ir.cbat.com.cn as well as from news wire services. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provisions of the US 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 doesn't assume any obligations to update any forward-looking statements except as required under applicable laws. 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. Yunfei Li. Mr. Li will speak in Chinese and I will translate his comments into English.

Yunfei Li, CEO

Thank you. Hello, everyone. We appreciate you joining our earnings conference call today. The first half of 2023 experienced significant macro uncertainties in the upstream lithium battery market. The price fluctuations of lithium carbonate, a key raw material for lithium batteries, had some impact on our overall business. However, we still made substantial progress in our core business, the sales of lithium batteries. In the first half of 2023, our battery segment generated revenues of $51.84 million, reflecting a year-over-year increase of 27.2%. Of this revenue, $46.76 million was from batteries used in energy storage applications, up 17% year-over-year, while batteries for light electric vehicles contributed $3.12 million, a remarkable surge of 309.9% year-over-year. Additionally, revenue from batteries for electric vehicles reached $1.96 million, an extraordinary increase of 6,454 times compared to the same period last year. During this half, our battery business achieved a gross margin of 12.8%, an improvement of 3.4 percentage points year-over-year, as we anticipated a significant number of orders in the latter half of the year. Our revenue growth in the second quarter was relatively flat, but we expect this to change moving forward. We have strong expectations for our revenue in the next two quarters and throughout full year 2023. Our battery business remains robust. As we gradually expand our brand presence and enhance our R&D capabilities, we have secured orders from numerous leading companies worldwide, which will boost our production capacity and allow us to provide high-quality products to both new and existing clients, further driving long-term revenue growth. Firstly, I’d like to share recent developments in our business. As of July 31, 2023, we recorded RMB 1.1 billion in total value of orders received but unfulfilled across our two primary battery production facilities in Dalian and Nanjing, alongside Hitrans, our subsidiary that supplies medium battery materials. Concerning client initiatives announced, as of July 31, 2023, our collaboration with JinPeng Group, the largest LEV manufacturer globally, has resulted in orders valued at approximately RMB 54.16 million. We have also made significant strides in our partnership with PowerOak, a leading manufacturer of portable power stations, and BlueTTi, PowerOak's brand, which has secured us orders totaling around RMB 48.05 million. Additionally, since initiating a three-year strategic partnership with Echom in July, we have received multiple orders from them worth around RMB 5.42 million. While Echom is still in the early stages of its outdoor portable energy storage operations, we anticipate an increase in orders as their business expands. Furthermore, in collaboration with various models, as previously mentioned, we have taken in orders totaling approximately RMB 3.65 million thus far. Now moving on to R&D, I want to discuss our sodium-ion battery development. In the second quarter of 2023, we unveiled our sodium battery at our Corporate Open Day, showcasing our products to investors, media, and clients. Our Model 32140 large cylindrical sodium battery is the first of its kind in the industry capable of large-scale mass production. We are also pioneering the mass production of these batteries globally. Following its launch, Model 32140 received significant attention from professionals, investors, and stakeholders across different industries. Our R&D and production capabilities for large cylindrical batteries have drawn positive feedback. Currently, we have received numerous requests from clients for samples of this sodium battery, and we expect orders to rise meaningfully as we ramp up production. Additionally, we have entered into a strategic cooperation agreement with Shenzhen Hello Tech Energy Co., Ltd., the parent company of Jackery, a leading global portable power supplier. Hello Tech will invest RMB 25 million to customize the research, development, and production of a more advanced sodium-ion battery, with plans for mass production and potentially hundreds of millions RMB worth of products to be supplied. We have already delivered the prototype A of this customized product, and upon receiving Hello Tech's approval of its quality and performance, we will move on to the prototype B stage, leading to mass production as scheduled. Furthermore, we have made significant progress in our lithium battery R&D. We are in the prototype B development phase for our Series 46 lithium batteries, which have received considerable interest from investors and peers. We expect to begin mass production of our Series 46 batteries by the end of the year, with models including 46110, 46115, and 46157 being prepared. Depending on market conditions, we will also consider the mass production of Model 46800. Next year, we aim to accelerate the production of our Series 46 batteries. I also want to emphasize our production capacity and geographic strategy. Given our R&D successes and the high volume of incoming orders that have surpassed our current supply, we are actively working on capacity expansion. Our Nanjing facility currently has a production capacity of 0.7 gigawatt hours, which we expect to increase to 2 gigawatt hours by year-end. Additionally, our Nanjing phase 2 project is under construction, potentially adding another 2 gigawatt hours of capacity in 2024 and bringing our overall Nanjing facilities to 4 gigawatt hours. By 2027, with the completion of our Nanjing phase 2 programs, we anticipate our overall capacity will reach 20 gigawatt hours. Meanwhile, our Dalian plant has a production capacity of 1 gigawatt hour, which we expect to grow to 1.4 gigawatt hours by the end of this year. We will also begin establishing production lines for our Series 46 batteries, which could add 5.6 gigawatt hours of capacity by the end of 2025 and further expand to 9 gigawatt hours by 2027, bringing the overall capacity of our targeted facilities to 16 gigawatt hours. Additionally, we are working to enhance our sodium battery production capacity, which currently stands at 0.5 gigawatt hours, with plans for 10 gigawatt hours in the pipeline in the long run. We aim to achieve full sodium battery production by 2026. Next, I would like to outline our marketing strategy for business development. We are closely collaborating with Viessmann Group, a leading European provider of residential energy storage, and we serve as a key supplier to a global leader in outdoor portable energy storage. Looking ahead, we will continue to develop both our residential and outdoor portable energy storage businesses, which will become significant revenue streams for the company. As we ramp up the mass production and capacity of sodium-ion batteries, we anticipate strong interest from clients in the small-sized power battery market, particularly those currently using lead-acid batteries and those needing fast charging and low-temperature performance. We have received many requests for samples from these clients in the small-sized power battery and energy storage sectors. Currently, demand for our sodium-ion batteries exceeds supply. Followed by our capacity increase, we will be able to deliver more samples to grow our market share. In summary, we are a leading player in the industry across multiple areas, including the mass production, geographic capacity landscape, and sample delivery of sodium-ion batteries, along with our dedicated efforts to promote the Series 46 lithium batteries. Looking ahead, we will continue to advance in the residential and outdoor portable energy storage sectors and solidify our position in the Series 46 lithium and sodium-ion batteries, further driving growth in the power market. We are optimistic about our prospects for the second half of this year and beyond.

Xiangyu Pei, CFO

Thank you, Mr. Li. And thank you, everyone, for joining our call today. I will now go over our key financial results for the second quarter and the first half of 2023. For the full details of our financial results, please refer to our earnings press release. We are pleased to report strong half-year results, marked by sustainable growth and increased profitability. Thanks to our product strength and optimized operating efficiency, our gross margin rose to 15.4% compared with 11.0% for the same period last year. As we progress year-over-year, our top priorities are to accelerate sales growth and improve profitability. Our solid balance sheet gives us the flexibility to continue investing in our future by accelerating our research and development across product lines, as well as expanding our technology and business initiatives to create value for both our users and our shareholders. Turning to our financial performance. Our net revenues were $42.4 million in the second quarter and $84.8 million in the first half, representing a decrease of 24.7% and 37.8%, respectively, from that same period in 2022. This decline was primarily attributable to a decrease in sales of the battery business and Hitrans, an indirect majority-owned subsidiary engaged in the production and sale of battery raw materials. During the first half of 2023, our battery business had strong revenue growth of 97% in the first quarter. However, during the second quarter, we began to experience a temporary slowdown in sales. Our second-quarter battery sales declined by 13.5% year-over-year to $22.2 million. That decline was primarily driven by the price volatility of lithium batteries, leading clients to hold off placing new orders during the quarter. Despite this short-term challenge, we remain confident that we will achieve strong full-year 2023 revenue growth as many of our clients will place new orders in the second half of the year as prices stabilize. Cost of revenues were $38.5 million and $78 million in the first half, representing a decrease of 24% and 37.9%, respectively, from the same period in 2022. This decrease was primarily due to the decline in battery revenues. Gross profit was $3.9 million in the second quarter and $6.8 million in the first half, representing a decrease of 29.8% and 37.12%, respectively, from the period of 2022. Our operating expense rose by 42% to $7.7 million in the second quarter and 11.4% to $13.4 million in the first half. Within that, our research and development expenses increased by 29.6% to $3 million in the second quarter and decreased by 3.1% to $5.4 million in the first half. Sales and marketing expenses increased by 38% to $1 million in the second quarter and 10.3% to $1.7 million in the first half. General and administrative increased by 46% to $3.6 million in the second quarter and 29.2% to $6.1 million in the first half. Our operating loss amounted to $3.8 million in the second quarter compared to an operating income of $0.1 million in the same period of 2022. Operating loss was $6.7 million in the first half compared to $1.2 million in the same period of 2022. Our change in fair value of warrants were $0.04 million in the same quarter and $0.12 million in the first half compared with $2.13 million and $3.76 million, respectively, in the same period of the prior year. As a result, our net loss attributable to shareholders of CBAT Energy were $2.6 million in the second quarter and $4 million in the first half compared to the net income attributable to shareholders of CBAT Energy of $0.8 million and $1.2 million, respectively, in the same period of 2022. This concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead. Thank you.

Operator, Operator

Our first question comes from Brian Lantier with Zacks Small Cap Research.

Brian Lantier, Analyst

I was wondering if I could ask a couple of follow-up questions. First on the Shangqiu lease, I was wondering if you could provide any additional details on that facility? Basically, was it operational? Do you still expect it to be operational by the end of 2023? And what type of batteries may have been produced in the past? And then I'll follow up with additional questions.

Yunfei Li, CEO

Yes. I would like to give you more detail about the Shangqiu battery plant. As you know, the production capacity of our Dalian plant is significantly insufficient, and we cannot meet the demand of our customers. That's why we decided to rent this Shangqiu battery manufacturing plant. It is a state-owned facility, and we share the same products, with similar equipment to our Dalian plant. Currently, this plant has a production capacity of 100,000 units per day. We are making some renovations and improvements, and it is expected to be fully operational by the end of this year.

Brian Lantier, Analyst

If I could ask one follow-up question on the battery gross margins. They appeared as though they've gone from 11% last year to 15.4% this year. Was that due to a shift in mix toward some of your newer products, like the 32140, and away from some of the older products, like the 21700?

Yunfei Li, CEO

There were several factors contributing to the increase in gross margin. One key reason is that this year, we boosted production capacity at our Dalian and Nanjing facilities, allowing us to achieve a high utilization rate at these plants. Our Dalian plant is nearing full production capacity, and after completing the first phase of the Nanjing plant at the end of 2022, we have also significantly increased its production capacity. This growth in production capacity has been a crucial factor in reducing costs. Additionally, last year, we experienced significant fluctuations in raw material prices, which negatively affected our costs and significantly impacted our profit margin. However, starting in the second quarter of this year, we have observed a decline in raw material prices, leading to reduced costs and contributing to the improvement in gross margin.

Operator, Operator

We have a question from Saiko Wu from TPG.

Unidentified Participant, Analyst

This is Saiko from TPG. You mentioned just now the company already has the capacity to produce the 46 series lithium battery. And I'd like to know for what reason that you decided to give priority to 46115 and 46157 instead of 46800. And in the future, how big is the chance for you to mass produce 46800?

Yunfei Li, CEO

We made this decision based on our overall business portfolio. For instance, we are considering our energy storage market. The height for model 46110 is about 31, and both the energy storage and the model specifications are more standard in the market. Model 46157 is slightly taller than 46115, and we estimate it can handle between 8,000 to 10,000 units, which we believe will meet the demand in the US and Europe. We primarily use lithium iron material, which is very important due to its superior energy capacity density. Currently, we are not planning to mass-produce model 46800, as it has a larger height. However, this doesn’t mean that we won’t produce it at all. When the timing is right, we will consider developing and producing model 46800.

Operator, Operator

Thank you. And I'm showing no further questions. So with that, I'll turn the call back over to Mr. Yunfei Li for closing remarks.

Yunfei Li, CEO

Thank you, operator. I appreciate everyone participating in today's call and for your support. We value your interest and look forward to updating you again next quarter on our progress.

Operator, Operator

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation and you may now disconnect.