EHang Holdings (NASDAQ:EH) Q1 2020 Earnings Call

0:00 Good day ladies and gentlemen, thank you for standing by and welcome to Yihang's first quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, we are recording today's call. If you have any objections, you may disconnect at this time. Now I will turn the call over to Julia Qian. Managing Director of the Blue Shirt Group Asia. Ms. Qian, please proceed.

0:35 Hello, everyone. Thank you all for joining us on today's conference call to discuss the company's financial results for the first quarter of 2020. We released the results 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 Huazi, 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 statements made under the safe harbor provision of the U.S. Private Security Litigation Reform Act of 1995.

1:22 Forward-looking statements involve inherent risks and uncertainties. As such, the company's actual results may be materially different from the expectations expressed today. Further information regarding these and other risks and uncertainties is included in the company power refining with the SEC. Company does not assume any obligation to update any forward-looking statement, except as required under biblical law. Also, please note that unless otherwise stated, all the figures mentioned during the conference call are in Chinese RMB. With that, let me now turn to the call to the management team and our CEO, Mr. Hu Huazhi. Mr. Hu will speak in Chinese, then our CSO Edward Xu will translate his comments to English.

2:14 Please go ahead, Mr. Hu. Thank you, Julia.

2:17 Hello, everyone. Thank you for attending our phone call meeting today. Even though from the beginning of this year, the world has experienced the unprecedented COVID-19 epidemic, but we can still tell you that the financial performance of the first quarter is still growing. The total income is RMB18.8 million, which is 80.3% of the total growth, and the net profit is 82.7% of the total growth. The sales of a line of 216 are 9. increased by 200% compared to the same period in 2019. In the first quarter, China implemented strict epidemic prevention measures, including blockade of epidemic areas, corporate shutdowns, and isolation of people. Therefore, we have indeed been affected by some short-term effects, including the interruption of supply chain and the temporary reduction of customer demand, and the delay of orders.

3:12 However, we have started a new business in this crisis, We successfully applied the I-216 and Falcon-B autonomous pilots to medical emergency rescue and transportation. We conducted flight demonstrations in Guangxi, Hezhou, China, to fully prove that the I-216 will be able to apply advanced technology to emergency scenarios. We will continue to actively develop air traffic scenarios in more cities. For example, emergency response and air travel We will expand the network of air traffic test cities And in the United States and Europe Achieve the breakthrough of supervision For global expansion after the epidemic Spread the road Since the beginning of April Our business in China Has gradually returned to normal The situation is getting better and better Sales and business are back to normal Our self-driving aircraft Can provide cost-effective and safe service Therefore I believe that in 2020, we can achieve more than 200% of income growth Thank you Mr. Hu and hello everyone. Let me first do the translation of what Mr.

4:46 Hu said in his opening remarks and then I will talk about our key business strategies going forward. Hello everyone. Thank you for joining us on the call today.

5:11 Despite the unprecedented global COVID-19 pandemic that started this year, we are pleased to report solid first quarter financial results with significant top-line growth. Total revenues were RMB 18.8 million, increased by 80.3% year-on-year. Gross profit grew by 82.7% year-on-year, and the sales volume of Yihang 216 reached 9 units in the first quarter of this year versus only 3 units in the first quarter of 2019. During the first quarter, China implemented strict controls to contain the virus. The country was locked down, businesses were closed, and people were quarantined. Because of this, we did experience some short-term impact. including disruptions across the supply chain and temporarily decreased the demand including delayed orders from the customers However, we were able to create new business opportunities from this crisis We successfully introduced a practical application for both Yihang 216 and Facom B in medical emergency transportation of flight tests in Hezhou People's Hospital in Guangxi has fully demonstrated our ability to apply AAV technology in an emergency situation.

6:42 We will continue to actively develop more UAM applications, such as emergency response and air tourism. We will expand the UAM pilot city network and achieve regulatory breakthroughs in the US and Europe, paving the way for global expansion after the virus is contained. Business in China has gradually resumed since the beginning of April The situation appears to have turned a corner Sales are recovering and our business is regaining momentum Our business opportunities are promising due to emerging opportunities to provide cost-effective and safe service with unmanned AAVs We are excited to continue to drive significant business development opportunities in air tourism Emergency Response, and Passenger Transport Notably, we obtained the world's first commercial pilot operation approval of passenger-grade AAV for air logistics uses This starts a new chapter in the commercialization of air logistics We are confident that we can generate at least a 200% revenue growth in 2020 We believe our first-mover advantage, sound growth strategy and ability to execute can drive robust growth. As Mr.

8:05 Hu mentioned, despite the challenging market conditions due to the pandemic, we still strive for rapid growth and great performance in first quarter of this year. We expanded our global presence and raised our brand visibility. Let me cover some achievements in this regard. In January, with the support from the North Carolina Department of Transportation, We conducted our first ever trial flight of an Ehang 216 in North Carolina after receiving approval from the Federal Aviation Administration. Our Ehang 216 became the first autonomous air vehicle to fly in the U.S. This achievement underpins our industry leadership and helps to increase customer confidence.

8:52 In February, Our Ehang 216 obtained another operational permit from the Civil Aviation Authority of Norway. This marks another milestone, as it was the first operational permit for long-term flight tests of the Ehang 216 in Europe. We believe this lays a solid foundation for our future UAM operations in other EU countries. Now, let me discuss the EU's UAM pilot city initiative. In first quarter of this year, we established UAM partnerships with the city governments of Sevilla and Ilia in Spain. Both cities are members of the UAM Initiative Cities Community, an EU initiative established to promote urban three-dimensional transportation.

9:43 In partnership with Sevilla, we will work together to develop urban air mobility services such as passenger transportation, air logistics, and Command Control Platforms. The city will also collaborate on applications for permission to conduct the test flights in accordance with the Spanish and the European legislation and will coordinate with EHAM in the planning of flight routes. Nearby, EHAM will collaborate with IREA City Council to develop the 3D air mobility solution for smart cities. Together, we plan to launch pilot operations of passenger-grade AAVs designed to explore different application scenarios, including tourism.

10:29 Furthermore, Yihang and Ilia will work together with the Spanish Aviation Safety and Security Agency to establish relevant systems and standards to support this new transportation ecosystem. Going forward, we expect to establish more partnerships with the city government in order to expand our global UAM footprint. To demonstrate our UAM industry leadership, in January, we issued a white paper entitled The Future of Transportation, White Paper on UAM Systems. This paper explores the potential for UAM to transform transportation globally We cover vehicle design, potential applications, the current regulatory landscape, and how to optimize UAM's path to commercialization.

11:23 As Mr. Hu mentioned, we found new opportunities during the outbreak. Importantly, both the EHAM-216 passenger grade AAV and the SACROM-B long passenger grade AAV were valuable for medical emergency transport. We demonstrated this real-world application of AAV technologies to transport medical supplies and personnel The AAV was also able to perform air inspection and broadcast of instructions in several cities We are further exploring other emergency response situations in which AAVs can operate with efficiency and effectiveness To conclude Although we started 2020 in an unprecedented and challenging environment, we still achieved solid business results.

12:12 This demonstrates our attractive growth strategy and ability to execute. We believe our first mover advantage will enable us to drive robust growth in the promising UAM industry. Now, I will turn the call over to our CFO, Mr. Richard Liu. Thank you.

12:34 Thank you, Edward, and hello to everyone on the call. Before I go into details about our financial results, please note that all numbers presented are in RMB, and percentage changes refer to year-over-year comparisons, unless otherwise specified. Detailed analysis is contained in our earnings press release, which is available on our IR website. I'm going to highlight some of the key points here. Although our business was adversely affected by the global pandemic, will still achieve significant top-line growth. Total revenue was 18.8 million, up 80.3% year-over-year. Growth was mainly driven by the significant increase in revenue from our core business of air mobility solutions, which represented 80.4% of total revenues.

13:24 Sales of the Yihang 216, our flagship passenger-grade AAV, reached 9 units in Q1, compared with 3 units in Q1 2019. A 200% increase. Growth profit in Q1 amounted to $11.2 million, up 82.7%. This led to growth margin of 59.3%, up 0.8% each point, versus the same period last year. The improved growth margin was due to a favorable revenue mix, reflecting the inherent value in our industry leadership and the first mover advantage, which gives us present power. adjusted operating expenses, excluding share-based compensation, increased by 32.9% to $31.1 million. As a percentage of total revenues, it was 165.3% as compared to 224.3% in Q1 2019. Compared to the 80.3% revenue growth, the 32.9% expense increase was modest.

14:33 It was mainly volume-driven spending and strategic support for global commercialization. We also increased R&D expenses as we strengthened our product development efforts. As an innovative technology-driven company pioneering a new sector, we have always kept tight control of operating expenses. However, we have built the basic infrastructure we need to grow and expect to see meaningful operating leverage as sales continue to ramp up. Under the impact of COVID-19 pandemic, our adjusted operating loss in Q1 increased by 18.8% to 19.2 million, while adjusted operating margin improved by 52.7 percentage points from negative 154.7% to 102%. And adjusted net loss in Q1 was 18.5 million, increased by 13.4% year-over-year.

15:33 Owing to the significant year-over-year revenue growth, the adjusted net margin improved by 57.8 percentage points from negative 156% to 98.2%. Turning to our balance sheet and cash flow, we ended the quarter with $257 million in cash, cash equivalent and short-term investments. In summary, we generated solid financial results in Q1 despite the unprecedented coronavirus impact. The lockdowns and restrictions implemented in China and elsewhere have some adverse impacts on customer demand and supply chains. Nonetheless, we are pleased to have achieved 80.3% revenue growth.

16:19 As a young company, however, we will continue to invest heavily in technology and talent to accelerate the commercialization of our products and solutions. We think we can sustain our momentum if the COVID-19 situation would be under control. We have seen solid recovery since mid-March. We are optimistic about our potential in 2020 and the long-term promise of the UAM industry. We are confident in our ability to lead this industry. As a newly public company, Yihang has been actively interacting and communicating with our investors. We believe that transparency is key to earning the trust of our shareholder community. In March, we successfully conducted two virtual conference calls with our investors and analysts.

17:08 We were pleased to see many interested investors and analysts join our calls and to discuss business developments. And going forward, we intend to increase our interactions with investors and further improve our transparency. Now let's turn to the business outlook. We are not changing our annual guidance at this time. We are confident that we can achieve accelerated annual revenue growth of at least 200%. We also believe we can achieve adjusted operating profit for the full year 2020. With that, we conclude our prepared remarks for today. Let's now open the call for questions. Operator, please go ahead. Thank you. Ladies and gentlemen, we will now begin the question and answer session.

17:56 To ask questions on the phone, please press star 1 and wait for a name to be announced. If you would like to cancel your request, please press the pound or hash key. Once again, to ask questions, please press star 1. There will be a short silence while questions are being collected. Our first question comes from the line of Vincent Yu of Needham and Company. I beg your pardon. Please go ahead.

18:34 Hi, management. Thanks for taking my question. I have a few questions. So the first question is for the commercial pilot operation, which is approved by CACC in Taizhou. Is there a route-specific approval or is it a blanket approval to carry out commercial pilot operations for logistic uses? My second question is, can we expect to see accelerated approval from CACC for more routes after the approval in Taizhou? And my third question is about the demands in April and May. Can management give a sense of how of the men's recovery is on April to May. Thank you.

19:21 Thank you, Vincent. This is Richard. I will answer your first two questions. They're correlated. First of all, the approval is an area-specific approval. It's not just a group-specific. So that means E-Hunter 615 can fly different routes for air logistics uses within that area. If you refer to our past release, we described and listed two use scenarios, which are between ground and hilltop and between shore and islands. It is a coastal area in Taizhou City where there are hills and islands. and there is a video attached to the press release and you are welcome to watch it.

20:17 With that, you can get a more concrete idea. And your second question, also as we put in our press release, we intend to expand it to other areas in China. And we're working on applications for other areas or sites in different cities such as and Huazhou Xie. With the first one accomplished and the pattern established, the following ones would be less, you can imagine that would be less difficult and would be quicker to accomplish. Also, the CAC, the regulator has been very supportive along the way for these innovative AAV solutions.

21:14 Hello. So do you have any follow-up questions?

21:21 Yeah, maybe I can answer the third question regarding the pipeline, right? So this is Edward. So regarding your question on the demand for April and May, currently our order pipeline is approximately on a quarterly rolling basis. We have largely resumed from the impact of the COVID-19 outbreak. and basically we see our order pipeline for second quarter back to roughly the level of fourth quarter of last year, which was at a historical high level. But unfortunately I cannot tell you the exact number, but based upon our current order book, we are comfortable and confident that this can give us the ability to achieve at least 200% Thank you.

22:15 Got it. So very quick follow-up. Do we have any capacity expansion plan for rest of 2020 as of now?

22:27 I will take this question of yours. Basically, in light of the pandemic right now, we're very cautious about capital expenditure. So in respect of capacity needs, we have been exploring alternative ways to support those needs. And as you probably know that the carbon fiber structure or fuel slots manufacturing is potentially a capacity bottleneck in our own facility in China. And we have been exploring an outsourcing approach and discussing with some potential third-party carbon fiber manufacturers in China to support the needs for this year at least.

23:14 Looking to the second half of this year, we may resume our full private expansion plan, as you know, given the pandemic situation will be contained and there will be more, you know, stronger business momentum going forward.

23:35 Got it. Thank you very much. Thank you for the questions. Next question comes from the line of Xiao Tim from Morgan Stanley. Please go ahead.

23:47 Hi, Mr. Lu, Richard and Edward. Congratulations on the solid progress and thanks for taking my questions. So just a few quick questions. The first one, again, about the supply. So I think during previous conference call, I remembered that management highlighted there was impact from the supply bottleneck of certain components. So may I know if the component has been removed, the bottleneck has been removed at the moment, and have we secured enough inventory for the upcoming delivery? And secondly, as we stick to our current guidance for 2020, so what would be the potential swing factors post the outbreak that management will keep a close watch and which projects we should pay more attention to and it would be more relevant to 200% your year revenue growth. And my last question is that could you provide some update regarding our overseas business?

24:54 Have we received a delivery and if not, when will we start to do so? So those are my questions. Thank you.

25:07 Thanks, Tim. This is Edward here. So regarding your first question I answered, so yeah, you're right. So basically at the beginning of the year due to the pandemic, we did experience some of the, you know, impact on the supply chain. And regarding the inventory and the components, basically we have resumed to normal level. And so now... Based upon our current order book and our capacity and production, we should be able to fulfill all the existing orders. Presenters, may I ask the next question?

26:00 I beg your pardon. Please continue.

26:04 Yeah, sorry, your second question was?

26:08 Oh, that's about because we stick to our original guidance for the whole year. So based on current situation, what would be the potential swing factor after the pandemic, that management, including , you guys will keep a close watch. What would be a key swing factor and which project we should pay more attention to which would be crucial to our 200% year-over-year growth in which market and which clients.

26:46 Yeah, so basically this 200% growth is based upon our assessments of the current situation including the ongoing impact of the COVID-19 on the overseas market. So On the domestic market, we think basically it should be okay because now the production is coming back and the market demand is there. So given our inventory and the component level, we see no big issue to fulfill all these orders. But on the other hand, What we are a little bit concerned is about this air show performance.

27:37 Air show performance because, you know, due to this COVID-19, some of the activities were canceled. And especially at the beginning of the year, we did plan our overseas expansion for this air show, et cetera. So these could be some, you know, swing factor. But it's no harm for our core business. Our core business is still the Yihang 216 AV, which is so far we think that's fine. And if we are lucky, if the COVID-19 can be contained in overseas markets and the demand comes back, we should see some upside. But now we keep our guidance.

28:26 at 200% growth year-on-year. So going forward, we would watch the situation of the pandemic closely. And also on domestic markets, we are also in talk with different business organizations and governments, and we seek potential partnership with different organizations. So on the domestic side, We think that the macro situation is also very important because if the macro situation deteriorates, it may negatively affect the general tourism market and for consumption demand.

29:21 So the risk can come from people's reluctance are all watching these factors closely and we will report as soon as we see any issues. Thank you.

29:56 Got it. So just a quick follow-up on my few questions. So regarding the overseas business, have we resumed the delivery? Or if not, where will we start to do so?

30:12 Yeah, for the overseas market delivery, we are still doing the delivery even in the first quarter. For example, we deliver three vehicles, one to Japan, one to Russia. and one to Mexico. So all three are new markets and I believe that although we are only delivering one, this can basically serve the purpose of the test flight. Our customers are quite enthusiastic about our product and so they purchase one for the test and if it goes smoothly, We do expect further follow-up orders from them.

30:58 But as I said, the biggest risk is the pandemic, which may also negatively affect the real demand from our overseas customers. But the good thing, as you can see, we did achieve some milestones. For example, we did the test flight in the US for the first time. We did obtain the test flight permit from the Norway government. I think those are very good things, and we did the partnership with two Spanish cities. So from a long-term perspective, we are quite comfortable about our overseas expansion plans. Thank you.

31:51 Thank you very much, Heather. Thank you for the questions. Our next question comes from the line of Joseph O'Shaugh of JMP Securities. Please go ahead.

32:04 Hello, everyone, and thank you for your comments. I have a couple of questions. The first one is I'm curious as to whether you have looked at incorporating DC fast charging technology into the platforms, and then I have a couple of follow-ups. Thank you.

32:24 Sorry, the cooperation with what, DC?

32:28 DC fast charging. So when you charge, you can charge obviously slower with alternating current, or you can charge very quickly with DC direct current, like, say, for example, a car, which allows you to charge the battery more quickly.

32:46 Yeah, yeah, that's right. So we've got the two modes of charging. The quick mode can finish around 60 minutes. And the longer one can take longer than that, one hour and 1.5 hours.

33:07 Okay, so that is a direct current charger? Is that just high-energy AC? I'm just trying to understand what the technology

33:17 is. Yeah, direct current charging is quicker. So we are talking about the 100% full charge at one hour. But normally, if you, you know, we can fly if we have 90% full. So for zero to 90%, it only takes like 40, 45 minutes. But if you charge to 100%, it may take about 60 minutes.

33:48 Okay. Thank you. Second question is as regards battery chemistry. Obviously, I think you're MCA, correct me if I'm wrong, but I know obviously through your platform weight matters a lot. I'm curious as to whether you have looked into any of the emerging technologies like dry cell or very low cobalt. I'm just wondering what your thoughts are about the path for battery chemistry for your platform. Yeah, of course.

34:20 That's a good question. And definitely the battery is a key factor which will affect our range in the future and also the weight, right? So given the current battery technology, we can achieve about 21 minutes flight. But this is not enough. We are always looking for better technology and many more. We are not a battery company and we design the BMP ourselves and we also have our own scientists looking at different options for the batteries.

35:18 So definitely you understand that the battery is a very critical factor in the future success of our products. And we believe that the future breakthroughs in the battery technology can help our AAV to fly further.

35:39 And just a final question. I apologize. I should know this. What form factor battery are you using? Are you using a cylindrical cell or pouch or prismatic? I am curious.

35:53 Thank you. I'm sorry. This is very professional work. I don't know how to translate into English. So we are using the battery. Richard, do you have the term in English? Sorry, I don't have it. Yeah, could you send us an email and we can get back to you on that?

36:22 Sure. Sure, I'll be glad to. Sorry about that. Thank you very much for your comments. Okay.

36:30 Thank you. Once again, if you'd like to ask questions, please press star 1. Next question comes from the line of Charles Alcock from AIN. Please go ahead. Sir Alcock, your line is open. You may unmute locally.

37:05 Thank you very much. Go ahead, please. Yes, hello, can you hear me?

37:11 Yes.

37:13 It's very encouraging to hear about the cooperation you've had from the CAAC in allowing the commercial pilot operations. But can you please just clarify what the longer-term plan is to achieve full-type certification with the 216 aircraft? Because I don't understand how you can keep delivering these aircraft across China and other parts of the world if you don't have a plan already. to achieve type certification, not just temporary operating permission.

37:47 Yeah, of course, our goal is to get the permanent certification, but I think it's good enough for the CEC authority to grant the temporary certificate first. And so this is all due to our safety record and also the standard we have achieved So going forward, according to our, you know, ongoing conversation with the CAEC officials, we already set up a team with experts, experts from both CAEC and from Yihang to make the, you know, the standards, to set the standards to assess the the future, the permanent certification. So we are working with the CAC closely.

38:46 So you should understand that this is a very new product and a new technology and basically there is no precedent in the world. So both the government officials and us, we are working on an appropriate Thank you.

39:14 And will you also apply for certification in Europe now that EASA has issued consultation over the means to comply with certification?

39:24 Yeah, of course. We do have a European team based in Vienna to work with the EASA officials. Thank you. Thank you for the questions. Our next question comes from the line of Tim Xiao of Morgan Stanley. Please ask your question.

39:52 Hi, Edward and Richard. Sorry, just a quick follow-up questions regarding the competition. So could you please provide some update regarding like our peers for example, like Volocopters, the Kitty Hawk, or Archers. Did you hear anything about Holdings competitors? And where would you expect to face more intense where you have to have competition with Holdings players? Thank you.

40:23 Tim, this is Richard. The name you mentioned as our peer company in other countries, They are still private, not like us, already public. So the information, in French speaking, is very limited. So based on the information available, it seems that most of them are looking at putting their product to market in about two years' time or more. So basically, Yi-Hung Holdings probably will continue to be the only one that has entered commercialization or doing commercial delivery in the market for a while. And because we're in China, as projected in your firm's research report, China will be the largest regional market. So our experience so far attests to it.

41:23 So even though we're looking global, for the time being, it's more advantageous to be in China where the needs are getting more and more vibrant. So in terms of competition, we think we're in a very good spot right now.

41:45 Got it. Thank you very much. Thank you for the questions. Once again, if you would like to ask questions. Ladies and gentlemen, thank you. That does conclude. May I take another question from the line? It's a follow-up question. Yes, you do have a follow-up question from Charles Alcock from AIN. Please go ahead.

42:28 Yes, thank you, since there's a bit more time. Can you tell us about your plans to continue flight testing in the U.S.? Will you build on the tests that you started in North Carolina at the beginning of this year?

42:44 Thank you for the question. This is Richard. Yes, we do have the plan cooperating with North Carolina DOT to continue the flight test there. As you probably know that in general we conducted a demo flight without unmanned demo flight. The next step will be a manned, which means carrying passenger demo flight or flight test in North Carolina. but because, frankly speaking, because of the pandemic, this plan has been postponed. But we hope that once the pandemic situation is contained and everything is back to normal, we will implement this next steps plan as soon as possible in the US.

43:34 And secondly, we have a partner A U.S.-based biotech company called United Therapeutics. They are actually being tested with our T16 basically for the use case of medical emergency transport to be more specific to transport, you know, organs. They are currently doing, have been doing or preparing for the flight test in their Canadian base. They have a Canadian base. And then later on, you will move to the U.S. to do the further test in the U.S.

44:24 Thank you.

44:25 Thank you. Thank you. Our next question comes from the line of Damian Donnelly of Equitas Fund. Please go ahead.

44:38 Hi, yeah, just looking at the use cases of the offshore oil, I presume that was in Norway where that's suggested to happen. How is that supposed to play out when the range of the e-hung is like 30 kilometers, 40 kilometers and the nearest offshore oil platforms are 50 kilometers offshore.

45:09 So far, this project has not started because we recently obtained the permit from the Norway government and also we are seeing this pandemic going on in Norway But our local partner in Norway will test the flight at AAV as soon as the situation stabilizes. I believe that they will have their plan to implement the test flight. And with that, Yi Hang will also send a technological team to Norway to assist the local flights.

45:54 Thank you for the questions. Ladies and gentlemen, if you have more questions, please contact us by email. Now let me turn the call back to Mr. Liu for closing remarks.

46:19 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. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect your lines.