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spk03: Thank you for standing by. This is the conference operator. Welcome to MicroVast first quarter 2023 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, then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Monica Gould, Investor Relations for MicroVast. Please go ahead.
spk00: Thank you, Operator, and thank you for joining us today. Joining me on today's call are Mr. Yang Wu, founder, chairman, president, and CEO, Sasha Keltoborn, chief revenue officer, and Craig Webster, chief financial officer. Ahead of this call, MicroVast issued its first quarter 2023 earnings press release, which can be found on the investor relations section of the company's website at ir.microvast.com. In addition, we have posted a slide presentation to accompany management's prepared remarks. 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 of views as of any subsequent date, and we undertake no obligation to revise or publicly release the results of any revision to these solar-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 on March 16, 2023, and the 10Q 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. And with that, I'd like to turn the call over to Yang Wu for opening remarks.
spk10: Thank you, Monica, and thank you all for joining us today. I'd like to start off with a high-level overview of the quarter. before providing some operational highlights. I will then turn the call over to Sasha Catabon, our Chief Revenue Officer, who will discuss some of our key wins in the quarter, followed by Craig Webster, our Chief Financial Officer, who will discuss our financials in more detail. I will then address our outlook for Q2 and the full year 2023 before opening the call up to your questions. Everyone, please turn to slide four as I cover a few highlights from the first quarter. We posted 28.1% revenue growth in Q1 2023, delivering revenue of 47 million. This exceeded our expectations as our European commercial vehicle customers began initial production and the supply chain issues began to abate. We achieved a double-digit close margin with a more than 8 percentage point year-over-year increase. We ended the first quarter with a record backlog of 486.7 million, driving by a healthy order intake of 62.7 million, led by significant ramp in sales to European customers. Our most significant achievement in Q1 was the completion of our phase 3.1 expansion in Huzhou, China, which started the trial production of the 53.5 amp hour cell. We continue to increase our production rate in line with delivery schedules provided by our customers, especially in the US and Europe. We estimate that this initial 2 GWh of cell module and pack capacity gives us an incremental 500 million in revenue potential, as you can see from our backlog numbers. There is already significant customer demand for our new product, and over 50% of the full-year capacity at Huzhou is already contracted. We expect customer orders and deliveries to get increasingly strong as the year progresses. And for that to be broad-based across the U.S., Europe, China, and Asia Pacific regions. With the Huzhou expansion now completed, our remaining capacity expansion plans for the year are centered on our new U.S. facility in Crossville, Tennessee. This will initially have an annual capacity of a two gigawatt hour. It is in full construction mode with startup production targeted for Q4 of this year. We would also like to provide a quick update on the Mexico ESS Container Assembly Hub. We mentioned our Q4 22 earnings call. We have listed a new facility in Mexicali, which is very close to the U.S. border, and we are currently working on installing a container assembly line. We expect to ship finished 4.3 megawatt-hour containers directly from our Mexicali facility starting in Q3 to customer project sites in the U.S., with many of those being located in the southwest sunbelt. I would now like to turn the call over to our Chief Revenue Officer, Sacha Calabon, who will discuss some of our key wins and achievements in the quarter.
spk07: Thank you, Mr. Wu, and thank you for all joining us today. First, I would like to provide a little bit more color on our backlog. Our record 486.7 million backlog includes orders from more than 80 customers representing a wide array of commercial vehicle platforms. many of which are or will be multi-year projects. Approximately 22% of our backlog is for European customers and 69% for US, including ESS projects. This gives us the confidence that we will see significant growth in both regions over the coming quarters. Now please turn to slide seven as I cover a few highlights from the first quarter. Following our initial contract announcement in January of last year, we were very pleased to sign significant new orders with Iveco, one of our largest customers, for our new 53.5-ampere-hour battery pack, which will power their new cross-way low-entry city and intercity bus platforms. Our high-energy density battery packs on the bus ranges from 400 to 466 kilowatt-hours, depending on operator's mission requirements, and they set new standards in terms of energy density and charging capacity. Furthermore, it will provide the Crossway with up to 10 years of battery life. We received an order for over 350 units of our 17.5-ampere-hour battery pack from XCMG, a leading global OEM of construction equipment for the hybrid truck. We also received major orders from Gosson for their U.S. business where we supply our new 53.5-hour battery pack to their full electric logistic vehicles. On the back of our announcement earlier this year with REE, we began SOP delivery of our 53.5-hour pack, which will power the company's full electric P7 skateboard platform. The P7 is the industry's flattest EV platform, and it's suitable for applications such as commercial trucks, school buses, walk-in vans, and delivery box trucks. And lastly, we start SOP deliveries of our 21-ampere-hour battery pack to CAMC, the Chinese leading heavy-duty truck OEM, for their 49-ton tractor. Our initial order calls for the delivery of more than 50 system units. We continue to expect order volumes to increase over the course of 23 as we ramp up production of our 53.5-ampere-hour cells on our new fully automated line in Huzhou to meet customer commitments. Please turn to slide eight, which highlights the significant growth in our European commercial vehicle business. Our European revenue almost tripled year over year in the first quarter and accounted to 22% of our total revenue, up from 7% of revenue a year ago. This growth was driven by the initial ramp of several customer projects, some of which I mentioned earlier, and added by an improving supply chain. Going forward, we expect government-led initiatives such as European Green Deal, EU's plan to ban combustion engine vehicle sales by 2035, along with US-IRA initiatives, continuing to be a significant driver of electrification initiatives. For example, on the commercial vehicle side, a total of 27 governments have already pledged to achieve 100% zero-emission bus and truck sales by 2040. With that, I will turn now the call over to Craig to review our financial performance.
spk02: Thank you, Sascha. I'll spend the next few minutes discussing our Q1 2023 financial results. Please turn to slide 10, and I will summarize the main line items from our Q1 P&L. First off, we recorded our highest ever Q1 revenue of $47 million. an increase of 28.1% from 36.7 million in Q1 2022. The year-over-year growth was primarily driven by increasing deliveries to our European customer base that Sasha just covered. Our gross margin rose to 10.3% in Q1 2023 compared to 0% in Q1 2022. After adjusting for non-cash settled shared base compensation expense in cost of sales, Adjusted gross margin increased to 13.5% in Q1 2023 compared to 5.2% in Q1 2022, an 8.3 percentage point improvement. The increase in gross margin was largely due to production efficiencies, a more favorable product mix, and one-off service fees for R&D. Operating expenses were $36.2 million in Q1 2023, compared to $43.4 million in Q1 2022. Similar to previous quarters, the largest contributor to the decrease in operating expenses was a decline in our share-based compensation expense, which totaled $16.4 million in the quarter compared to $26.2 million in Q1 2022. After adjusting for non-cash SBC expense in SG&A, our adjusted operating expense in Q1 2023 was 19.8 million compared to 31.1 million in Q1 2022. GAAP net loss was 29.6 million in Q1 2023 compared to net loss of 43.8 million in Q1 2022. After adjusting for non-cash SBC expense and changes in fair value of our warrant liability, adjusted net loss was 11.7 million in Q1 2023 compared to an adjusted net loss of $29.1 million in Q1 2022. You can see the impact of these adjustments in slide 11, and 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 12 shows the geographic breakdown of our revenue for Q1 2023 compared to the prior year period. As you can see, our European business showed a strong 270% year-over-year increase and accounted for 22% of our revenue, up from just 7% a year ago as our key customers began serial production of their vehicles. As we outlined last quarter, a large percentage of our commercial vehicle backlog is from European customers who are launching the electrified models for the first time. We continue to expect volume growth in our European segment, especially for the 53.5 amp hour cell as customers expand production. Our US revenue increased 52% year over year. We continue to expect US revenue to rise this year as we begin deliveries on our 1.2 gigawatt hour ESS project in the second half of the year. In 2024 and beyond, we expect US revenue growth to remain strong as we begin to meet opportunities in the U.S. market from our Clarksville facility. Once online, we expect Clarksville to have high capacity utilization based on current and anticipated orders. We should be in a position sooner rather than later this year where we will need to start planning for additional capacity. As you know, our investment decisions to further expand capacity are always predicated on confirmed customer orders. Then to slide 13, we entered the quarter with cash, cash equivalent, restricted cash, and short-term investments of $285.8 million. Net cash used in operating activities during the quarter was $11.2 million, which was primarily due to our operating loss. Negative free cash flow of $47.1 million was mostly as a result of our CapEx spend on HUSO 3.1 and Clarksville 1A in Q1 2023. which totaled $31.4 million. We also had capital expenditures totaling $4.5 million from improvements to our existing facilities and ongoing R&D projects. With HUSHO 3.1 now completed, we will be drawing down on the remaining balance of around $67 million from our project finance facility to meet final milestone payments to our contractors and equipment suppliers. We believe that all remaining payments will be satisfied from that facility. We close the quarter with a record backlog of $486.7 million, up from $410.5 million in the fourth quarter. The 19% sequential growth in our backlog was driven by commercial vehicle projects in Europe. This once again underpins our strong conviction in our four-year guidance and our belief that 2023 is just the start of a number of high growth years for microVASC. This sales growth is already allowing us to access more financing options. In Q1, we added a $17 million credit line, $9.5 million of which remains undrawn. As sales continue to increase quarter over quarter, we expect to add additional working capital credit lines, and our current estimate is that we would add a further $20 to $30 million by the end of Q2. Looking ahead, we estimate that four-year capital expenditures will remain in the range of $180 to $210 million and will primarily be used for ongoing construction in Clarksville. As we have mentioned before, we believe Clarksville can easily support some modest debt financing. The growth in backlog, the additional margin and cash flow uplift from IRA, and our proven experience in bringing on line capacity will clearly resonate with lenders. With that, I will turn it back over to Mr. Wu to review our outlook.
spk10: Thanks, Craig. Please turn to slide 15. As a result of our outperformance in the first quarter, we are raising our annual revenue guidance for the full year from a range of $336 million to $358 million. representing year-over-year revenue growth 65% to 75% to a range of 348 million to 368 million, reflecting growth of 70% to 80%. For the second quarter, we expect the revenue to be in the range of 63 million to 67 million. up slightly from Q2 a year ago at the midpoint, driving by the continued ramp of our European commercial vehicle projects, as well as orders from customers in Asia Pacific. With a strong and a growing backlog, we continue to have good visibility into 2023, driving by European commercial vehicle projects, entering the production phase and the ramp up for our energy storage business. We are seeing strong demand for our products globally and expect that our momentum will continue as customer volumes ramp throughout the year and beyond. On last quarter's call, I noted that execution will remain critical to our ability to achieve our targets. We are very pleased with the progress we made in the first quarter, accelerating both revenue and backlog growth, completing our capacity expansion project in Huzhou, and driving substantial growth margin improvement. We continue to expect that the Inflation Reduction Act of 2022 to be important legislation advancing clean energy initiatives and helping our reduce carbon emissions in the U.S., while creating even more exciting direct and indirect business opportunities for Microwas going forward. Our global Microwas team are focused Oriented culture and our ability to execute has been and will be a competitive advantage of Microbus. And I would like to personally thank the Microbus team for their tireless work and commitment to our mission before turning the call back over to the operator to start the Q&A session.
spk03: If you would like to ask a question, please press star and 1 on your touchstone keypad now. You'll be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, to ask a question, please press star and one on your keypad now. And our first question comes from Colin Rush from Oppenheimer. Your line is open.
spk04: Thanks so much, guys. You know, and congrats on the gross margin improvement here. I want to dig into that just another layer deeper. Can you talk a little bit about the yield trends you're seeing on the capacity as you ramp up the 53.5 amp hour cells and your ability to drive some incremental margin as you get up to some of the higher revenue levels?
spk05: Craig, you want to answer this question or you want me to answer this question?
spk02: I'll take it. Colin, good to hear the voice. Yeah, what we're expecting to see later in the year as we move from, you know, Q1 was not fully automated production lines. We were not getting big volume discounts on 53.5. As we move forward later into the year, we're going to be producing off, as I say, fully automated lines, volume discounts, high utilization. And we expect that to feed through to gross margin improvement, particularly Q3, Q4, because that's when the production schedules we've got from customers really kick in this year.
spk04: Excellent. And then with the U.S. facility, can you talk a little bit about equipment procurement and any sort of headwinds or progress that you're making in terms of buying that equipment and getting it into the country?
spk10: Thanks, Colin. I can answer this question. A U.S. facility actually is 100% a mirror with China equipment. Same supplier, same system, just a different certification. The U.S. requires a UL certification. That's why we're slightly behind China equipment installation. With the maturity of China-side operation experience and installation experience, we overcome all the problems in China. We think the U.S. is going to be much smoother. Also, we send the U.S. crew to China for the operation and installation training as well. That's why I expect the U.S. is going to be much, much smoother. We're still on the track and the plan to build this factory before end of this year. That's our plan. We still remain.
spk04: Excellent. And then just a final one on the sales process. It's great to have the backlog number out here and appreciate that. But I'm curious about your ability to move customers through the sales pipeline and close incremental POs for the balance of this year. I assume some of that backlog is for 2024. But I just want to get a sense of how much book and ship business you've got and how those customers are moving through the pipeline.
spk05: Thank you.
spk09: Can I take the question?
spk08: Okay, okay, both. Colin, great to hear you. Generally speaking, the backlog we have is probably for 23, 24, and mainly we have ongoing tests, ongoing customers testing our new battery solutions. And there will be backlog increases within this year for sure. So we started with a lot of testings already in 2022, as you probably remember. And we have to go to certain tests sometimes by bigger customers through summer and winter tests. And this will show effects in Q3 and Q4 for sure.
spk05: Thanks. On the backlog side.
spk03: Thank you. And our next question comes from Amit Dayal with HC Wainwright. Your line is open.
spk06: Thank you. Good to see the execution come through. Just on the CapEx guy, is 35 million primarily targeted towards the Clarksville facility?
spk05: Amit, that's right.
spk02: I mean, all the spend going forward now is Clarksville. So as you saw in the slides, Hoosier was done. We've got remaining milestone payments to contractors, but they all get funded from the undrawn facility. And then what's really good about Clarksville is the level of engagement that we're getting from customers, which you're seeing feed through into that backlog increase. And then you know, in terms of lenders, there's a lot of lender interest because, you know, what we're proving out is that we can grow the backlog. The backlog in the U.S. gets the IRA credits, and the benefit of them actually seeing that we're experienced at this, so we closed the huge capacity expansion, and, you know, per Colin's question on equipment, it's the exact same equipment coming into into the U.S., which we've just shown that we can bring into ramp phase. So it's very de-risked, and it puts us in a really strong position in the close of the year, healthy cash balance. We're only raising capital on the debt side of the balance sheet. We don't want to be in the equity market, and we're able to do that because we're clearly growing revenues and growing backlog this year. Thank you for that.
spk06: The capacity in China... You're breaking up.
spk05: Can you repeat the question? No, the nine is not good.
spk03: I can't... This is the conference operator, Mr. Dayal. I assume you're on a cell phone. Maybe you can get to a window or kind of a clear line of sight and try again.
spk05: It's an operator. Is there anyone else ready for a question?
spk03: I think we've missed Mr. Dayal.
spk01: Hi, this is Kathy from the investor relations team. We've gotten some questions that I can pose and that meanwhile we'll wait for him to come back. The first is beyond ESS, what commercial vehicle projects do you have in the US and when should we expect them to begin to ramp?
spk09: Cassidy, that's a great question which came from the audience.
spk08: So, generally speaking, we have a couple upcoming commercial vehicle and special vehicle projects which are upcoming, as I mentioned already to Colin, mainly in Q3 and Q4. We are still under NVA, but we think that we will be able to disclose quite soon also the project names with our customer together.
spk01: Perfect. And one more that we have received is, can you talk us through what the competitive market is for your 53.5 amp power cell and where are the competitors versus you in the process of ramp up?
spk10: I can answer this question. You know, the 53.5 amp power cell is dedicated to the commercial vehicle. You know, when we designed this and we developed for over three years, you know, they take a very long time to test and, uh, 35 this battery this battery gets to the you know much longer the lifespan and they like a cycle life you know this battery is two to three times longer than the competitors battery and they still remain the very high energy density you know the to power the commercial vehicle commercial vehicle needs much longer life battery you know everybody know it compared with passenger car you know like a three times longer distance to drive. That's why, you know, this battery dedicated, we use this battery to ESS projects, you know, same battery, same module, and it's going to give ESS, you know, the system much longer, you know, life, and which give, you know, the much better, you know, the total investment return.
spk05: Added Compared with competitors, you know, we haven't seen, you know, which competitor, you know, they reach to our performance. We haven't seen it. Perfect. Thank you. And I'll turn it back to the operator.
spk03: As a reminder, if you do have a question, please press star 1 on your touchtone keypad now. And seeing no further questions, I'll turn it back to Mr. Wu for closing comments.
spk10: Okay. Thank you all for joining today's meeting.
spk05: I wish everybody have a good day and a good night, good dream. Thank you. That concludes the conference call. Thank you for joining and have a pleasant evening.
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