EHang Holdings Limited (EH) Q2 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Thank you for standing by, and welcome to EHang's Second Quarter 2020 Earnings Conference Call. [Operator Instructions] 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 second quarter of 2020. We released the result early today. The press release is available on the 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 Strategy Officer; and Mr. Richard Liu, Chief Financial Officer. Before we continue, please note that today's discussion will contain forward-looking statement made on the Safe Harbor provision of the U.S. Private Security Litigation Reform of 1995. Forward-looking statement involves inherent risk and uncertainties. As such, the Company's actual results may be materially different from the expectation expressed today. Further information regarding these and other risks and uncertainties is included in the Company's 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 state all the figures mentioned during the conference call are in Chinese RMB. With that, let me now turn the call over to Mr. Hu Huazhi, our CEO. Mr. Hu will speak in Chinese. Then our CSO, Edward, will translate his comments into English. Please go ahead, Mr. Hu.

[Foreign Language]

Thank you, Mr. Hu, and hello, everyone. My name is Edward, CSO of EHang. Let me first translate what Mr. Hu said in his opening remarks, and then I will talk about our key business strategies going forward. Thank you, Julia. Hello, everyone. Thank you for joining us on the call today. It's widely known recently the COVID-19 pandemic and geopolitics have brought a huge impact on the global economy. But our business continued stable growth in the second quarter of this year. I would like to express my gratitude to my team for their endeavors. Our total revenues were RMB35.7 million, an increase of 62.7% year-on-year. Gross profit was RMB20.6 million, an increase of 60% year-on-year. It is worth mentioning that under this environment sales volumes of EHang 216 exceeded the level of the same period of 2019. As the world's only AAV company that has achieved commercial deliveries, technology is our core competency. Relying on the EHang 216 platform, we have rapidly developed customized solutions for aerial rescue and firefighting, solving the problems of high-rise firefighting by fulfilling the gap of aerial firefighting. We have not only completed the development of the new model quickly but also rolled out it to the market rapidly. We have also made several remarkable regulatory breakthroughs in China and Canada. We obtained the world's first commercial pilot operation approval for passenger grade AAVs for air logistic in China as well as special flight operation certificate from the Transport Canada Civil Aviation. Finally, due to the COVID-19 pandemic, we re-evaluated our global marketing strategy in order to minimize the geopolitical risk and further enhance marketing opportunities. Notably, Europe is our most important region after Asia, and so was the focus of changes. We established a new regionalized marketing management team, deploying local talents to accelerate the market development. Going forward, we will put more efforts in the Chinese market and also enhance business developments in the European markets. We remain confident but cautious about the COVID-19 situation globally. We expect to roll out more new products, including the one with a fight range of over 100 kilometers, opening up more market opportunities. We believe 200% revenue growth is achievable as our continuous efforts in innovation lead to stronger development. So those were Mr. Hu's remarks. Now let me cover some of our business achievements in this quarter. As Mr. Hu just mentioned, we made a number of breakthroughs on the regulatory front, which is key for progress in the AAV industry. We were the first company approved to use passenger grade AAVs for air logistics. With this approval, we will start trial air logistic operations using the EHang 216. We would do commercial pilot operations in the category of 150 kilograms plus heavy-lift cargo transport between ground and a hilltop and between shore and islands and a customer site in Taizhou. This approval was based upon a pioneering regulation for specific unmanned aircraft under the globally recognized Specific Operation Risk Assessment or SORA framework of the Joint Authorities for Rulemaking of Unmanned Systems or JARUS. Starting from this air logistics trial in Taizhou, we intend to gradually expand this application to more locations in China. This is an important milestone for EHang as it enables us to accelerate the commercialization of AAV technology and air mobility solutions. We believe this will benefit the long-term development of UAM applications. Another exciting regulatory breakthrough was the EHang 216 obtained a special flight operation certificate issued by Transport Canada Civil Aviation. Notably, this permit was the first of its kind permit for the periodic operations of passenger grade AAVs in North America. This fully demonstrates our leading position in the global AAV market. It is a positive signal from global regulators to establish a supportive and sustainable regulatory environment for the UAM industry. In smart city management, EHang completed the deployment of a command control center in the city of Hezhou in China. This center was the third of its kind after those in the cities of Shaoguan and Lianyungang. This deployment demonstrates our ability to build this type of sophisticated centralized command control system designed specifically for urban air mobility uses. More importantly, it also shows our strong commitment to further expand and scale our business. To demonstrate our AAV technologies in use in smart city management, in April 2020, we participated in a flood emergency response exercise organized by the local government in Shaoguan, China. In this exercise, large-scale AAV operations were conducted efficiently and autonomously. As a supporting partner, EHang responded quickly by sending 10 remotely managed AAVs to four emergency sites. This exercise fully demonstrated the real application of our AAV technologies in an emergency situation. It also showed our ability to further explore new uses with efficiency and effectiveness. Moving to our business expansion. The increasing market demands and our strong commercialization ability of AAVs are driving us to expand our production and upgrade our manufacturing capabilities. With the local government support, we are going to build a new AAV production facility in Yunfu city of Guangzhou - Guangdong Province in China. The facility will include an R&D center for air mobility solutions and a training center for operations and technical talent with an initial annual capacity of 600 units. We are excited with our facility expansion and we expect it to further support the growth of air mobility business in China. Looking at air tourism services, in May 2020, EHang partnered with the Shenzhen-listed tourism platform company LN Holdings to develop the world's first UAM themed hotel at the LN Garden Hotel in Guangzhou, China. A variety of air tourism service using EHang AAVs are planned for the hotel such as aerial sightseeing, transportation, air logistics and aerial media light shows. We are excited to establish such meaningful collaboration which not only broadens the uses of AAVs but also develops a new commercial use case for EHang by providing customers a brand new interesting experience of air tourism. Finally, I would like to announce the appointment of Mr. Dongming Wu, CEO of DHL Express China as an Independent Director of EHang. We are greatly honored to welcome Mr. Wu who has over 30 years of valuable experience in the global delivery and logistic industry. We believe Mr. Wu will help our strategic development, especially in air logistics and further enhance our corporate governance. To conclude, we continue to deliver solid performance in this quarter. Despite the difficult market conditions, we are optimistic about the long-term promise of the UAM industry, and we believe our first-mover advantage will enable us to drive robust growth in the near future. 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. We achieved a significant revenue growth again this quarter, quite an achievement considering all the uncertainties and challenges. Total revenues were RMB35.7 million, up 62.7%, growing across all revenue streams. Our core business of air mobility solutions represented 63.5% of total revenues. Sales of the EHang 216, the Company's flagship passenger grade AAV reached 16 units compared with 14 units in Q2 2019. Gross profit in Q2 was RMB20.6 million, up 60%. We maintained a high gross margin of 57.6%, a slight 0.9 percentage point lower than that of Q2 last year. The slight margin fluctuation is mainly due to change in revenue mix. Adjusted operating expenses, excluding share-based compensation, increased by 41.9% to RMB35.4 million. As a percentage of total revenues, it was 99.2% as compared to 113.8% in Q2 2019. The increases were mainly due to higher R&D expenses related to the continuously strengthened product development efforts and additional G&A expenses related to public company operations and provisions in light of COVID-19 evolvement. As revenue continue to grow, there is operating leverage that supports our path towards operating profitability. Our adjusted operating loss in Q2 slightly decreased by 6% to RMB11.1 million, and adjusted operating margin improved by 22.8 percentage points from negative 54% to negative 31.2%. The comparison of adjusted net loss is in line with that of adjusted operating loss. Looking at our balance sheet and cash flow, we ended the quarter with roughly RMB258 million in cash, cash equivalent and short-term investments. Overall, the financial results in Q2 was solid, with significant revenue growth and stable high gross margin despite the COVID-19 pandemic. Now let's turn to the outlook. We maintain our forecast of at least 200% growth in annual revenues in 2020 based on the current momentums in economic recovery and the expectation of no further major interruptions impacted by the COVID-19 pandemic. The Company is confident in its long-term growth outlook, given the growing number of practical uses for AAVs in the global UAM market, especially in China. 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 Tim Hsiao from MS. Please go ahead.

Hi, Mr. Hu, Richard and Edward, thanks for the call and also taking my question. So just three quick question. The first one, I think Mr. Hu just mentioned we start seeing some recovery across the board. So could you probably quantify or provide some updates how is the recovery pace of the domestic market and also the overseas? And my second question is the - more like the supply chain hiccup because I think June - our past few calls, you mentioned during the COVID-19 pandemic, there is more like a supply chain but likely disruption. So just wondering if that has all been back to normal and do we need to pay additional, like probably the additional upfront payments to secure component supply. And my last question is about new project because I think Edward just mentioned about the new collaboration and project about firefighting. And on top of the project Edward just shared, when can we expect more significant progress or when can we start monetizing those projects? Those are all my questions. Thank you.

Okay. Thank you, Tim. So let me answer your first question. The first question is about the recovery pace of overseas operation, right, so - and the impact on the - on both domestic, right. So basically, you know that this COVID-19 pandemic is quite a big surprise. And at the beginning, I think we see more impact on the domestic side. But now, it's switched to the overseas market. So our focus is more on the European side - the European market. And - but we also have some clients in North America such as the ones in Canada and also the ones in Japan and Korea. So I will start with Europe first. Right now, we still see - we are monitoring the situation. And we see still lockdowns or travel restrictions in some of the European countries. That means that there are some negative impact on the operation of the 216 in European market. But we also made some breakthroughs in the light show performance business, for example, because for this year, we are trying to penetrate the European market with our drone light show performance business. So right now, we are happy to see some breakthroughs with the progress going now. And also, as you are aware of, the recent permit we have obtained in Canada and also in Norway. So we believe that if the COVID-19 pandemic gradually disappear, we are going to see the big progress in those market because, so far we have obtained the operation permit - flight permit from those authorities. So I think that's very important because with that permit, we are able to do more demo flights in those markets. For example, we are actually planning a number of flights in Europe in the next 30 to 40 days in Europe such as in Linz, which is the third largest country in Austria and in Rotterdam and another city in France. So we - actually, we see those market with good enthusiasm in our project. And also I just want to mention that just recently, we delivered a 216 to - for Japan, and we are also getting a new order from Korea. I think in North Asia, those markets are new breakthroughs for us. So we are happy to see that - to make new progress in those North Asia market. So overall, we think that the COVID-19 pandemic is definitely negative for our overall market expansion, but we still see the good opportunity with good client interest in those markets. So we are hopeful that after this pandemic getting under control, we should be able to expand in those market quickly. Thank you.

And this is Richard. I will take your second question. So basically, at this moment, we see our supply chain should be in a safe situation. Based on the experience from the early days of the pandemic, we have built some safe level of some key component and material. And we believe this will help us to strengthen our supply chain capability. And in addition, we also continue to enhance our relationships and working more closely with some key suppliers. And going forward, as I mentioned earlier, if there will be no major interruptions, our supply chain should be okay.

Yes. As regarding to the third question is about our new version of the firefighting AAV which was just released by the end of July. I think that was very interesting product for this year, and actually the release of this project is a bit delayed. It's due to this pandemic thing. But we are happy that they got finally released. And immediately after the release, actually we got very strong interest and - from different - especially from the government side. So far, we have secured order of several units, two new for government already. And actually, today we are attending this emergency equipment show in Guangzhou. So we attended this show with very good client interest as well. So we are hopeful that this can be a new driver for our sales for the next 12 months because why - we think that this is a very unique solution for high-rise firefighting because I understand that the latest - the best closed advanced ladder the fire engine vehicle with a height limit of only 120 meters high. So for any skyscrapers above that level, there is no better solutions. So basically there is nothing can reach that level. However, with our AAV, our 216 - EHang 216 firefighting AAV, it can fly to up to the level of 500 or 600 meters high, and with this the bombs that can break the glass, it can release the carbon dioxide and also we have got a very strong extinguisher that can put out the fire. So we did the very successful exercise with the fire department in LN government. So I think this got widely recognized by the government officials. So far, we are in cooperation with the Ministry of Emergency in China [indiscernible] and the different emergency departments in different provincial governments, including Guangdong and Hainan, et cetera. So yes, we are quite optimistic about this new product. Thank you.

Our next question comes from the line of Vincent Yu from Needham & Company. Please ask your question.

And I have a few questions. The first question is - well, about the new product categories. So as we have explored new use case such as the firefighting and air ambulance for 216 model, and then you also just mentioned that we are working with the National Emergency, like department. What are some other use cases you think are nice fit for our model and also easy reach that's - and we are - that we are - EHang is paying attention to? Second question is about the case you mentioned to work with the hotel, LN. What kind of revenue or revenue sharing model we have on that case? And third question is about our order book. Is there any comments you guys can share on next year's order book as we are entering September or what kind of goal we have for next year if it is available to share? Thanks.

Vincent, this is Richard. I will take your first question. So basically, our experience is that after we commercial - start commercial delivery of our EHang 216, we have customer feedbacks from different background. And all this new use cases are actually results of related customer feedback, which represent the practical needs. And interestingly, the ranges required are typically around 10 kilometers which are nicely fitting to the current capability of EHang 216. So EHang 216 has become a - like a - like a product platform, and on this platform more practical use cases can be further developed and deployed. So basically, in addition to what you have known as aerial sightseeing, aerial firefighting, there are other use cases which some customer are in discussion with us for potential orders such as aerial logistics, aerial emergency transport and rescue. As Edward just mentioned, there are interest from the emergency management department or ministry in China. And other potential use cases could include aerial [indiscernible] aerial cargo transport in harbors and for near-shore marine platforms such as offshore oil rigs, sea ventures, etc. And probably Edward can take the second question.

The second question regarding our cooperation with the Lingnan Group, right? So understand that Lingnan Group is a SOE, is a platform company of the Guangzhou government. This is a conglomerate. It is a very large group with business segments in the tourism, in hotel, in food processing and restaurants, etc. So it's a very big group. It has a small branch which is listed in Shenzhen exchange market. So basically this is a very credible large SOE group. And so basically, our cooperation or partnership is based upon different aspect of our project. For example, for the 216 AAV is going to be the sightseeing. So we're going to provide the of tourism sightseeing service in their Lingnan Garden Hotel, which is a very nice hotel situated in line shop in Nansha in Guangzhou. So this is going to be the first model, first cooperation between our Company and the Lingnan Group. So after the successful operation of this business, we're going to replicate in the two other luxury hotels operated by the Lingnan Group. And we also are going to cooperate in the light show business. For example, we are going to provide the drone light shows for the Lingnan Group to celebrate the holidays in their hotel and in their tourism spots and amusement parks, etc. So we - basically, we signed a large framework agreement as to provide such services. And finally, we are also talking about providing the logistic services for them because they own a large chain of this food processing and restaurants and so they are going to have the centralized kitchen that to send the food to different restaurants. So it's interesting an project that we may use our drones to deliver the food for them. So for such a big group, there are so many different aspects that we can cooperate at. So it's very exciting for us. So far, we are just testing the first project. And so, basically, waiting to provide the service. So at this stage, we're not talking about the sale of equipment yet. We are talking about the potential service we're going to operate the AAVs for them and then we can get paid for the service. Thank you.

And I'm going to take your third question. So basically we are advocating potential business leads for the increasing number of use cases on - but sorry, we don't have a specific number right now to share with you. But it is expected that next year, we will continue to achieve significant growth as we are at the early stage of a huge new market and we are probably the only supplier in the market and there are more use case opportunities to be developed.

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

I have two questions. First, you had talked a little bit about the longer-range, 100 kilometer device. I'm wondering if that simply requires a larger battery pack or what other innovations you might be looking at to increase the range. And secondly, I was particularly interested in the Canadian regulatory approval. I was wondering if you can discuss a little bit what that use case is, if it's tourism or firefighting or something else. Thank you.

So, for - right now, I think it's tricky, because we have not officially released this 100 kilometer range product yet. But since our CEO, Mr. Hu Huazhi, is excited to talk about this and so - that's what we can say, that within our pipeline we actually have a number of new things in our pipeline, but this definitely will be a very interesting one, because right now, as you can see that our 216 AAV can sustain at 21 minutes flight with about 35 kilometers. Some people say that this probably is not enough for some longer-range travel. So that's why it just triggered our interest in exploring the longer-range product. And what we can tell you that, this new product is pretty much ready for release. It's already in a good shape. And it can still carry two passengers, it can fly a much longer range. And so we think that can be another driver for our new business in future. Thank you.

Joe, this is Richard. I'm going to take your second question. So basically, the approval we got from the Canadian authorities, it is approval to allow our partners in Canada to conduct trial flights in a period of time; not just for one time, it's for a period of time. This is a breakthrough for the authorities in North America to issue relevant approval or permit for this new category of aerial vehicle for a period of time. If I remember correctly, it is until next April. So from now until next April, our partners in Canada can conduct trial flight with our 216s. And you probably know that partner. Just now, Edward also mentioned a little bit. It is the - it is United Therapeutics. They have a base there. And they will - so basically, the potential use case is a typical medical emergency transport, to transport organs for transplantation.

That's very interesting. May I ask a follow-up question?

Yes. Please go ahead.

Do you believe that there is potential for air tourism business in the Canadian or North American market?

Yes, of course, because North America is so - they're very rich in tourism resources. There are so many beautiful scenery sites, definitely. So - but the major bottleneck or hurdle is the regulatory restrictions, right. So just - but we think we made a very good progress in getting this approval by the Canadian authorities and also in January this year, we did a demo flight in North Carolina. So that was a very good milestone we achieved so far. So if we can get further permit or clearance from the government, definitely we see a huge market potential because right now, we - actually we see a lot of clients in North America approaching us asking us how to sell our unit and launch our operation in North America. But first thing is due to this pandemic thing and the second is, we are working on this permit, right. So - but we definitely see very strong market demand, and with real interest in those markets. So, yeah, so we remain very optimistic about those markets. Thank you.

Our next question comes from the line of [Damon Donnelly from Equities Fund]. Please ask your question.

I just quite a quick questions, I was wondering if you could add any data on the goals of the AMS emergency medical services drone projects that you're working on. And the second question what's the roadmap look like for logistics and by the partnership with DHL are there any major milestones for that in 2021? And for the 100-kilometer range drone is there any color you can add to the like on the technical - and grew quite technical achievement in terms of how that's being achieved, like what kind of batteries or how are you going from in 35 kilometers to 100 kilometers is a pretty major milestone?

Sorry then, let me just clarify your question so first question is about emergency medical service right?

Yes.

The milestone, the data right?

Yes what are the goals for that like it is making that were with paramedics or yes replace ambulance or is it more for like organ transplant or like carrying air logistics?

Yes, actually I think, I don't know whether you are aware of our press release we did just several days ago.

Yes.

During weekend so, we just got invited by the IQ International Organization of Aviation authorities. So we've got invited by them to join a very interesting project of this ambulance. Ambulance project means that IQ is going to design a very smart autonomous air ambulance. So we are very privileged to be invited to participate in the project by contributing our technology, our motors, engines, et cetera. So definitely that shows the recognition of our project. And as you can see from our website, we just did some video clips on our website. Showing what do we did during this China and the pandemic situation in early of this year. Yes, because our autonomous our vehicle, which is controlled by the computer can manage very accurately and safely on the rooftop of the hospitals. So, actually you can see from that video. And we did the transportation of the medical supplies from the ground to the hospital. And this is very safe because given that the disease can be very contagious. So, with the no staff within this vehicle so it just eliminates the risk of being contacted right. So yes we actually - we have made these products - in a very good shape. And so, I think the IQ's project or this ambulance just opened another door for us to expand our project in the global market.

Is the goal of that project is to transport patients or like people like going to AR or the goal not that ambitious?

Sorry, I cannot hear clearly please repeat?

Is the goal for that project to transfer patients in emergency situations or is it not for paramedics?

Yes, so our AAVs are designed for both schools and the passengers and the patients. So basically our AAV can carry passengers and then meanwhile, if you don't carry passengers we can also carry medical supplies or even organs as our clients are planning. It can carry and the plot for example, for emergency situation. So it has a very good application in real life.

Okay. Second question is - what's the roadmap look like for the logistics use cases for 2021?

You mean in-2021 for logistics?

Yes, like for DHL partnership or anything else?

DHL partnership, okay, okay, yes so DHL partnership we are in good cooperation with them. I think but so far, we are still in early stage because from a DHL perspective, they have a lot of very sophisticated demand. For example you know we are not going to design the drone for them. We're going to design the whole solution that means we are going to provide the drones plus the smart box right. The box product can automatically charge the drone and also shelter the drone. And also can show the parcels automatically and also we are going to deploy the facilities in different places. So far, the project is going so far so well. So we are close to the end of the Phase 1 of our cooperation within this or next week. So we actually, we made a very good progress in Phase 1. So after that we're going to move to Phase 2. So that means we are going to have more real application used cases. So I think this is ongoing project and both sides showing good interest in 2000 units, so far yes we are happy about our cooperation so far.

And the final one was just how you extended the range from 30 kilometers to 100 kilometers, is it new battery technology in there or is there anything you can add to that achievement?

Yes so, I think everyone is very - shows very good curiosity. So, I would keep this as a secret right now because it's not time for us to release it and once we release it, you are going to be surprised. So yes stay tuned.

Our final question comes from the line of Vijay Rakesh from Mizuho. Please go ahead. Vijay, your line is open. Please go ahead.

On the call, you mentioned, EHang 216 you had 16 units. Just wondering what the geographic breakdown of those sales were Asia versus Europe, et cetera. And number two on the two European countries, can you elaborate a little bit more about those countries and what the applications are cargos or logistics? And the last one number three, I think you mentioned Japan and Korea as new markets, what applications are you seeing there? Thanks.

Sorry we missed your first question, can you say it again?

The EHang 216 the 16 units on the quarter just the geographic breakdown. How many of these units were for Mainland China versus or Asia versus Europe versus North America?

So Vijay you're referring to the second quarter right?

Yes.

Okay. So for the units of 216 we showed in Q2. They are all in China.

Thanks.

So yes, so Edward.

Yes so, your second question is regarding the two European countries for what for - the operation?

Yes you mentioned Rotterdam and one of the country?

Yes, actually we have been supplied in three countries, one Linz of Austria, which is the third largest country in Austria - and third largest city in Austria. And so we actually have been talking about with this project for a long time both parties and the biggest of this is also introduced by our partner of FACC. So, we are going to do a demo flight there. So Linz is a very beautiful city with a beautiful river. So we are going to fly across the river. And then what in Rotterdam is about the port because of the local port authorities a very interesting, you know project and because - normally it takes very long time for them to transport the sea crews from the vessel to the harbor. It is very expensive and very time consuming. So by using our AVVs hopefully this can help them to improve the efficiency. And yes also another potential client in France is also inviting us to fly in France as well. So we are actually planning a number of demo flights in upcoming months. And your final question is about the market in Japan and Korea right. So in Japan, right now it's a private company, it’s a private company who purchased our AAV and they are going to operate in Japan for - just for sightseeing. So I think but right now due to this pandemic thing and travel restriction, we are unable to launch the flight there, but we are going to fly in Japan very soon after this situation is getting better. And in Korea it’s also similar because I think it's the local governments, who are interested show the interest, interest in our project in our AVVs and place order for AAV and they show actually in Korea, it’s going to be a multiple demo flights in different cities. So I think with successful demo flight in Korea, it's very hopeful that we can open up new market there.

And the application in Korea?

Yes in Korea, it's more about this urban transportation and tourism.

Right, thank you. We are now on top of the hours of this earnings conference call. If you have more questions please reach out to us via email. Now let me turn the call back to Mr. Lui for closing remarks.

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

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.