Microvast Holdings, Inc. (MVST) Q4 2021 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Microvast Fourth Quarter and Full Fiscal Year 2021 Earnings Call. [Operator Instructions]. I would now like to turn the conference over to Sarah Alexander, Microvast's General Counsel. Please go ahead.

Thank you, operator. Welcome and thanks everyone, for joining us today. Mr. Yang Wu, President and Chief Executive Officer; and Leon Zheng, Chief Financial Officer are hosting today’s call. Sascha Kelterborn, our Chief Revenue Officer, is also on the line to discuss the product launch we announced last week. Dr. Wenjuan Mattis, Chief Technology Officer and Shane Smith will also be available to participate in Q&A. Ahead of this call, Microvast issued its fourth quarter and full fiscal year 2021 earnings press release, which can be found on the Investor Relations section of our website ir.microvast.com. As a reminder 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. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. 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 our annual report on Form 10-K filed earlier today. 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'll turn the call over to Mr. Wu.

Thank you, Sarah, and good afternoon everyone. 2021 was a challenging year with an anticipated headwinds. Despite those headwinds, our team rallied together to grow revenue 41% compared to 2020. I'm proud of the accomplishments of our team. Global supply chain disruptions were a major challenge in 2021. For Microvast, the impact was largely indirect. This global semiconductor shortage caused many of our OEM customers to delay certain projects, which in turn also shifted demand for certain of our product to the right. The delayed products remain in our forecasted contractor revenue, and we expect to begin seeing more revenue from those large contracts in later this year, and the further ramping up in 2023 with timing of those projects, signing up with our on-going manufacturing capacity expansions. In addition to supply chain challenges, we also faced increasing raw material price throughout 2021. Unfortunately, this is a problem that we expect to continue into 2022. We are taking steps to mitigate the impact original raw material prices where possible, including entering into long term supply contracts, and seeking additional sources of raw materials in some instances. At the same time, we are discussing the possibility of price adjustments with our customers as a direct result of those inflationary pressures. We will review our financial performance in more detail in a few moments. However, I would like to touch on a few highlights. In the first quarter, we challenged our production team to meet demand, which included a seasonal influx of quick turn orders. It was not easy, but as a team executed and it turned in a solid Q4 revenue performance of $66.8 million, which represents 39% growth over the same quarter of prior year. It is worth noting that our revenue grows substantially in each of the four physical quarters in 2021 compared to 2020. On a full year basis, this achievement translated to $152 million in revenue representing 41% gross comparing to the prior fiscal year and achieving the guidance range we established in August 2021 following our business combination. We ended this year with a strong backlog of $114.5 million, representing 161% growth over $43.8 million in backlog at December 31, 2020, and a sequential growth of 117% over $52.7 million in backlog at September 30, 2021. This backlog creates a solid foundation going into 2022. Our business development team has done an excellent job of generating long term, multi-year sales contracts with new customers and expanding existing relationships. This is evidenced by growth in our forecast contract revenue from $1.5 billion in February 2021, the date when we know the merge belongs and to $2.5 billion added at year-end. When we refer to forecast contract revenue, we are describing backlog plus management's estimates for revenue we expect to realize from existing contractual relationships with customers. Most of those contracts include estimated volume requirements. However, they do not typically include a volume commitment we expect that to realize current forecast contract revenue between 2022 to 2031. We continue to have success with large OEMs in a commercial vehicle sector and are excited for the journey ahead. Next, I will provide an update on the construction progress at our various manufacturing operations. We are pleased with the progress. So the environment is certainly tied to execute construction projects given labor shortage, inflation, logistic hurdles and other challenges. As you know, we're in the process of constructing a new building on our existing campus in Huzhou, China, which we refer to as the phase three. The progress at this site has been impressive from a Greenfield site in July 2021 to finishing the roof installation in less than six months. We posted an updated time lapse video to our social media account in later January. Once completed, this building will feature approximately 700,000 square feet of manufacturing space. The manufacturing equipment has been ordered, and we will be ready to begin serial production by the first quarter of 2023. Completion of this initial phase will bring our total capacity in China up to five gigawatt hour per year. In addition, we have space for more growth as the new facility is large enough to expand our total manufacturing capacity in China to approximately 12 gigawatt hour per year. We are also making progress in Clarksville. The focus of the project has been renovating and remodeling the internal of the existing building. We expected to deliver delivery and installation requirements in Clarksville to lag our Huzhou project by approximately six months. We expect to begin serial production in mid-2023 at this site. In Orlando, we have activated recruiting personnel for the research and development facility. We have also begun with detailed planning process to convert the existing space into laboratories suitable for future global R&D projects. Our module and pack facility in Berlin, Germany is complete and is in production as projects with European OEM began to ramp up. This facility received ISO and IATF certifications. We distributed a press release announcing the two new lithium battery cells as well as our Gen 4 battery pack last week. We are excited about our customer’s response to the performance of those cells and expect those solutions to become important revenue drivers in future years. Before turning the call over to Leon to discuss our financial results, I would like to invite our Chief Revenue Officer Sascha Kelterborn to discuss those new solutions in more detail.

Thank you, Mr. Wu. It's my pleasure to be here today to discuss these exciting developments. By introducing the new MpCO-48Ah and the HpCO-53.5Ah cells to our -- our commercial customers can now select a battery solution based on their operational requirements. We can now provide a high power or a high energy battery with what we believe is market leading performance in each category. These new cells are built to offer overall better performance with optimized energy density, cycle life and total cost of ownership, while reserving the important fast charging capability. Both cells are available in the same dimensions and can be integrated into the new standard Microvast Gen 4 battery packs. The new packs have the same black box design as our old generation battery packs. These high level of compatibility of the new series allow us, the OEMs to switch batteries on the technical requirements without changing the power paying design or the interfaces. Compared with the Gen 3 battery packs, the new version delivers around 20% more energy and power. The new pack has additional safety features at the model and pack level to improve -- management and meet the toughest safety requirements. The Gen 4 battery packs will be certified to meet global cross regional battery standards. In addition, the lightweight and long life pack design combined with the new battery cells present an attractive value proposition in terms of total cost of ownership to our customers. Our new series of battery cells and pack cover the common and future demands of commercial vehicle OEMs. In addition, we shared a brief new product video on our social media piece yesterday. With having said, that I would like to turn the call to my colleague Leon Zheng, our CFO to discuss our financial performance.

Thank you, Sascha. Good evening, everyone. I will spend a few minutes to discuss the results of our operations in 2021. Despite many industry wide and the global [Technical Difficulty] we successfully grew revenue in every quarter during 2021 compared to the same period in 2020. The achievement culminated in 39% of revenue goes to $66.8 million in Q4 2021 compared to $48.1 million in Q4 2020. Business grew revenue 41% from $107.5 million in 2020 to $152 million in 2021. We posted gross profit $1.2 million in Q4 2021 compared to gross profit $8.7 million in the same period attributable to include service accommodation expense, to accrued a warranty expense, inventory impairments and the price increase. Growth loss was $47 [ph] million compared to the gross profit of $17.1 million in 2020. The change was largely due to the increase in product warranty expense of $49.5 million approximately $17 million, which were related to the prior quarter. In addition in cost of an appointment in 2021.[Technical Difficulty] expense and the inventory impairment related to legacy products as well as share based compensation with all the high overhead gross profit $28.1 million in 2021. This translates to a gross margin of 18.5% for the full year of [Technical Difficulty]. Expenses were $52.2 million in 2021 compared to [indiscernible] in the current year period. For the full year operating expenses were $157.4 million compared to $49.2 million in 2020. The increase operating expenses will now cast stock based compensation accommodation for the product, and $78.6 million for the full year of 2021. In addition, the company increased headcount to support its planned growth initiative and also incurred additional expenses related to operating as a public company. In the world, the net was a $206 [ph] million compared to the net loss of $33.6 million in the prior year period. The chart is [Technical Difficulty] we discuss about. As we mentioned we had backlog of $114.5 million at the end of the year 2021 was up more than double year-over-year, as well as sequentially. This gives us confidence going into 2022. Moving to the balance sheet. We ended the fiscal year of 2021 with approximately $536.1 million in cash, cash equivalents and restricted cash. And we are continuing to use capital to expand our manufacturer capacity. Capital expenditure totaled $87.9 million in 2021 compared to $18.6 million in 2020. The increase was largely driven by the Company’s manufacture capacity expansion. We expect the spending to further -- in 2022 and estimate our capital expenditure will be between $300 million to $350 million for the upcoming fiscal year. With that, I will turn to Mr. Wu to discuss our business environment.

Thank you, Leon. The last several years have been full of challenges, many of which were unprecedented. Our team pushed forward and we are continuing to build a strong foundation for future growth. We believe our business can sustain a strong growth rate going forward. Our preliminary guidance for the upcoming year is 30% to 45% gross compared to 2021. We are optimistic about 2022; however developments over the last several weeks have added a level of uncertainty. I'm pleased to note that we do expect a strong start to the 2022 fiscal year. We anticipate that our revenue for the first quarter will be between $32 million to $34 million. This representing 115% to 128% gross over $14.9 million for the prior quarter. Thank you all for your time today. Before I turn this call over to Sarah, let's pray for peace. Everyone deserves to have a beautiful and peaceful life.

Thank you, Mr. Wu. I'd like I'd now like to turn the call back to the operator to moderate the question-and-answer session.

Thank you [Operator Instructions]. Your first question comes from Adam Jonas from Morgan Stanley. Please go ahead.

Hi everybody. Good evening. And thanks for doing the call. Mr. Wu, thanks for those really, very kind and thoughtful comments in the prayer at the end. That's, I wish more people did that. Thank you. Just a couple of questions, first, on the capital strategy. I think just your CapEx alone will spend, of course, well over half your cash balance. So I'm, I think, if you add some reasonable amount of cash, operating expenses over the year that if I were to grow it, let's say in line with your growth of revenue, just for just for discussion, you're going to consume maybe two thirds or more of the cash. So tell us what's your capital strategy in terms of debt, or equity or government loans or grants, and your minimum cash balance, please, that you would expect you to run the business what you would what you would not want to go below? Thank you.

Leon, you want to answer this question?

Sure, definitely. Thanks for the question. Yes, as we are, there are many headwinds and so many obstacles we are facing. We will not we could not give you the detailed quantitative figures. But from our side, we ended up 271 [ph] more than 536. So, the question [Technical Difficulty] and we should have a minimum cash balance around the $200 million or above. Okay, these, we need to be okay.

I'm having great difficulty hearing you. I'm so sorry. But your connection is, is not great. And I heard you said a minimum cash balance of $200 million. I just want to confirm that. And I didn't know if you had any strategy or even at a high level, how you would approach bringing in more capital before you need it. It's always better to bring in capital when you have a growth opportunity before you reach a minimum cash balance. So I'm curious how you prioritize the various sources, please.

Sure, sorry. I just repeat what I said. I couldn't hear it. I just apologize.

Leon, your phone is interrupted, you know, the almost every sentence. And it's not continuous speaking.

My apologies, can you hear me now?

Yes, well, we'll try it again. And then otherwise, we'll ask different questions. And we can follow up. But we can hear you. I want to try again, please. Yes, I think so. So let's, let's, let's continue. Thank you.

Okay. Okay, sorry, sorry for that, better communication. It's just our lives will be [indiscernible] what I said. So based on our current estimate, we do believe by end of this year, we have we should have minimal cash balance of $200 million or more. So regarding our capital funding plan going forward what do we do? Basically, we expect to lose certain we get get a certain amount of bank balance. So from local bank in, in China, at the same time, we also actively negotiated with the U.S. financial institution to get additional loans by before the end of this year. So if we are able to get additional finance, so our case of balance will be even larger than the minimum amount, we kind of projected.

Thank you, Leon. Then just a one more follow up for me if that's okay. The CapEx guidance of $300 million to $350 million for fiscal year 2022, is this CapEx ready to be spent right now? Meaning if that’s expenditure based on any further final investment decision, environmental approvals, or is it contingent upon any financing commitment, including some of the loans that you that you're pursuing, that have yet to be finalized?

Let me answer the question, I would like to have Shane, our Chief Operating Officer to answer the second part of the calendar CapEx progress. I think that the short answer to your question is the cash balance, we currently are projecting without a consider we get additional balance from the financial institution, either in the U.S. and in China. So the short answer is, the money with the CapEx to be spend in 2022 will come from the equity we reached last year.

Okay.

Yes. So Adam, this is Shane Smith.

Hey, Shane thanks.

How you doing? As you know, we're not looking at environmental conditions in terms of putting the money to work. We've outsold what we have capacity for. So of course, we've got to put that capacity in place. We basically have contracts in place for $400 million. And what you're seeing is just the payment schedule, for either the construction milestones or equipment milestones that we expect. And so some of that money that we've already put to work, just kind of rolls into 2023. And that's why you're seeing only the $300 million and a little over $300 million that we're paying out this year. But again, the contracts are already in place, both on construction and equipment to get where we need to be to execute the plans that the customers are closely watching. Back to your other question, I mean, we are spending a fair amount of CapEx, but we have assets in place, that it's fairly easy to get financing for. And so we are -- we've been fairly on the low debt side, if you will, probably too low for a company, our size for the contracts we have in place, and for the capital we're spending. So we're now putting that work, putting that money to work in a different way to the assets and, and Leon's well, on his way of actually, he's already inked some of those funding options. And so I think we have a little -- we have more room in that area before we would look at the equity market, if you will. I think the equity market is more of a, hey, we keep winning business, where you will hear that story and so far, so good. That's a likely story. Maybe in the next 18 months, but the market is going to receive that message well.

Understood. I really appreciate that chain. And can I just squeeze in one more for Professor Mattis please on the supply chain if that's okay. Dr. Mattis?

Hey Adam, I’m ready here.

Hi, hope you're well, good to hear your voice. Dr. Mattis, so tell tell me, tell us what could you elaborate a bit more on supply chain prices? And I understand you can do LFP and nickel rich, which gives you flexibility because your technology is material agnostic, if you will, which is great. So, but you mentioned long term supply contracts. I'd be curious, any, any capital commitments that you've need to make to make that secure? And I'd love your -- I'd love your thoughts on how we should think about pass through particularly of lithium, which you cannot avoid, which is up about 5x. Prices 5x in China if I understand lithium carbonate. So a little more detail, that would be really helpful. And that's that's my last question. I do appreciate the opportunity. Thank you.

Yes, sure. Yes, so the supply question would actually better refer to Mr. Shane Smith, but I would like to just talk about my point of view. So as for the cathode material pricing, China market went up to 2.5 times, and nevertheless, the other materials such as PDDS [ph] lithium, PM 16, electrolytes, those all ramped up. And as for Microvast’s strategy, the most expensive components in the lithium ion battery is a castle the material. And by making our own material not only increases the capacity, increases the safety and also saves more than two digit percentage for Microvast in terms of the cost. And we do have the strategy collaboration conversations already started in United States, in Europe for the long term collaboration in terms of the recycling of our products, and also in recycled scraped material in the cell production line. So those topics are well on the way. And by this point, Microvast was not limited by the supply chain change the interruptions currently have spread out in the world. And we'll pass this call to Mr. Shane Smith for more accurate.

So Adam it is, as Mr. Wu alluded to in his opening comments, it is one of the areas that we’re closely watching, or trying to engage how long of a contract to get in. Because we are doing a little bit of a do you think, when a price is going to go down or is this a trend we're going to continue to see? Right now, I'm saying it's a continued trend; they will go through 2022 and into 2023. And that's the way we're forecasting. That's the way we're engaging in our contracts. And, and so it's something that we closely watch. On the sell side, we are engaging customers to increase prices, and trying to keep that balance is challenging. So I think that that will be a part of our story, in terms of margin pressure.

Thanks, Shane. Thanks, everybody.

Yes, good to hear from you Adam.

Thank you. [Operator Instructions] Your next question comes from Gabe Daoud from Cowen. Please go ahead.

Yes, hi, thanks for taking my questions. My first question is do you guys plan on providing any additional details on the backlog regarding regional or customer dynamics and how much of the backlog will be realized in 2022?

Sascha, do you want to go ahead and take that question?

Yes, please. I will go ahead. Thanks for that question. I mean, most of the backlog which we have right now will be realized in 2022. Partly some backlog could be shifted to 2023. But actually most of it will be realized in 2022. So if we talk about the forecast of contract revenue, this is something which will start end of 2022 and move all the way to 2031 as already mentioned, but the increasing factor will start extremely to various vehicle projects in 23, as well as in 24.

Got it. And then regional -- question I've gotten yet regional...

Yes. Okay. Yes, regional I think we can go ahead. Yes, Shane go ahead please.

Go ahead Sascha. Go ahead.

Okay, regional it will be will be dedicated to Europe as well as to the Asian, India and Asia market, mainly and also to the U.S.

Can you provide any additional percent percentages or not?

Not, I would not at that stage. Let's, so it's way easier to shift that in 23 and 24. Because a lot of projects that we are starting. We're building up as already mentioned the in the core the capacity is now for the U.S market. And, and so mainly it will be dedicated in the first step to the to Europe as well as to a to especially also Asia. And the second step, it will directly move over to the U.S.

Got it. Thank you. And the second question I've gotten from several investors was regarding your lawsuit with her former general counsel. I was wondering if you could give us an update on where that stands, any plans to get this overhang behind you.

Sure Gabe, this is Sarah Alexander. The -- we a trial has been scheduled and postponed a number of times. It's currently now scheduled for May but yes, we would, we would like to get that behind us and move forward. It's been outstanding for quite some time.

Perfect, thank you.

Thank you. This concludes the question and answer session. I would like to turn the conference back over to Sarah Alexander for any closing remarks.

Thanks Matt. Before we go, we received some great questions in response to our ask Microvast campaign. Well, we don't have time to address every question we receive. I would like to take a few minutes to address a few important themes. Thanks to everyone who submitted questions, we appreciate your feedback and keep them coming. The most frequently asked question was a request for an update on the status of our S1 registration statement. To provide some additional color on the timeline of events our business combination with Tuscan closed on July 23, 2021. Our understanding is that shortly after the completion of our business combination, the SEC Chairman made public remarks directing this SEC staff to quote take a pause for now on approving the registration statements of certain issuers with a significant portion of their operations in China. We filed our initial S-1 registration statement in the middle of this pivot in mid-August. Over the course of the next several months, we received correspondence from the SEC following each of our S-1 filings, and have responded with amended filings to address those comments. Most of the comments have related to clarifying certain aspects of our operations in China, as well as the implication or potential implication of current or future laws on our operations. As an example, we were requested to make additional disclosures following the PCAOB and the SEC implementation of the holding foreign companies’ accountable act in the December 2021, January 2022 timeframe. It's also our understanding that many of the comments we received were issued by the SEC to many other similarly situated companies during the same time period. In addition, we've been informed by the SEC staff that due to the significant increase in the number of recent transactions, the SEC’s internal review process and turnaround time is slower than issuers may have experienced in previous years. Finally, the current delay between our last S-1A filed in January 28, 2022 is because the financial statements included in that filing were current as of September 30, 2021. Those financial statements became stale in mid-February, and the document is required to be updated with December 31, 2020 results. Our annual report on Form 10-K was filed earlier today. So we will now turn our focus to the S-1, get the financials and disclosures as of 1231 updated quickly and get the next amendment on file as soon as possible. We recognize that this process has taken longer than is typical. And we fully understand our shareholders frustrations. We’re moving the process forward as swiftly as possible and we appreciate your patience and understanding as we bring this process toward a conclusion. In addition, we've had several people ask for clarity about the holding foreign companies accountable act and its potential impact on Microvast. So I can provide you with a little bit of additional background information on the law on the regulation which originally became law in December of 2020. Among other things, the statute requires the SEC to identify public companies that have retained a registered public accounting firm, to issue to issue an audit report where the firm has a branch or office that is located in a foreign jurisdiction, and the PCAOB has determined that it is unable to inspect the books of such accounting firm. On December 16 2021, the PCAOB published a list of the accounting firms in Mainland China and Hong Kong that it determined it is unable to inspect. That list does include Microvast auditor, a Mainland China office of Deloitte, as well as the Mainland China and Hong Kong offices of other major accounting firms also located in the region. On January 10, 2022, new SEC rules became effective, which amended the disclosure requirements in annual reports for issuers that the SEC identifies as having an audit report issued by one of the above mentioned accounting firms. The SEC refers to these issuers as commission identified issuers pursuant to the HFCAA if an issuer is a commission identified issuer for three consecutive years, the SEC shall prohibit the securities of the issuer from being traded on a securities exchange. Microvast does anticipate that it will be designated as a commission identified issuer following the filing of its 10-K earlier today, but we've also begun discussions with our auditors to determine a path forward and a timeline for compliance as we expand and diversify our global operations. Those are all of the questions that we have time for today. Thanks, everyone for joining and this concludes today's call.

This concludes today's conference call. You may disconnect your lines. Thank you for participating. Have a wonderful day.