Microvast Holdings, Inc. Q3 FY2021 Earnings Call

Thank you, Therese, and thank you, everyone, for joining us today. Hosting the call with me are Mr. Yang Wu, President and Chief Executive Officer; and Leon Zheng, Chief Financial Officer. Shane Smith, our Chief Operating Officer, is also on the line to help out with Q&A. Ahead of this call, Microvast issued its third quarter press release, which can be found on the Investor Relations section of our website at ir.microvast.com. Please note that on this call, we will be making forward-looking statements based on current expectations and assumptions which are subject to risks and uncertainties. These statements reflect our views only as of today and 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 the quarterly report on Form 10-Q filed this afternoon. In addition, during today's call, we may discuss non-GAAP financial measures, which we believe are useful as supplemental measures of Microvast's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. A webcast replay of this call will also be available on the Investor Relations section of our company website. With that, I'd like to turn the call over to Mr. Wu.

Thank you, Sarah, and good afternoon, everyone. I would like to start out by thanking our employees for their outstanding contributions to Microvast's success. I would also like to thank our shareholders for their commitment and our customers for their support. The third quarter of 2021 was significant for us. We successfully completed our business combination with Tuscan Holdings in July. This transaction raised $708 million in net cash proceeds to fund our growth initiatives, including our ongoing capacity expansion in Crossville, Tennessee, and Huzhou, China. In addition, we will move into our new R&D facility in Orlando, Florida. We are pleased with the progress at these sites. This is a difficult time for construction projects, given labor shortages and other challenges. We have posted updates on our social media accounts showing the progress of the construction of the new buildings on our campus in Huzhou, which will be referred to as Phase III once completed, providing approximately 700,000 square feet of manufacturing space designed for our gigawatt-hour per year production capacity in total. The 2-gigawatt hour per year fully automated production line is under construction and is planned to be completed in the end of 2022 to the first quarter of 2023. I am proud of the progress we have made in just a few months since this transaction closed. In Clarksville, renovations are underway to make the building and the utilities ready for manufacturing. In Orlando, our existing employees will move into the new facility, and we will be actively recruiting to expand our R&D team. We'll continue to invest in R&D to ensure that our battery technologies remain at the forefront, and we expect to announce 2 new products in the first quarter of 2022. We will have more information about those developments in our next earnings call. Before turning the call over to Leon to review our financial results, I would like to highlight a few key takeaways for Microvast. We are now visible to the public markets. We have been in business since 2006, and we are established as a manufacturer and innovator. We achieved a revenue growth of 20% during the quarter and 43% year-to-date, compared to the same period in 2020. This growth was achieved in the face of many macroeconomic challenges, including global supply chain disruptions, logistic challenges, increasing raw material prices, inflation, and the ongoing COVID-19 pandemic. Historically, our business was concentrated in Asia Pacific; however, we are focused on gaining momentum with our customer base in Europe and North America. This momentum is evidenced by a 53% growth in our forecasted contract revenue, which grew from $1.5 billion in February 2021, when the merger was announced, to $3.3 billion at the end of September. We refer to forecasted contracted revenue as describing backlog plus management estimates for revenue we expect to realize from existing contractual relationships with customers. We also have signed contracts in place, either in the form of framework or supply agreements. In addition, we have had advanced discussions with customers about future volume requirements for specific projects or models. These contracts also include pricing and other terms and conditions; however, they do not typically include volume commitments. We expect to realize our forecasted contracted revenue between 2021 to 2031. We also saw backlog growth of 65% to $53 million, up from $32 million in September 2020. We are pleased to see global trends toward electrification continue in the United States, with the recent passage of the Infrastructure Investment and Jobs Act. The bill provides solid support for electrification efforts in the United States, which we expect to increase our addressable market and accelerate our progress and opportunities in North America. I will now turn it over to Leon to discuss third quarter financial results.

Thank you, Mr. Wu. Despite the many industry-wide headwinds, we have seen revenue growth for the third sequential quarter. Revenue grew by 20% this quarter and is up 43% year-to-date, compared to the same period last year. Gross loss was $35.9 million compared to a gross profit of $3.7 million in Q3 2020. The change was largely due to a $35.6 million product warranty expense accrual and a $6.6 million inventory write-down. In addition, increased raw material costs and a $2.3 million share-based compensation accrual following the business combination also negatively impacted our Q3 gross profit. Before we move to operating expenses, I would like to provide more context on the warranty accrual. Most of the warranty accrual this quarter was related to a legacy product sold to certain customers in China during 2017 and 2018. This legacy product experienced performance issues that did not meet our standards, leading us to perform a rigorous root cause analysis. Following the completion of this analysis in early October 2021, we determined the costs were associated with components sourced from a third-party supplier. We believe it's more likely than not that we will need to replace this legacy product during the remaining warranty period and the term of the sales contract. Accordingly, we accrued a $34.1 million one-time warranty expense related to this legacy product in this third quarter. The component was not incorporated into any of our other products. If we exclude the one-time warranty expense accrual, the inventory write-down, and the share-based compensation expense, the company's adjusted gross profit would have been $7 million instead of a negative $3.59 million loss during the quarter. This translates to an adjusted gross margin of 19%. Operating expenses were $78 million compared to $12.7 million in the prior year period. The change in operating expenses was primarily due to a $56 million share-based compensation expense accrued following the business combination, as well as increases in headcount to support the company's planned growth initiatives and other expenses related to operating as a public company. Finally, net loss was $116.4 million compared to a net loss of $10.1 million in the same quarter of last year. The change was primarily due to the reduction in gross profit and higher operating expenses as we discussed earlier. Turning to our balance sheet, the business combination bolstered our cash position. Microvast ended the third quarter with approximately $612.5 million in cash, cash equivalents, and restricted cash. Finally, let me talk about our backlog and the CapEx spending. As of September 30, 2021, we had a backlog of $52.7 million, an increase of 65% from $31.7 million in the same quarter of last year. We are currently ramping up our production efforts to fulfill a majority of this backlog in Q4 this year, which gives us confidence in reaffirming our 2021 revenue guidance. However, we are closely monitoring modest bottlenecks in international shipping. Moving on to CapEx, based on equipment delivery timelines and schedules during the upcoming holiday season, the company expects some of its previously planned capital expenditures for 2021 to take place in early 2022. Total capital expenditures for 2021 are now expected to be in the range of $120 million to $150 million. With that, I will turn back to Mr. Wu to discuss our business outlook.

Thank you, Leon. As Leon mentioned, we are closely monitoring challenges in international shipping. Based on the current market conditions, backlog, business trends, and other factors, we are reformulating our previous outlook and continue to expect full year 2021 revenues to be in the range of $145 million to $155 million. Additionally, as temporary supply chain headwinds dissipate, we believe we are well-positioned to capitalize in 2022 and beyond. We are in the middle of our budget cycle and expect to be able to provide additional clarity on 2022 in our next earnings call. Thank you for your time today. I will turn it back over to the operator, who will open up the line for questions.

Thank you, operator. At this time, we're going to move to questions submitted in response to our Ask Microvast campaign. We appreciate all the questions submitted, and it's great to have such strong support across our retail investor base. Given the volume we've received, we will focus on the most frequently asked topics, but we love hearing directly from all of you. With that, by far, the most frequently asked category of question relates to updates on specific customers or contracts. Now Shane, I know we have nondisclosure agreements in place with almost all of our customers, but what updates are we able to share with the investment community at this time?

Thanks, Sarah. We are sometimes able to negotiate with our customers to make public announcements about specific projects or partnerships, but not always. What we can tell you is that our forecasted contracted revenue has grown significantly since we announced the business combination in February 2021. It's up 53% from $1.5 billion to $2.3 billion. This is an encouraging metric that shows we're continuing to win major multiyear contracts with leading OEMs, validating the strength of our existing product portfolio. We do hope to be in a position to provide some additional details about these new and existing customer relationships in the next couple of months.

Great. Thanks, Shane. We recently announced the purchase of a new R&D facility in Florida, and we also received a lot of follow-up questions on that. Mr. Wu, are you able to elaborate on the plans for this new facility?

Yes, Sarah. As everybody knows, Microvast is a fully vertically integrated company. We make materials, battery cells, battery packs, and systems, you know this from top to bottom. Our R&D center will do the same to support our growth. At the center in Florida, we will explore all spectrums of technologies from battery materials to battery cells, battery packs, and battery management. Our mission statement for the research center is to create excellence to power the world.

Great. Thank you. There was also a lot of interest in our ongoing capacity expansions. Shane, are you able to add any color?

Sure. Our capacity expansions are underway, and we expect CapEx to increase in Q4, as we implied in the guidance we provided in the press release. I would like to go through each one of the facilities real quick. In Huzhou, as Mr. Wu previously noted, we're building a new building on our existing campus. We are ordering enough equipment to support 2-gigawatt hours of capacity, but the building is designed to support 12-gigawatt hours that we will need to add to the utility infrastructure. So the building is coming along, and we're in the process of ordering the equipment right now. In Clarksville, we purchased an existing building. We're in the middle of renovations to make the layout of the building suitable for our needs. Again, the initial capacity will support 2-gigawatt hours per year, but the existing building and utilities will be designed for 4-gigawatt hours, so we can rapidly respond to customer demand. Additionally, there's enough space on the existing land to add an additional 4-gigawatt hours to support future customer demand, giving us a total potential capacity of 8-gigawatt hours at the Clarksville facility. Our Berlin facility is operational already and able to ship to customers today. Overall, plans are progressing nicely. We're looking forward to completing these projects to meet customer demand. We believe we will realize some nice efficiencies with some of the new manufacturing equipment we order, including a higher level of automation, resulting in less headcount.

Awesome. I think we've got time to cover one more question from our retail investors, and I believe we have a question on the investment professional line as well. Mr. Wu, a few of our investors have requested additional clarity with respect to Microvast plans in the passenger vehicle market.

Yes. While we are focused on commercial vehicles, as we said before, we believe most car manufacturers will build their battery manufacturing in-house. Microvast intends to be their material supplier, a component supplier, and we also plan to license the technology to them as well. If we develop very advanced technology, and if they like it, that's the overview of the passenger vehicle business. Thank you, everybody.

Great. I think we have one more question from the investment community, so I'll pass it back over to the operator to put him on the line.

Next question comes from Jack Kester with Blue Sky Capital.

Good to hear you guys put up a great quarter. A lot of us here in the states have been a little bit disappointed in the lack of communication. We'd like to see more clarity, and I understand you have NDAs for a number of your clients, but we would really appreciate any updates you can give us on any granularity and clarity going forward as you progress. We think Microvast is an exciting company, and we're behind you 100%. You've got a big retail base along with institutional investors. And we'd like to see that grow, maybe get some analyst coverage, etc. So anything that you can do to help us out would be greatly appreciated in terms of communication and clearly letting us know. A new slide deck today would have been great. We've been using the one since February. And if you can get that updated, that would be great, too.

Well, Jack, all really good points. I think you will hear a lot about Microvast going forward. There's actually a lot to talk about. As a newly public company, there were a lot of things we had to get in place that we believe are now in place, and we want to start giving some visibility into what we're seeing with new customers. That's why we're highlighting $800 million in new contract wins, which is a significant mark. Now sometimes being able to name those customers can be tough. But we are working on getting permissions to issue press releases, and we believe we are heading in the right direction. You can expect to hear more announcements from us as we achieve our goals.

That's great. We're looking forward to that. Can you give us any color on the U.S. Postal Service contract with Oshkosh?

I really wish I could. Oshkosh is a great strategic investor and partner. However, this is one of those subjects that I know can be frustrating when you can't say anything about it. We're really fortunate to have Oshkosh as a partner.

Thank you very much for your time today. And please keep us updated on all the developments going on at Microvast. It sounds like it's an exciting time.

Sure will. Thanks a lot, Jack.

At this time, there are no additional questions in the queue.

We'll turn it back over to Mr. Wu for closing remarks.

Yes, thank you all for joining our conference this afternoon. I wish everyone has a good dream tonight.

This concludes the conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.