Microvast Holdings, Inc. Q4 FY2021 Earnings Call

Thank you for your patience. This is the conference operator. Welcome to the Microvast Fourth Quarter and Full Fiscal Year 2021 Earnings Call. I would now like to introduce Sarah Alexander, Microvast's General Counsel. Please proceed.

Thank you, operator. Welcome and thank you everyone for joining us today. Mr. Yang Wu, President and Chief Executive Officer; and Leon Zheng, Chief Financial Officer are hosting today’s call. Sascha Kelterborn, our Chief Revenue Officer, is also on the line to discuss the product launch we announced last week. Dr. Wenjuan Mattis, Chief Technology Officer, and Shane Smith will also be available to participate in Q&A. Ahead of this call, Microvast issued its fourth quarter and full fiscal year 2021 earnings press release, which can be found on the Investor Relations section of our website ir.microvast.com. As a reminder, 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 of views as of any subsequent date. We undertake no obligation to revise or publicly release the results of any revisions to these forward-looking statements. 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 our annual report on Form 10-K filed earlier today. 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'll turn the call over to Mr. Wu.

Thank you, Sarah, and good afternoon everyone. 2021 was a challenging year with anticipated headwinds. Despite those headwinds, our team rallied together to grow revenue 41% compared to 2020. I'm proud of the accomplishments of our team. Global supply chain disruptions were a major challenge in 2021. For Microvast, the impact was largely indirect. This global semiconductor shortage caused many of our OEM customers to delay certain projects, which in turn also shifted demand for certain of our products to the right. The delayed products remain in our forecasted contracted revenue, and we expect to begin seeing more revenue from those large contracts later this year, further ramping up in 2023 with the timing of those projects aligning with our ongoing manufacturing capacity expansions. In addition to supply chain challenges, we faced increasing raw material prices throughout 2021. Unfortunately, this problem is expected to continue into 2022. We are taking steps to mitigate the impact of rising raw material prices where possible, including entering into long-term supply contracts and seeking additional sources of raw materials in some instances. At the same time, we are discussing the possibility of price adjustments with our customers as a direct result of these inflationary pressures. We will review our financial performance in more detail in a few moments. However, I would like to touch on a few highlights. In the first quarter, we challenged our production team to meet demand, which included a seasonal influx of quick turn orders. It was not easy, but the team executed and turned in solid Q4 revenue performance of $66.8 million, representing 39% growth over the same quarter of the prior year. It is worth noting that our revenue grew substantially in each of the four quarters in 2021 compared to 2020. On a full year basis, this achievement translated to $152 million in revenue, representing a 41% increase compared to the prior fiscal year and achieving the guidance range we established in August 2021 following our business combination. We ended this year with a strong backlog of $114.5 million, representing 161% growth over $43.8 million in backlog at December 31, 2020, and a sequential growth of 117% over $52.7 million in backlog at September 30, 2021. This backlog creates a solid foundation going into 2022. Our business development team has done an excellent job of generating long-term, multi-year sales contracts with new customers and expanding existing relationships. This is evidenced by growth in our forecasted contract revenue from $1.5 billion in February 2021, the date when our merger closed, to $2.5 billion at year-end. When we refer to forecasted contract revenue, we are describing backlog plus management's estimates for revenue we expect to realize from existing contractual relationships with customers. Most of those contracts include estimated volume requirements; however, they do not typically include a volume commitment. We expect to realize current forecasted contract revenue between 2022 and 2031. We continue to have success with large OEMs in the commercial vehicle sector and are excited for the journey ahead. Next, I will provide an update on the construction progress at our various manufacturing operations. We are pleased with the progress. Given the environment, it is certainly challenging to execute construction projects due to labor shortages, inflation, logistic hurdles, and other challenges. As you know, we're in the process of constructing a new building on our existing campus in Huzhou, China, which we refer to as phase three. The progress at this site has been impressive, going from a greenfield site in July 2021 to finishing the roof installation in less than six months. We posted an updated time-lapse video to our social media account in late January. Once completed, this building will feature approximately 700,000 square feet of manufacturing space. The manufacturing equipment has been ordered, and we will be ready to begin serial production by the first quarter of 2023. Completion of this initial phase will bring our total capacity in China up to five gigawatt hours per year. Additionally, we have space for more growth as the new facility is large enough to expand our total manufacturing capacity in China to approximately 12 gigawatt hours per year. We are also making progress in Clarksville. The focus of the project has been renovating and remodeling the interior of the existing building. We expect to deliver and install requirements in Clarksville to lag our Huzhou project by approximately six months. We expect to begin serial production in mid-2023 at this site. In Orlando, we have activated recruitment for the research and development facility. We have also begun the detailed planning process to convert the existing space into laboratories suitable for future global R&D projects. Our module and pack facility in Berlin, Germany is complete and is in production as projects with European OEMs begin to ramp up. This facility received ISO and IATF certifications. We distributed a press release announcing the two new lithium battery cells as well as our Gen 4 battery pack last week. We're excited about our customers' response to the performance of these cells and expect these solutions to become important revenue drivers in future years. Before turning the call over to Leon to discuss our financial results, I would like to invite our Chief Revenue Officer, Sascha Kelterborn, to discuss those new solutions in more detail.

Thank you, Mr. Wu. It's my pleasure to be here today to discuss these exciting developments. By introducing the new MpCO-48Ah and the HpCO-53.5Ah cells to our commercial customers, they can now select a battery solution based on their operational requirements. We can now provide a high power or a high energy battery with what we believe is market-leading performance in each category. These new cells are built to offer overall better performance with optimized energy density, cycle life, and total cost of ownership while retaining important fast charging capability. Both cells are available in the same dimensions and can be integrated into the new standard Microvast Gen 4 battery packs. The new packs have the same black box design as our old generation battery packs. This high level of compatibility of the new series allows OEMs to switch batteries based on technical requirements without changing the power train design or the interfaces. Compared with the Gen 3 battery packs, the new version delivers around 20% more energy and power. The new pack has additional safety features at the module and pack level to enhance management and meet the toughest safety requirements. The Gen 4 battery packs will be certified to meet global and cross-regional battery standards. In addition, the lightweight and long life pack design combined with the new battery cells present an attractive value proposition in terms of total cost of ownership to our customers. Our new series of battery cells and packs cover the common and future demands of commercial vehicle OEMs. Additionally, we shared a brief new product video on our social media page yesterday. With that said, I would like to turn the call over to my colleague Leon Zheng, our CFO, to discuss our financial performance.

Thank you, Sascha. Good evening, everyone. I will spend a few minutes discussing the results of our operations in 2021. Despite many industry-wide and global challenges, we successfully grew revenue in every quarter during 2021 compared to the same period in 2020. The achievement culminated in a 39% revenue increase to $66.8 million in Q4 2021 compared to $48.1 million in Q4 2020. Overall, revenue grew 41% from $107.5 million in 2020 to $152 million in 2021. We posted a gross profit of $1.2 million in Q4 2021 compared to a gross profit of $8.7 million in the same period, attributable to service accommodation expenses, accrued warranty expenses, inventory impairments, and price increases. The gross loss was $47 million compared to gross profit of $17.1 million in 2020. The change was largely due to increased product warranty expenses of $49.5 million, approximately $17 million of which were related to the prior quarter. Additionally, cost increases associated with appointments in 2021 impacted gross profit. The total gross profit was $28.1 million in 2021, translating to a gross margin of 18.5% for the full year. Operating expenses were $52.2 million in 2021 compared to a loss in the prior year period. For the full year, operating expenses totaled $157.4 million compared to $49.2 million in 2020. The increase in operating expenses is attributed to stock-based compensation related to products, and $78.6 million for the full year of 2021. In addition, the company increased headcount to support its planned growth initiatives and incurred additional expenses related to operating as a public company. In total, the net loss was $206 million compared to a net loss of $33.6 million in the prior year period. As we mentioned, we had a backlog of $114.5 million at the end of 2021, more than double year-over-year, as well as sequentially. This gives us confidence going into 2022. Moving to the balance sheet, we ended fiscal year 2021 with approximately $536.1 million in cash, cash equivalents, and restricted cash, and we are continuing to invest capital to expand our manufacturing capacity. Capital expenditures totaled $87.9 million in 2021 compared to $18.6 million in 2020. The increase was largely driven by the company’s manufacturing capacity expansion. We expect spending to increase further in 2022 and estimate our capital expenditures will be between $300 million to $350 million for the upcoming fiscal year. With that, I will turn it back to Mr. Wu to discuss our business environment.

Thank you, Leon. The last several years have been full of challenges, many of which were unprecedented. Our team pushed forward, and we are continuing to build a strong foundation for future growth. We believe our business can sustain a strong growth rate going forward. Our preliminary guidance for the upcoming year is a 30% to 45% increase compared to 2021. We are optimistic about 2022; however, developments over the last several weeks have added a level of uncertainty. I'm pleased to note that we expect a strong start to the 2022 fiscal year. We anticipate that our revenue for the first quarter will be between $32 million and $34 million, representing a 115% to 128% increase over $14.9 million for the prior quarter. Thank you all for your time today. Before I turn this call over to Sarah, let's pray for peace. Everyone deserves to have a beautiful and peaceful life.

Thank you, Mr. Wu. I would now like to turn the call back to the operator to moderate the question-and-answer session.

Thank you. Your first question comes from Adam Jonas from Morgan Stanley. Please go ahead.

Hi everybody. Good evening. And thanks for doing the call. Mr. Wu, thanks for those really kind and thoughtful comments in the prayer at the end. I wish more people did that. Thank you. Just a couple of questions, first, on the capital strategy. I think just your CapEx alone will spend, of course, well over half your cash balance. So I'm thinking, if you add some reasonable amount of cash operating expenses over the year that if I were to grow it, let's say in line with your revenue growth, just for discussion, you're going to consume maybe two-thirds or more of the cash. So tell us what's your capital strategy in terms of debt, equity, government loans, or grants, and your minimum cash balance, please, that you would expect to run the business, and what you would not want to go below? Thank you.

Leon, would you like to answer this question?

Sure, definitely. Thanks for the question. Yes, as we are there many headwinds and obstacles we are facing. We cannot give you detailed quantitative figures, but we ended up 271 more than 536. So answer the question regarding the minimum cash balance, we should plan to have a minimum cash balance of around $200 million or above. Okay, these we need to be okay.

I'm having great difficulty hearing you. I'm so sorry, but your connection is not great. And I heard you say a minimum cash balance of $200 million. I just want to confirm that. And I didn't know if you had any strategy or even at a high level, how you would approach bringing in more capital before you need it. It's always better to bring in capital when you have a growth opportunity before you reach a minimum cash balance. So I'm curious how you prioritize the various sources, please.

Sure, sorry. I will repeat what I said. I couldn't hear it. I apologize.

Leon, your phone is interrupted, you know, almost every sentence. And it's not continuous speaking.

My apologies, can you hear me now?

Yes, well, we'll try it again. And then otherwise, we'll ask different questions. We can follow up, but we can hear you. I want to try again, please. Yes, I think so. So let's continue. Thank you.

Okay, sorry for that, better communication. As I previously mentioned, based on our current estimate, we believe by the end of this year, we should have a minimum cash balance of $200 million or more. Regarding our capital funding plan going forward, what do we do? We expect to obtain a certain amount of bank loans from local banks in China. At the same time, we are also actively negotiating with U.S. financial institutions to secure additional loans by the end of this year. If we obtain additional financing, our cash balance will be even larger than the minimum amount we projected.

Thank you, Leon. Then just one more follow-up on my end if that's okay. The CapEx guidance of $300 million to $350 million for the fiscal year 2022, is this CapEx ready to be spent right now? Meaning is that expenditure based on any further final investment decision, environmental approvals, or is it contingent upon any financing commitment, including some of the loans that you're pursuing that have yet to be finalized?

Let me answer the question; I would like to have Shane, our Chief Operating Officer, answer the second part of the CapEx progress. The short answer to your question is that the cash balance we currently project does not consider additional loans from financial institutions, either in the U.S. or in China. So the short answer is that the money for the CapEx to be spent in 2022 will come from the equity we raised last year.

Yes. So Adam, this is Shane Smith.

Hey, Shane, thanks.

How you doing? As you know, we're not looking at environmental conditions in terms of putting the money to work. We've sold what we have capacity for. We must put that capacity in place. We have contracts in place for $400 million. What you're seeing is just the payment schedule for either the construction milestones or equipment milestones that we expect. Some of that money we have already put to work will roll into 2023; and that’s why you're seeing only the $300 million and a little over $300 million that we're paying out this year. But again, the contracts are already in place for both construction and equipment to get where we need to be to execute the plans that the customers are closely watching. Back to your other question, I mean, we are spending considerable CapEx, but we have assets in place that it's fairly easy to secure financing for. We've been on the low debt side, probably too low for a company our size relative to the contracts we have in place and the capital we are spending. So we are now putting that money to work differently, and Leon is well on his way; he has already inked some of those funding options. I believe we have some room in that area before we would need to look at the equity market. I think the equity market is more a matter of keeping business coming our way, where you will hear that story, and so far, so good. That's a likely story, perhaps in the next 18 months, but the market is going to respond positively to that message.

Understood. I really appreciate that Shane. And can I just squeeze in one more for Professor Mattis, please? On the supply chain if that's okay.

Hey, Adam, I’m here.

Hi, hope you're well; good to hear your voice. Dr. Mattis, could you elaborate a bit more on supply chain prices? I understand you can do LFP and nickel-rich, which gives you flexibility because your technology is material agnostic, if you will, which is great. So, you mentioned long-term supply contracts. I'd be curious, are there any capital commitments that you need to make to secure that? And I'd love your thoughts on how we should think about pass-through pricing, particularly of lithium, which you cannot avoid, which is up about 5x. Prices are 5x in China if I understand lithium carbonate. So a little more detail would be really helpful. And that's my last question. I appreciate the opportunity. Thank you.

Yes, sure. Yes, regarding supply, it's better to refer to Mr. Shane Smith, but I'd like to share my point of view. As for the cathode material pricing, the China market has gone up to 2.5 times; nevertheless, other materials such as PDDS lithium and PM 16 electrolytes have also ramped up. Microvast’s strategy is that the most expensive components in lithium-ion battery production are the cathode materials. By producing our own materials, we not only increase capacity and enhance safety but also achieve significant savings in terms of cost. We have initiated collaborative conversations in the United States and Europe for long-term collaboration in terms of recycling our products and using recycled scrap material in the cell production line. These discussions are well underway. As of now, Microvast is not limited by supply chain interruptions currently affecting the global market. I will pass the call to Mr. Shane Smith for more accurate information.

So Adam, it is, as Mr. Wu alluded to in his opening comments, it is one of the areas that we’re closely monitoring, engaging with suppliers to determine how long contracts are needed. Currently, it looks like this trend will continue through 2022 and into 2023 from our forecasting perspective. In our sales efforts, we are working to increase prices and balancing that with maintaining strong relationships; it is challenging. So I believe that price pass-through will be a part of our margin story.

Thanks, Shane. Thanks, everybody.

Yes, good to hear from you, Adam.

Thank you. Your next question comes from Gabe Daoud from Cowen. Please go ahead.

Yes, hi, thanks for taking my questions. My first question is if you plan on providing any additional details on the backlog regarding regional or customer dynamics and how much of the backlog will be realized in 2022?

Sascha, do you want to go ahead and take that question?

Yes, please. I will go ahead. Thanks for that question. Most of the backlog we have right now will be realized in 2022. Some portions of the backlog could be shifted to 2023, but actually most of it will be realized in 2022. So if we talk about the forecast revenue, it is something which will start at the end of 2022 and will move all the way to 2031, as already mentioned. But the substantial increases are expected in various vehicle projects in 2023 and 2024.

Got it. And then regarding the regional dynamics, I’ve not yet received any specifics so far.

Yes, okay. Yes, regional dynamics will mainly be focused on Europe as well as the Asian, India, and Asia markets, and also the U.S.

Can you provide any additional percentages or not?

Not at this stage, so it’s way easier to shift that in 2023 and 2024. A lot of projects that we are starting now will focus on the U.S. market, but initially, most of the focus will be on Europe and Asia.

Got it. Thank you. And one last question I have from several investors was regarding your lawsuit with your former general counsel. I was wondering if you could give us an update on where that stands and any plans to get this overhang behind you.

Sure Gabe, this is Sarah Alexander. The trial has been scheduled and postponed a number of times. It's currently now scheduled for May, but we would like to get that behind us and move forward. It's been outstanding for quite some time.

Perfect, thank you.

Thank you. This concludes the question and answer session. I would like to turn the conference back over to Sarah Alexander for any closing remarks.

Thanks everyone for joining. Before we go, we received some great questions in response to our ask Microvast campaign. While we don't have time to address every question we receive, I would like to take a few minutes to address a few important themes. Thanks to everyone who submitted questions; we appreciate your feedback and encourage you to keep them coming. The most frequently asked question was a request for an update on the status of our S1 registration statement. To provide some additional color on the timeline of events, our business combination with Tuscan closed on July 23, 2021. Our understanding is that shortly after the completion of our business combination, the SEC Chairman made public remarks directing the SEC staff to take a pause for now on approving the registration statements of issuers with significant operations in China. We filed our initial S-1 registration statement in the middle of this pivot in mid-August. Over the course of the following months, we received correspondence from the SEC following each of our S-1 filings and responded with amended filings to address those comments. Most of the comments have related to clarifying aspects of our operations in China and the potential effects of current or future laws on our operations. As an example, we were requested to provide additional disclosures following the PCAOB and SEC implementation of the Holding Foreign Companies Accountable Act in December 2021 and January 2022. It's also our understanding that many comments we received were issued by the SEC to many similarly situated companies during the same timeframe. Additionally, we have been informed by the SEC staff that due to the significant increase in the number of recent transactions, their internal review process and turnaround time is slower than issuers may have experienced in previous years. The current delay between our last filed S-1A on January 28, 2022, is because the financial statements included in that filing were current as of September 30, 2021. Those financial statements became stale in mid-February, and the document needs to be updated with December 31, 2020 results. Our annual report on Form 10-K was filed earlier today, so we will now turn our focus to the S-1 and get the financials and disclosures as of December 31 updated quickly and file the next amendment as soon as possible. We recognize that this process has taken longer than typical and fully understand our shareholders' frustrations. We are moving the process forward as swiftly as possible and appreciate your patience and understanding as we bring this process toward a conclusion. Additionally, we've had several people ask for clarity about the Holding Foreign Companies Accountable Act and its potential impact on Microvast. I can provide a bit more background on the law and its provisions which originally became law in December 2020. Among other things, the statute requires the SEC to identify public companies that have retained a registered public accounting firm to issue an audit report, where the firm has a branch or office located in a foreign jurisdiction, and the PCAOB has determined that it is unable to inspect the books of such accounting firm. On December 16, 2021, the PCAOB published a list of the accounting firms in Mainland China and Hong Kong that it determined it is unable to inspect. That list does include Microvast's auditor, a Mainland China office of Deloitte, as well as the Mainland China and Hong Kong offices of other major accounting firms in the region. On January 10, 2022, new SEC rules became effective, amending disclosure requirements in annual reports for issuers that the SEC identifies as having an audit report issued by one of the firms mentioned above. The SEC refers to these issuers as commission identified issuers pursuant to the HFCAA. If an issuer is designated as a commission identified issuer for three consecutive years, the SEC shall prohibit the securities of the issuer from being traded on a securities exchange. Microvast anticipates that it will be designated as a commission identified issuer following the filing of its 10-K from earlier today, but we have begun discussions with our auditors to determine a path forward and a timeline for compliance as we expand and diversify our global operations. Those are all the questions we have time for today. Thanks, everyone for joining, and this concludes today's call.

This concludes today's conference call. You may disconnect your lines. Thank you for participating. Have a wonderful day.