Microvast Holdings, Inc. (MVST) Earnings Call Transcript & Summary

Thank you for standing by. And this is the conference operator. Welcome to the Microvast Third Quarter 2021 Earnings Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Sarah Alexander, Microvast's General Counsel. Please go ahead.

Thank you, Therese, and thank you, everyone, for joining us today. Hosting the call with me are Mr. Yang Wu, President and Chief Executive Officer; and Leon Zheng, Chief Financial Officer. Shane Smith, our Chief Operating Officer, is also on the line to help out Q&A. Ahead of this call, Microvast issued its third quarter press release, which can be found on the Investor Relations section of our website at ir.microvast.com. Please note that on this call, we will be making forward-looking statements based on current expectations and assumptions which are subject to risks and uncertainties. These statements reflect our views only as of today and should not be relied upon as representative about views as of any subsequent date. And we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For further discussion of the material risks and other important factors that could affect our financial results, please refer to our filings with the SEC, including the quarterly report on Form 10-Q filed this afternoon. In addition, during today's call, we may discuss non-GAAP financial measures, which we believe are useful as supplemental measures of Microvast's performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. A webcast replay of this call will also be available on the Investor Relations section of our company website. With that, I'd like to turn the call over to Mr. Wu.

Thank you, Sarah, and good afternoon, everyone. I would like to start out by thanking our employees with their outstanding contributions to Microvast's success. I would also like to thank our shareholders for their commitment and our customers for their support. The third quarter of 2021 was eventful. We successfully completed our business combination with Tuscan Holdings in July. Transaction raised $708 million in net cash proceeds upon our growth initiatives, including our ongoing capacity expansion in Clarksville, Tennessee and Huzhou, China. In addition, we will move into our new R&D facility in Orlando, Florida. We are pleased with the progress of the 3 of those sites. This is a difficult time for construction projects, given labor shortages in [indiscernible] and the other challenges. We presently posted [indiscernible] to our special media accounts showing the progress of the construction of the new building -- buildings on our campus in Huzhou, which will be referred to as Phase III. Once completed, this [ million well future ] approximately 700,000 square feet of manufacturing space designed for 12-gigawatt hour per year production capacity in total. The 2-gigawatt hour per year fully automated production line is under construction and planning to be completed in end of 2022 to first quarter of 2023. I am proud of the progress we have made in just a few months since this transaction closed. In Clarksville, we purchased [ an existing during ] our previous year as the renovations to make the building and the utilities ready for our manufacturing are underway. And in [ Oriental ], our existing employees will move into the new facility and will be actively recruiting to expand our R&D team. We'll continue to invest in R&D to ensure that our battery technologies remain on the forefront, and we expect to announce 2 new products in the first quarter of 2022. We will have more information about those developments in our next earnings call. Before turning the call over to Leon to review our financial results and to highlight a few key takeaways of Microvast, we are now revealed to the public markets. And we have been in business since 2006, and we are an established battery manufacturer and innovator. We achieved a revenue growth of 20% during the quarter and 43% year-to-date, 43% year-to-date. Each as compared to the same period in 2020. This growth was achieved in a phase of many macroeconomic energy level challenges, including global supply chain disruptions, logistic challenges, increasing raw material prices, inflation and ongoing COVID-19 pandemic. Historically, our business was concentrated in Asia Pacific. However, we are focused and gaining momentum with our customer base in Europe and in North America. This momentum is evidenced by 53% growth in our forecasted contracted revenue, which grew from $1.5 billion in February 2021, when the merger was announced, to $3.3 billion at the end of September. When we refer to forecasted contracted revenue, we are describing backlog plus management estimates for revenue we expect to realize from existing contractual relationships with customers to be included. We also has signed contract in place, purely in the form of framework or supply agreement. In addition, we have had advanced discussion with customers about the future volume requirements for particular projects or particular model. This contract also include pricing and other terms and conditions. However, we do not adequately include volume commitments. We expect to realize carrying forecasted contract revenue between 2021 to 2031. We also saw backlog growth of 65% to $53 million from $32 million in September 2020. We are pleased that you see the global trends toward electrification continue in the United States with the recent passage of the Infrastructure Investment and the Jobs Act, the bill provides solid support for electrification efforts in the United States, which we expect to increase our addressable market and accelerate our progress and opportunities in North America. I now turn it over to Leon to discuss third quarter financial results.

Thank you, Mr. Wu. Despite the many industry-wide headwinds we have faced, we grew revenue for the third sequential quarter. Revenue grew 20% this quarter and is up 43% year-to-date, each compared to the same period last year. Gross loss was $35.9 million compared to gross profit of $3.7 million in Q3 2020. The change was largely due to a $35.6 million (sic) [ $34.1 million ] product warranty expense accrual and a $6.6 million inventory write-down, in addition increased price in raw material costs and a $2.3 million share-based compensation accrued following the business combination also negatively impacted our Q3 gross profit. Before we move to operating expenses, I would like to provide more context on the warranty accrual. Most warranty accrual in this quarter was related to a legacy product sold to certain customers in China during 2017 and 2018. This legacy product experienced performance, which doesn't meet our standards, leading us to perform a rigorous root cost analysis followed within the completion of the root cost analysis in early October 2021, we determined the cost was the component sourced from a third-party supplier. We believe it's more likely than not, we will need to be [ pleased ] this legacy product during the remaining warranty period and the term of the sales contract. Accordingly, we accrued a $34.1 million onetime warranty expense related to this legacy product in this third quarter. The component was not incorporated into any of our other products. If we exclude the onetime warranty expense accrual, the inventory write-down and the share-based compensation expense, the company's adjusted gross profit would have been $7 million instead of negative $3.59 million (sic) [ $35.9 million ] loss during the quarter. This translates to an adjusted gross margin of 19%. Operating expense was $78 million compared to $12.7 million in the prior year period. The change in operating expenses was primarily due to a $56 million share-based companion expense accrued following the business combination as well as include head count to support the company's planned growth initiative and other expenses related to the operating as a public company. Finally, net loss was $116.4 million compared to a net loss of $10.1 million in the same quarter of last year. The change was primarily due to the reduction in gross profit and higher operating expenses as we discussed -- described above. Turning to our balance sheet. The business combination with Tuscan in July bolstered our cash position. Microvast ended the third quarter with approximately $612.5 million in cash, cash equivalents and restricted cash. Finally, let me talk about our backlog and the CapEx spending. As of September 30, 2021, we had a backlog of $52.7 million, the increase of 65% from $31.7 million in the same quarter of last year. We are currently ramping up our production efforts to perform a majority of this backlog in Q4 this year, which gave us confidence and reaffirm our 2021 revenue guidance. However, we are closely monitoring modest, especially bottlenecks in international shipping. Moving to CapEx. Based on the equipment, delivery time line and schedule during the upcoming holiday season, the company expects some of its previously planned capital expenditure for 2021 to take place in early 2022. Total capital expenditure for 2021 are now expected to be in the range of $120 million to $150 million. With that, I will turn back to Mr. Wu to discuss our business outlook.

Thank you, Leon. As Leon mentioned, we are closely monitoring challenges in the international shipping. Based on the current market conditions, backlog, business trends and other factors, we are reaffirming our previous outlook and continue to expect the full year 2021 revenues to be in the range of $145 million to $155 million. Additionally, as temporary supply chain headwinds dissipate, we believe we are well positioned to capitalize in 2022 and beyond. We are in the middle of our budget cycle and expect to be able to provide additional clarity on 2022 on our next earnings call. Thank you for your time today. I will turn it back over to the operator, who will open up the line for questions.

[Operator Instructions] At this time, there are no questions from the phone lines.

Thank you, operator. At this time, we're going to move to questions submitted in response to our Ask Microvast campaign. We appreciate all the questions submitted, and it's great to have such strong support across our retail investor base. Given the volume we've received, we will focus on the most frequently asked topics, but we love hearing directly from all of you. With that, by far, the most frequently asked category of question related to updates on specific customers or contracts. Now Shane, I know we have nondisclosure agreements in place with almost all of our customers, but what updates are we able to share with the investment community at this time?

Thanks, Sarah. We are sometimes able to negotiate with our customers to make public announcements about specific projects or partnerships, but not always. What we can tell you is that our forecasted contracted revenue has grown significantly since we announced the business combination in February 2021. It's up 53% from $1.5 billion to $2.3 billion. This is an encouraging metric that shows we're continuing to win major multiyear contracts with leading OEMs, validating the strength of our existing product portfolio. We do hope to be in a position to provide some additional details about these new and existing customer relationships in the next couple of months.

Great. Thanks, Shane. We recently announced the purchase of a new R&D facility in Florida, and we also received a lot of follow-up questions on that. Mr. Wu, are you able to elaborate on the plans for this new facility?

Yes, Sarah. As everybody note, Microvast is a fully vertically integrated company. We make materials, battery cell, battery pack, battery system, you know this from the top to the bottom. And our R&D center will do the same to support our growth. On the center in Florida, we will explore all spectrum of technologies from a battery material to battery cell, battery pack, battery management. And our mission statement for a research center is create excellences to power the world.

Great. Thank you. There was also a lot of interest in our ongoing capacity expansions. Shane, are you able to add any color?

Sure. Our capacity expansions are underway, and we expect CapEx to increase in Q4 as we implied in the guidance we provided in the press release. I would like to go through each one of the facilities real quick. In Huzhou, as Mr. Wu previously noted, we're building a new building on our existing campus. We're ordering enough equipment to support 2-gigawatt hours of capacity. But the building is designed to support 12-gigawatt hours that we will need to add to the utility infrastructure. So the building is coming along, and we're in the process of ordering the equipment right now. In Clarksville, we purchased an existing building. We're in the middle of renovations to make the layout of the building suitable for our needs. Again, the initial capacity will support 2-gigawatt hour per year, but the existing building in utilities will be designed for 4-gigawatt hours so we can rapidly respond to customer demand. And additionally, there's enough space on the existing land to add an additional 4-gigawatt hours to support future customer demand, giving us a total potential capacity of 8-gigawatt hour on the Clarksville facility. Our Berlin facility is operational already, able to ship to customers today. So overall, plans are progressing nicely. We're looking forward to completing these projects to meet customer demand. We believe we will realize some nice efficiencies with some of the new manufacturing equipment we order, including a higher level of automation, resulting in less head count.

Awesome. Thanks for that color. I think we've got time to cover one more question from our retail investors, and I believe we have a question on the investment professional line as well. Mr. Wu, a few of our investors have requested additional clarity with respect to Microvast plans in the passenger vehicle market.

Yes, sorry. While we are focused on the commercial vehicles, for passenger vehicles, as we said before, we think all the -- most of the car manufacturers, they are going to build a battery manufacturer, I mean, by themselves. Microvast intended to be their material supplier, a component supplier and as well as we plan to license the technology to them as well. If we develop it, a very advanced technology, if they like it, that's our -- the overview of the passenger vehicle business. Thank you, everybody.

Great. I think we have one more question from the investment community. So I'll pass it back over to the operator to put him on the line.

Next question comes from [ Jack Kester ] with Bluesky Capital.

Thanks for putting up a great quarter. A lot of us here in the states have been a little bit disappointed in the lack of communication. We'd like to see more clarity, and I understand you have to do the NDAs for a number of your clients, but we would really appreciate any updates you can give us and any granularity and clarity going forward as you progress. We think Microvast is an exciting company, and we're behind you 100%. You've got a big retail base along with the institutional investors. And we'd like to see that grow, maybe get some analyst coverage, et cetera. So anything that you can do to help us out would be greatly appreciated in terms of communication and clearly letting us know. A new slide deck today would have been great. We've been using the one since February. And if you can get that updated, that would be great, too.

Well, Jack, all really good points. And I think you will hear a lot about Microvast going forward. There's actually a lot to talk about. We -- as a newly public company, there was a lot of things we had to get in place, but we believe those are in place, and we did want to start giving some visibility in what we're seeing with new customers. That's why we're highlighting $800 million in new contract wins. That's a pretty significant mark. Now sometimes being able to, as I spoke earlier, being able to name what those customers are, that can be tough. But hey, we're working on those -- getting their permissions to get those press releases out, and sometimes we're going to be successful at doing that, sometimes we're not. But I think we're heading in the right direction. I think you can expect to hear more announcements from us, as we knock down those achievements and make the progress towards our goals.

That's great. We're looking forward to that. Can you give us any color on the U.S. Postal Service contract with Oshkosh?

I really wish I could. Oshkosh is a great strategic investor and a great partner. Again, one of those subjects that I know you can get frustrated with when you can't say anything about it. And it's just -- we're really fortunate to have Oshkosh as a partner.

Understand. Understand. Thank you very much for your time today. And please keep us up on all the developments going on at Microvast. It sounds like it's an exciting time.

Sure will. Thanks a lot, Jack.

At this time, there are no additional questions in the queue.

We will turn it back over to Mr. Wu for closing remarks.

Yes. Thank you all for this afternoon to join our conference and wish you that -- everybody, have a good dream tonight.

This concludes the conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.