Cenntro Inc.

Good day, ladies and gentlemen, and thank you for standing by and welcome to the Central Electric Group Earnings Conference Call for the year ended December 31st, 2021. Currently, all participants are in a 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 Marianne McInerney. Centro's Chief Marketing Officer. Ms. McInerney, please proceed. Ms.

Thank you, Operator, and hello, everyone. Welcome to Centro Electric Group's earnings conference call for the year ended December 31, 2021. We have Peter Wang, Centro's Chief Executive Officer, and Edmund Chang, Centro's Chief Financial Officer, joining us on our call today. We released our 2021 financial results earlier today. That press release is available on the company's IR webpage at httpsir.centroauto.com, as well as from News Wire Services. A replay of this call will also be available in a few hours on our IR website. Before we continue, please note that today's discussion contains forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that are not historical facts. Such statements may be, but may not be, identified by such words as may, believe, anticipate, could, should, intend, plan, will, aim, can, would, expect, estimate, project, forecast, position, potential, goal, strategy, outlook, and similar expressions. Examples of forward-looking statements include, among other things, statements regarding assembly and distribution capabilities, and decentralized production and fully digitized autonomous driving solutions. Forward-looking statements involve inherent risk and uncertainties and other factors that could cause the company's actual results to differ materially from the expectations expressed today. Further information regarding these risks and uncertainties is included in the company's public filings with the SEC. The company does not assume any obligation to update any forward-looking statement except as required under applicable law. Also please note that unless otherwise stated, all figures mentioned during the conference are in U.S. dollars. In addition to our results determined in accordance with the U.S. generally accepted accounting principles, we used adjusted EBITDA to evaluate ongoing operations and for internal planning and forecasting purposes. Adjusted EBITDA is a supplemental measure for our performance that is not required by or presented in accordance with U.S. GAAP. Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income or any other performance measure derived in accordance with U.S. GAAP. We define adjusted EBITDA as net income or net loss before net interest expense, income tax expense, and depreciation and amortization, as further adjusted to exclude the impact of stock-based compensation expense and non-recurring or extraordinary expenses, losses, charges, or gains. For reconciliation of adjusted EBITDA, to our U.S. GAAP net loss, please refer to our earnings release that we posted on the company's IR website shortly before this call. Finally, as an Australian public limited company, we are subject to the Australian Corporations Act of 2001, which requires financial statements to be prepared and audited in accordance with Australian auditing standards and international financial reporting standards. The financial information that we are discussing today was not prepared for the purposes of the Corporations Act and is considered non-IFRS financial information under the rules and regulations of Australian Securities Authorities. For reconciliation of our U.S. GAAP financial analysis to our IFRS financial results, please refer to our earnings release that we posted to the company's website shortly before this call. With that in mind, let me now turn the call over to our CEO, Mr. Peter Wang. Please go ahead, Peter.

Thank you. Marian and hello everyone. Thank you all for joining our earnings conference call today. On the last day of 2021, Centro successfully become a publicly traded company on Nasdaq capital market through a stock purchase transaction with Naked Brand Group, making a significant milestone in Centro's history that opened a new chapter for us. After the closing of the transaction, the company concurrently divested the remainder of naked historic clothing business and has more than 250 million cash on hand. That can support production expansion and accelerate the future business growth. Our mission is to lead the transformation in the automotive industry and become a leader in the electric commercial vehicle sector, providing electrical commercial vehicle from class one to class four, mainly for use in urban delivery and urban services. With that mission in mind, we have developed vehicle models for each of our target markets in America, Europe, and Asia. We are pleased to announce that we achieved improved operational performance for 2021. We had vehicle sales volume of 918 units, representing growth of 29.8% from the previous year. This is a testament to our capability for producing and selling a continuously growing number of electric commercial vehicles, despite the global supply chain crisis and the shipping disruption and the resulting material cost increases. As demand for our vehicle remains very strong, our priority is to overcome the challenges of the supply chain crisis, ramping up the production to expand our market share We have made meaningful progress on this front to support target long-term growth. Last month, we completed a strategic acquisition of a 65% equity interest in Tropos Motor Europe, TME, a wholly owned subsidiary of Moself SE, and one of our largest channel partners. The TME has a distribution network of 50 dealers in Germany and 13 importers in Europe across 16 countries and also sells directly to major freight operators. We expect the acquisition will expand our European assembly capability with the TME's facility in Hanna, Germany. which will produce some of our vehicles that are target for the European market. We believe the acquisition combined with our distribution effort in Europe will address growing local markets need in the region. In December, we selected Jacksonville, Florida for our new US-based manufacturing facility. This 100,000 square foot facility is expected to be capable of assembling up to 10,000 vehicles per year once fully operational. In addition, we plan for further expansion to support additional vehicles and launching battery packaging operations. The site provides efficiency for materials, logistics, and also supports the export needs of a finished vehicle for our partners and the customer networks. Besides the two additional plans, we are also planning to expanding our existing production capability through acquisition of additional production space in Chongqing, China. Currently, we have three vehicle plans for production and assembly, and we also all source production and assembly of our new vehicles model to the third-party OEMs. As we scale up our production, we hope the further increasing economy of scale will reduce material production costs. Having secured needed working capital from our stock purchasing transaction With Naked Brand Group, we intended to put more effort to develop our network of distributors and service providers to strengthen our marketing and sales capabilities. The acquisition of a 65% equity interest in TME has quickly increased our vehicle distribution capabilities in Europe, especially in Germany. We continue to develop new vehicle models to meet ever-growing demand and to improve vehicle quality and add vehicle features that respond to our customer needs. 2022 will be a challenging year for all the industry sectors, given the backdrop of ongoing supply chain shortages, the global economy, the continuously evolving COVID pandemic and associated regional lockdowns, and the Russian-Ukraine conflict. We expect both the cost of logistics and the cost of materials of our critical components, including steel and batteries, to continue to increase. While near-term industrial conditions are fluid, our focus on leading commercial vehicle electrification remains strong. We are building a global brand to address growing needs. And we believe we currently have adequate cash to navigate the challenging environment. Looking ahead, we believe we will maintain our solid growth trajectory to capture the vast demand for electric commercial vehicle as we strive to become a pioneer and a frontrunner in the automotive industry transformation. Now, let me turn the call over to our CFO, Edmund Chen, who will provide details on our 2020 financial performance. Edmund.

Thank you, Peter. Thank you everyone for joining our call today. I will now go over our key financial results for the year ended December 31st, 2021. For the full details of our financial results, please refer to our earnings press release. We are very delighted to have delivered record revenue and gross margin improvement led by increased vehicle sales and other service income. The performance demonstrated our ability to manage and increase supply despite higher raw material and shipping costs. Additionally, in support of further revenue growth, we continue to step up sales and marketing efforts and boost production. Importantly, with the closing of the stock purchase agreement with Naked Brand Group, we solidified our balance sheet with a strong cash position, which gives us additional strength to fill our next phase of business development. Moving on to our results, our net revenue for the year ended December 31st, 2021 was $8.6 million, representing an increase of 57.1% over 2020. driven by growth in sales of our vehicles and other service income. Within that revenue in 2021, vehicle sales accounted for 85%, with another 13% from other service income and the remainder from spare parts sales. Geographically, we generated 51% of our revenue from Europe and 40% from the United States, with the remainder from Asia and others. Compared to 2020, our cost of goods sold rose 44.7% to $7.1 million in 2021, primarily due to an increase in the number of vehicles sold to our channel partners. Despite higher costs resulting from supply chain and logistics disruption, we were able to improve our gross profit. We were able to generate gross profit of 1.5 million, up 163.7% from 0.6 million in the previous year. In addition, Our gross margin was up 710 basis points year over year to 17.5%, primarily driven by an increase in vehicle sales and an increase in service revenue. Meanwhile, total operating expenses increased 60.3% to $18 million. The increase is largely due to an increase in selling and marketing expenses due to higher freight costs, and increases in general and administrative expenses relating to transaction expenses in connection with central's combination with liquid bank groups and its proposed IPO, and also on the expansion of its US operations. Selling and marketing expenses rose 32% to $1 million. General and administrative expenses increased 71.5% to $15 million, and R&D expenses were up 8.3% to $1.5 million in 2021. As a result, net loss was 16.4 million compared with net loss of 5.2 million in 2020. Adjusted EBITDA after adding back non-recurring expenses related to the combination with naked blank group and the proposed IPO was negative 7 million compared with negative 5.6 million in 2020. Upon the completion of the stock purchase transaction with Naked Bank Group, we were able to enhance our balance sheet in 2021, laying a strong foundation for the expansion of our manufacturing capacities and product portfolio. As of the end of December 2021, our cash equivalents and restricted cash were $261.1 million, compared with $4.5 million a year earlier. Now, let me turn the call back to our CEO, Peter Venn, for his closing remarks.

Thanks, Eamon. Yeah, looking ahead, we believe our strong financial position, coupled with a robust product roadmap, and advanced technologies while positioning us to address this market of a broader perspective and driving higher revenue and profit level in the long run while creating value for our shareholders. We have made strong progress against the backdrop of pervasive global and industry challenges. we introduced four new product lines. We made a strategic acquisition, and we are adding new capacity on three continents, all of which have positioned us for growth and market share gains. To that, we like almost all other EV companies are concerned with the challenges in the global supply chain and in shipping sectors. While we believe we can navigate these challenges, we continue to exercise a strong degree of caution and continue to incorporate localization into our supply chain. That concludes our prepared remarks. Let's now open a call for questions. Please go ahead.

Thank you. To ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. You may ask a maximum of three questions at a time. You can come back again to the queue if you have more questions. Please stand by while we compile the Q&A roster. Our first question comes from the line of Bruce Chan of Stifel. Your line is open.

Thank you, Operator, and good afternoon to you, Peter, Edmund, and Mary Ann. I'm going to max out my three-question allotment here, if I may. First one, you stated in the release that December was your highest volume production month so far, which I think is great news. Can you maybe help us to extrapolate that number to what 2022 production could look like and how that's influenced by the China COVID shutdowns, the Ukraine situation and the supply chain issues that you mentioned? And I guess specifically what I'm curious about is whether we're going to continue to see that 600 vehicle per month number and then how that changes once Jacksonville comes fully online.

Okay. Thank you, Bruce. Yeah. In the last year, 2021, the last month, we produced 628 vehicles. And, you know, due to the, you know, the supply chain issue and others. But, of course, we have also encountered the shipping issues. And this year, we'll continue to this way. And we will continue as we're adding our new product line, adding our capacity. So we are very confident we're going to maintain this pace. But we also, as the supply chain comes, especially very recently, and it happened, and the chip supply and the battery is our main issue, and also the shipping and the internal lockdown, because most of our current supply chain is made in China. So that's hurting us a little bit. And so we're going to maintain that. And also in order to counter this thing, so we have ordered three months battery for our short-term inventory and to cope those things. And also we're going to ask Jacksonville a facility operational, we're going to pack our battery in the United States. So that's the thing. So we still, you know, with extreme caution, how are we going to deal with that? We'll prepare ourselves. But at this moment, we cannot give the number and how we're going to do it because the whole situation is still developing. We really don't know.

Okay, that's really helpful. And actually, that was going to be my second question about the battery supply issues. So that's encouraging to hear. So maybe, you know, jumping to the third question then, and this one probably is for you, Edmund. I noticed that you had a press release towards the end of the year talking about a change in your auditor. Just want to see, you know, whether there are any concerns or implications to read from that auditor change.

Yes, Bruce. Markham was previously our SEC auditor for the central group prior to the stock purchase transaction with the Naked Bank Group in end of 2021. And due to the nature of the transaction, the historical financial statements of the central group became the financial statements of the company. So with the audit committee's approval, we appointed Marcom as our auditor for the SEC purposes. Separately, also the company is an Australian public limited company. It is required to file IFRS audited financial statement with the Australian Security and Investment Commission. For the purposes of the compliance with the Australian law, we appointed with Australia to conduct an audit under IFRS and filed the required report with Australian authorities. I wonder if I have answered your question.

No, you did. That's very helpful. I appreciate those answers, and I'll jump back into queue for any additional questions.

Thank you. Thank you. Our next question comes from Michael Schlinsky of DA Davidson and Company. Your line is open.

Hello. Good afternoon. Can you hear me okay?

Yes.

Great. Thank you for having me on the call. I've got a couple of quick ones here. Maybe they're not so so quick. Maybe can we first start off with talking about your current sales pipeline. Can you give us a sense as to the current selling environment? Are people unwilling to even speak with any EV companies given supply chain challenges? Are you seeing a lot of large orders versus one-off smaller business orders? Give us a sense as to who you're selling to, who you're talking with today, and how it's been going the last couple of months given all the global issues that you've been seeing.

Okay. Okay. Hi, Michael. Okay. So first of all, the overall market demand for electric commercial vehicle states remains very, very strong in Europe and also in the United States. And especially Europe and Japan, they have very strong demand. And the issue is not getting the order and is how we're going to supply our product and with aftermarket support. So that's very, very important. So this year we spent so much time to develop our local distributor network and after sales network and also the spare parts supply. So that's very good. So for the For the customer, we are right now, we are targeting the mid-tier and also the small business as our market target of the customer instead of big market free because those big free will take time and also requires nationwide aftermarket support. But we usually don't give the purchase indication and we only confirm the order knowing that we can deliver on time. And we don't take and confirm any orders if we don't know exactly when we can deliver. So currently we are not announcing any backlog of the orders. We do have a lot of the so-called backlog, the interest indication. And in this moment, our key is to make sure we can deliver on time. And to answer your question, the demand is not an issue. The order is not really the issue. The issue is how we can deliver the product with quality, with time, and with the aftermarket support.

Got it. And, Ashley, leading to my other question, can you give us some sense as to how the 2021 vehicles that were delivered, maybe how they performed relative to promised expectations as far as range, as far as performance? And this is going to be in the filing, but can you give us any sense as to what the warranty experience has been on those previously delivered vehicles so far here in 2022? Okay. Yeah. And...

So what we do, so we purposely build our vehicle, which is targeted for urban delivery and all urban services. Mostly they don't require long range, but we'll have provided them a sufficient range for them daily use. And we also, because the nature of commercial vehicle, you have to make sure It's operational 24 hours a day. You don't want to stop it because they would hurt your business. So we have to make sure that the aftermarket support capabilities there and also our warranty. And in Europe, this regulation requires minimum two years of warranty. But actually, we provide the warranty much longer than our competitors or our counterparts in Europe. For example, the battery, we provide a warranty for five years and also a five-year or 100,000 kilometers. Or we also provide our powertrain, our motor and controller with eight years warranty and with 200,000 kilometers. So which one comes first? And so we are very confident in our quality, and so we'll provide that our warranty is longer or better than other competitors.

Okay, that's great, Keller. I'll jump back in the queue. Thank you so much, Peter.

Thank you. Again, to ask a question, please press star 1 on your touchtone telephone. Again, that's star 1 on your touchtone telephone to ask a question. Our next question comes from Carl Birkenfeld of American Trust Investments. Your question, please.

Okay. Great presentation. Thank you very much. On the call there, Peter Wang and Edmund Cheng. The question I have is on the recent lockdown in Shanghai. How will they affect the overall gross margins in 2022? Yeah. Okay.

So it is very hard to see where this will ultimately go. But it is hard not to see their continuation of the lockdown, especially in China, could have a big impact on the sector. As it touches many aspects of the shipping, the supply chain shortage, and we do not know how significant it might be since the situation is still developing. There is a little we can do about it. Besides, we have placed the order on major parts and components for the next three months. In other words, for the next three months, we should be okay if the situation deteriorates because we are already warehousing the three-month key components. Also, we're going to continue to develop a supply chain source in our local markets. That means we're going to And in the near future, we're going to pack our battery in Jacksonville, in our own facility. Now, how is that going to impact on us? I think the impact is obvious, just like anybody else we cannot avoid. But in this moment, in this situation, and I think we should be able to implement our plan as a way But we do have to be very cautious how they're going to go. And if the situation continues or deteriorates, then we will see our gross margin going to be deteriorating a little bit. And also, we're going to see the revenue going to hurt because the shipping is very crucial for us. because we are global supply right now. We supply to Europe, we supply to the U.S., we supply to Asia. So the vehicle shipping will be the problem because how are we going to realize the sales, not only on production. Production-wise, I don't see there will be impact, but the sales realization, it may be if the shipping increases. situation, you know, continually to deteriorate. And so I think in this moment, and we cannot really, you know, project how the, you know, the guidance will be. And, you know, we'll see how to see the, you know, monitor the situation go.

Okay, well, thank you. That was a great answer as far as making the supply chain localized. And I guess you're preparing for three-month stock, correct?

Yes.

That's great. That's a good solution. Thank you, sir, for answering the question.

Thank you. Our next question comes from Bruce Chan of Stiefel. Your line is open.

All right. I appreciate the double dip here. And I'm not sure if I missed this earlier on the call, but I wanted to ask about capital allocation. So, you know, you just wrapped up a major, you know, acquisition or majority purchase of Tropos. You mentioned that you still have about $250 million in dry powder on the balance sheet. How are you thinking about priorities for capital here? You know, Jacksonville is asset light and I assume fully funded at this point. So, Are you going to be more focused on battery development or new model development, distribution? Is M&A still on the table for you?

Edelman, could you answer that?

Yes, Bruce. In the near future, what we're looking at is there are two priorities that we are focusing on. One priority we are focusing on is what Peter has mentioned, is to secure enough supplies. So investing in needed inventory, especially key parts and components, is key for us. So our first priority is to allocate enough money for securing our working capital. That's a very important piece of it for the inventory. Another piece of it is, although just a view is funded from that sense, but we still need to look into continuation of CAPEX and also R&D development from that sense in terms of a new product development. So those are the two key focus that we have.

to secure uh continue on our technology leadership as well as our new product developments for future revenue stream okay terrific and then just a final question here uh you mentioned the geographic split as you know roughly uh 51 europe 40 u.s do you expect that to remain the case going forward

Peter, you want me to answer that?

Yeah. I certainly can, Edmund.

Okay. Go ahead, Marianne.

We do believe that Europe will continue to be the biggest market for our products in 2022. While we're not in a position to offer guidance for the future period due to the evolving situation, we are excited by the response that our products have received in the U.S. and other new developing markets. So we do anticipate that Europe will remain at least at 50% as we move forward at this time. Again, it's very difficult to provide specific guidance for this period due to the uncertainties and the evolving situations with the supply chain and COVID and geopolitical issues.

Okay. Understood. Well received. Well, thank you all so much for your time. I appreciate it.

Thank you. If you have any other questions, please contact us via email. This concludes the call. You may now disconnect.