EHang Holdings Limited (EH) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Thank you for standing by, and welcome to EHang First Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. Now I will turn the call over to Julia Qian, Managing Director of The Blueshirt Group Asia. Ms. Qian, please proceed.

Hello, everyone. Thank you all for joining us on today's conference call to discuss the company's financial results for the first quarter of 2020. We released the results earlier today. The press release is available on company's website as well as from Newswire services. On the call with me today are Mr. Hu Huazhi, Chief Executive Officer; Mr. Edward Xu, Chief Strategic Officer; and Mr. Richard Liu, Chief Financial Officer. Before we continue, please note that today's discussion will contain forward-looking statements made under the safe harbor provision of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company public filing with the SEC. The company does not assume any obligation to update any forward-looking statement, except as required under applicable law. Also, please note that, unless otherwise stated, all the figures mentioned during the conference call are in Chinese RMB. With that, let me now turn the call to the management team and our CEO, Mr. Hu Huazhi. Mr. Hu will speak in Chinese, then our CSO, Edward Xu, will translate his comments to English. Please go ahead, Mr. Hu.

[Foreign Language]

[Interpreted] Thank you, Mr. Hu, and hello, everyone. Let me first do the translation of what Mr. Hu said in his opening remarks, and then I will talk about our key business strategies going forward. Hello, everyone. Thank you for joining us on the call today. Despite the unprecedented global COVID-19 pandemic that started this year, we are pleased to report solid first quarter financial results with significant top line growth. Total revenues were CNY 18.8 million, increased by 80.3% year-on-year. Gross profit grew by 82.7% year-on-year, and the sales volume of EHang 216 reached 9 units in the first quarter of this year versus only 3 units in the first quarter of 2019. During the first quarter, China implemented strict controls to contain the virus. The country was locked down, businesses were closed and people were quarantined. Because of this, we did experience some short-term impact, including disruptions across the supply chain and temporarily decreased the demand, including delayed orders from the customers. However, we were able to create new business opportunities from this crisis. We successfully introduced a practical application for both EHang 216 and Falcon B in medical emergency transportation of flight tests in Hezhou People's Hospital in Guangxi, has fully demonstrated our ability to apply AAV technology in an emergency situation. We will continue to actively develop more UAM applications, such as emergency response and air tourism. We will expand the UAM pilot city network and achieve regulatory breakthroughs in the U.S. and Europe, paving the way for global expansion after the virus is contained. Business in China has gradually resumed since the beginning of April. The situation appears to have turned the corner. Sales are recovering, and our business is regaining momentum. Our business opportunities are promising due to emerging opportunities to provide cost-effective and safe service with unmanned AAVs. We are excited to continue to drive significant business development opportunities in air tourism, emergency response and passenger transport. Notably, we obtained the world's first commercial pilot operation approval of passenger-grade AAV for air logistics uses. This starts a new chapter in the commercialization of air logistics. We are confident that we can generate at least a 200% revenue growth in 2020. We believe our first-mover advantage, sound growth strategy and ability to execute can drive robust growth. As Mr. Hu mentioned, despite the challenging market conditions due to the pandemic, we still strive for rapid growth and a great performance in first quarter of this year. We expanded our global presence and raised our brand visibility. Let me cover some achievements in this regard. In January, with the support from the North Carolina Department of Transportation, we conducted our first ever trial flight of our EHang 216 in North Carolina, after receiving the approval from the Federal Aviation Administration. Our EHang 216 became the first Autonomous Aerial Vehicle to fly in the U.S. This achievement underpins our industry leadership and helps to increase customer confidence. In February, our EHang 216 obtained another operational permit from the Civil Aviation Authority of Norway. This marks another milestone as it was the first operational permit for long-term flight test of the EHang 216 in Europe. We believe this lays a solid foundation for our future UAM operations in other EU countries. Now let me discuss the EU's UAM pilot city initiative. In first quarter of this year, we established UAM partnerships with the city governments of Seville and Llíria in Spain. Both cities are members of the UAM Initiative Cities Community, an EU initiative established to promote urban 3-dimensional transportation. In partnership with Seville, we will work together to develop Urban Air Mobility services such as passenger transportation, air logistics and command-and-control platforms. The city will also collaborate on applications for permission to conduct a test flight in accordance with the Spanish and the European legislation and will coordinate with EHang in the planning of flight routes. Nearby, EHang will collaborate with Llíria City Council to develop the 3D Air Mobility solution for smart cities. Together, we plan to launch pilot operations of passenger-grade AAVs designed to explore different application scenarios, including tourism. Furthermore, EHang and Llíria will work together with the Spanish Aviation Safety and Security Agency to establish relevant systems and standards to support this new transportation ecosystem. Going forward, we expect to establish more partnerships with the city governments in order to expand our global UAM footprint. To demonstrate our UAM industry leadership, in January, we issued a white paper entitled The Future of Transportation: White Paper on UAM Systems. This paper explores the potential for UAM to transform transportation globally. We cover vehicle design, potential applications, the current regulatory landscape and how to optimize UAM's path to commercialization. As Mr. Hu mentioned, we found new opportunities during the outbreak. Importantly, both the EHang 216 passenger-grade AAV and the Falcon B nonpassenger-grade AAV were valuable for medical emergency transport. We demonstrated this real-world application of AAV technologies to transport medical supplies and personnel. The AAV was also able to perform air inspection and broadcast of instructions in several cities. We are further exploring other emergency response situations in which AAVs can operate with efficiency and effectiveness. To conclude, although we started 2020 in an unprecedented and challenging environment, we still achieved solid business results. This demonstrates our attractive growth strategy and ability to execute. We believe our first-mover advantage will enable us to drive robust growth in a promising UAM industry. Now I will turn the call over to our CFO, Mr. Richard Liu. Thank you.

Thank you, Edward, and hello to everyone on the call. Before I go into details about our financial results, please note that all numbers presented are in RMB and percentage changes refer to year-over-year comparisons, unless otherwise specified. Detailed analysis is contained in our earnings press release, which is available on our IR website. I'm going to highlight some of the key points here. Although our business was [indiscernible] by the global pandemic, we still achieved significant top line growth. Total revenue were CNY 18.8 million, up 80.3% year-over-year. Growth was mainly driven by the significant increase in revenue from our core business of air mobility solutions, which represented 80.4% of total revenues. Sales of the EHang 216, our flagship passenger-grade AAV, reached 9 units in Q1 compared with 3 units in Q1 2019, a 200% increase. Gross profit in Q1 amounted to CNY 11.2 million, up 82.7%. This led to gross margin of 59.3%, up 0.8 percentage points versus the same period last year. The improved gross margin was due to a favorable revenue mix, reflecting the inherent value in our industry leadership and the first-mover advantage, which give us pricing power. Adjusted operating expenses, excluding share-based compensation, increased by 32.9% to CNY 31.1 million. As a percentage of total revenues, it was 165.3% as compared to 224.3% in Q1 2019. Compared to the 80.3% revenue growth, the 32.9% expense increase was modest. It was mainly volume-driven spending and strategic support for global commercialization. We also increased R&D expenses as we strengthened our product development efforts. As an innovative technology-driven company pioneering a new sector, we have always kept tight control of operating expenses. However, we have built the basic infrastructure we need to grow and expect to see meaningful operating leverage as sales continue to ramp up. Under the impact of COVID-19 pandemic, our adjusted operating loss in Q1 increased by 18.8% to CNY 19.2 million, while adjusted operating margin improved by 52.7 percentage points from negative 154.7% to 102%. And adjusted net loss in Q1 was CNY 18.5 million, increased by 13.4% year-over-year. Owing to the significant year-over-year revenue growth, the adjusted net margin improved by 57.8 percentage points from negative 156% to 98.2%. Turning to our balance sheet and cash flow. We ended the quarter with CNY 257 million in cash, cash equivalents and short-term investments. In summary, we generated solid financial results in Q1 despite the unprecedented coronavirus impact. The lockdowns and restrictions implemented in China and elsewhere has some reverse impacts on customer demand and supply chain. Nonetheless, we are pleased to have achieved 80.3% revenue growth. As a young company, however, we will continue to invest heavily in technology and talent to accelerate the commercialization of our products and solutions. We think we can sustain our momentum if the COVID-19 situation would be under control. We have seen solid recovery since mid-March. We are optimistic about our potential in 2020 and the long-term promise of the UAM industry. We're confident in our ability to lead this industry. As a newly public company, EHang has been actively interacting and communicating with our investors. We believe that transparency is key to earning the trust of our shareholder community. In March, we successfully conducted 2 virtual conference calls with our investors and analysts. We were pleased to see many interested investors and analysts join our calls and to discuss business developments. And going forward, we intend to increase our interactions with investors and further improve our transparency. Now let's turn to the business outlook. We're not changing our annual guidance at this time. We're confident that we can achieve accelerated annual revenue growth of at least 200%. We also believe we can achieve adjusted operating profit for the full year 2020. With that, we'll conclude our prepared remarks for today. Let's now open the call for questions. Operator, please go ahead.

[Operator Instructions] Our first question comes from the line of -- with Vincent Yu of Needham & Company.

I have a few questions. So the first question is for the commercial pilot operation, which is -- was approved by CACC (sic) [ CAAC ] in Taizhou. Is there a route-specific approval? Or is it a blanket approval to carry out commercial pilots operation for logistics uses? My second question is, can we expect to see accelerated approval from CAAC for more routes after the approval in Taizhou? And my third question is about the demand in April to May. Can management give a sense of how the demand recovery is in April to May?

Thank you, Vincent. This is Richard. I will answer your first 2 questions. They are correlated. First of all, the approval is an area-specific approval. It's not just group-specific. So that means EHang 216 can fly different routes for air logistics uses within that area. If you refer to our press release, we described that -- listed 2 use scenarios, which are between ground and hilltop and between shore and islands, as it is a coastal area in the Taizhou City, where there are hills and islands. And there is a video attached to the press release, and you're welcome to watch it. With that, you can get a more concrete idea. And on your second question, also, as we put in our press release, we intend to expand it to other areas in China. And we're working on applications for other areas or sites in different cities, such as Guangzhou, where we're headquartered, and Shaoguan and Hezhou. With the first one accomplished and the pattern established, the following ones would be less -- you can imagine that will be less difficult and would be quicker to accomplish. Also, the CAAC regulator has been very supportive along the way for this innovative AAV solutions. Hello?

So do you have any follow-up questions?

Yes. Maybe I can answer the third question regarding the pipeline, right? So this is Edward. So regarding your question on the demand for April and May, currently, our order pipeline is approximately on a quarterly rolling basis. We have largely resumed from the impact of the COVID-19 outbreak. And basically, we see our order pipeline for quarter -- for the second quarter back to the roughly the level of fourth quarter of last year, which was at a historical high level. But unfortunately, I cannot tell you the exact number. But based upon our current order book, we are comfortable and confident that this can give us the ability to achieve at least 200% growth year-on-year. Thank you.

Got it. So a very quick follow-up to that. Do we have any capacity expansion plan for the rest of 2020 as of now?

I will take this question of yours. Basically, in light of the pandemic right now, we are very cautious about our capital expenditure. So in respect of capacity needs, we have been exploring alternative ways to support those needs. And as you probably know that the carbon fiber structure or fuselage manufacturing is potentially a capacity bottleneck in our own facility in China. And we have been exploring and outsourcing approach and discussing with some potential third-party carbon fiber manufacturers in China to support the needs for this year, at least. And looking to the second half of this year, we may resume our full capacity expansion plan, as you know, given the pandemic situation will be contained and there will be most -- stronger business momentum going forward.

Next question comes from the line of Hsiao, Tim from Morgan Stanley.

Congratulations on the solid progress. So just a few quick questions. The first one, again, about the supply. So I think during previous conference call, I remember that management highlighted there was impact from the supply bottleneck of certain components. So may I know if the component has been removed -- that the bottleneck has been removed at the moment? And have we secured enough inventory for the upcoming delivery? And secondly, as we stay -- stick to our current guidance for 2020, so what would be the potential swing factors post the outbreak that management will keep a close watch? And which project we should pay more attention to and would be more relevant and crucial to your 200% year-on-year revenue growth? And my last question is that, could you provide some update regarding our overseas business? Have we resumed the delivery? And if not, when would you start to do so? So those are my questions.

Thanks, Tim. This is Edward here. So regarding your first question, I'll answer. So yes, you're right. So basically, at the beginning of the year, due to the pandemic, we did experience some of the impact on the supply chain. And regarding the inventory and the components, basically, we have resumed to normal level. And so now, based upon our current order book and our capacity and production, we should be able to fulfill the -- all the existing orders. Your second question?

Presenters, may I move to your next questions?

I beg your pardon. Please continue.

Yes. Sorry, your second question was...

That's about -- because we stick to your original guidance for the full year. So based on current situation, what would be the potential swing factor after the pandemic that management, including category [ ministry research ] you guys will keep a close watch? What would be the case when you factor in there? And which project we should be -- we should pay more attention to which would be crucial to your 200% year-over-year growth, in which market or which clients?

Yes. So basically, this 200% growth is based upon our assessment of the current situation, including the ongoing impact of the COVID-19 on the overseas market. So on the domestic market, we think it is -- basically, it's -- it should be okay because now the production is coming back and the market demand is there. So given our inventory and the component level, we see no big issue to fulfill all these orders. But on the other hand, what we are a little bit concerned is about this air show performance because this -- due to this COVID-19, some of the activities were canceled. And especially at the beginning of the year, we did plan our overseas expansion for this air show, et cetera. So this could be some swing factor, but it's no harm for our core business. Our core business, the EHang 216 AAV, so which is so far, we think, are fine. And if we are lucky, if the COVID-19 can be contained in the overseas market and the demand comes back, we should see some upside. But now we keep our guidance at 200% growth year-on-year. So going forward, we would watch the situation of the pandemic closely. And also on domestic market, we are also in talk with different business organizations and government. And we seek potential partnership with different organizations. So on the domestic side, we think that the macro situation is also very important. Because if the macro situation deteriorate, it may negatively affect the general tourism market and the -- for consumption demand. So the risk can come from people's reluctancy to consume or to travel. And so which will, in turn, affect the demand and also the redelivery of our AAVs. So that can be a risk. So -- but from a management perspective, we are all watching these factors closely, and we will report as soon as we see any issues.

Got it. So just a quick follow up on my third question is -- so regarding the overseas business, have we resumed the delivery? Or if not, when will we start to do so?

Yes. For the overseas market delivery, we are still doing the delivery even in the first quarter. For example, we delivered 3 vehicles: 1 to Japan, 1 to Russia and 1 to Mexico. So all 3 are new markets. And I believe that, although we are only delivering 1, this can basically serve the purpose of the test flight. Our customers are quite enthusiastic about our product. And so they purchase 1 for the test. And if it goes smoothly, we do expect further follow-up orders from them. So -- but yes, as I said, the biggest risk is the pandemic. So -- which may also negatively affect the real demand from our overseas customers. But the good thing, as you can see, we did achieve some milestones. For example, we did the test of flight in U.S. for the first time. Well, we did obtain the operation -- the test flight permit from the Norway government. I think that those are very good things. And we did the partnership with 2 Spanish cities. So yes. So from a long-term perspective, we are quite comfortable about our overseas expansion plans. Thank you.

Our next question comes from the line of Joseph Osha of JMP Securities.

I have a couple of questions. The first one is I'm curious as to whether you have looked at incorporating DC fast-charging technology into the platforms? And then I have a couple of follow-ups.

Sorry, the incorporation with what? DC...

All right. DC fast charging. So when you charge, you can charge obviously slower with alternating current, or you can charge very quickly with DC, direct current, like, say, for example, a car, which allows you to charge the battery more quickly. So yes.

Yes. Yes. That's right. So we've got the 2 modes of charging. The quick mode can finish around 60 minutes. And the longer one can take longer than that, 1 hour -- and 1.5 hours. Yes.

Okay. So -- and that is -- so that is a direct current charge? Or is that just high-energy AC? I'm just trying to understand what the technology.

Yes. Direct charging is quicker. So we are talking about the 100% full charge at 1 hour. But normally, if you -- we can fly if we have 90% full. So for 0 to 90%, it only takes like 40, 45 minutes. But if you charge it to 100%, it may take a while, about 60 minutes.

Okay. Second question is as regards battery chemistry. Obviously, I think your [ MCA ], correct me if I'm wrong, but I know, obviously, so your platform weight matters a lot. And I'm curious as to whether you have looked into any of the emerging technologies like dry cell or very low cobalt. I'm just wondering what your thoughts are about the path for battery chemistry for your platform.

Yes, of course. That's a good question. And definitely, the battery is a key factor, which will affect our range in the future and also the weight, right? So given the current battery technology, we can achieve about 21 minutes flight. And -- but this is not enough. We are always looking for better solutions, and we look for better technology, which can effectively improve our range and also by reducing the total weight of our AAV. However, we are not a battery company, and we design the BMP ourselves. And we also -- we have our own scientists in looking at different options for the batteries. So definitely, we understand that the battery is a very critical factor in the future success of our product. And we believe that the future breakthroughs in this battery technology can help our AAV to fly further.

And just a final question. I apologize, I should know this. What form factor battery are you using? Are you using a cylindrical cell or pouch or prismatic? I am curious.

I'm sorry. This is very professional word. I don't know how to translate into English. So we are using [Foreign Language] battery. Richard, do you have the term in English?

Sorry, I don't have it. Yes.

Yes. We -- could you send us e-mail? We can get back to you on that.

Sure. Sure. I'll be glad to. Sorry about that.

[Operator Instructions] Next question comes from the line of Charles Alcock from AIN.

Can you hear me?

Yes.

It's very encouraging to hear about the cooperation you've had from the CAAC in allowing the commercial pilot operations. But can you please just clarify what the longer-term plan is to achieve full-type certification with the 216 aircraft? Because I don't understand how you can keep delivering these aircraft across China and other parts of the world if you don't have a plan to achieve type certification, not just temporary operating permission.

Yes. Of course, our goal is to get the permanent certification. But I think it's good enough for the CAAC authority to grant the temporary certificates first. And so this is all due to our safety record and also the standard we have achieved. So going forward, according to our ongoing conversation with the CAAC officials, we already set up a team with experts, experts from both CAAC and from EHang, to make the standards -- to set the standard to assess the future -- the permanent certification. So we are working with the CAAC closely. And so you should understand that this is a very new product and new technology. And basically, there is no precedent in the world. So both the government officials and us, we are working on an appropriate way and the standard for the certification.

And will you also apply for certification in Europe now that IATA has issued consultation over the means to comply with certification?

Yes, of course. We do have a European team based in Vienna to work with the IATA officials.

Our next question comes from the line of Tim Hsiao of Morgan Stanley.

Sorry, just a quick follow-up questions regarding the competition. So could you please provide some update regarding our -- like our peers, for example, like Volocopters, the Kitty Hawk or Archers? Did you hear anything about all these competitors? And then would you expect to face more intense or head-to-head competition with all these players?

Tim, this is Richard. The name you mentioned as our peer company in other countries, they are still probably not like us already public. So the information, frankly speaking, is very limited. So based on the information available, it seems that most of them are looking at putting their product to market in about 2 years' time or more. So basically, EHang probably will continue to be the only one that has entered commercialization or doing commercial redelivery in the market for a while. And because we're in China, as projected in your firm's research report, China will be the largest regional market. So our experience so far attached to it. So even though we're looking global, for the time being, it's more advantageous to be in China, where the needs are getting more and more vibrant. So in terms of competition, we think we're in a very good spot right now.

[Operator Instructions] Ladies and gentlemen, thank you. That does conclude -- now I take the -- another questions from the line. It's a follow-up questions. Yes. You do have a follow-up questions from Charles Alcock from AIN.

Can you tell us about your plans to continue flight testing in the U.S.? Will you build on the test that you started in North Carolina at the beginning of this year?

Thank you for the question. This is Richard. Yes, we do have the plan, cooperating with North Carolina DOT, to continue the flight tests there. As you probably know that in January, we conducted a demo flight -- with our unmanned demo flight. The next step will be a manned, which means carrying passenger demo flight or flight test in North Carolina. But because -- frankly speaking, because of the pandemic, this plan have been postponed. But we hope that once the pandemic situation is contained and everything is back to normal, we will implement these next steps and plan as soon as possible in the U.S. And secondly, we have a partner, a U.S.-based biotech company called United Therapeutics. They are actually being tested with our 216 to -- for the -- basically, for the use case of medical emergency transport to be more specific to transport organs. They are currently doing -- have been doing or preparing for the flight test in their Canadian base. They have a Canadian base. And then later on, it will move to the U.S., to do further test in the U.S.

Our next question comes from the line of [ Damien Donnelly ] of [ Equitas Fund ].

I was just looking at the use cases of the offshore oil, I presume, that was in Norway, where that's suggested to happen. How is that supposed to play out when the range of the EHang is like 30 kilometers, 40 kilometers and the nearest offshore oil platforms are 50 kilometers offshore?

So far, this project has not started because we've recently obtained the permit from the Norway government. And also, we are seeing this pandemic going on in Norway. But our local partner in Norway will testify the AAV as soon as the situation stabilize. I believe that they will have their plan to implement the test flight. And with that, EHang will also send a technological team to Norway to assist the local flights. But right now, I cannot tell you the detailed plan at this stage. Sorry.

Ladies and gentlemen, if you have more questions, please contact us by e-mail. Now let me turn the call back to Mr. Liu for closing remarks. .

Thank you, operator, and thank you all for participating on today's call and for all your support and [ for your ] interest in our company, and look forward to reporting to you again next quarter on our progress.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect your line.