This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: Thank you for standing by. This is the conference operator. We welcome you to MicroVAS second 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, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Rodney Worthen, MicroVest Director of Investor Relations. Please go ahead.
spk04: Thank you, operator, and thank you, everyone, for joining us today. Joining me on today's call are Mr. Yang Wu, Founder, Chairman, President, and CEO, Mr. Sasha Keltiborn, Chief Revenue Officer, and Mr. Craig Webster, Chief Financial Officer. Ahead of this call, Microbus issued its second quarter 2023 earnings press release, which can be found on the investor relations section of the company's website at ir.microbus.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 for subsequent dates, and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in the light of new information for future events. These statements are subject to a variety of risks and uncertainty that could cause the 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 of FEC, including our annual reports on Form 10-K, filed on March 16, 2023, 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-fast 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 measurements have been reconciled to their most comparable GAAP metric and 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 will turn the call over to Mr. Wu for opening remarks.
spk01: Thank you, Rodney. and thank you all for joining us today. I would 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 Sacha Cadabon, 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 the financials in more detail. I will then address our outlook for Q3 and the fall year 2023 before opening the call up to questions. Please turn to slide four as I cover a few highlights from the second quarter. We posted 16% revenue growth in Q2 2023, delivering a revenue of $75 million. This increase came from growth in our European business, along with a strong demand from customers in China. We once again achieved a double-digit growth margin with an adjusted growth margin of 17.3%, a seven percentage point increase year over year. We ended the second quarter with a record backlog of 675.9 million. driving by a strong order intake of $271.3 million from our commercial vehicle business. This growing backlog demonstrates the rapid adoption of our new 53-point amp-power cell technology across commercial vehicle and ESS applications. Turning to slide five, our most significant operational achievement in Q2 was our phase 3.1 expansion in Huzhou for our 53.5 amp power cell. This has now transitioned from trial production to shipping qualified products to our customers. Since Q1, our contract capacity for deliveries of our 53.5 amp 5M power cell from Huzhou through Q2 2024 has increased from 50% to 75%. We expect customer orders and deliveries to increase further as the year progresses, especially for deliveries to the United States and Europe. We would also like to provide an update on our ESS container assembly operations as you will see from slide six. Due to the rule change related to how domestic contents is valued as a part of the Inflation Reduction Act, we have decided to locate all ESS container assembly operations in the United States. Because this change could have adversely impacted our customers, We expanded our Colorado footprint and will no longer base any of those operations in Mexicali. This company-owned facility in Windsor, Colorado has the capacity to assemble 1,000 containers annually. We are preparing Windsor to start assembly operations and expect to begin shipments of finished 4.3 megawatt hour ESS containers in early Q4 to customer job sites. We had originally planned to start shipments in Q3 and therefore we expect some push out in recognizing revenues from our ESS business this year. The short-term impact on Booking revenues this year is far elevated by ensuring our assembly facility put our customers and the partners in the best position to claim the domestic content bonus credit. I would now like to turn the call over to our Chief Revenue Officer, Sacha Cadabon, who will discuss some of our key sales, partnerships, and achievements in the quarter.
spk08: Thank you, Mr. Wu, and thank you all for joining us today. First, I would like to provide a little bit more color on our backlog. As Mr. Wu mentioned, our backlog increased six times year over year, driven by both the rapidly expanding energy storage business in the U.S. and strong commercial vehicle demand in Europe. Over 80% of our record 675.9 million U.S. dollar backlog is compromised of orders for 53.5 MPH from customers in the U.S. and Europe. We also saw increasing demand in South Korea and India where we successfully secured several important projects. Now please turn to slide seven as I cover a few highlights from the second quarter. During the quarter, we received the first purchase order from a leading US commercial vehicle OEM for deliveries from Glaxo starting in 2024. Additionally, we received an order from a leading European port vehicle OEM for a new heavy-duty port application. Both projects further expand our footprint in serving commercial vehicle customers. We also signed a general purchase agreement for 1,000 units for our 21-ampere-hour Gen 3 pack with JVM Group, the leading Indian bus OEM. Delivery started in May and extends to the second quarter of next year. JVM Group is a global automotive conglomerate with operations in more than 25 locations across 10 countries, and Microvest presently represents the main supplier of lithium technology for JVM. Turning to slide eight. We substantially increased our backlog for one of our largest customers, Edeco Group, during this quarter. Earlier this year, we announced an initial contract for a new 53.5-ampere-hour battery pack, which will power the new cross-way low-entry city and intercity bus platforms. Furthermore, we are providing Weishai, a leading multinational industrial equipment company, with our Gen 4 high-power battery for the hybrid truck platforms. Weishai is operating globally with a focus on the new energy vehicles and strategies such hybrid and fuel cell technologies. Micromast is also extending our partnership with ReFire, a leading hydrogen technology company to equip over 100 units of the 4.5-ton hydrogen truck with our Gen 3 packs. ReFire is a long-term partner of ours focused on R&D and product development for advanced fuel cell systems. MicroVest is a major supplier of batteries to both YTI and ReFire for the hybrid and fuel cell product offerings, and we are proud to support them in the global transition to clean energy. Another positive benefit here is that we strengthen our technology references for fuel cell applications, which presents opportunities for future development and partnerships. We had another excellent quarter in building up our European business. Our European revenue increased 91% year-over-year in the second quarter and accounted for 13% of our total revenue, up from 8% of revenue a year ago. This growth was driven by the continuously ramp-up of several customer projects. In addition to IVECO Group, Gosson and REE entering several deliveries, multiple customers have placed multi-year contracts. Looking ahead to the next quarter, we expect to add significant multi-year contracts to our backlog for European commercial vehicle customers dedicated to both existing and new technologies. I will now turn the call over to our Chief Financial Officer, Craig Webster, to review our financial performance in the quarter.
spk03: Thank you, Sascha. I'll spend the next few minutes discussing our Q2 2023 financial results. Please turn to slide 10, and I will summarize the main line items from our Q2 P&L. We recorded another strong quarter with Q2 revenue of $75 million, an increase of 16% from $64.4 million in Q2 2022. Growth was primarily driven by an increase in sales volume led by strong sales in China and increasing deliveries in Europe as our OEM customers ramp up their production volumes. On a year-to-date basis, revenue was $121.9 million, up 21% from $101.1 million in the prior year six-month period. Our gross margin improved to 15.3% in Q2 2023, compared to 7.5% in Q2 2022. After adjusting for non-cash settled shared base compensation expense in cost of sales, Adjusted gross margin increased to 17.3% in Q2 2023, compared to 10.4% in Q2 2022, a 6.9 percentage point improvement. The increase in gross margin was due to a combination of improved economies of scale, more favorable product mix, and lower raw material prices. Operating expenses were $39 million in Q2 2023, compared to $50.4 million in Q2 2022. Consistent with the past few quarters, the largest contributor to the decrease in operating expenses was the decline in our share-based compensation expense, which totaled $16.3 million in the quarter, compared to $28.6 million in Q2 2022. After adjusting for non-cash SBC expense in SG&A, our adjusted operating expenses in Q2 2023 were $22.7 million, compared to $21.7 million in Q2 2022, an increase of $1 million, with increasing headcount costs as we expand our business, being the largest contributor. Gap net loss was $26.1 million in Q2 2023 compared to net loss of $44.2 million in Q2 2022. After adjusting for non-cash SBC expense and changes in fair value of our warrant liability, adjusted net loss was $8.3 million in Q2 2023 compared to an adjusted net loss of $14.9 million in Q2 2022. On a year-to-date basis, adjusted net loss was $19.9 million compared to an adjusted net loss of $44 million in the prior year six-month period. 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 Q2 2023 compared to the prior year period. As you can see, our European business showed a strong 91% year-over-year increase and accounted for 13% of our revenue, up from just 8% a year ago as key customers began their vehicle ramp-up. We continue to expect growth in our European revenues throughout the second half, especially for the 53.5 amp hour cell, in line with vehicle build plans from our customers. Although our U.S. revenue increased a modest 1% year over year, we continue to expect U.S. revenue to rise this year as we begin deliveries on our 1.2 gigawatt hour ESS project in the second half of the year. As Mr. Wu mentioned, there is a near-term impact to when we recognize some of those revenues after making the strategic decision to make Windsor, Colorado our dedicated ESS assembly hub. Looking ahead, we expect U.S. revenue growth to pick up in Q4 and to continue to accelerate next year as Clarksville comes online. Turning to slide 13, we entered the quarter with cash, cash equivalents, restricted cash, and short-term investments of $195.8 million. Net cash used in operating activities during the quarter was $29.8 million, which was primarily due to operating loss and working capital. Negative free cash flow in the quarter of $87.6 million resulted from this net operating cash outflow as well as our capital investment program. The majority of this capital expenditure in Q2 was to fund our capacity expansions in Clarksville and Husserl, which totaled $52.5 million. We also have capital expenditures totaling $5.2 million relating to improvements to our existing facilities and ongoing R&D projects. Looking ahead, we estimate that full-year capital expenditures will remain in the range of $180 to $210 million and will primarily be used for the Clarksville Phase 1A capacity expansion. As Mr. Wu mentioned, we are pleased to report that our Clarksville facility remains on track for a Q4 start of trial production. Going to slide 14, we show you the financial resilience of MycoLabs. Our total debt outstanding of $93 million is very modest, and you can see that the maturity profile requires only $6.5 million to be repaid in the second half. Looking further out, Total debt repayments of the 31 December 2025 are a very manageable $33.6 million. All of this debt is for our China operations, and none of it has any recourse to our U.S. holding structure or asset. Turning to the U.S. operations, these currently remain free of leverage, and we are making solid progress on our debt financing, which is likely to be secured by the Phase 1A expansion. We expect that facility to be in place during Q3. As outlined on slide 15, we closed the second quarter with a record backlog of 675.9 million, up from 486.7 million in the first quarter, and an over six times increase year over year. The 39% sequential growth in our backlog was once again driven by commercial vehicle projects in Europe. Our solid backlog underpins our expectations of multiple years of fast growth, given the rapid and accelerating adoption of our 53.5 amp hour cell for commercial vehicles and ESS projects. Currently, the 53.5 amp hour cell accounts for over 80% of our total backlog. Turning to slide 16, based on our backlog, we anticipate high utilization rates for our Phase 1A expansion in Clarksville. At full utilization on Phase 1A, Clarksville has an IRA Section 45X potential of around $80 million per year. With the ability to monetize these credits early, Clarksville has the capacity to self-fund its additional expansions. If we fill Phase 1A, it generates IRA credits. And if phase 1A has no spare capacity, then we need to expand, which generates additional IRA credits. And we would only expand if we have obtained customer commitments. That's the golden rule. You can see from slide 17 that we are targeting adjusted gross margins in a 20% range next year as we scale our business and putting us on a path to profitability over the next two to three years. We're already starting to see that gross margin expansion this year. We expect to achieve continued margin improvement through our key levers of industrialization, automation, utilization, and relentless innovation. With that, I will turn it back over to Mr. Wu to review our outlook.
spk01: Thanks, Craig. Please turn to slide 19. We maintain guidance for our four-year revenue to be in the range of $348 million to $368 million, representing year-over-year revenue growth of 70% to 80%. Even with the near-term delay in the shift to Windsor, Colorado, we are very encouraged by our continued backlog growth, which greatly increased our visibility into 2024 and beyond. For the third quarter, we expect the revenue to be in the range of 72 million to 80 million, up 97% from Q3 a year ago as a midpoint, driving by the continual ramp of our European commercial vehicle projects, as well as orders from customers in Asia Pacific. As we continue to enhance our substantial backlog position, We retain clarity into the second half of 2023 propelled by our commercial vehicle segment and expansion of our energy storage business in the United States. We see strong demand trajectories for microvacs battery solutions across the globe and anticipated that growth and the momentum to carry forward as customer orders remain robust throughout this year and into the next. We are proud of what we have achieved thus far in the first half of the year, with Huzhou Phase 3.1 successfully ramping up to qualified production of our 53.5 ampere cell. Its production will continue ramping up in the second half. Additionally, we succeeded in securing the new company-owned facility in Colorado to begin assembling our complete US-made ESS solution for customer across the country. As we look to second half, our focus shift to bridging our Crossrail Phase 1A operation online and the beginning trial production in Q4 so we can hit the ground running as we enter While we must continue to execute, we are encouraged by our backlog growth, growth margin improvement, and customer excitement as our new and upcoming capacity expansions begin to fulfill orders around the world. I would like to take this moment and personally thank the Microbus team for their tireless work and commitment to our mission. Our focus on results and our ability to execute have been and will continue to be a competitive advantage for MicroVast. And now, I will turn the call back over to the operator to start the Q&A session.
spk09: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate 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 the star key. Our first question is from Colin Rush with Oppenheimer. Please proceed.
spk02: Thanks so much. Can you speak to the key drivers of the cost savings at the gross margin line and how much was driven by the supply chain, how much from utilization improvement, and how that likely evolves through the balance of the year?
spk03: Colin, I'll take that one. Some of it's definitely coming from product mix, which is just more 53.5 amp hour. As that ramps up throughout the year, we expect utilization is going to increase. And you can see that in the trajectory for future quarters. Certainly, there's been benefits in raw material prices has helped some as well. And some of it's also sort of that geographic shift as well. More revenue has been recognized in Europe.
spk02: That's super helpful. And then when we look at the backlog number, at the analyst day you talked a little bit about some of the awards that you've gotten. Could you give us an update on where you're at in terms of incremental award contracts and which end markets those may be coming from?
spk03: Sasha, do you want to deal with the first bit and then I'll, in terms of the additional backlog, and then I'll give a bit more clear in terms of 24, yeah?
spk08: Sure, sure, Craig, I will. Thanks, Colin, for the question. So, general speaking, we will increase our backlog purely dedicated on the commercial vehicle, right? This means in the bus section, it means on the truck section, so the 53.5 on the hour is dedicated for that, and we see a couple significant wins upcoming in the next quarters. And we already increased due to the fact that the European OEMs are now doing their startup production rollout. We increased existing contracts and we were able to gain further backlog in this contract as well.
spk03: Colin, I'll just add a bit more context here as well. So you saw that over 80% of the backlog It's 53.5 amp hours. So we're just starting to, you know, ramp that up. As we do that, that's one that's going to help us with that gross margin expansion because we just hit, you know, higher utilization. And then in terms of production planning, over 60% of the backlog is the 24. And the backlog gives us two really big areas of comfort. It underpins the numbers for this year, and we know we've gotta have a big Q4. That's not a sales challenge, right? The sales are there, they're in backlog. We've just gotta produce as much as we can. Everything that we can produce, it's got a home for. And then as we look out to 24, we can see already that we're gonna have already a significantly bigger year than this year. And that's all, again, based on 53.5 amp hour.
spk02: Excellent. Thanks so much for the detail, guys. And then the last one from me is just, you know, how are you seeing the competitive landscape evolving for commercial vehicle batteries? Obviously, the 53.5 amp hour cells have been really well received by the market. Are you seeing other OEMs start to follow your lead on that?
spk08: That's a good question, Colin. So we're not only producing the 53.5, but this is one of the leading future products of ours, and we see that further OEMs are adopting these cell technologies. They see clearly the advantage of lifecycle and fast charging capability, and this plays a very important role for their total cost of ownership calculation. So I will report most likely in Q3 and Q4 about some further very nice updates on the 53.5, especially on the commercial vehicle side. So you will see that there we are right now in the process of getting these things moved ahead. And you can see that the 53.5 is not only rising in Europe, But we have also interesting demands, as you can see on our slides, also with JDM in India. So they are not only dedicated to 21 ampere, but they are also moving to, what, 53.5. So it's picking up in general. The Z technology plays a major role for us in the commercial vehicle application. But we have also the 48, which is the same standard, same LBC cell application. which will also play a big role, especially on the fuel cell side, which we talked about. So this will be also a topic where we will see more increasing demand on the commercial vehicle side.
spk02: Some clarification on that, but I'll take it offline. Thanks so much, guys. Okay.
spk09: Our next question is from Amit Dial with HC Wainwright. Please proceed.
spk06: Thank you. Good afternoon, everyone. With respect to sort of the margin outlook, you know, it looks like some revenues are being pushed out from 3Q to 4Q. Will that impact margin performance next quarter for you guys, gross margins?
spk03: Hi, Amit. It's only going to be a little bit of revenue to push out in the next year. There's a chance that we can recover it because, you know, what we don't include in backlog is a lot of China revenues. And as you've seen from previous quarters, Q4 is always super strong for China. So that could make up some of that. And, you know, whether it's going to be for an energy storage or commercial vehicle customer, you know, what we're ramping up is 53.5 amp hour. So pushing a little bit out is not going to impact is not going to impact margins.
spk06: Okay, thank you for that. I mean, it's good to see, you know, the execution on that front continue to come through. And then on the operating expense side, is this sort of where we will be for the rest of the year, Craig, in terms of, you know, total OPEX, what we saw for Q2?
spk03: You know, what will happen is, particularly on, like, sales side, I mean, as we've, we're probably going to get very close to doubling revenues from where we are today in Q4. So you can have some more sales expense around that. R&D expense is not going to increase significantly throughout the year. GNA is manageable. I think we've guided you before that where we're trying to manage this year is around sort of 20 to 25 in, in, um, in cash OPEX, you know, it's still the target. Um, and I think, you know, we've got all of the, um, we've got all the infrastructure, you know, in place to like deliver these increasing revenues. So I just don't see, um, uh, I don't see, uh, you know, much impact. Um, what we'll be focused on, you know, really Q3, Q4, that's going to impact margins is just improving yields. And as we improve yields, we'll improve margin.
spk06: Okay, thank you. Just one last one for me on the separator side, maybe any updates, you know, with respect to how you was setting, you know, timeline expectations, you know, for that offering.
spk03: You just broke it right at the start. What was the first bit on?
spk06: for the separator product. Any update on the timeline for commercialization? You know, post the developments last quarter, just wanted to see how the timeline for bringing the product to market might have changed.
spk01: This is Yang Wu. And separator right now, we are focusing on, you know, our China, you know, the 10 million square meter small production line. We won't make this wrong and send the samples out first and we're still planning to build a bigger factory in later years.
spk07: Okay. Thank you. That's all.
spk09: Our next question is from Sean Milligan with Jannie. Please proceed.
spk00: Hey, guys. Nice quarter and thanks for taking my questions. Craig, I was trying to kind of back in you give a total backlog of 676 million you talk about uh china having 370 million contracted volumes and then you said like 80 percent of backlogs the 53.5 amp hour cells just like can you clarify um like how much backlog you have for clarksville at this point um okay so the just the you might have got i might have misspoke but the um
spk03: there's very little backlog for China in there. So China is a much more short-term market. So this is the beauty of the backlog, right? So it's over 80% is 53.5 amp hour. Backlog is about 10% for China market. And the balance is split roughly 50-50 Europe, and then U.S. The way we look at backlog for Clarksville is like whatever we can produce for an energy storage customer, that could come from the U.S. But right now, the only production we have is Hoosier. So all 53.5 amp hour cell production this year is coming from Hoosier because that's what's available. Does that answer your question?
spk00: Yeah, that's helpful. And then you talk about 1,000 units per year for the container manufacturing or assembly facility. I'm just trying to think, so that's above, like is that in preparation for a a phase 1B of Clarksville? Because it's more than the output you'll have, right?
spk03: Yeah, no, Sean, good question. I suppose the easy way to think about it is 1,000 containers is about a billion dollars a year in revenue. Phase 1A is roughly like, you know, excluding IRAs, Phase 1A is going to be about a $500 million. Phase 1B would be the same, would be another $500. So this is the beauty about Windsor is that it's sized for the Phase 1A and Phase 1B.
spk00: Okay, that's really helpful. And then I guess like one last question, if you can take it, but in terms of timing for the – You know, the larger utility-scale storage projects, are you waiting on some of the domestic content revision clarity? Like, what are your customers telling you in terms of what they're waiting to put in additional firm orders there?
spk01: Actually, we're not waiting for it. We are, you know, working so hard to increase the capacity as much as possible. And right now, the purchase order is more than what we can make. And it's a good problem to have.
spk00: Okay, great. Thank you, guys, and nice quarter.
spk03: Thanks a lot, Sean. Thank you.
spk09: There are no more phone questions at this time. I would like to turn the call back over to Rodney to address questions that have come in via email.
spk05: Thank you, Operator. We'd like to take just a couple questions from the online for the management team. In relation to the backlog growth, can you give a bit more color onto what is happening and where you see the backlog going from here? Okay.
spk03: Well, both. It's demand from commercial vehicle customers is super strong. I think Sash can touch a bit more on that. And then energy storage customers, you know, which is U.S., as Uzong just mentioned, you know, it's more of a, like, what we've got available than sales. And our expectation is that the clocks or one a is going to be super high utilization as soon as it's running. Um, and based on, um, you know, orders, um, you know, we were, we've got customers that want to book out 25 capacity, uh, already. Um, and as we get that 25 capacity books, um, we have to take, you know, we have to take prepayments like cash comes in early and then we can use that, um, to then fund, you know, the, the additional capacity expansion needed. Um, Sasha, do you, do you want to add anything else on, on commercial vehicle backlog growth?
spk08: Yeah, let me add, uh, three things. Uh, Craig, thanks a lot. So in general, we are gaining also for the volumes in other markets like South Korea, Taiwan, we're increasing our backlog in India. So we are further increasing backlogs for projects which are dedicated to 25, 26 onwards on commercial vehicle side also in Europe. And what we clearly see is that similar to the development of Europe, we're getting more and more prototype orders into the U.S. So also here we will see over 24, 25 upcoming further backlog increases. Also on the commercial vehicle side, we see that European customers, which we have, are moving to the U.S., winning their electrification projects, and they're using as well the same technology, what they're using in Europe today already with the 53.5. So they're taking that technology also to the U.S. market.
spk05: All right, and that's it. Turning back over to the operator.
spk09: Thank you. This will conclude the question and answer session. I would like to turn the conference back over to Mr. Wu for closing remarks.
spk01: Thank you all. Thank you all for joining us today. You know, it takes your time. And I hope you guys, you know, everybody think Michael Ross Moore with your beautiful dreams. Thank you.
spk09: Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
Disclaimer