Microvast Holdings Inc (MVST) 2023 Q4 法說會逐字稿

Thank you for standing by, and welcome to Microvast fourth quarter 2023 and full-year conference call. (Operator Instructions) And the conference is being recorded. (Operator Instructions) I would now like to hand the call over to Microvast Investor Relations. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us today. With me on today's call are Mr. Yang Wu, Founder, Chairman, and CEO, and Mr. Craig Webster, Chief Financial Officer. Mr. Wu will start off with a high-level overview of the quarter before providing some operational updates. Mr. Webster will then discuss our financials in more detail before handing it back to Mr. Wu to address our first quarter 2024 outlook and opening the call up to questions.

Ahead of this call, Microvast issued its fourth-quarter and full-year 2023 earnings press release, which can be found on the Investor Relations section of the company's website, ir.microvast.com. In addition, we have posted a slide presentation to the website to accompany management's prepared remarks.

As a reminder, please note that statements made in this call are forward-looking and based on current expectations and assumptions. They should not be relied upon as representative of views for subsequent dates and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements due to new information or future events.

Actual results may differ materially from expectations due to a variety of risks and uncertainties. For more information on material risks and other important factors that could affect our financial results, please refer to our filings with the SEC.

We may also discuss non-GAAP financial measures during this call. These measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. These non-GAAP measures have been reconciled to their most comparable GAAP metrics in the tables included at the end of our press release.

After the conclusion of this call, a webcast replay will be available on the Investor Relations section of Microvast website. And now, I will turn the call over to Mr. Wu for opening remarks.

Thank you, and thank you all for joining us today. Please turn to slide 3 as I cover a few highlights from our full-year 2023 financial performance before turning to our key achievements in Q4. I'm pleased to say that we booked a record revenue of $306.6 million for the full year 2023. This was driven primarily by substantial year-over-year revenue increases in our EMEA business, which grew revenue 434% compared to 2022.

We also saw double-digit percentage growth in both APAC and China. The overall business saw a top-line increase of 50% year over year, and that we delivered this strong revenue performance at a high gross margin, which increased to 90% from a 4% in the prior year. I'm also very pleased with the results from our Huzhou 3.1 expansion that was completed during the year.

Starting in the second half of 2023, we were delivering qualified products to our diverse customer base from our latest fully automated production line. This demonstrates that we can successfully industrialize our technology at scale.

Please join me on slide 5 to go over our successes in the final quarter of that year. Along with some challenges that we also faced, we saw our highest revenue quarter of $104.6 million, jumping 61% year over year, and that we achieved an adjusted gross margin of 23.5%.

We saw major successes in our commercial vehicle business, expanding relationships with OEMs worldwide. We are working with new manufacturers on testing our products for additional contracts in 2025, and we have begun to gain meaningful traction in specialized and differentiated vehicle settlements.

However, the year also brought challenges. We saw a challenging financing environment, a reduced energy storage contract through mutual resolution with a customer, and an overall negative market sentiment in both the sector and for rapid growth companies like ours.

Turning to slide 6, we have made some exciting business developments in our commercial vehicle business. We've received many new orders and it delivered to customer a variety of products showing the strength of our technology portfolio. This included leading OEMs such as eVersum, Evoy, LGMG, and Yongxing New Energy.

Please join me on slide 7 to go over some updates around our APAC operations. As I mentioned in the opening, our Huzhou Phase 3.1 automated line has been successfully brought online. It's producing qualified 53-point amp power cell. And as the products are being delivered to customers, we do not expect significant additional CapEx associated with Phase 3.1 going into 2024. The APAC business generated revenue of $219 million in full year 2023, increasing 18% year over year.

We anticipate that the APAC business will generate original profitability as operations and now mature, self-funding, and achieving sustainable gross margins. We also expect a further revenue expansion year over year.

Our expectations are driven by two major components. First is a market in China where we bring in stable revenue from our established base of e-Bus OEMs, but we are also seeing promising expansion opportunities in the electrified in mining and earth moving segments where our high-power products offer performance advantages. The second major contributors is India market, where the e-Bus segment is growing rapidly and is supported by government incentives with some of our major partners expect it to benefit.

Turning to slide 8, we will go over some updates around our EMEA operations. We saw electrifying growth in 2023 with original revenues of more than 434% year over year. We have localized production of our VDA modules and anticipated customer demand will lead to increasing volumes. We also expect additional revenue growth in the region of 2024.

Having narrowed our losses in 2023, we also have our sights set on original breakeven for the coming year in addition to a developing pipeline of the new and exciting commercial vehicle customers. We see several catalysts for continuing growth in 2024. One of those is higher package volume from e-Bus and LCV platforms. As we are seeing continued expansion and demand in this segment, we are also seeing segments demand and are working with the leading refuse truck OEM with the demo expected at IAA 2024.

Finally, join me on slide 9 to go over some updates for our US operations. The challenging financing environment means that, for the time being, we have got Clarksville as far as we can on our own balance sheet. Because of this, regional growth and profitability in APAC and EMEA will be the key drivers for our business in 2024 until this third-party financing needed to complete the Phase 1A facility has been secured.

Accordingly, we are not currently anticipating material production volumes or revenues from our Clarksville facility. We are also not expecting IRA 45X credits in 2024.

Once we are able to secure financing, our current estimate is that an additional six to eight months is needed to bring Clarksville Phase 1A to SOP. With a majority of this time allocated to equipment installation, in the interim, we will be slowing CapEx and OpEx spend in the US.

This slowdown will allow us to better manage liquidity, evaluating financing opportunities, and the build-out of our US operations for substantial success in 2025. Once we reach SOP, we anticipate generating IRA credits and delivering qualified products to commercial vehicle and energy storage customer in the US.

The lack of funding in the US has contributed to our assessment that there is currently a substantial doubt that we can continue as a going concern without raising additional capital. And we are engaged in a financing and customer activities to address this urgency.

However, we remain bullish on the US and the opportunity it presents to our business. The energy storage market continues to be an area with exponential growth and there is significant customer interest in our Clarksville capacity, given the advantages in secured battery supply that meets domestic contents requirement.

On the commercial vehicle side, OEMs are increasingly electrifying their vehicle line-ups. We see demand for our various technology across a wide array of segments and have numerous projects underway that we anticipate will create a demand for Clarksville production in 2025.

So 2023 was not without challenges. It was also full of successes, and we are proud of our achievements in the last year. We are looking forward to executing on the many opportunities ahead of us in 2024. I will now turn the call over to Craig Webster to discuss financials in more detail.

Thank you, Mr. Wu. I will spend the next few minutes discussing our full-year and Q4 2023 financial results. Please turn to slide 11, and I will summarize the main line items from our Q4 and full year P&L.

We recorded revenue of $104.6 million in Q4 2023 compared to $64.8 million in Q4 2022, a 61% year-over-year increase that Mr. Wu mentioned earlier, a record revenue quarter for the company. On a full-year basis, despite facing several challenges, we achieved revenue of $306.6 million, up 50% from $204.5 million in the prior 12-month period.

We posted gross profit of $23 million in Q4 2023 compared to gross profit of $2.2 million in Q4 2022, a 934% improvement. On a full-year basis, our gross profit was $57.2 million compared to a gross profit of $9.1 million for the prior year, a 531% improvement. Our gross margin for full year 2023 was 18.7%, whereas in the prior year, it was 4.4%, a 14.3-percentage-point improvement.

Operating expenses were$46 million in Q4 2023 compared to $37.3 million in Q4 2022. The largest contributor to the increase in operating expenses was the increased headcount for both our Colorado and Tennessee facilities as we build out our US operations.

Full-year 2023 operating expenses were $165.9 million compared to $170.7 million in the prior year, a 3% decrease. GAAP net loss was $24.6 million in Q4 2023 compared to net loss of $33.7 million in Q4 2022. GAAP net loss for the full year 2023 was $106.4 million compared to a net loss of $158.2 million in the full year 2022. These results show that as we scale our business and industrialize our technologies, we are narrowing our losses.

We believe a more appropriate representation of our financial performance, especially as it relates to cash operating expenses and operating loss, is as illustrated in slide 12. After adjusting for non-cash settled, share-based compensation expense in our cost of sales, adjusted gross profit was $24.6 million in Q4 2023 compared to adjusted gross profit of $4.2 million in Q4 2022. This translates into an adjusted gross margin of 23.5% in Q4 2023 compared to 6.4% in Q4 2022, a 17.1-percentage-points improvement.

We're pleased to see another quarter of gross margin improvement as our business benefits from higher sales volumes, increased utilization, and better raw materials pricing on these higher volumes. By making the same adjustments for full year 2023, our adjusted gross profit was $63.3 million compared to an adjusted gross profit of $16.8 million in the full year 2022. This translates into an adjusted gross margin of 20.7% in full year 2023 compared to 8.2% in full year 2022, a 12.5-percentage-point improvement.

After adjusting for non-cash SBC expense in SG&A and R&D, our adjusted operating expense in Q4 2023 was $34.3 million compared to $21.4 million in Q4 2022. When making the same adjustment for full year 2023, our adjusted operating expense was $107.1 million compared to $96.5 million for full year 2022. This was an 11% year-over-year increase being a much slower rate of increase than our top line growth of 50%.

After making those non-cash SBC expense adjustments and accounting for changes in fair value of our warrant liability, adjusted net loss was $11.4 million in Q4 2023 compared to $15.9 million in Q4 2022. On a full-year basis, adjusted net loss was $41.6 million in full year 2023 compared to $77.3 million in full year 2022. Reconciliations of these non-GAAP metrics to the most comparable GAAP metrics are included in the tables at the end of our earnings press release.

Slide 13 show the geographic breakdown of our revenue for the 12 months ended December 31, 2023, compared to the prior year period. As you can see, our three largest markets were Asia-Pacific, China, and India, growing 19%, 18%, and 434%, respectively year over year.

Revenue in our US region for full year 2023 post a slight decline of 14% compared to full year 2022, with revenue losses in our EFS division being the biggest disappointment. However, as Mr. Wu mentioned, despite some near-term financing challenges to address in the US, we expect our US business to make meaningful contributions in the future as we are well positioned to capitalize on the domestic content opportunity in the US once our Clarksville facility reaches SOP. I will now turn it back over to Mr. Wu to provide some visibility in the outlook for the coming year.

Thanks, Craig. Please turn to slide 15. We expect Q1 2024 revenue to increase 40% to 60% year over year. This first Q1 revenue guidance in the range of $65 million to $75 million. We also aim to maintain a gross margin target of between 20% to 25%.

From our Asia-Pacific operations, we expect all three Huzhou phases to deliver qualified products to customers throughout 2024. We will also be targeting increasing utilization, continuing progress on R&D for new products, and targeting original profitability,

In 2024, we also expect our EMEA operations to continue meaningful revenue growth with new customer wins for specialty commercial vehicles. We are targeting original breakeven for the year.

Turning to US, we plan a reduction in OpEx and CapEx spending for the year until we can secure funding for Clarksville. Once the facility is online, we will be targeting rapid growth and are aiming to secure capacity commitments from both energy storage and commercial vehicle customers to achieve a high utilization levels.

For 2024, the company's core focus is going to be maintaining revenue growth and our margin profile as catalysts to improve our liquidity and providing us with a route to breakeven. With that, I would now like to open the call up to your questions. Operator, please provide instructions for the Q&A session.

(Operator Instructions) Colin Rusch, Oppenheimer.

Thanks so much, you guys. Can you talk a little bit about the overall quantum of capital that you're going to need to secure to get Clarksville back on track, and then also, yeah, how we should think about the moderation in OpEx in the US and how that impacts the overall company OpEx run rate?

Hi, Colin, hope you're well. So as we indicated last time, we've got about halfway through Clarksville on CapEx. So to get it done, it's about $150 million. That includes some aging AP. So the majority of what's left to spend, it relates to equipment and installation, and to do that, we need to raise money, as we've always said. We got this as far as we could on balance sheet.

So we've been working for quite a period now, and you're probably sick of hearing us talk about it on the financing. And it wasn't done at the end of the year. We're still making progress on that. No guarantees that it's done but we've been spending a lot of time with one lender in particular.

The estimated timing to get Clarksville the SOP would be six to eight months from when we closed our financing. And I just mentioned, the majority of that time is to do installation. We'd already started some installations during Q4.

OpEx-wise, currently, we're managing that because we've not closed the financing. So really, as we mentioned on the call, there's a regional focus on what we do, which is -- China's got really good and decent growth rate. It's profitable itself, financing. It's got access to its own CapEx and OpEx credit lines.

Europe, as you just saw, had a really good year, the start of, like, electrification for a lot of its customers. I would expect Europe to have another really solid year in '24. The operating base in Europe is much smaller because it's just a module line, doesn't need any financing, got a really good customer base. Does that answer your question?

Yeah, it does. And then in terms of the customer growth in Europe and China, can you talk a little bit about -- you talked a little bit about the (inaudible) revenue for the first quarter, but can you talk about the order activity and how that's trending versus where you're at a year ago in terms of backlog and how those orders are going to go?

Okay, the backlog impact we've had has come from energy storage. So we've reached a mutual resolution with the customer to reduce the volumes on their contract. That's impacted backlog. So backlog now is predominantly commercial vehicle. You know our business pretty well, so Q4 is always seasonally the strongest quarter, particularly in China, where they defer a lot of their orders until the end of the year.

Q1, still going to be a really solid quarter for us. And as you know, it's always the slowest one because of impacts of Chinese New Year, so we lose a lot of revenue, and turned out to be February this year.

The encouraging part on Europe is the number of platforms that we're on. So it's e-Bus, it's light commercial vehicles, and it's commercial truck specialty. So we'd expect Europe to have big contribution to overall revenue growth in the year. But just looking at where we're at on the financing side, which is a key focus, we can give you a much more informed decision on the year and what things look like in a couple of months' time.

Okay, thanks so much, guys. I'll hop back in the queue and I'll follow up offline. Thanks.

(Operator Instructions) Sean Milligan, Janney Montgomery Scott.

Hey, Craig, can you walk us through expectations for 2024 on operating cash flow? You highlight that you're trying to run Asia and Europe breakeven or above breakeven. Just trying to get the expectations on pop cash flow for this year, and then just updated on CapEx figures, if you're not spending anything for CapEx in the US. We're spending on that 48-amp power line in China and that's still fully funded via the facility, correct?

So any CapEx spend in the US is going to be completely contingent on raising financing to do that. So if we are successful to close, then we'd expect to spend around $150 million in the US. That's Clarksville Phase 1A debt-funded.

CapEx elsewhere would be very, very minimal. China, if we need to do the Phase 3.2 expansion, and that's a smaller amount of dollars, like we estimate around $30 million to do that. We would do it, provided we've got financing in place. And as you know, we've got the CapEx -- it's a line we've not used yet in China from the local banks. So the biggest project and it's -- say, it's highly contingent on that financing is doing Clarksville Phase 1A.

Operating-wise, we're self-funded in China, self-funded in Germany. Germany's got a very strong position with its customers in terms of backlog, increasing sales. And it's not an expensive operating base to run. We've got to be quite careful in the US. And depending on where we get to in terms of that total financing solution for the US, we're going to have to be quite prudent in how we manage US operations going forward.

Okay, and so right now, as it stands that Phase 3.2 in China, is that going forward or not?

Currently, we'll put 3.2 on hold. We still got plenty of decent growth opportunities in China without that.

Okay, thank you.

Derek Soderberg, Cantor Fitzgerald.

Yeah, hey, guys. Thanks for taking the questions. On gross margin guidance, 20%, 25%, a really good number there, curious what's driving that. Can you talk a bit about Huzhou utilization today and kind of where that's going to move throughout the year? And maybe if you could just kind of frame gross margin directionally from there, how we should sort of move throughout the year would be helpful. Thanks.

Derek, you're right. Really -- a really solid year for us in terms of gross margin business fundamentals. We know the news on liquidity in the US is not great, but we feel we've got solutions for that. And the business fundamentals lend into it, right? So we've just grown revenue 50%. We really expanded the gross margin line and we really managed our OpEx.

And remember, we're a global business, so compare our OpEx to other people that are trying to launch a sort of new technology battery business, right. There's a global operation. We've managed that pretty well.

Gross margin expansion really came down to higher sales, always helps. So higher sales, better pricing on our raw materials, yields being really good across the three phases, Phase 1, 2, and 3. And then raw material prices have helped as well. So that's been the real contribution there.

As we look out this year, I think we're going to see good utilization on all lines, Phase 1, 2, and 3. Phase 3, as you know, is [53.5] because they're going to be delivering to all regions: China, Asia-Pacific, Europe, and the US. So we'd expect this year to be able to hold gross margin at 20% to 25%, and then it will just come down to, if we're really accelerating Clarksville again, then there will be some push-up on OpEx. But if we don't do that, we will be managing OpEx. You're not far from where it's currently at.

Got it, that's helpful. And then just related to sort of a previous question, just wanted to clarify some things with the OpEx management here, is there sort of a revenue run rate you'd need to get to reach profitability? Could you share that with us?

And then just to clarify, it sounds like APAC is going to be profitable this year. What about EMEA and the broader business? I mean, you can kind of relate that back to the revenue run rate you need to get to from profitability. That'd be helpful. Thanks.

Sure. So APAC had consistent profitability the whole year '23. We'd expect that to continue into '24. EMEA, if it can deliver the volumes that we're expecting, so a decent growth here would be very close to breakeven. The Q4 numbers are quite illustrative of what it needs to take to get close to breakeven. So probably, when we're at a sort of [150] run rate revenue per quarter, we're going to be very close to breakeven.

Got it, really appreciate it. Thanks, guys.

Thank you. I would now like to turn the conference back to Yang Wu for closing remarks. Sir.

Okay, thank you all for joining us today. Look forward updating you our progress again soon for the first quarter of 2024, along with additional operational updates and guidance for the rest of the year. Thank you.

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