Greenland Technologies Holding Corp. Q2 FY2021 Earnings Call

Good day, ladies and gentlemen. Thank you for standing by and welcome to the Greenland Technologies Second Quarter of 2021 Earnings Conference Call. Currently, all participants are in 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 Julia Qian, Managing Director of Blueshirt Group Asia. Ms. Qian, please proceed.

Thank you, operator, and hello, everyone. Welcome to Greenland Technologies' second quarter of 2021 earnings conference call. Joining us today are Mr. Raymond Wang, Chief Executive Officer; and Mr. Jing Jin, Chief Financial Officer. We released the result earlier today. The press release is available on the company's IR website, as well as on Newswire Services. A replay of this call will also be available on our IR website in a few hours. Before we continue, please note that today's discussion will contain forward-looking statements made under the Safe Harbor provision 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 corporate filing with the SEC. The company does not assume any obligation to update any forward-looking statements, except as required under applicable law. 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. Raymond Wang. Go ahead, Mr. Wang.

Thank you very much, Julia, and good morning, everyone. Thank you so much for joining us today. So this call is a continuation of our commitment to provide greater communication and transparency into our business for shareholders, investors, and interested parties. And since this is our second ever earnings call, I just wanted to start with a quick overview of our business. Founded in 2006, Greenland Technologies Holding Corporation is a market leader in the development and manufacture of transmissions and drivetrain components for material handling vehicles, focusing on forklift trucks, operating out of a 650,000 square foot manufacturing facility in Shaoxing, China. We are the largest independent drivetrain supplier for forklift OEMs in China, with over 40% market share and a clientele that includes all of the Tier 1 forklift manufacturers, such as Linde, Heli, HANGCHA, and Doosan, just to name a few. Now, with a focus and commitment to developing high-quality innovative products, we announced the expansion of our product line with our own brand of all-electric industrial vehicles, including lithium-powered electric forklifts and industrial-sized electric front loaders and excavators for commercial sale by the end of this year. Here at Greenland, we have a proven history of strong fundamentals and consistent positive profit generation. Once again, we have achieved a record quarter with $28.2 million in revenue and 42,046 transmissions sold and delivered, representing a 70.1% and 43.6% year-over-year growth respectively. This is the highest revenue and transmissions sold within a single quarter in the history of our company. To all of the hardworking individuals at Greenland, thank you very much for an amazing job and continuing to strive for the success of the company. These results are attributed to three key factors: strong global growth for forklifts and other material handling vehicles, our established supply chain, and improved efficiency with our production facility. First, strong growth in the global logistics and warehousing industries has continued to drive sales of forklift trucks and other material handling vehicles, particularly in markets outside of China. We have been seeing significant momentum in the second quarter. Some of our clients have reported their vehicle exports outside of China have nearly doubled in the second quarter, which is a positive indicator to our business. Secondly, this demand requires the production capability and supply chain to support the growth, and our teams have been working hard to overcome any volume challenges to continue to deliver for our clients. Because of our industry reputation and long-term relationships with our suppliers, we have mitigated supply chain impacts that others in the industry have struggled with throughout this year. As a result, we have produced and delivered a record number of drivetrains within a single quarter. Lastly, our production facility has benefited from the increased sales volume. Our 650,000 square foot facility has the capability to support the increased production needs, and increased production has led to improved economies of scale within our site. This has resulted in an increase to our gross margins by 2.8% year-over-year, representing a significant milestone in our mission for operational excellence that we continue to deliver for our clients and shareholders. This is during a time factoring in an increase in raw material costs and other increases in supply chain expenses. Now, regarding our electric industrial vehicles, we announced our line of lithium-powered electrical forklifts, known as the GEF-series. There will be three models initially with rated load capabilities ranging from 1.8 tonnes to 3.5 tonnes. These vehicles utilize an integrated drivetrain specifically designed to support lithium-powered forklifts. The first batch has already completed production, is loaded into containers, and is ready to be shipped over to the United States for sale. They will arrive by next month and be available for commercial sale on the East Coast region of the United States. Moving on to our GEL 1800, the electric wheeled front loader, this has also completed production and is finalizing the last steps of quality assurance before beginning preparations for shipment over to the United States. Our investor deck does include images taken of the GEL 1800 during assembly, especially showcasing our 141-kilowatt lithium battery, which is the power force behind this unit. It will arrive in October of this year and will be followed shortly by the GEX 8000, which is an 8-tonne electric excavator that will be arriving by the end of this year in December. Production on the excavator is progressing as planned, and we're excited to showcase both of these vehicles to the North American markets when they arrive. Our strategy is to have these vehicles assembled in the United States at modest assembly facilities. In addition to assembly, these sites will also offer sales, distribution, and support to the local area. We are still in discussions with various locations and states and have not yet decided on the final location for our first assembly site. However, our list of potential locations continues to get shorter, and we have been pleased with the cooperation and support from state and local governments as we continue our search. To finance the expansion of our business and our new line of electric industrial vehicles, Greenland recently filed an S-3 registration of $155 million in shares and worked with Aegis Capital to raise about $7 million in a follow-on offering. These funds are allocated to finance the establishment of our first assembly sites, marketing, product development, and other business expenses. Developing innovative solutions to meet market trends are the core elements of our growth strategy, and we're happy to be investing more in our research and development efforts. In June, we entered a strategic research partnership with Zhongcha Heavy Industry Machinery to develop new systems of lithium-powered electric forklifts that will improve efficiency, operation time, and power of these vehicles. This R&D will lead to the next stage of lithium-powered forklifts and enhance our efforts to become a market leader in the North American region. This record quarter continues to showcase the strength of our business, which will be bolstered as we expand to the global market with our new product line of electric industrial vehicles. I'm extremely proud of our results for the first half of the year. There is a lot to be excited about at Greenland Technologies, and I wish to thank our team members and partners for working hard every day to deliver results, and to our investors and shareholders for their faith and support in our company's success. Now with that, let me just turn the call over to our CFO, Mr. Jing Jin, who will provide more insight into our financial performance. J.J., go ahead.

Thank you, Raymond. And thank you everyone for joining our call today. I will now go over our key financial results for the second quarter of 2021. So for the full details of our financial results, please refer to our earnings press release. Our stellar financial performance in the second quarter reflects our market-leading position to cater to growing demand for high-quality transmission products and our ability to navigate supply chain challenges. The number of our technician products sold increased 48.5% to 42,046 units from 28,305 units in the second quarter of 2020. We generated a record revenue of $28.2 million, an increase of 70.1% year-over-year. The increase was primarily due to the significant rise in our sales volume driven by the continuing growing demand in 2021. Additionally, we successfully captured opportunities by optimizing our supply chain and revenue generation, while some of our peers faced challenges in handling material shortages and were unable to deliver. The cost of goods sold was $22.5 million, an increase of 64.3% from $13.7 million in the second quarter of 2020. The increase was primarily due to the higher volume of the transmission products sold and the rise in raw material prices. Compared to the 70.1% revenue growth, we generated positive operating leverage of 5.8%. We are pleased with this result despite the material shortages and supply chain constraints. Driven by higher sales volume and continued cost management, our profitability increased. Gross profit was $5.7 million, an increase of 98% from $2.9 million in the second quarter of 2020. Our gross margin also increased by 280 basis points year-over-year to 20.2%, as a result of our product mix shifting toward higher-margin products. In most cases, our materials costs were well managed through strategic partnerships and long-term supply agreements. The total operating expenses were $2.3 million, up 84.1% from $1.2 million in the second quarter of 2020. Our operating expenses as a percentage of total revenue was 8%, up only 1.6 percentage points compared to 6.4% in the second quarter of 2020, primarily due to the increase in sales and labor costs year-over-year. The selling expense in the second quarter was $0.5 million, $0.2 million higher than the prior year. The general and administrative expenses were $0.75 million, up 69.6% from the second quarter of 2020, due to the expiration of the Chinese government policy related to COVID-19 relief. Moreover, as we continue to increase investment in our commercial electric vehicle product development, research and development expenses rose 111.4% year-over-year to $1 million in the second quarter of 2021, which is 3.5% of the total revenue we generated. We are further advancing our products and solutions in pursuit of growth in the electrification area and securing our market leadership in the transmission and drivetrain segment. Fueled by the rapid growth in revenue, we generated a record net income of $3.2 million, an increase of 114.2% from the previous year. Last but not least, let me update our financial guidance for 2021. We raised our revenue guidance range to $90 million to $100 million from the original range of $80 million to $90 million. The updated guidance range represents an increase of 35% to 49% year-over-year. So that concludes our prepared remarks. Let's open the call for questions. Operator, please go ahead.

Your first question comes from the line of Rommel Dionisio of Aegis Capital. Please ask your question.

Hi. Good morning. Thank you for taking my question. I'd like to explore the core revenue growth for the quarter a bit more. Achieving 70% growth is an impressive result. I note your comments on the market improvement and the challenges faced by your competitors. However, I'm curious about the extent of market share gains contributing to this performance. It seems like you are significantly outperforming the market in China. Could you elaborate on the factors driving this? Is it due to new products, deeper engagement with existing customers, or acquiring new customers? I would appreciate any additional insights you can provide. Thank you.

Yes, of course. So from a market share growth standpoint, we have experienced a lot of success during the global pandemic, which is unfortunate to say, but we managed to thrive in a difficult time for the industry. From both a supply and labor standpoint, we were able to deliver for clients, which contributed to our growth and increased sales. However, much of our gross margin increase is attributed to the efficiencies we are gaining from a manufacturing production standpoint through economies of scale, along with an increase in adoption of some of our newer component products, like our integrated drivetrains that produce a higher margin for our business. This includes sales from our existing clientele as they look to electrify their fleet. So I would attribute the increase to our gross margin toward that. JJ, do you want to add anything else to that?

Yes. Our new addition, you can look at our accounts receivable for these average new products; we also saw a slight increase in accounts receivable. So yes, that's also contributed to the revenue growth we're looking for. Because during COVID, domestically in China, I think, since the strong commitment of the Chinese government to manage and relocate the supply chain, we managed to secure it and deliver our products. We've experienced some competitors that were unable to deliver products to their customers. But I think part of the reason for our growth is securing that supply chain.

Okay. And maybe just a quick follow-up. Obviously, we're seeing raw material prices rise across the board. To what extent are you able to pass through some price increases as a result of those rising raw material prices? Thanks.

Of course, so yes, raw materials, especially steel that directly impacts our business has been peaking at the start of this year. It's a short-term spike. We're already seeing prices start to normalize. However, it was a difficult time period. We actually opted not to pass that expense directly to our clients. We expected it to be short-term. Our assumptions there were appropriate, and this actually helped support our clients through this time, which really helped to build long-term relationships. This is a very key attribute for the success of our company and how we are able to attract and maintain Tier 1 OEM clients. We worked with them and supported them through difficult short-term hurdles. So we were actually able to absorb it, and the results we are posting today already factor in that increase in our expenses, further showcasing the strength of our results.

Yes, yes, it certainly does. Okay, thanks very much. Congratulations on the quarter.

Your next question comes from the line of an unidentified analyst. Please ask your question.

First, I'd like to congratulate the company on its outstanding financial performance last year during the COVID crisis in 2020. Going forward, in your export market into the United States, do you think that the interest in the United States for your products will justify your forecast for 2021 and 2022?

Yes, absolutely. Our expansion into the United States with our electric industrial vehicles is beginning this year; we have the vehicles arriving in Q3 and Q4, and we will begin initiating commercial sales. However, full disclosure, it's going to take a little bit of time for reasonable sales to begin. We still need to create and establish our assembly sites, develop brand awareness for our product, especially since we're pioneering this space of industrial-sized all-electric construction vehicles. Historically, this market has been dominated by internal combustion diesel engines, and there's consumer adaptation that we need to drive. Therefore, I don't expect to see reasonable sales for our construction vehicles until probably the Q2 to Q3 timeframe of 2022. Our guidance for 2021 is primarily attributed to our core business of drivetrain and transmission components, but it will be supported by moderate vehicle sales, particularly in our lithium-based forklifts, which we anticipate will sell much faster.

My second question is with regards to the transmission deduction. Doesn't your electric cars use a direct drive as opposed to gears and stuff?

Our electric forklifts utilize our integrated drivetrain system, which incorporates both the electric motor, the driving axle, and the speed reduction gearbox altogether in a single package. It's very easy to incorporate, so it still utilizes gears and driving axles with the required motor horsepower, specifically designed to support lithium battery-powered forklifts.

Thank you very much, and like I said, again, congratulations on your performance last year and going forward. Thank you very much.

Thank you.

Your next question comes from the line of an unidentified analyst. Please ask your question.

Hello and congratulations on your business. I think it's a very good idea to go fully electronic. I wonder if you plan to ship products potentially to Europe because the whole world needs electric products.

Yes. After we announced our products, particularly the electric front loaders and excavators, we announced this to the North American market. However, the beauty of the internet is that the whole world saw it right away. We've begun to receive strong interest from European countries like Russia, Oslo, Romania, Germany, Italy, and even other countries like Australia, Morocco, and those in South America. This shows us that the demand for these vehicles is present in the global market, especially as governments begin to implement emission targets. Right now, our focus will be on the North American market, but we are actively exploring opportunities in other markets, like Europe.

When do you plan to adjust for the American market? There are a lot of clients like Amazon. Do you have any plans to speak to Amazon?

We have not spoken to Amazon yet, but I would love to initiate those conversations.

It's a very good idea.

I think it's perfect.

Your next question comes from the line of Jiya Gel of Amazon. Please ask your question.

Hi, I have another question. How do you prevent other competitors from entering this field?

The key is that manufacturing and production require a high level of skill and expertise to develop electric industrial vehicles of this size, which is why there are no commercially available vehicles today. The only other potential vehicles that exist are from Volvo, Caterpillar, and Komatsu. They do produce electric versions of their vehicles, primarily excavators. However, these companies have no true incentive to make these vehicles commercially available, because they are already market leaders with significant backlogs for their internal combustion vehicles. If they were to sell an electric industrial vehicle, that would simply cannibalize their own sales. Therefore, there is very little competition in this space for the time being.

I read an article stating that lithium-powered electrical vehicles are starting to gain traction, is that true? Because I think focusing on industrial electric products is a great idea, but if you diversify into other fields, you may lose focus.

You're right. Focus is key, which is why we are not exploring any type of products in the electrical passenger car market or anything of that nature. Our focus is just on industrial vehicles, as that's our expertise. We're the market leader for drive train systems for material handling vehicles. From a focus standpoint, we operate in our expertise.

I wish you success. It's a very good idea.

Thank you very much.

Your next question comes from the line of Wayne Lee of BCL. Please ask your question.

Okay. Thank you for taking my question. I wanted to ask about the trends for electric motors and excavators in the U.S. and what will be the effective margins?

I'm terribly sorry, Wayne. I only caught the last part of your question regarding margins, but I missed the first part. Could you repeat it?

Okay. The first part is what's your manufacturing plan for electric motors and excavators? And the second question is, when they are assembled in the United States, what will be the effective margin?

Are you asking for the prototype? Like the building side of the electric vehicle?

Yes.

Okay. So we will be establishing a modest assembly site for the final assembly, quality assurance, and distribution of these electric vehicles. We will continue to rely on our strength in manufacturing capabilities and supply chains overseas in China. The parts will be created there, and we will package them together in semi-knocked-down (SKD) kits for shipment to these assembly sites for final assembly. Therefore, we only need modest assembly sites, discussing around 40,000 to 60,000 square feet in size. Now, regarding price and margins, we have not yet announced the price for the GEL-1800 or the GEX-8000, the front loader and the excavator. However, our initial purchase price will be comparable to the legacy combustion engine vehicles today. It's important to note that our electric vehicles require significantly less maintenance than internal combustion vehicles, and the cost of electricity to operate them is a fraction of the price of diesel fuel. The return on investment for our vehicles becomes extremely attractive to both businesses and end consumers. Also, let's not forget about potential opportunities for government incentives for electric vehicle products. All of this considered, Greenland vehicles will provide significant value to our clients.

Do you see potential partnerships or leveraging existing dealers as a distribution channel?

We will build our own distribution channel. We will not rely on the dealership network. We lack confidence that dealers have the right incentives to promote our products, especially since the industry is predominantly dominated by internal combustion vehicles they're selling today. For instance, if a dealer has 200 diesel excavators on their lot and five electric ones, and a customer comes in asking for advice on which vehicle to buy, they're likely to promote the diesel engine because they have much more stock. This leads to a lack of confidence in moving our products. So we will establish our own distribution networks. To support this, we've opened a sales and marketing office on the East Coast of the United States, currently based out of New Jersey, and it will continue to grow as we establish assembly sites.

Okay. Thank you.

Your next question comes from the line of Lucy Lu of Valuable Capital Ltd. Please ask your question.

Hi, can you hear me right now?

Yes, we can.

Yeah. We noticed like the company has started pre-booking for the GEL-1800 electric loader and the GEX electric excavator. Can you please share with us how many units have been pre-booked and what's the market response so far?

Since we started the pre-booking service right at the end of the second quarter, it would not be appropriate to share results so soon. However, I can say that, upon launching the pre-booking service, we received strong interest and inquiries about the vehicles. However, the number of commitments has been low, because this is radically new technology and products that have historically been internal combustion. We expected some reservation in the market but are confident we can quickly address these concerns once the vehicles arrive in the U.S., and prospects can experience firsthand the advantages of electric vehicles like instant torque, quiet operation, and zero emissions. We expect an increase in pre-bookings at that point.

Thank you. When do you expect to reach reasonable scale, and can you share with us the sales metrics?

We will likely begin sharing sales metrics in the fourth quarter of this year. Reasonable sales for these products are expected to begin in the second to third quarter of next year, once our first assembly site is operational. From that point, we can start pushing sales and service and moving toward winning fleet contracts, which is the target for these vehicles.

What is the market interest and demand for electric forklifts?

The demand for electric forklifts is high. One hesitation we hear from potential clients is the price, particularly in the North American market. A lithium-powered forklift in the 2.5-tonne rated load range, which is the most common size used in warehousing today, can top around $70,000 because the battery and charger are typically sold separately. This presents a financial challenge for businesses. However, we are focusing on lithium-powered forklifts at a price level comparable to lead-acid models available today, which positions us well for market entry and captures market share as the return on investment for our vehicles is favorable.

Will you be leveraging existing dealer networks for your electric forklifts?

We will build our own distribution channels for the forklifts, loaders, and excavators.

How many stores will you need, and what will be the working capital required for building up the inventory and hiring personnel?

The working capital for each of these assembly sites ranges from about $3 million to $5 million to establish inventories and get them fully staffed. We expect operating expenses for these sites to be between $1 million to $2 million. This does not incorporate the costs of the parts coming in and out for the end product. In addition, we will explore sourcing as many locally-sourced critical components in the U.S. to mitigate any trade tariff financial burden to improve our profit margins. We are initially focusing on the East Coast for this expansion as we explore setting up new assembly sites. Also, we have worked with Aegis Capital to raise about $7 million in a follow-on offering, which will support the establishment of our first assembly site. Our current working capital position has us well-equipped to develop these sites as quickly as possible.

I believe we lost Lucy's connection.

Thank you. Seeing no more questions in the queue, let me turn the call back to Mr. Wang for closing remarks.

Wonderful. Thank you. So everyone, just as a quick recap, I am extremely proud of everything that's been done at Greenland Technologies by our team of hardworking individuals dedicated to the success of our business, not just for us, but for our shareholders and our investors, and for all the support across the board. This has been a record first year in the history of our company. I'm extremely optimistic about what the future holds, especially because we've been able to deliver these results during very challenging times. We've met and overcome all of these challenges. This is boosted by the launch of our new product line of electric industrial vehicles, which I'm extremely excited about and cannot wait for them to arrive in the U.S., so we can start sharing these products locally and grow that business channel. This is a milestone stage for our business. We're right on the doorstep of the next evolution for Greenland Technologies. Thank you all for being here to learn more about our company, for asking wonderful questions, and for all of your support. We look forward to speaking with you again in the third quarter.

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