Earnings Call Transcript - CBAT Q1 2024

Thierry Li, CFO and Secretary of the Board

Thank you, operator, and hello, everyone. Welcome to CBAK Energy's First Quarter 2024 Earnings Conference Call. Joining us today are Mr. Yunfei Li, Chief Executive Officer of CBAK Energy; myself, Chief Financial Officer and Secretary of the Board; and Jennifer, our interpreter, our general engineer, Mr. Xiujun Tian will join us for the Q&A section. We released our results earlier today. The press release is available on the company's IR website ir.cbak.com.cn as well as from newswire services. A relay of this call will also be available in a few hours on our IR website. Before we continue, please note that today's discussions 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 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 U.S. 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 the comments into English. Go ahead, Mr. Li.

Yunfei Li, CEO

Hello, everyone. Thank you for joining our first quarter of 2024 earnings conference call. I would like to provide an overview of our performance in the first quarter. We are pleased to announce that we have started 2024 on a solid note with robust growth. In the first quarter, our battery business recorded revenues of $44.84 million, which is a remarkable increase of 51.5% compared to the same period last year. This strong start sets a promising outlook for the year ahead, even as the battery industry faced significant downward pressure, with many competitors seeing declining gross margins and profits. Our battery business continues to trend positively and achieve rapid growth. Our focus remains on the energy storage sector, particularly in home and portable energy storage. As a result, revenue from batteries used in electric vehicles dropped to $0.48 million, down 73.6% year-over-year. Similarly, revenue from batteries for light electric vehicles decreased by 23.3% to $1.51 million. On the other hand, revenues from batteries for energy storage applications grew remarkably to $42.85 million, reflecting an impressive 66% increase year-over-year. The strong growth in our energy storage business, along with orders from high-quality clients, has improved our gross margins. In the first quarter, our battery business achieved a historic gross margin of 41.2%, an increase of 30.3 percentage points compared to the same period last year. Net income from our battery business also continued its upward trajectory, reaching $11.68 million in the first quarter, a significant jump from $0.11 million in the same quarter last year. This signifies a 107-fold increase, matching the entire net income for the prior year. Now let me provide details about our order demand. As of May 7, 2024, we have recorded approximately RMB 327 million or about $45.2 million in combined value of orders received that are yet to be fulfilled across our major production facilities in Dalian, Nanjing, and Shaoxing. Regarding our disclosed client initiatives as of May 7, 2024, our accumulated orders from Jinpeng Group, the largest manufacturer of scooters and electric tricycles globally, totaled approximately RMB 60.28 million or about $8.32 million. Our collaboration with PowerOAK, a global leader in portable energy storage technology and its subsidiary brand BlueTTI, reached approximately RMB 41.28 million or about $5.7 million. Additionally, our orders with Viessmann Group, one of Europe's top three household energy storage suppliers and a leading European manufacturer of heating and cooling systems, amounted to around RMB 1.11 billion or about $153 million. At the same time, our orders with Anker Innovations, one of the largest third-party accessory suppliers globally for Apple's products, also reached RMB 74.8 million or around $10.33 million. Furthermore, our client base in the energy storage sector continues to expand. We have received substantial orders from several key clients, enhancing our global market presence and increasing our market share. Among them is a European battery industry client, with whom we are currently discussing future collaborations and negotiating confidentiality agreements. We hope to secure consent to update investors, shareholders, and the capital markets about the progress of these collaborations through official company channels. Turning to our research and development efforts, we are committed to exploring diverse demands across various segments of the battery market while actively pursuing new product innovations. Our latest project, the development of our larger synergical lithium-ion battery, the model 40140, is progressing well. By expanding the size of our original synergical battery, this model enhances both energy density and cost-effectiveness, providing clients with a better and safer solution. We plan to procure production equipment in the fourth quarter of 2024 and expect to formally launch mass production in the first quarter of next year. We believe that this product will significantly strengthen our market expansion efforts and drive an increase in sales. Meanwhile, our battery technology is gaining recognition in international markets, attracting interest from top companies in India and other foreign companies along the supply chain. Several foreign giants have approached us about acquiring our large synergical battery manufacturing technology through technology transfer. We are currently evaluating the possibility of transferring or licensing our battery technology in certain markets in the future. We will continue to enhance our technology, R&D, and innovation in energy storage to meet the diverse needs of various customer groups and the growing demand for energy. Additionally, we observe increasing interest in sodium-ion battery production and applications among battery factories and downstream customers in Europe and the United States, as we are one of the first companies globally to achieve mass production of large synergical sodium batteries. We are excited about this trend and are in talks with several industrial investors and world-class investment funds regarding separate financing for our sodium-ion battery project, aiming to promote the development of sodium-ion batteries independently from the lithium battery segment in the future.

Thierry Li, CFO and Secretary of the Board

Thank you, Mr. Yunfei Li, and thanks, everyone, for making time to join our earnings conference call today. We are delighted to report strong first quarter results marked by sustainable growth and increased profitability. Total net revenues increased by 38.7% year-over-year, while net revenues from our battery business saw a significant uplift of 51.5% year-over-year. In addition, the gross margin jumped to 31.9% from 6.9% a year ago, with the gross margin of our battery business surging 30.3 percentage points year-over-year to 41.2%. As a result, our bottom line turned positive with a net income of $9.6 million and the net income from the battery business of $11.7 million, positive for the third consecutive quarter. We believe that we will be able to achieve a net income from the battery business of RMB 220 million or approximately $30.5 million to RMB 250 million or approximately $34.6 million for the full year of 2024. In addition, Hitrans, our independently operated subsidiary that supplies lithium battery materials also expects to break even or incur only slight losses this year. There is another exciting news we want to share with you. We have gathered attention from multiple institutional investors. Currently, we are in the process of due diligence with these institutional investors for investment purposes, while the progress of these transactions is uncertain due to factors such as evaluations. Ideally, we hope to complete private financing this year. Subsequently, we will provide updates to investors, shareholders, and the capital market on relevant development through the official channels of our company. I will now provide an overview of our 2024 first quarter financial results. In the interest of time, I will be presenting abbreviated highlights only. We encourage you to refer to our press release issued earlier today for complete details. In the first quarter, our total net revenues increased by 38.7% year-over-year to $58.8 million. Net revenues from sales of batteries reached $44.8 million, a year-over-year increase of 51.5%. Our total gross profit grew 546.3% year-over-year to $18.8 million, resulting in a gross margin of 31.9% compared to 6.9% in the prior year period. Gross profit for the battery business increased by 474.4% year-over-year to $18.5 million, with gross margin climbing to 41.2% from 10.9% in the prior year period. Our total operating income amounted to $10.3 million compared to an operating loss of $2.9 million in the prior year period. Net income attributable to shareholders of CBAK Energy was $9.8 million compared to a net loss of $1.4 million in the prior year period. Net income from the battery business was $11.7 million compared to $0.1 million in the same period of 2023. That concludes our prepared remarks. Let's now open the call for questions.

Brian Lantier, Analyst

Congratulations on a really impressive performance. If I could dive a little bit more into the gross margin, Thierry, is that a combination of factors here when you're signing the contracts, the pricing that you're achieving from the customers and then the cost input falling over the last year? Or if you could just give me a little bit more color as to how you're able to achieve that gross margin improvement?

Unknown Executive, Interpreted

Okay. So thank you for your question. I'm going to explain. There were two main reasons to have this soaring gross margin. The first one is that if you compare it with the other leading battery manufacturers in the Chinese market, the gross margin is around 20%. However, our margin is about 40%, that is double the average in the Chinese market. Why? Well, on the one hand, it is because our product quality has been well recognized by some big customers from Europe and from the U.S., and these customers are high-end customers. They value product quality over price. And we have been in cooperation with them for 4 to 5 years. We have received almost zero customer complaints from them. That is a very good testimony of how well our product has been recognized by them. This is one of the reasons why they are willing to offer a good price to us. And then secondly, it is also because of the decline of the raw materials, just as Brian just mentioned. Yes, indeed, the cost of lithium carbonate has declined substantially from the peak in 2022. So the reduction in the material cost has also contributed to the increase of our gross margin.

Thierry Li, CFO and Secretary of the Board

Yes, to clarify, the 20% gross margin for market average is only for top players. If you're talking about medium-sized battery manufacturers, the gross margin is somewhere between 15% to 18%, something like that.

Brian Lantier, Analyst

Great. And if I could ask a question more on the overall market itself. Anecdotally, looking at some of your customers' products, it looks like they are pushing a lot of their larger storage units for home storage and emergency storage systems. I wonder how that impacts you and the demand for cells. It seems like as each unit is requiring more cells, that will lead to additional purchases and higher volume. Is that a trend you're seeing as well from your customers?

Unknown Executive, Interpreted

Yes, indeed, we observed the change in the market demand. And actually, we also witnessed an increasing order in the household storage projects. Just as we have announced in our media release, we already have our production and strategic plans that focus on the 46140, which represents a bigger size, bigger dimension of the lithium battery, and we believe that it will be able to fill the blank in the battery with a larger size. If you have a look at the other large cylindrical batteries, like 26650, we have already achieved stable market production, and for 32140, we've already opened the market and are receiving orders readily. And then for 40140, we have already entered into the B-type sample, a prototype B development stage. So yes, indeed, we have this product's strategic plan well in place already. And when we are making this plan, we are taking careful consideration of the market demand, and we are ensuring that our production will match the market demand. Besides that, what I want to add is for 40140, it is predicted that we're going to start mass production in the first quarter of 2025, and for 46140, we also have our plan in 2025.

Brian Lantier, Analyst

Great. And the last question, if I could just maybe ask about the facility expansion and where you stand reaching your goals of 5 gigawatts of production capacity, I guess, at the end of 2024.

Thierry Li, CFO and Secretary of the Board

Brian, I would directly respond to your question. I think you are correct. We are preparing the additional 5 or 6 gigawatt hour capacity by the end of this year, as we reported in our full year 2023 earnings call. The first large factory in our Phase 2 of Nanjing project is already roofed. What we are doing right now is we are procuring the equipment for the facility. We're procuring all those production equipment right now. And the timeline runs very smoothly, and we believe that all the equipment will be ready by the end of this year. So next year, first quarter, we will start production. So this is the timeline. No change.

Yunfei Li, CEO

Thank you, operator, and thank you all for participating in today's call and for your support. We appreciate your interest and look forward to reporting to you again next quarter about our progress.

Operator, Operator

Thank you all again. This concludes the call. You may now disconnect your lines. Thank you.