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spk04: Thank you for standing by. This is the conference operator. Welcome to the micro vast second quarter 2022 earnings call. As a reminder, all participants are in a listen only mode and the conference is being recorded. After the presentation, investment community professionals have the opportunity to participate in a question and answer session. To join the question queue, you may press star and then one on your telephone keypad. Should you need assistance during the conference call, you may signal for an operator by pressing star and then zero. I would now like to turn the conference over to Sarah Alexander, a MicroVAS General Counsel. Thank you. Please go ahead.
spk00: Thank you, John, and thanks to the audience for joining us today. Sasha Kelterborn, our President and Chief Revenue Officer, and Craig Webster, Chief Financial Officer, will host today's call. Ahead of this call, MicroVast issued its second quarter 2022 earnings press release, which can be found on the investor relations section of our website at ir.microvast.com. In addition, we have posted a slideshow to our website to accompany tonight's call. As a reminder, please note that we will be making forward-looking statements on this call. 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 about views as of any subsequent date, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For further discussion of the material risks and other important factors that could affect our financial results, please refer to our filings with the SEC, including our annual report on Form 10-K filed in March and the 10-Q filed earlier today. 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 micro-VAS 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 press release. 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 Sasha for some opening remarks.
spk02: Thank you, Sarah. Everyone, please turn to slide four of our presentation as I cover a few highlights from the second quarter. We posted 93% revenue growth during the quarter, delivered 64.4 million US dollars in Q2 2022. This revenue performance exceeded expectations, especially considering that our shipments, they're very slow in April and the first half of May, as a result, of the COVID lockdowns in Shanghai and the surrounding region. I want to thank our global team and especially our local team in China this quarter. Faced with many external challenges and situations that were out of their control, they rose to the occasion maintaining production throughout the lockdown and put us in a position to deliver strong quarterly results after the pace of shipments began to pick back up in the second half of May when the lockdown restrictions were eased. We had an outstanding month in June and we were able to make up the shortfall from the first half of the quarter. On a regional note, I would highlight that our market share in India continues to increase and it was again a key region for our revenue growth this quarter. We ended the second quarter with a strong backlog of 105.3 million U.S. dollars, driven by a healthy order intake of 47.8 million U.S. dollars. Our forecasted contracted revenue remained at a solid 2.5 billion U.S. dollars. Except backlog, our forecasted contract revenue is compromised entirely of customers located outside of China. When we refer to forecasted contract revenue, we are describing backlog plus management estimate for revenue we expect to realize from existing contractual relationships with customers. Most of these contracts include estimate volumes requirements. However, they do not typically include a volume commitment. We expect to realize current forecasted contract revenue figures between 2022 and 2031. The most prominent challenge in the second quarter continued to be raw material prices, which remain at elevated levels as a result of supply chain disruptions as well as worldwide inflation. Our unit costs across the board are tracking significantly higher than we anticipated at the beginning of the year. We are actively monitoring these trends and implementing mitigation strategies where possible, including optimizing longer-term supply contracts, identifying new and or additional sources of supply, and increasing our selling prices where possible. However, we expect raw material prices, especially for certain key materials like lithium and cobalt, to remain elevated through 2022 and possibly into 2023. Looking forward into 2023, we expect our order volume to increase. After we bring the new manufacturing capacities online in Huzhou, we expect this additional volume to increase our production visibility, enabling us to lock in higher volume commitments. please turn to slide number five, which highlights some of our key partnerships in the commercial vehicle market. SAFRA is a French bus OEM which has a dedicated unit specializing in the renovation of passenger transport equipment and active in propelling clean and sustainable mobility. One of SAFRA's core strategy centers on the construction and marketing of hydrogen buses under the Bus Innova and High City brands is the retrofitting of buses with hydrogen, the renovation and maintaining of passenger transport vehicles as well as customer service. Microvest is nominated as exclusive battery supplier and has signed a framework agreement up to 10 years with Zafra with a revenue forecast of over 150 million US dollars. Clean Logistics is a transport leader in the mobility revolution within commercial vehicle transport. Microbus has already delivered prototype systems for hydrogen buses and trucks for clean logistics. The expected volume forecast from 2023 to 2027 is approximately 1,300 to 5,000 vehicles. Weishai Power Group is an international company with business segments such as power system, commercial vehicles, aquaculture equipment, construction machinery, smart logistics, and marine transportation equipment. Its products are exported to more than 110 countries and regions. MicroVast is in the process of delivering battery systems to Weishai Power for its heavy truck tractor project with 4 million order volume only in Q2. XCMG is one of the most influential large-scale enterprises in China construction machinery industry. Its product portfolio includes various heavy-duty construction equipment, truck cranes, asphalt concrete paper, graders, Cold-miling machines, fire trucks, and microbus expect to deliver 50 sets to their 49-ton hydrogen heavy-duty trucks with a total revenue of 1.4 million U.S. dollars in 2022. Please turn to slide 6, which highlights some key wins during the second quarter, including an order from JBM Group for over 11 million U.S. dollars and another order from Switch in excess of 8 million U.S. dollars. We also continue to benefit from ongoing customer relationships, as example, Oshkosh, RideBus, ZF, King Long, and others. In total, the order intake for Q2 was $47.8 million. I will now turn the call over to Craig to review our financial performance of Q2.
spk01: Thank you, Sascha. I'll spend the next few minutes discussing our Q2 2022 financial results. Please turn to slide eight and I will summarize the main line items from our Q2 P&L. First off, revenue. I am pleased to report strong revenue growth in the second quarter, which grew 93% to $64.4 million from $33.4 million in Q2 2021. I will take you through the geographic breakdown in a later slide, but I would like to highlight that this marks the sixth quarter in a row that we have shown substantial revenue growth over the same quarter in the prior year. In fact, on a percentage basis, revenue has grown double or triple digits for each quarter since Q1 2021. On the year-to-date basis, revenue was $101.1 million, up 109.2% from $48.3 million in the prior six-month period. We posted gross profit of $4.8 million in Q2 2022 compared to gross loss of $6.8 million in the prior period, an improvement of 171.5%. After adjusting for non-cash settled share-based compensation expense in our cost of sales, adjusted gross profit was $6.7 million in Q2 2022 compared to adjusted gross loss of 6.8 million in Q2 2021. This translates into an adjusted gross margin of 10.4% in Q2 2022, compared to negative 20.3% in Q2 2021, a 30.7 percentage point improvement. I was pleased to see gross margin improve at a faster rate than revenue during the quarter, despite higher raw material prices. This result underpins our efforts to improve our gross margin performance long term, and it will continue to be an area of focus for us going forward, especially as we plan for significantly higher customer deliveries in 2023. Operating expenses were $50.4 million in Q2 2022 compared to $15.8 million in Q2 2021. The largest contributor to the increased operating expenses was share-based compensation expense, which totaled $28.5 million in the quarter. Operating expenses also increased as the company continues to add headcount to support planned growth initiatives and also incurred additional expenses related to operating as a public company compared to the prior year period. As I mentioned previously, non-cash share-based compensation expenses were a significant contributor to both the increase in GAAP operating expenses and operating losses. The large majority of share-based compensation expense relates to equity awards made in the years preceding our business combination last summer. Accounting rules require that those awards be expensed to our P&L over a three-year period following the merger. We believe a more accurate representation of our financial performance especially as relating to cash operating expenses and operating loss, is as illustrated in slide 9. After adjusting for non-cash stock-based compensation in SG&A, our adjusted operating expense in Q2 2022 was $21.7 million, compared to $15.8 million in Q2 2021. GAAP net loss was $44.2 million in Q2 2022, compared to net loss of $27.1 million in Q2 2021. After adjusting for non-cash share-based compensation expense and changes in fair value of warrant liability and convertible notes, adjusted net loss was $14.9 million in Q2 2022, compared to $23.8 million in Q2 2021. Reconciliations of these non-GAAP metrics to the most comparable GAAP metrics are included in the tables at the end of our earnings press release. Slide 10 shows the geographic breakdown of our revenue for the three- and six-month periods ended June 30, 2022, compared to the prior year period. I am pleased to report that all four of our key geographies posted growth in Q2 2022. compared to Q2 2021. As you can see, the largest growth in revenues came from the Asia Pacific region ex-China, equivalent to 231% growth compared to Q2 2021 and 310% growth for the first six months. India continues to be the biggest driver of growth for us in the Asia Pacific region. In addition, our China business continues to perform well posting 57% growth during the quarter. Europe also posted a healthy 15% growth rate. Even though Europe's growth is currently lagging the other geographies, given the impact from the war in Ukraine, we have some exciting projects coming up in the region, and we expect the growth rate to increase beginning in the second half of 2022, and with a very significant pickup starting in 2023. I will now take you through our funding position and the cash movement in Q2 2022, which is on slide 11. We started the quarter with $471 million in cash, cash equivalents, and restricted cash. Net cash used in operating activities during the quarter was $39 million, which is primarily due to increased accounts receivables, notes receivables, and inventory due to our higher sales. In particular, April and May were slow months for shipments due to Shanghai port operations being restricted with COVID lockdown measures. This meant the majority of our shipments occurred in June, which pushed many payment and collection dates into future quarters. Our capex spent on Huzhou 3.1 and Clarksville 1A in Q2 2022 totaled $23 million, and we also had capital expenditures totaling $4 million that mainly relate to improvements to our existing facilities and R&D projects. Our current estimates are that capital expenditure for the second half will be in the range of $180 to $220 million and will primarily be used for our capacity expansion projects. As our payments are determined by construction and equipment delivery milestones, it may be the case that some of these payments are brought forward or pushed out into 2023. We closed the quarter in a very strong cash position of approximately $396.9 million in cash, cash equivalent and restricted cash. We expect to add modest levels of debt given the low leverage on our balance sheet and as our fixed asset base grows. For example, with 99% of the HUGO building complete and this facility already backed by very strong cash flows from our customers, we have been in discussions with a syndicate of local banks to arrange a project finance facility. We expect this to be available for drawdown from late August. With the benefit of this debt financing, we expect to close the year with at least $250 million in cash. As the Clarksville construction progresses and receives equipment, it too will also support debt financing along the lines we're putting in place for the HUGO expansion. Accordingly, All our capacity expansion projects are fully funded and the business is in a very solid balance sheet position to execute on its aggressive sales plan for 2023. Lastly, please see slide 12 for an overview of our HUGO 3.1 expansion project. The new capacity this brings online for our new high-power and high-energy cells supports our 2023 growth targets, with over half of the available capacity already allocated to customers across Europe, Asia Pacific, and China, who have entered into multi-year framework agreements with us. Hoosier remains on schedule, with the exterior of the building at 99% completion. We posted drone footage to our social media accounts earlier this week with aerial views of the facilities. We expect equipment to start being delivered this month, with production ramp-up beginning in Q4 2022. We currently expect Clarksville to begin serial production in late Q3 2023 and be well positioned to take advantage of the recently announced initiatives under the Inflation Reduction Act. With that, I'll turn it back to Sascha to review the outlook.
spk02: Thanks, Craig. Please turn to slide 13. We are reaffirming our guidance of 35% to 45% revenue growth compared to 2021. we continue to be optimistic about opportunities to grow forecasted contracted revenue this year from its current level of $2.5 billion, and are looking forward to the full deployment of our newly launched products to further drive global sales growth, including nearby markets. Accordingly, we have a good visibility on 2023 as a result of two large SOP projects for deliveries to our customers in Europe, which we currently estimate at $80 million in revenue with potential upside. We are therefore planning for a sustainable increase in customer volumes next year and which truly sets the platform for future years of growth. Executing is critical, and to achieve our targets, we will continue to focus our efforts on revenue growth through new multi-year supply contracts with existing as well as new customers. to fill the new capacity coming online in 2023, completing the capacity expansion projects to serve increasing customer demands and driving margin improvements as we scale the business model. We recently established a new subsidiary in Denver, Colorado, called Microbust Energy Inc., and have begun building a dedicated team to focus on energy storage solutions. which we see as a huge growth opportunity, especially in the U.S. market. We believe energy storage is an attractive end market for our new 53.5 ampere hour cell. Energy storage was valued at over $10 billion in 2020 and is projected to globally reach over $37 billion in 2027. Further, we expect the U.S. Inflation Reduction Act of 2022 to be important legislation advancing clean energy initiatives and helping to reduce carbon emissions in the U.S., helping to create even more exciting direct and indirect business opportunities for microvast going forward. In addition, I'm pleased to report that we have signed an LOI with a NASDAQ-listed innovative e-mobility commercially heating platform provider and are finalizing right now a strategic cooperation agreement with them. You will hear more about it. Finally, as many of you are aware, our annual stock meeting will help tomorrow at 9 a.m. Central Time. If you have not done so already, please vote your shares. The polls are open until midnight Eastern Time tonight. And if you would like to meet some of us in person, please come to our booth at the IAA conference in Hannover, Germany, in calendar week 38. Full details on the IAA website. I will now turn the call back to Sarah.
spk00: Thank you, Sascha. The operator will now tune in to moderate the question and answer session.
spk04: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing any star keys. One moment, please, while we poll for any questions. Our first question comes from the line of Colin Rush with Oppenheimer. Please proceed with your question.
spk03: Thanks so much, guys. Can you talk a little bit about how involved your customers are in helping source some of the raw materials? Obviously, there's a very dynamic environment, very competitive. I'm curious about how active they are in leveraging some of their purchasing power to help you guys with the supply chain.
spk02: Colin, thanks a lot for that question. It's a very valid question. Yes, we are involved with our customers together in our strategic partnerships. As you know, we have a strategic partnership with FPT and the vehicle group. We are involved in finding solutions, joint solutions, in acquiring raw materials, other materials on the market jointly together in order to have a better bargaining power. This is what we do as an example. We do that also with other strategic customers in order really to narrow down the risk of having further increasing raw material prices.
spk03: Excellent. And if you look across the potential customer landscape, and you guys did a nice job of booking some new business this quarter, how many new folks are working through qualification right now that you might be able to convert over the next, call it, three to six months?
spk02: We have various customers or potential customers we are working on right now. A quick turnover in three to six months is always difficult to say because we are an automotive industry. This means we have normally... a summer and a winter test, an A sample, a B sample, and a C sample in case it is a dedicated solution for customers. Otherwise, if it's an already existing solution, this goes quicker. So this means we have already, I would say, at least 10 customers in alignment where we will see revenue upcoming within the next three to six months.
spk03: Great. And then, you know, one of the things that we're seeing, you know, pretty substantially is as we move away from fossil fuels into electrification of a variety of applications, there's, you know, an enormous amount of demand coming around energy storage and certainly a variety of supply constraints. Can you talk a little bit about the variety of applications you guys are considering right now from end markets and the impacts that you're getting from potentially new customers?
spk02: We will stay with our strategy. So one of our most important markets is the commercial vehicle applications. This means everything from 3.5 tons all the way to 100 tons. And then on the energy storage side, we will further go, do further deep dives into that topic. We have the technology on hand, so we do not need to develop anything new. We are in deep discussions right now with a couple of customers in regards to energy storage solutions, and we will continue further later do have a further rollout in that market as well. So we are happy that it's now supported by the government, and we will further deep dive into these different markets, not only in the U.S., but also in Europe and other regions in Asia, because everywhere we see big potentials on the energy storage as well as in the commercial vehicles field. Perfect. Thanks so much, guys. Great. Thanks, Colin.
spk04: Thank you, and our next question comes from the line of Mike Schliske from DA Davidson. Please proceed with your question.
spk05: Hello, and thank you for taking my question. I wanted to ask about the mechanisms regarding your raw material costs. When you work with companies like Away or some of those larger companies that you've been talking about, they often have contractual issues. contractual clauses which will allow you to raise your prices if raw materials hit certain levels. Oftentimes there's a 30 to 90 day lag, but there is a way to pass it along and it's pretty much in writing. Is that what you're experiencing in your current contracts? Can you tell us a little bit about how you'll be able to pass along pricing if that's not in your contract?
spk01: Hi, Mike. It has to be contractual. So if we're in an existing program with a customer, we can only pass that on if it's per the contract. Now, in a number of our multi-year contracts, that provision is in there. What we're faced with next year is that we're starting new production for new cells. So at this point, we don't know if we are in a price increase position. What we need to do is deliver per those contracts for at least a quarter, and then we see where the unit costs come out versus what's in our pricing terms. And if there's an escalation event, then we'll talk through that with a customer, but we have to remember these are long-term partnerships, and it's got to work for everybody that we're making money and also they're making money. Got it.
spk05: Yeah, that makes sense. And I wanted to touch also on the mix you have between hydrogen and battery power, I guess just in general, but hydrogen trucks and battery power trucks. Do any of those vehicles in the hydrogen space have a different mix as far as how much you can make per vehicle? They're often usually using a smaller battery because of the hydrogen system. Will there be any kind of mixed issue as you start to ship one contract versus another? Or do you feel like you'll have pretty consistent gross margins quarter over quarter? And it doesn't matter whether a hydrogen or a BEV is what you're shipping to.
spk02: Mike, to give you an answer, I think hydrogen is a technology which is upcoming right now. It started in Europe. It is quickly picking up. It's also now picking up in the U.S. market, but it's in the startup phase. So you have various mixtures. You have hybrid trucks. You have full electric trucks. You have hydrogen trucks. So at the end of the day, we have a good mixture in between when we deliver. And hydrogen is mainly used for long distance. And, yes, you have a smaller battery in there, but you need a special battery in there, which is – fast charging capable with high C rates. Then you can use a smaller battery compared to other suppliers. We tested our battery solution on a hydrogen truck just recently. It went through the desert. We made that announcement and everything was fine. We performed perfectly. This gives us also a solid base for our battery technology for hydrogen trucks. And I think all three technologies, if it's a hybrid, if it's a hydrogen or a battery full bath, you will see them in the market long run. So hydrogen for sure until 2035 as an example because you can reach longer distances as long as you have not enough fast charging stations available for commercial vehicle applications as an example.
spk05: Okay. I'll leave it there, guys. Thank you so much for the time.
spk04: Thanks, Mike. Thanks, Mike. Thank you. At this time, we have reached the end of the question and answer session, and I would now like to turn the call back over to Sasha for any closing remarks.
spk02: Thanks a lot. Thanks for your time, everybody. I wish everybody a peaceful, relaxing evening, and thanks a lot again for participating in our Q2 call. Thanks.
spk04: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.
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