VinFast Auto Ltd. Q3 FY2023 Earnings Call

Good day, and welcome to the VinFast Auto Limited 3Q 2023 Earnings Call. As a reminder, this call is being recorded. I would now like to turn the call over to Carol Wynn, Head of Investor Relations. You may begin.

Good morning. Before I turn it over to Thuy, let me remind you that some of the statements on this call include forward-looking statements under federal securities law. These include, without limitation, statements regarding the future financial performance of the company, delivery volumes, financial and operating outlook and guidance, macroeconomic and industry trends, company initiatives and other future events. These statements are based on the predictions and expectations as of today and actual events or results may differ due to a number of risks and uncertainties. We refer you to the cautionary language and the risk factors in our most recent filings with the SEC. In addition, management will make reference to non-GAAP financial measures during this call. A discussion on why we use non-GAAP financial measures and information regarding reconciliation of our GAAP versus non-GAAP results is available in our earnings press release issued earlier this morning as well as in the Investor Deck. With that, I'd like to turn it over to Madam Thuy.

Thank you, Carol. Welcome, everyone, to VinFast Auto's Third Quarter 2023 Earnings Call. Thank you for joining us. Firstly, I would like to talk about our strategic priorities. We are excited to update you on our accomplishments over the last quarter. But first, I want to reiterate our unwavering focus on our strategic priorities to strengthen and grow the business, which are largely in line with those shared recently for Q2. Priority #1 is global growth. We continue to be pleased with the response and interest our vehicles have received across our global markets, especially amongst consumers. We remain focused on shipping the VF 9 to North America by the end of the year, as well as targeting post-delivery of the new VF 6 later this year in Vietnam and the VF 7 and VF 3 in 2024. Priority #2 is the expansion of our global footprint. We are continuing to build out our production capability in North Carolina, and the facility will best position us to serve the North American main markets. We are progressing in our evaluation of up to 50 global and other markets. In the future, we have identified having high potential to engage quality distributors. We must focus on local distributors in many of our key markets to capitalize on an efficient expansion model. And Priority #3 is our continued focus on building automotive technology through our in-house R&D and external partnerships, making our vehicles smarter and more reliable to our customers. Next, I would like to discuss the key milestones achieved in Q3, a few highlights for our third quarter. In September, VinFast officially introduced a B-Segment EV model, the VF 6, in Vietnam. The affordable VF 6 is designed for families by Torino design, equipped with a wide range of smart features and ADAS level 2 capabilities. The model is expected to have a driving range of 248 miles and 237 miles respectively, with a charge time of less than 25 minutes. VinFast is planning for integration of the VF 6 in Vietnam later this month. We are pleased that the new model has already attracted significant interest with meaningful interactions on Facebook and TikTok. We are also making strides in global expansion. As we unveiled basically for Q2, VinFast is establishing broad distribution channels, leveraging local networks and expertise of third-party dealerships and distribution to increase coverage in our growing list of markets. We aim for our vehicles to be present in up to 50 markets and countries globally by the end of 2024. And in the U.S. specifically, this approach provides seamless consumer access that is especially safe compared to a pure direct-to-consumer model. In fact, we have signed 27 letters of intent with well-known dealership groups, covering more than 100 open dealership points across the U.S., including Florida, Texas, North Carolina, Virginia, Louisiana, New Jersey, and so on. Leveraging local distributors in many of our key markets makes for a capital efficient expansion model that will allow VinFast to be more efficient about cost and use of capital. We recently announced plans to commence delivery of EVs in Indonesia by 2024, identifying the country as a key market for the establishment of manufacturing facilities for our EV and battery production. In addition to Indonesia, we have identified India as another market where we intend to grow our facility to begin production in 2026. Each facility has planned total capacity of up to 50,000 tons to begin in Phase 1 and an estimated total CapEx of $150 million to $200 million. We expect to participate in the tremendous potential brought by the increased EV production in both Indonesia and India, while EV penetration is currently still very low. We look forward to giving you an update on the international expansion of our manufacturing facilities which will complement our existing facility in North Carolina once production commences. Also in Q3, we have received $955 million in loans from Vingroup and $291 million in grants from our chairman, as well as $240 million from our deSPAC transaction and the strategic investment by Gotion. We continue our expansion, adding over 10,000 new third-party channel employees in North America and gaining access to about 500,000 channel partners through our network in preparation for vehicle deliveries in the EU later this year. We are concluding discussions with our key channel partners globally. By the end of Q3, VinFast had 247 showrooms and workshops in the quarter and 126 showrooms globally for EVs. Looking forward, we remain focused on executing again our strategic priorities to strengthen and grow the business. We will continue to expand our global footprint and manufacturing capability in key markets such as Indonesia and India, while we expect high EV demand growth. We will build and develop our business model as we expand our distribution network and enter new markets. In addition, we are making a significant effort to reduce our CapEx. We estimate our CapEx spending for global manufacturing to decrease by about $400 million in 2024 and 2025. This optimization of our manufacturing CapEx will allow us to expand into Indonesia and India, while making the overall spend lower than our prior estimates. Finally, we continue to maintain and promote our best-in-class after-sales policy in the market as we expand into global markets. I would like now to hand over to David to discuss our financial performance for the quarter.

Thank you, Madam Thuy, and hello everyone again. So firstly, let me take you through the third quarter results and the numbers. We delivered 10,027 EVs and 28,230 E-Scooters for the quarter. The VF e34 has recently launched as the main driver in Q3, and there was a significant increase in e-solutions largely due to EV sales here in Vietnam. We reported revenue of $343 million, representing an increase of 160% from the third quarter of 2022 and an increase of 4% from the second quarter of 2023. Total revenues are primarily comprised of revenue from EV sales, including an encouraging uptick in Canada just this last month. Gross margin improved 4% quarter-over-quarter due to lower sales to the first customers who were eligible for incentives, as well as better economies of scale resulting from an increase in sales of E-scooters. Operating expenses declined quarter-over-quarter by 7%, mainly attributed to the decrease in R&D costs related to EVs as we brought three EV models into commercial production in the last four quarters. While SG&A increased by 43% year-over-year, it remained flat quarter-over-quarter. CapEx spending declined by 47% in Q3 compared to Q2 and by 40% compared to the year prior. We reduced our spending on tools and equipment for new vehicle programs and front-loaded backend purchases in connection with battery use. Let me give you some guidance now on the upcoming quarter. We are reaffirming our target of 40,000 to 50,000 vehicles for this year, 2023. We expect about $400 million in savings, including manufacturing CapEx that will be redirected to manufacturing expansion as outlined earlier in 2023. We also remain on track to ship the VF 9 to North America and deliver the VF 6 in Vietnam by the end of this year, and we are excited about delivering the VF 7 and VF 3 beginning in Q4. We will continue to look for opportunities to strengthen our balance sheet on top of the deSPAC merger and negotiate strategic investment and funding support from our chairman and Vingroup. With that, I'll hand back to you, Madam Thuy, for closing remarks and the Q&A session.

In conclusion, VinFast has made considerable advancements this quarter and is committed to establishing and expanding its presence in key markets while maintaining strong positioning as we advance the company's mission of creating a greener future for everyone. Thank you, back to the operator.

Our first question comes from Brian Dodson with Chardan Capital Markets.

So just a quick question on your 2023 delivery target of 40,000 to 50,000 vehicles. Could you break up the composition of that target in terms of what types of vehicles you expect to be delivered?

Yes. So first of all, I guess the targets will be increased in Q4 compared to the prior ones that we delivered. We're comfortable that we'll be able to deliver that uptick in volumes seasonally in Vietnam. The increase in vehicle sales ahead of the lunar new year will be a beneficiary, particularly with the launch of the VF 6 and the VF 5. The domestic models that we expect to be most popular in Q4 are the VF e34, the VF 5, and VF 6, while we will also be making deliveries on both a retail basis and to customers of the VF 8, but in relatively smaller quantities. We don't provide a breakdown of model-by-model deliveries or projections, so that's as much as I can say.

Your sales growth in North America, you said, was spurred by interest in Canada. Could you elaborate on what's driving that interest? And how do you expect those trends to evolve over the next few quarters?

Sorry, what's the question about Canada?

You called out strong interest in Canada when talking about North America. And I was just curious to see what trends you are seeing in that region and how you expect those trends to evolve over the next year or so?

We continue to receive strong interest in Canada. The demand for vehicles there is very high, and we expect that with the addition of the VF 9, there will be growing demand from Canada. The Quebec region, in particular, has attracted a lot of interest in our vehicles.

Yes. I think it's just the overall receptivity towards electric vehicles is strong in Canada. There’s probably a structural lack of competition and choice for Canadian consumers compared to other markets, especially in the U.S. Additionally, consumers in Canada show a notable affinity for the Tesla brand, but we see an emerging acceptance for new Asian brands in the EV space, which is contributing to increased activity for VinFast. We are very encouraged by the uptick in North American sales driven by increased sales in Canada.

That's very helpful. And then, regarding your plan to have vehicles available in 50 global markets by the end of '24, do you mean scooters and cars? Could you break that down between scooters and cars?

We were referring mostly to the EVs, but obviously in certain markets like Indonesia and India, where two-wheel vehicle penetration is significant, we will also focus on scooters. When I mentioned up to 50 global markets and countries by the end of 2024, we were primarily referring to EVs.

In the U.S., you mentioned having LOIs from 27 U.S. dealers. What does the timetable look like between LOI and getting something on the showroom floor?

We expect to have some dealerships open by the end of the year.

Thank you. Our next question comes from Andreas Shepherd with Cantor Fitzgerald.

I wanted to clarify on the first question. You reaffirmed your guidance for the rest of the year. By my calculations, you would need a bit of a steep increase in Q4. Can you remind us what the key drivers are and what is behind your conviction to meet the delivery guidance?

The seasonal uptick in local market demand for vehicles in the fourth quarter is notable. We expect that to drive the bulk of the uptick in volumes. We also have outstanding contracts with a B2B partner, GSM, for the delivery of our e-taxi models. We have a new VF 6 model coming onto the market and that's available for reservation from October 20th here in Vietnam, which will also be delivered this quarter. Additionally, we're planning our first deliveries of the VF 8 into Europe and the first deliveries of the VF 9 into the North American market. Overall, we are reiterating the same guidance, understanding that it is an uptick in volume relative to the prior two quarters.

What is the expectation around gross margins? Do you expect those to gradually continue to improve quarter-over-quarter? Is there a time period by which you expect positive gross margins?

Yes. The quarter-over-quarter improvement is favorable. We expect that trend to continue. When we launch a new vehicle model, it takes time to optimize the production processes and the efficiency of inventory and suppliers. We expect that the operating contribution margin from the new vehicle model will improve in the next quarter. Overall, we expect the trend to improve, and we are very focused on optimizing operations and manufacturing. We aim to achieve breakeven profitability within the next two years.

Could you share any guidance for delivery numbers for next year? Do you expect a significant ramp-up in deliveries given the new expansion?

We are not providing guidance for next year, but we are creating capacity because we do anticipate a steep ramp-up in our volumes next year. Some initiatives, including key target markets in Indonesia and India, and our production of CKD facilities there, will drive volume in addition to strong growth domestically in Vietnam. Worth noting is that we have up to 300,000 units of capacity in Vietnam that we plan to fully utilize over the next few years.

Our next question comes from Adam Hornby with DLD Asset Management.

I'm having a little bit of trouble hearing you. Could you tell us how many deliveries in the quarter went to Green SM Taxi?

In Q3, about 70% of our deliveries went to GSM vehicles brought to Vietnam.

What production or delivery number do you need to hit in order to achieve cash flow breakeven?

As indicated previously, the full demand for the market is about 200,000 to 250,000 vehicles per year. Because our cost structure is lower than other OEMs, we believe we can allow for about 150,000 vehicles to achieve cash flow breakeven.

There are no further questions on the phone. The next question is from the webcast: How many cars were sold to GSM and to the U.S. market in Q3 2023 and the first 9 months of 2023? Could you please break down the revenue by VN and U.S. markets?

Cumulatively, the number we have sold to GSM is approximately 12,000 cars.

The next question is: What is the payment scheme for GSM? How much of the first 9 months' revenue was from GSM and what percent of cash that was collected?

The payment terms for GSM contracts are standard terms, and we've collected—we have 60 to 90 day payment terms on those contracts. The revenue from GSM for the first 9 months to date is approximately $380 million.

David, the next question is, how are you going to manage with only $131 million cash on hand? Are you going to raise more money and how?

We've been clear about our commitments from Vingroup and the Chairman for the next 6 months and beyond, totaling up to $1 billion. We have been proactive in capital markets, especially given our listing, looking for opportunities to raise cash and monetize the company's share price, in addition to other avenues we are considering.

The next question is, can you please update on the development timeline of the U.S. factory?

We expect the exit lease to commence in the middle of 2025.

The next question is, why does VF plan to build another CKD factory in India while the VN factory is currently running at a lower utilization rate and there are plans in Indonesia?

The main driver is the government’s incentives in the country that allow us to be more competitive in the market. This also gives us faster access to customers and we expect to participate in the growing EV market as adoption rates rise. In the past weeks, we've looked at our CapEx plan and managed to save about $400 million from the planned CapEx so that we can invest in our plants in Indonesia and India. But as David mentioned, in the coming two years, we still expect most of our deliveries to come from our current facility.

The next question is related to your financials. Why was your Q3 revenue slightly higher after a significant increase in Q2?

Q2 did increase for a couple of reasons. It was comparing low sales in Q1 due to the new year holiday here in Vietnam and in Q3, we delivered more new models such as the VF 5 and the VF 9. Thus, the quarter-over-quarter Q3 to Q2 increase in revenue was modest. We expect a larger uptick in revenue from vehicle sales in Q4, which is seasonally higher.

How should we think about your debt profile?

We maintain a diversified balance sheet of debt, with domestic and international bank loans, syndicated loans, and domestic bonds. Our other borrowings are structured over 1 to 3 years, no more than 5 years, and sourced from a variety of international banks.

What are the key selling points for the VF 6?

The VF 6 is not only key for us in Vietnam, but internationally, as a B-Segment SUV aimed at families. It's designed beautifully by renowned designers in Italy and comes equipped with a wide range of smart drive features and ADAS level 2. The battery size is about 60 kilowatt of LFP type, with a strong range and excellent charging capabilities, priced very competitively at approximately $28,000 for customers here in Vietnam. When exported internationally, we expect it to perform well in high-volume segments.

Can you elaborate on your distribution strategy for the Indonesia market? Are you partnering with a local partner, and are there any government incentives for the CKD plant?

We are in discussions with both the government and local partners; we will provide more information in the future.

Can you elaborate more on the changes in CapEx guidance from 2024 to 2025? Is it due to changes in plans for the U.S. factory?

We are optimizing our plans, not really changing our timelines. If anything, we've added more items to the U.S. manufacturing facility and optimized local manufacturing CapEx.

As for the CapEx, this is a multiyear segment where we reinvest proceeds into our planned investments in Indonesia and India. So it's not a one-year reduction of $400 million in CapEx.

How would the expansion of the third-party dealership affect your balance sheet and P&L?

I believe it will be more efficient. Our CapEx optimization is driven by rolling out our distribution channels to dealerships, rather than directly investing in owned and operated showrooms. This will improve visibility on upcoming quarters and help reduce volatility.

Additionally, partnerships with dealerships and distributors enhance our speed to market, which is crucial as we expand.

Could you share more information about your production cost structure?

We have cost structure advantages here in Vietnam, making it efficient to manufacture and export to target markets. We benefit from significant labor cost advantages, advantageous foreign trade agreements, and a well-educated technology and R&D workforce. We have high-volume production capabilities and a fully integrated supply chain that allows us to operate effectively.

The question is related to the registration of shares. Why did the company register these shares so soon after the listing?

We registered for 7 billion shares, but not all will be sold to the market; only about 46 million shares will be added to the free float. The intention is to increase liquidity and free flow in the market, allowing for more investor participation. There is no specific period for when the shareholders will sell these shares, and they haven't begun selling yet.

Can you share preliminary guidance for 2024 and 2025 R&D expenses as compared to the first 9 months of this year?

R&D spend had a high run rate through 2022 and 2023, but this is expected to trend down significantly from mid-next year as we finalize delivery of our full portfolio of vehicle models. Coupled with lower CapEx, we expect free cash flow to improve much sooner and turn positive.

That wraps up all the questions on the phone and through our webcast.

I'd like to add a final note regarding GSM. We believe GSM is a good business with about 70% in the taxi sector and the other 30% in vehicle leasing. GSM is doing very well, now the #2 taxi company in Vietnam, and we expect it to be #1 soon. GSM is expanding into other markets beyond Vietnam with VinFast, including Indonesia, India, and the U.S. We consider GSM a valuable partner as we grow.

Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day.