Earnings Call Transcript - CENN Q2 2022

Operator, Operator

Good day ladies and gentlemen, thank you for standing by and welcome to the Cenntro Electric Group Limited Earnings Conference Call for the First Half Ended June 30, 2022. 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. I will now turn the call over to Marianne McInerney, Cenntro's Chief Marketing Officer. Ms. Marianne, please proceed.

Marianne McInerney, Chief Marketing Officer

Thank you, operator, and good afternoon, everyone. Welcome to Cenntro Electric Group’s earnings conference call for the first half year ended June 30, 2022. We have Mr. Peter Wang, Cenntro's Chief Executive Officer; and Mr. Edmond Cheng, Cenntro's Chief Financial Officer joining us on our call today. We released our first half 2022 financial results earlier today. That press release is available on the Company's IR website at ir.cenntroauto.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 contains forward-looking statements within the meaning of the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that are not historical facts. Such statements may be, but need not be, identified by such words as may, believe, anticipate, could, should, intend, plan, will, aims, can, would, expects, estimates, projects, forecasts, positioned, potential, goal, strategy, outlook and similar expressions. Examples of forward-looking statements include among other things statements regarding assembly and distribution capabilities, decentralized production and fully digitalized autonomous driving solutions. Forward-looking statements involve inherent risks and uncertainties, and other factors that could cause the Company’s actual results to differ materially from the expectations expressed today. Further information regarding these 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 are in U.S. dollars. In addition to our results determined in accordance with the U.S. Generally Accepted Accounting Principles, we used adjusted EBITDA to evaluate ongoing operations and for internal planning and forecasting purposes. Adjusted EBITDA is a supplemental measure for our performance that is not required by or presented in accordance with U.S. GAAP. Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with U.S. GAAP. We define adjusted EBITDA as net income or net loss before net interest expense, income tax expense, and depreciation and amortization, as further adjusted to exclude the impact of stock-based compensation expense and non-recurring or extraordinary expenses, losses, charges or gains. For reconciliation of adjusted EBITDA to our U.S. GAAP net loss, please refer to our earnings release that we posted on the Company’s IR website shortly before this call. Finally, as an Australian public limited company, we are subject to the Australian Corporations Act of 2001, which requires financial statements to be prepared and audited in accordance with Australian auditing standards and international financial reporting standards. The financial information that we are discussing today was not prepared for the purposes of the Corporations Act and is considered non-IFRS financial information under the rules and regulations of Australian Securities Authorities. For a reconciliation of our U.S. GAAP financial results to our IFRS financial results, please refer to our earnings release that we posted to the Company’s website shortly before this call. With that, let me please now turn over the call to our CEO, Mr. Peter Wang. Please go ahead, Mr. Wang.

Peter Wang, Chief Executive Officer

Thank you, Marianne, and hello, everyone. Thank you all for joining our first half 2022 earnings call today. In the first half of this year, the world continued to face challenges in the global supply chain, logistics, and associated rising material costs. We actively addressed and adapted to the environment and continued to execute our strategic initiatives and grow our top-line during the period, despite the aforementioned challenges. Notably, we sold 337 units of electric commercial vehicles in the first six months of 2022, up 23% from the same period in 2021, which led to 105% growth in net revenue to $5 million. Out of that, we sold 132 units of our newly launched LS 200 model, which doubled our average selling price. This reflects our capabilities for executing our tiered product strategy while meeting various customer demands amidst global uncertainty. We continue our focus on diversifying our products lineup and strengthening our supply distribution and service infrastructure capability. This effort, which I will elaborate further on later, will prepare us in our mission to help transform the commercial fleet industry to zero emission vehicles and will be the foundation of our long-term growth into the future. We have maintained a significant commitment to research and product development. We introduced three new ECV products to meet the needs of an increasingly diverse market, which complement the popular Logistar 200 and Metro. In September, we expanded our Logistar series with a new Logistar 260, which targets a wide range of applications in the trade, couriers, express, parcel service, logistic solutions, and the facility management segment. Production of our electric LS 260 commercial van has already commenced. In August, the first Logistar 100, a light electric commercial van rolled off the production line as part of our effort to expand product offerings. This responds to customer need for adaptable electric vehicles, particularly in Europe, one of our key markets. With best-in-class cargo space and multiple entry points at the side and the rear of the vehicle, this versatile, compact light cargo van is ideal for various commercial applications, including package delivery, trade, maintenance services, and hospitality, especially in urban areas with high population density. More importantly, we received type approvals from the European Union for both LS 260 and LS 100 after completing all homologation tests for the vehicles in compliance with all EU standards and regulations. This will allow us to sell both vehicle models in all 27 EU member states and other countries that adopt EU vehicle homologation standards. Initial deliveries of both LS 100 and LS 260 are scheduled for September 2022 and will soon follow with launches in Asian, Caribbean, and South American markets. In North America, we launched the all-electric Class 4 Logistar 400 earlier this year. Designed primarily for urban delivery and freight, it covers two significant markets, including last-mile delivery and service fleets and upfitters. Since March, we have showcased the LS 400 at various key industrial events and exhibitions, drawing considerable interest and inquiries. The LS 400 is purpose-built for robust duty cycles and can support a wide range of applications, including last-mile delivery for packages, food, beverage, as well as municipal functions such as waste management. The EPA certification for LS 400 is expected by the end of September 2022. With the progress on both homologation and production, we have opened order books for these three new EV models, LS 100 and LS 260 for our European customers, and LS 400 for our North American customers. Aside from vehicle production, as battery costs increase and battery supply become an issue due to supply challenges and pandemic issues, we made a strategic decision to secure supply of this critical component for our electric commercial vehicles. In August, we set up a separate wholly-owned subsidiary, Cennatic Power Inc. to manufacture advanced lithium batteries for our vehicles. Having in-house production of essential battery technology will allow us to accelerate the development of our electric commercial vehicles, cut our supply chain dependency from China, and lower the battery sale costs. The installation of the production line at Cennatic's Monterrey, Mexico manufacturing facility is underway, with trial production expected to begin in the first half of 2023. In early tests, Cennatic’s lithium-ion battery cell boasts advanced features, including greater temperature tolerance, faster charging time, safe operating parameters, longer life cycles, and cost efficiency. As the market demand for our advanced electric commercial vehicle continues to grow, our first and foremost task is to eliminate or remove supply chain disruptions and raise our production capacity, especially in new markets. Our European assembly factory in Germany is fully functional with ISO-9000 certification. We have scaled assembly capability in New Jersey, while Florida assembly capability will be ready soon. Our Jacksonville plant is also preparing to scale, with hiring and training underway. The company currently has five manufacturing and assembly plants, and we are positioned to meet the increased demand for our EVs. Furthermore, we are actively expanding our vehicle distribution and service infrastructure. In terms of distribution, we made a strategic decision to end channel distribution partnerships and replaced this with a direct B2B distribution model. We have already made progress identifying excellent distributors, dealers, and value-added resellers. We will support our global distribution strategy with an introduction of essential EV centers across the U.S., Europe, and in South America and the Caribbean. The initial EV center will be located in Dusseldorf, Warsaw, Barcelona, and Jamaica to align with our go-to-market strategy that focuses on the U.S. and European markets. The center will support customers in all levels of the binding process from initial inquiry to after sales and parts, and parts will serve to support our distributors, dealers, and value-added retailers. With our focus on expanding production, assembly, and product development, the company is in good shape, and we are strongly well-positioned to offer adaptable electric commercial vehicles to a growing customer base. Now, let me turn the call over to our CFO, Edmond Cheng, who will provide details on our first half 2022 financial performances.

Edmond Cheng, Chief Financial Officer

Thank you, Peter, and thank you everyone for joining our call today. I will now go over our key financial results. For the first half of the year ended June 30, 2022, for the full details of our financial results, please refer to our earnings press release and our 6-K filing today. Driven by vehicle sales volume growth of 23% and an improved product mix, we achieved 105% year-on-year revenue growth for the first half of 2022. Our results demonstrate the value of the continuous investment we have made in product development and partnership with the right OEM suppliers to extend our product offering to address market needs. We also stepped up our investments in sales and marketing, infrastructure, and research and development to support our growth initiatives. However, in light of the uncertain macroeconomic environment, we remain prudent in managing our expenditure and working capital in order to preserve the strength of our balance sheet versus the need to support business growth. Moving on to our results, our net revenue for the first half of the year was $5 million, representing an increase of 105% from the previous year. The increase was due to both a 23% growth in sales volume as well as an improvement of average selling price, ASP, from $7,354 in primarily selling Metro Car Kits last year to $14,400 in the improved product mix that includes 132 units of LS 200 at a much higher ASP. Within the revenue, vehicle sales accounted for 96% with the remainder from spare part sales and other services revenue. We sold 132 units of LS 200 in the first half of the year, accounting for 60% of total units sold, despite the fact that we had just launched this vehicle at the beginning of 2022. The number of Metro sold was 203 units compared with 273 units in the previous year. We have made a strategic decision to transition away from private label distributors to building our own direct B2B marketing and sales team in North America. Geographically, we generated 59% of our revenue from Europe, 32% from Asia, with the remainder from the United States. With the increase in vehicle sales, we were able to generate a gross profit of $0.53 million, up 18% from the prior year. Our gross margin was 10.6% compared with 18.3% in the previous year. The decrease in gross margin percentage was mainly driven by inflationary pressure on input costs, such as battery and shipping costs. The shipping cost of a 40-foot container to Hamburg or New York has risen to a high of $20,000 for the first six months of this year from the average of $2,000 for the same period last year. Recently, in August, the average cost of shipping the same 40-foot container has come down to $5,000. Meanwhile, total operating expenses were $24.7 million compared with $5 million in the first half of 2021. A major portion of this increase, $8.3 million, was due to one-time costs, which was comprised of approximately $6.5 million related to the compensation to certain directors for the past performances of the company and $1.8 million for the compensation paid in 2022 related to the FOH divestiture in December last year. Of the remaining $11.4 million increase versus the same period of last year, $3.1 million increase was due to higher legal and compliance costs to support our growth as a public company. We have already initiated action items to contain the rise in these costs. The remaining increase was primarily driven by headcount growth by 51% year-over-year to a total of 157 from 104 in the same period last year. Most of the headcount increases were in Europe and the United States. Since we have filled some key positions, we will rationalize the pace of these headcount increases. Net loss was $23.1 million compared with a net loss of $4.5 million for the same period last year. As mentioned earlier, $8.3 million of the net loss is considered one-time and non-recurring. Our adjusted EBITDA was negative $12.9 million compared with negative $3 million in the first half of 2021. As of June 30, 2022, our cash and cash equivalents were $183 million compared with $2 million a year earlier. As mentioned earlier, in light of the uncertain macroeconomic environment, we remain prudent in managing our expenditure and working capital in order to conserve the strength of our balance sheet. Now, let me turn the call back to Peter for his closing remarks.

Peter Wang, Chief Executive Officer

Yes. Despite the remaining challenges in the supply chain and the shipping sector, we continued onward and upward with our meaningful progress. We added new EV products with order books already opened. These new vehicles come with high price points and we’ll continue to improve our product mix. We made a strategic decision to make our own advanced lithium battery cells, which will enhance our supply chain. We also launched new vehicle assembly facilities in both the U.S. and Europe, with vehicle distribution and service infrastructure being built, all of which will lay a strong foundation to speed up the growth of our electric commercial vehicles. Importantly, we are pleased to see favorable policies emerging in the U.S. through the Inflation Reduction Act, which we believe will stimulate more rapid adoption of electric vehicles and significant investment into the sector. As we move through the second half of 2022 and into 2023, we will further enhance our supply capabilities to navigate the supply chain and logistic challenges. With our solid balance sheet, a diverse lineup of quality products, and cutting-edge technologies, we look forward to capturing market share in the electric vehicle market and all the revenue potential it offers. That concludes our prepared remarks. Let's now open the call for questions. Operator, please go ahead.

Operator, Operator

Thank you. Seeing no questions in today’s queue, this concludes the call. You may now disconnect.

Peter Wang, Chief Executive Officer

Thank you.