Zapp Electric Vehicles Group Limited

Good day and thank you for standing by. Welcome to ZAP's Shareholder and Analyst Update conference call. At this time, all conference call participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. If you are a conference call participant, to ask a question during the Q&A session, you will need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 and 1 again. Alternatively, written questions may also be submitted at any time via the webcast. Please be advised that today's presentation is being recorded. I'd now like to hand the conference over to Mark Kobol, Head of Investor Relations for ZAP. Please go ahead.

Thank you, Sarah, and welcome, everyone, to ZAP's shareholder and analyst update call and webcast. We'll start with some prepared remarks from Swin and Dave, and then Jeremy and David will join for the Q&A portion of the presentation. For participants joining us by phone, please note there is a slide deck available on our investor relations website, ir.zap.ev.com. During today's call, we will discuss our business outlook and make forward-looking statements. These comments are based on our estimates and expectations as of today. Actual results could vary materially due to a number of risks and uncertainties, including those described in our most recent filings with the SEC, which are also available on our website. Now I'd like to turn the call over to Swen Chatsawan, CEO of ZAP, for his opening remarks.

Swen Chatsawan Thank you, Mark, and thank you to everyone joining us on this call today. There's much for us to update today. The ZAP team took significant steps forward to reach many important milestones. Firstly, i300 won another coveted design award in 2024, the IF Design Award. This adds to the equally prestigious awards we won in 2023, the Red Dot and the German Design Awards. This brings the total to nine. These awards go a long way to validate i300 as a fit for purpose for the most valuable segment of the two-wheeler market, a market which is expected to reach $200 billion in the coming years and which is spread globally, including the high-growth emerging markets such as India, Thailand, and Indonesia, for which the i300 was designed. It's worth reminding that two-wheelers are largely toys in the US, but in the rest of the world, they are a consumer must. On top of which, global growth in electric two-wheelers is expected to significantly outpace that of the internal combustion engine two-wheelers. And unlike cars, it's expected to exceed half of all sales. We've also installed our proprietary microfactory system in our own standalone reference site. This serves to refresh our cost-effective, fast turnaround time manufacturing concepts and to showcase our technology to candidate contract manufacturers so that we can respond quickly and cost-effectively in Thailand, Indonesia, India, and elsewhere around the world. This reference site can assemble up to 21,500 i300s per year. I'll continue today with our most recent developments before recapping more highlights from 2024. And then we'll discuss our outlook for the rest of the fiscal year and beyond. As I mentioned, in Q4, we made a decision to open our own microfactory reference site. is in the export processing zone in Thailand called the Bangkok Free Trade Zone. It was completed on budget and on time in less than three months. It opened ahead of schedule in December, and it revalidates our proprietary, cost-effective, sustainable manufacturing concepts. This ISO 9001 certified microfactory is fully functional and can assemble up to 21,500 units per year, from less than 12,000 square feet of space. We'll produce bikes for Thai customers as well as for export to other key Asian and European markets. This site installation revalidates how quickly it can be replicated and on a modest capex budget as well as on a per unit install cost. Subsequent sites can be located within the same or other free trade zones in Thailand as well as any other country or regions with high two-wheeler demand but no free trade agreements with Thailand. This could include India, the Middle East and North Africa region, and South America. Our microfractories can be built by us and transferred to be operated by a contract manufacturer. This is commonly known as build, transfer, operate, or build, operate, and transfer, They can be built directly by a contract manufacturer, according to our reference site. Our proprietary assembly system has many benefits. It is highly incremental and it avoids the usual production line-based issues, such as restart costs and overruns. This means we can accurately track demand and eliminate goods in and goods out inventory costs. That has matured and is now seven years old. having survived COVID and listed on NASDAQ. Beyond the IP side mentioned earlier in the highlights and our micro factory reference site, we also achieved other important operating milestones in 2024. We completed the motorcycle single vehicle approval process in the United Kingdom and subsequently delivered our first vehicles from our experience center at Vista Motion in Oxfordshire. We also completed Thailand's Department of Land Transportation homologation in September. Thailand is the world's fifth largest two-wheeler market, where 84% of all households already owns at least one two-wheeler. Thailand shows the potential for penetration in all other emerging markets. A commercial rollout involves development across all fronts of our omni-channel approach. These include mono-brand concept stores, pop-up stores and department stores, appointment of authorized resellers, strategic collabs, and online activities. We developed a full-stack platform behind our website. Customers can order vehicles directly online. This stack includes a detailed personalization system as part of the ordering process. We've also developed a dropship direct-to-customer, or DSDTC system, which dovetails with the stack to make deliveries directly to customers' locations. This DSDTC system is a garageless, van-based, delivery and after-sales support customer experience model. Our first activation will be in the capital city of Thailand, Bangkok. This will be followed by a number of other cities. These activations should see many bikes hit the road in fiscal 2025. and we have yet to kick off our wider brand awareness campaign. ZAP is ready to scale rapidly to meet demand as we roll out globally to other key urban areas in Southeast Asia, Europe, and India. In November, our application for homologation in the EU was submitted to the Type Approval Agency in Ireland. We anticipate the requisite certificate will be issued in the coming weeks. In the meantime, we've been refining plans for commercial rollout in Europe as we've been doing in Thailand. As we receive the required certification, we plan to start marketing and deliveries of i300 in the European countries where two-wheelers sales are highest. We expect this to be France, then Italy. Since we launched in 2018, we've received more than 200 inquiries from potential resellers around the world. As we go back through this list, we believe there are many strategic partners globally that we can activate. India is the largest market for two wheelers in the world and is another priority for us. To put India in some perspective, the number of premium units sold in India is more than double the total number of all two wheelers sold in the US and Europe combined. Like everywhere, we believe I300 is perfectly positioned to capture share in this significant and valuable Indian premium sector opportunity. The receipt of the EU type approval permits that to start selling in India immediately afterwards, which we will do so. And we are now prepared to quickly and cost-effectively set up our micro factory in India to scale even before we begin shipping directly from our existing factory in Thailand. Altogether, we now have a stronger platform from which to launch commercially in a number of countries. It is good to remind ourselves that a removable, portable battery solution is not dependent on a dedicated charging infrastructure. Accordingly, any lack of such infrastructure does not limit our ability to scale, nor do we need to invest time or money on it. This means our team can focus solely on sales of our vehicles. portable solution also means that the user experience is essentially the same as charging a phone or a laptop. We've been meticulous and patient in our approach to commercial launch, and we're careful not to begin spending funds on marketing too early. I've already discussed the steps taken to improve our production capabilities. We always anticipated that sales would ramp up during this fiscal year, 2025. And now that the new facility is operational with a later start, but to a wider commercial rollout, means we can expect to sell 1,500 units in the next eight months. However, our focus on role is to more countries this year, which means that we continue to expect to sell more than 25,000 units per year starting in fiscal 2026. This volume of sales would equate to more than $200 million in revenues, meaning rapid growth in less than two years from where we stand today, making the most of the momentum in the two-wheeler market. It is important to note, however, that this represents only one-tenth of 1% of the expected global market. Our first product, i300, was designed specifically for the most valuable segment of that large and growing global market, which is concentrated in several emerging markets and is increasingly dominated by electric adoption. That was conceived to maximize shareholder value from these global megatrends. And we think there's an immense opportunity in front of us. With that, I'd like to hand the call over to Dave.

Thanks, Swin. And hello, everyone. As Swin mentioned, ZAP recorded its first sales of i300 in fiscal 2024. This was an important step forward in the launch of commercial operations for the company. Although it contributes little to the financial results in 2024, as you've just heard, we believe that will change in 2025 and to an even more significant degree in 2026. I'll first very briefly recap our financial results, and then I'll discuss our financial resources and plan. There was a net loss of $9 million in 2024 compared to $222 million in 2023, which reflected primarily costs associated with the business combination in the prior year. The company generated an operating loss of $6 million in 2024 compared to $8 million in 2023. This was due primarily to reduction in marketing spending as more significant commercial launch plans for i300 were delayed beyond the end of the fiscal year. Net cash used in operating activities was $5 million in 2024, compared to $7 million in 2023. The company has liquidity available from a standby equity purchase agreement. As I'll cover more in a moment, we think this facility provides more than enough near-term resources for ZAP to begin generating positive cash flow, such that we can utilize it to raise additional capital only as needed and at our discretion. We're also looking to secure additional debt financing that would allow us to expand more rapidly while avoiding dilution for shareholders. We highlighted earlier the many benefits of our new microfactory, which should also improve our anticipated gross operating margin to a percentage in the range of low to mid 20s. Based on our guidance, this means we would still expect to begin generating positive operating cash flow at some point in fiscal year 2026. To achieve our guidance, we would need to open an additional factory by the end of the current fiscal year, and we've incorporated that into our plans. As Swin covered, we opened the first factory in less than three months. It was incredibly cost-effective, even for two-wheelers, and the costs were a fraction of what you would see in the four-wheel space. So we talk about budgets in the hundreds of thousands of dollars rather than the hundreds of millions of dollars. We've continued to utilize strategies to conserve cash, including delays in the launch of brand building and other marketing efforts in Europe and Southeast Asia. This also extends to the settlement of deferred payment obligations related to the business compilation in 2023, allowing ZAP an opportunity to execute on its business plan. Our planned utilization of authorized resellers, franchise DSDTC, and contract manufacturing will keep the required investment very low compared to traditional two and four wheeler companies. As we roll out in targeted urban areas globally, our spend on marketing activities will increase. Additionally, as we transition to an in-production company, we anticipate additional investment into the hiring of more people and other costs associated with operating a public company. However, our business was always intended to be asset light and doesn't need significant capital to scale quickly. Accordingly, we believe only a fraction of the liquidity provided by our existing standby facility would be sufficient to see the company generating positive cash from operating activity. I'll now turn the call back to Mark so we can take your questions.

Thank you, Dave. That concludes our prepared remarks for today, so we'll move to Q&A. Sarah, could you please prompt for questions?

Thank you. To ask a question, you'll need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. If you wish to ask a question via the webcast, please type it into the box and click Submit. Please stand by while we compile the Q&A roster. Thank you. We'll go ahead with our first question. This is from the line of Tate Sullivan from Maxim Group. Please go ahead.

Thank you. Good day. Thank you for your comments on the units that you expect to sell in the market in the next eight months of 1500. Can you give some guidance on the timing of that? Have you made first sales in Thailand? Will most of those be in Thailand as well?

That's the SWIN. Okay, I'll do that. Yes. Obviously, we're still in ramp-up mode. For now, we are looking to make a good proportion of those sales in Thailand. As I mentioned, our EUWTA, we expect to come through soon, and that will give us an opportunity to do two things, to enter the European market and start selling in India as well.

Are there, to make first sales in Thailand, are there certain regulatory authorizations that you need, or is everything in place, or is it the dealer process that will lead to first sales in Thailand?

From the regulatory perspective first, we have the regulatory homologation approvals to sell in Thailand now from the Department of Transport, and we are rolling out all facets of our omnichannel approach presently, which, as I mentioned, will include a concept store, a number of pop-ups, and online activities.

Thank you. And then are there increasing inventory needs as you make more sales? Is it just in time? I mean, you have a minimal inventory. Well, you have now a half a million balance of inventory. Do you expect that to increase with more sales?

Thank you for that question. That's the beauty of our business model. It's very scalable both ways, and we will be holding almost no inventory. It is, as you correctly said, GitHub, and we can schedule manufacturing based on demand.

Absolutely. And last for me, thank you, is in fiscal year 24, 25% gross margin sales. on the European deliveries. Was there some timing related to that? Is that where you expected? And can you comment on where you might target going forward, if you can? Okay.

Dave? Yeah. Hi, Tate. Yeah, as I said earlier, we expect on a go-forward basis to be in the sort of low to mid-20s, so 25 would be on the upper end of where we were. Obviously our situation when we were producing just a small number is different to the go-forward, but low to mid-20s is what we should be expecting. Okay.

Thank you all. Welcome. Thank you. We'll now move to the next question. This is from the line of Theodore O'Neill from Litchfield Hills Research. Please go ahead.

Thanks very much. guidance for 2026 in the 25,000 unit area. What's the CapEx requirement to achieve that? And do you expect to build up more facilities outside of Thailand to achieve those numbers?

Hi, Theo. CapEx requirement, as we said, the micro factory that we just built was, I said, hundreds of thousands, not hundreds of millions. So it was vanishingly low. We will be opening another microfactory, as we covered earlier. Whether it's outside Thailand or not is still up for discussion. The existing facility will produce 21,500, and so to get to the 25, we're intending to open another one towards the end of the year. But the actual CapEx requirement of that would be pretty small.

And as you look out into the market, is it, you know, to go from the 21.5 you've got in one factory in Thailand to get to the 25 or more even possibly, are you still sort of finding your way in terms of what countries present the greater opportunity for you?

Yes, I'll answer that for you. The key three regions are Southeast Asia, India, and Europe. And Southeast Asia, we mean Thailand, Indonesia, and Vietnam. And Europe, we mean the EU countries. So yeah, the market is, for us, it's split three ways at the moment in terms of our 2026 focus.

Okay, thanks very much.

Welcome.

Thank you. We have another question on the phone lines. This is from the line of Ashish Shah from Sajosi. Please go ahead. Hi.

Congratulations on the great quarter. Thank you for taking my question. You just said the three biggest markets are going to be Southeast Asia, India, and EU countries. How does your go-to-market strategy change for each of these regions?

Okay. Actually, it's It's uniform. We won't be changing our approach to outreach to customers in any of these markets. We found that in our segment, the customer profile is quite similar. Lifestyle focused on design, so we felt no need to adjust anything at the strategic level. Obviously, at the tactical level, we will have to adapt to the local market conditions.

Right. Okay, thank you. And another question that I had is, you referenced that you will need to open another plant or a micro factory in 2025. How much is that going to cost? And what are the major costs that are related to that opening another factory? And is it going to be hard to hire people for that factory? And what are these locations for these plants going to be like?

Hi, yeah. No, as I said, it's low hundreds of thousands of dollars rather than hundreds of millions of dollars. So it was surprisingly swift. Three months from us signing the lease, we were actually up and running in the site in the Bangkok free trade zone. Hiring staff, it's a very low labor intensity production line, as we've always said, the Dolly system that we have. It does not require lots of either machinery or people because coming from the architecture of the bike, very few parts, sub-assemblies, et cetera, et cetera. It's a virtuous circle with that. In terms of locations, we could take more space in the Bangkok free trade zone. There is plenty of space available there. There are other free trade zones in Thailand that would be available to us. And as Swin said, obviously, there's India for when we're actually selling higher volumes in India than you can bring in under the ECWVTA license and other countries as and when it becomes clear where you want to go. Ultimately, if you can get these things up and running in three months, let's say six months to be cautious, you're not having to make a decision today for what you're going to do in August. We can actually be quite agile in that regard, and that's the plan. But the point we wanted to make is we've got that in our plans, and that's within our guidance in terms of what we're actually expecting to do.

Got it. Okay. Thank you.

Malcolm?

Thank you. So we've received several questions on the webcast, so I'll sort of compile those a bit and ask here. Maybe to start for you, Swin, so we've talked about our first unit sales in fiscal 2024 in the UK. Can you talk more broadly around the level of pre-orders that ZAP has received?

Sure. As you know, Mark, we've not generally discussed pre-order volumes in part because of the related symbolic nature of deposits against pre-orders. We have seen interest in pre-orders for sure, but more importantly, we've seen a lot of interest from potential authorized resellers, which allows us to expand our sales base. We've also had outreach from the press, and as a result, allowed third-party reviews, which has prompted many people to ask for test rides, which is the normal sequence of things. We plan to follow up on pre-orders as and when we're able to deliver orders in the respective jurisdictions. And as was asked earlier, the first stop of that would be Thailand. It's also important to say we've so far spent very little on marketing, which Dave has mentioned, and on brand awareness. And we expect to remain disciplined in that spending avenue, but we will have to increase it as we roll out to multiple markets.

Great. Thank you. Next sort of topic, shall we say, is on liquidity available and ZAP's plans in terms of utilization of the liquidity facility that we have.

Yeah, no, I mean, as I said, the clue is in the name. It's a standby equity agreement. So it's there as and when it is required, but only as and when it is required. So the fact that it has a 45 million capacity as of the end of last week doesn't mean that we have any either need nor desire to go anywhere near that. It's actually there to either accelerate rollout plans be able to, you know, move to our goals quicker or to cope with, you know, working capital cycles or anything like that. But, you know, there are no plans to use it extensively. And as I said, we are looking to obtain debt financing at the moment that obviously wouldn't mean we wouldn't need to use the SEPA for such amounts that are there. We've been clear and said, obviously, it's in the 20th. We do need to raise more money this year because we will not be cash flow positive on 1,500 units. But next year, we will be. And so it's a question of how quickly you get to next year.

All right. And then the sort of last topic in the webcast questions, Swin, maybe can you talk a little bit more about the brand awareness campaigns and the rollout of what we anticipate for that?

Sure. In the first instance, we'll be doing things which are tactical because Thailand is a very concentrated market and it's possible to do that. We'll also be testing all of our facets there, our boutique designs, our pop-up designs. And once we feel that those tactical layers to our satisfaction, and then I think it will be time to invest much more broadly online in terms of creating our brand awareness on social media using our tactical level, if you like, to create the content that will allow us to roll out at the global brand awareness level.

Great. Thank you. So that's all the questions that we have today. Thank you, everyone, for joining us. Please remember, you can keep up to date and follow ZAP's progress through the investor portal on our website, ir.zap.ev.com. And you can also subscribe there to receive email alerts. We are happy to receive your questions and feedback. And please also be sure to follow our social media channels through the links provided. Thank you again for joining us on the call and have a great rest of your day.

This concludes today's conference call. Thank you for participating and you may now disconnect.