Earnings Call Transcript - MVST Q1 2022

Sarah Alexander, General Counsel

Thank you, operator and thanks to the audience for joining us today. Mr. Yang Wu, Chief Executive Officer will begin today's call with some opening remarks; Craig Webster, who was recently appointed as our Chief Financial Officer and Sascha Kelterborn, who was recently promoted to the position of President will host today's call. Leon Zheng, our former Chief Financial Officer who has transitioned into an advisory role with Microvast is also on the line. Ahead of this call, Microvast issued its first quarter 2022 earnings press release, which can be found on the Investor Relations section of our website ir.microvast.com. In addition, we have posted tonight's accompanying slideshow presentation to our website. As a reminder please note that on this call, we will be making forward-looking statements. These statements are based on current expectations and assumptions and reflect our views only as of today. They should not be relied upon as representative of views as of any subsequent date, and we undertake no obligation to revise or publicly release the results of any revisions 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 our annual report on Form 10-K, filed on March 29, 2022. In addition, during today's call, we may discuss non-GAAP financial measures, including adjusted gross profit, adjusted net loss and adjusted EBITDA, 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. These non-GAAP measures have been reconciled to their most comparable GAAP metric in the tables included at the end of our earnings press release. A webcast replay of this call will also be available on the Investor Relations section of our company website. With that, I will turn the call over to Mr. Wu for some opening remarks.

Yang Wu, CEO

Thank you, Sarah. First, I would like to take a few minutes to address the leadership changes that we announced last month. Leon has been the CFO of Microvast for the last 12 years and he has been an integral part of building this company. We would not be where we are today without his leadership, guidance and steady hand. I want to personally thank him for his years of loyal service and for his continued service as an advisor and as a Director. Craig has been involved with Microvast for over 10 years. And he knows our business and industry very well. I'm confident that he has the skill set required to take Microvast to the next level. And I look forward to working with him in his new role as the CFO. Sascha joined Microvast in 2016 and has been an integral part of our growth strategy in the Western Hemisphere. He will assume responsibility for the company's day-to-day operations in a new role as President. I will continue to serve as the company's Chief Executive Officer. This new leadership structure will enable me to focus on Microvast's strategic direction. I'm confident that this team will best position Microvast to execute on the opportunities in front of us. Sascha will touch on our business results and Craig will review the financial performance in more detail in a few moments. However, I would now like to turn the call over to Leon. Thank you all.

Leon Zheng, Former CFO

Thank you, Mr. Wu. First, it has been an honor to serve Microvast as Chief Financial Officer. I'm very proud of the buildings we have built, and I'm excited about the company's future. When I joined Microvast in 2010, the company had very few employees and no revenue, only potential. Over the last 12 years, we have built a strong team and worked together to execute that vision. I'm blessed to have been a part of this journey. And I'm even more excited about the opportunities that remain in front of Microvast. Craig has been involved with Microvast as a member of our Board of Directors since 2012. He and I have developed a great working relationship over the last decade. He knows our business and the industry very well. And I'm confident he's the right person to step into the role of Chief Financial Officer and to help guide Microvast into its next phase. I look forward to working closely with him to ensure a smooth transition. I have the utmost confidence in Microvast's future, and I look forward to continuing to serve this company as a Director, working together with Craig in a wider role. And I will continue to support Microvast as a shareholder for many years to come. Thank you to our shareholders for your continued support and patience. And thank you to the Microvast team around the globe. It has been a true pleasure to work with each and every one of you. With that, I will turn the call over to Sascha, President of Microvast.

Sascha Kelterborn, President

Thank you, Leon. On a personal note, I have very much enjoyed working with you for the last few years and I'm pleased that you have chosen to continue forward with Microvast as a Director and in an advisory capacity. Your historical knowledge of this business is vast. I'm excited to step into the role of President with renewed focus on executing our international growth strategy. I enjoy new challenges and I'm ready to move the company to the next level. Everyone, please turn to Slide Number 4 of the PowerPoint presentation we have just published. As I cover a few highlights from the first quarter, we posted 145.5% revenue growth during the first quarter, delivering $36.7 million in Q1 2022. Our first quarter performance exceeded expectations as our team rallied to get as many product solutions out the door before the COVID lockdown situation in China worsened. This is a robust revenue growth despite many macro headwinds. A big part of our growth in the first quarter was in the Asia Pacific region. We have seen our market share in India increasing with our partners, and this was one of the biggest contributors to ex-China growth in the first quarter. For example, we received a $10.1 million order for various e-bus solutions from Ashok Leyland. In addition, orders from our multiyear European projects were strong across the new battery solutions that we have recently announced. We ended the first quarter with a strong backlog of $120.8 million as a result of a healthy order intake of $62 million. We're very excited about the prospect of further increasing our backlog in the coming quarters. Our forecasted contract revenue remains at a healthy $2.5 billion. Except for backlog, our forecasted contract revenue is comprised entirely of customers located outside of China. We continue to make progress behind the scenes to advance our relationships with leading OEMs globally and we'll continue our efforts to grow our forecasted contract revenue. When we refer to forecasted contract revenue, we are describing backlog plus management estimates for revenue we expect to realize from existing contractual relationships with customers. Most of these contracts include estimated volume requirements; however, they do not typically include a volume commitment. We expect to realize current forecasted contract revenues between 2022 and 2031. The first quarter did come with some challenges, the most prominent one being rapidly increasing raw material prices driven by supply chain disruptions as well as worldwide inflation. We're actively monitoring these trends and doing what we can to mitigate this risk, including entering into long-term supply contracts, identifying new and additional sources of supply, and increasing our selling prices wherever possible. However, this is a trend that we anticipate will continue well into 2022. In addition, I would also note that the semiconductor supply chain has not yet normalized and there were further supply chain disruptions in the auto industry caused by the conflict in Eastern Europe. These challenges do not necessarily impact our business directly; however, they do impact the timing of the OEM demand for our battery solutions as many customers are unable to complete the production of existing vehicles. We are finalizing the various vehicle testings in the development phase due to chip shortages or other supply chain issues, which in turn delays demand for our products. I will touch on our capacity expansion projects more in a moment, but they are well underway. We recently launched two new battery cells and a new battery pack during the first quarter, which will be key drivers of revenue growth going forward internationally. Please turn to Slide Number 5, which highlights some of our key partnerships in the commercial vehicle market like the Iveco Group, eVersum and others. We are moving forward with our announced collaborations and preparing our global battery production lines for various vehicle SOPs within the next 12 months. Next, please turn to Slide Number 6, which outlines some of our incoming order activity in Q1. In addition to the $10.1 million order from Ashok Leyland mentioned earlier, we also have stable business growth with our existing customer base and partners like, for example, Oshkosh, Wrightbus, CNHTC, or King Long in both serial and new development projects with a $51.9 million order value. Slide 7 is an overview of the new power and energy battery cells and battery pack we announced during Q1. These products enable our customers to optimize vehicle design in terms of energy density and cycle life, delivering overall improved performance and reducing the total cost of ownership by preserving fast charging capabilities. Both cell solutions are rated for over 5,000 cycles at 25 degrees. We expect these next-generation products to be critical drivers of our future revenue growth. Moving on to Slide Number 8, we have presented an overview of our engagement with TÜV SÜD that was announced last week. TÜV SÜD is a leader in the certification world, and we are pleased to partner with them on one of the first sustainable assessments in the battery industry. TÜV SÜD has completed an analysis of our operations, which we'll use as a baseline to measure our progress towards sustainability goals going forward. The next phase of the project will include a deep dive into identifying areas where we can improve sustainability in our manufacturing processes and in our global supply chain. I will now turn the call over to Craig to review our financial performance.

Craig Webster, CFO

Thank you, Sascha. Before I take you through our Q1 financial performance, I would just like to personally thank Leon for all his years of hard work and devotion to Microvast. I am fortunate to inherit from him a great finance team that has global reach and capabilities. Additionally, Leon leaves me with a very strong balance sheet and an orderly and clean capital structure. As you know, we have exciting plans for our capital deployment over the next couple of years and beyond. Now, let me turn to our financials and I'll spend the next few minutes discussing our Q1 2022 financial results. Please turn to Slide 10. And I will summarize the main line items from our Q1 P&L. First off, revenue. I am pleased to report strong revenue growth in the first quarter, which grew 145.5% to $36.7 million from $14.9 million in Q1 2021. As Sascha mentioned, this performance exceeded our expectations, and I will take you through the geographic breakdown in a later slide. We posted gross profit of $13,000 in Q1 2022 compared to a gross loss of $1.2 million in the prior period. After adjusting for non-cash settled share-based compensation expense, adjusted gross profit was $1.9 million in Q1 2022 compared to adjusted gross loss of $1.2 million in Q1 2021. This translates into an adjusted gross margin of 5.2% in Q1 2022 compared to negative 8.3% in Q1 2021, a 13.5 percentage point improvement. Operating expenses were $43.4 million in Q1 2022 compared to $11.5 million in the prior year period. The largest contributor to the increased operating expenses was share-based compensation expense, which totaled $26.2 million in the quarter. Of this SBC expense, $14.3 million is non-cash, and the balance is currently expected to be settled in cash this year. Operating expenses also increased as the company added headcount to support planned growth initiatives and incurred additional expenses related to operating as a public company compared to the prior year period. Net loss was $43.8 million in Q1 2022 compared to a net loss of $16.3 million in Q1 2021. After adjusting for non-cash settled share-based compensation expense and changes in the fair value of our warrant liability and convertible notes, the adjusted net loss was $29.1 million in Q1 2022 compared to $12.7 million in Q1 2021. Adjusted EBITDA was negative $23.1 million in Q1 2022 compared to negative $6 million in Q1 2021. Reconciliations of these non-GAAP metrics to the most comparable GAAP metrics are included in the table at the end of our earnings press release. Slide 11 further illustrates the impact of these adjustments. As I just mentioned, we had substantial SBC expenses in Q1 of $26.2 million that are primarily related to stock option and RSU awards under a plan that pre-existed our merger. Because of the modification made to these awards, we are required under GAAP to expense it to our P&L over a three year period starting from July 23, 2021. We have adopted a prudent approach of only adjusting for the non-cash settled portion of this SBC expense. Slide 12 shows a geographic breakdown of our revenue in Q1 this year compared to last year. As you can see on a percentage basis, the biggest growth was in Asia Pacific, excluding China, at a growth of 628% year-over-year. As Sascha mentioned, this was primarily driven by deliveries to leading OEM customers in India. It is worth noting that our China business still posted an 86% year-over-year growth, and we expect that while this will remain a growing market for us, we currently expect the contributions from customers in Asia Pacific, Europe and the U.S. to grow at a faster rate. I will now take you through our funding position and the cash movement in Q1 2022, which is on Slide 13. We started the quarter with $536 million in cash, cash equivalents, and restricted cash. Net cash used in operating activities during the quarter was $24.9 million, which was primarily due to increased notes receivable and inventory due to our higher sales, as well as the management decision to pay for certain raw materials earlier than usual in order to secure lower prices from our suppliers. Our CapEx spend on Huzhou was $3.1 million and Clarksville $1.1 million, totaling $38 million during the quarter. Additionally, we invested a further $2 million into our existing facilities and R&D. This gives us approximately $470.7 million in cash, cash equivalents, and restricted cash at the end of Q1. Management estimates our total capital expenditures in 2022 to remain in the range of $300 million to $350 million, with most of this being allocated to our capacity expansion projects, which will bring online an additional four gigawatt hours of capacity per annum. These expansions are our growth drivers for the coming years, fully funded from our current balance sheet capacity. We will also be opportunistic in bringing in bank financing. Our growing fixed asset base is unencumbered and our current debt levels are very low. Regarding the asset base, our capacity expansions are underpinned by our large and growing forecasted contracted revenues, which will bring incremental cash flows in the future. To round off, we closed the quarter in a very strong cash position, and with flexibility across our balance sheet and capital structure to raise more capital at a time that best suits us and as needed to support future growth beyond our current four gigawatt hour expansion. With that, I will turn it back over to Sascha to review the outlook.

Sascha Kelterborn, President

Thanks, Craig. Lastly, please turn to Slide 15. First, an update on the construction progress related to our ongoing manufacturing capacity expansions. Our manufacturing facility in Huzhou is located in a nearby neighboring province to Shanghai and thus far has not been directly impacted by the COVID lockdowns in China. I'm pleased to report that the ongoing construction related to this project remains on schedule and is on track to continue production by the first quarter of 2023. We expect production to begin ramping up in Q4 2022. We posted an updated time-lapse to our social media accounts last week, which shows that the facility has reached 90% completion on the exterior side. This is an impressive feat against the backdrop of a difficult environment in China during the last few months. In addition, our ability to produce battery solutions was not immediately impacted by the lockdown and we have been able to continue production from our existing raw material inventory in Huzhou. However, logistics have created many challenges in getting products out the door in Q2 both on the ground and by sea. Additionally, as April progresses into May, it has also become increasingly challenging to replenish production and raw materials timely due to supply chain disruptions impacting our vendors as well as our transportation network. We expect the challenges will be temporary in nature, and as of now, we believe we can make up the softness experienced during the first half of Q2 once logistics normalize. We have finished goods in our warehouse that are ready to be shipped as soon as transportation can be arranged. We will continue to monitor the situation closely. We expect Clarksville to begin zero production in Q3 2023. Clarksville is well on its way to meeting USMCA requirements, which will give us a competitive advantage in North America. This global expansion will add an additional four gigawatt hours of production capacity per year and will be mostly dedicated to our recently announced larger battery cells. Moving forward, a key part of our strategy is to continue to focus on our manufacturing capacity expansion efforts outside of China. A critical component of this strategy is diversifying our supply chain to certify our geographic presence and customer base. Once completed, these efforts will help insulate Microvast from regional disruptions in the future. Moving to the 2022 outlook, please turn to Slide Number 16. We experienced some challenges early in 2022; however, we are maintaining our guidance of 35% to 45% revenue growth compared to 2021. We continue to be very optimistic about our opportunities to grow forecasted contract revenue this year and are looking forward to the full deployment of our newly launched products to further drive international sales growth. At the same time, we will further explore the market for energy storage solutions. This market was valued in 2020 at $10.37 billion and is projected to reach $37 billion globally by 2027. We will also take advantage of our high-performance battery solutions in the upcoming and growing fuel cell market, which is projected to grow to $9.1 billion by 2027 versus $2.9 billion in 2022. Our fuel cell battery cell solutions have already been tested in very harsh desert conditions at the beginning of this year. Long-term, we look towards a positive future with political leaders across the globe coming together to reduce countries' carbon footprints and support agreements like the Paris agreement or the new European legislation package that has given a boost to green and renewable technologies. By the way, we are also exploring opportunities to participate in some of the recently announced government-funded electrification projects in the United States as well as in Europe. With that positive outlook, I will turn the call back over to Sarah.

Sarah Alexander, General Counsel

Thank you, Sascha. I would now like to ask the operator to open up the line for questions-and-answers.

Operator, Operator

Thank you. Our first question is from Adam Jonas with Morgan Stanley. Please go ahead.

Adam Jonas, Analyst

Hi, everybody, thanks for the call. Thanks for the details. I got your full CapEx outlook, but could you also provide any magnitude or cadence of OpEx as well, particularly what would consume cash? Any visibility you could provide there would be very helpful? Thank you.

Craig Webster, CFO

Sure, Adam, Craig here. Not a problem. I think it will come as a surprise to you that we'll run some cash outflow this year. I think, you know, our best estimates for that is that cash outflow from operations would be in the region of about $50 million. Q1 was slightly higher than we'd anticipated because we took the decision to buy a lot more raw materials. You saw that from the inventory going up. And now notes receivable is an indicator for you that it will be like that for the rest of the year. That was a tactical management decision to go into the market earlier on raw materials.

Adam Jonas, Analyst

Okay, I appreciate that. And, obviously, given the cash projections and the cost of the expansion in Huzhou and Clarksville with your cash position, I imagine you'd be getting down to what you would define as minimum cash levels within a couple of quarters. I didn't know if you wanted to - obviously you're exploring lots of different options, and there's all sorts of exciting opportunities to get low-cost financing from grants and the DOE and others, but for another time, perhaps. But can you remind us what you would say your comfortable range of minimum cash to run the business would be before you bring in some new outside funds?

Craig Webster, CFO

Yes, I think it's very similar to what Leon mentioned last time. We're looking to always have minimum cash around $150 million to $200 million. Just so you know what we're doing with the balance sheet, Adam, is this: We've got cash, and then we're converting that cash into productive assets, fixed assets. Once we do that, our fixed asset base goes up. It's unleveraged, and our fixed assets are backed by cash flows because we've already got the technology. But as we do that, we've then got the flexibility to add debt financing. And that's a lot easier for banks to do because you've done what you promised to do. You build the building, you put the equipment in there, they see the customers come. And they're not just looking at an LTV on a building. They're looking at the cash flows associated with it, and that's the nice position that we're in.

Adam Jonas, Analyst

Makes a lot of sense, I look forward to meeting you and thanks for the details.

Craig Webster, CFO

Yes, I look forward. You come to Houston anytime. We'll see you in New York next time as well.

Adam Jonas, Analyst

You got it. Thanks.

Craig Webster, CFO

Thanks.

Yang Wu, CEO

Thanks, Adam.

Operator, Operator

As there are no further questions, I'll turn the conference back over to Sascha Kelterborn for any closing remarks.

Sascha Kelterborn, President

Thank you all for joining today, and we wish you a great and pleasant evening. Thanks a lot.

Operator, Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.