EHang Holdings Limited (EH) Q2 2021 Earnings Call Transcript

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EHang Holdings Limited (EH 2.06%)
Q2 2021 Earnings Call
Aug 25, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Huazhi Hu -- Founder, Chairman and Chief Executive Officer

[Foreign Speech]

Edward Huaxiang Xu -- Chief Strategy Officer

[Foreign Speech]

Thank you, Mr. Hu. Hello, everyone. I'm Edward Xu, Chief Strategy Officer of EHang. First, I'm glad to help translate CEO's remarks into English.

Hello, everyone. Thank you all for joining our Earnings Conference Call today. I would like to start by sharing with you our business progress for the first half of 2021. Then I will give you some highlights on our business plans for the second half. As I shared with you in our last quarterly earnings call, EHang has leveled away UAM operation with the aim to become an urban air mobility platform operator, empowered by our autonomous aerial vehicles. To achieve this exciting goal we have made relentless efforts and careful preparations in the past few months.

As you know, we newly released our VT-30 Passenger-grade AAV as one of our flagship products besides the EHang 216. The release of the VT-30 fully demonstrated our technological strength in the field of AAV industry, and it is also complementary to the EHang 216, which is designed for short to medium range intra-city air mobility. Our priority is to launch intra-city air mobility first, with application of EHang 216 to make urban air taxi a reality.

I believe many of you know that we have made quite a number of trial flights carrying passengers and cargoes during recent years. There are still people looking forward to taking a ride with our EHang 216 for flight experience. But I think what EHang has done essentially in the past few years is not only to build AAVs, but to build safety. Over the years, we have been making trial flights with good safety record. Meanwhile, we have accumulated abundant experiences and also products that may help us think seriously for further improvement, which we have been working on recently. To ensure top safety record in the upcoming operations of our AAVs after the formulation of airway solution standards and completion of the certification process, we have been making comprehensive progressions from various perspectives.

In terms of sales, we delivered 18 units of EHang 216 AAVs in the first half of 2021, including 15 units in the first quarter and three units in the second quarter. As we mentioned in our last earnings conference call, EHang is gradually transitioning into an operation platform model from a product sales-centric model, which is also reflected in our actual AAV sales performance.

Next, I'm glad to share with you the progress of our 100 Air Mobility Routes Initiative. As of now, we have screened and tested seven operation spots, most of which are located in South China, in addition to the ones that are operated by our partners. We position our operations as new transportation mode for Island hopping, low altitude aerial tourism and suburban transportation. We started by focusing on South China and the plan to expand gradually to other areas in China. So far, we have targeted 15 self-run operation spots, six are in Guangdong province and another six in the Yangtze River Delta region.

We also plan to assist our customers to conduct operations in additional 21 locations. Meanwhile, our collaboration with CAAC for EHang 216 Type Certification is going on very well. CAAC has officially accepted our application on January 19th of 2021. It has spearheaded the project team by recruiting over 20 experts from the country to start the certification process. We have held several rounds of review meetings and inspections in Guangzhou and Hezhou. Critical consensus has been reached between the expert team at EHang on the basis of complete understanding of the design features of EHang 216.

Now the Type Certification process are proceeding in an orderly manner in accordance as planned. We have taken the EHang 216 Type Certification program as the company's top priority. We expect to work with the CAAC to formulate airworth as a certification standard for the EHang 216 passenger-grade AAVs in the third quarter of this year, which will be unprecedented in the aviation industry. In addition, we expect to obtain the Type Certificate for EHang 216 within the next four to six months. We will strive to complete all the relevant certification and inspection work ahead of schedule within this year.

In terms of new products, we have released our brand new type of hybrid eVTOL, the VT-30, in May of this year, which is designed for longer range urban air mobility. VT-30 is designed to travel a distance of up to 300 kilometers with a designed flight time of up to 100 minutes. This complements to the existing EHang 216, a product focusing on short to medium business intra-city air mobility. Currently, VT-30 is undergoing a large number of internal travel flights and has made good progress.

Our EHang 216F, the firefighting model, and other auxiliary products have filled the gap in urban high-rise firefighting. In January of 2021, we successfully completed the technical examination of the EHang 216F by the China National Fire-Fighting Equipment Quality Supervision Testing Center, which certified the reliability of our products aspired by the equipment and paved the way for the commercialization of the EHang 216F AAV.

Subsequently, we will start to promote, sign and deliver the EHang 216F related orders. With so many technical advantages, we believe it will play an important role in the real scenarios of firefighting, rescue and emergency activities in various places. With our new production facility in Yunfu, Guangdong officially put into operation in June of 2021, our production capacity has been increased. The facility is mainly used for the production of the EHang 216 service of passenger-grade AAVs and others.

Phase 1 covers a gross floor area of 24,000 square meters and has designed the initial annual capacity of about 600 units. Although the Investor Day, which was scheduled to be held at the new Yunfu production facility on August 18th has been unexpectedly called off by the local government right before the event due to the reemergence of the COVID-19 cases in Guangdong. We still hope to reschedule the event after the lift of traveling ban. We will then expect to provide investors with opportunities for in-person visits and communications.

In the first half of the year, we continue to carry out a large number of trial flights, which are in line with the CAAC's regulatory methods to encourage trial flights first and integrate the trial operation experiences into the certification process. For example, we made a trial and demo flight at the opening ceremony of the Chinese Super League in Guangzhou and the Digital China Summit in Fuzhou, in Japan and in Beijing for the first time and over South China Sea from Zhuhai Hengqin to Dong Ao Island, etc.

In June, we participated in the anti-COVID-19 campaign in Guangzhou by transporting medical and emergency supplies to quarantine areas using the EHang 216 and EHang 216L AAVs. In Europe, we have successfully been selected and deeply involved in a large number of urban air mobility projects supported by the European Union and have reached extensive industry collaborations with the government and partners in Spain, France, Italy and other countries.

Looking forward to the second half of the year, we expect to continue to sell and deliver our service of AAV products. During the strategic transition of our business model, we have also maintained a sufficient cash reserves for at least 12 to 24 months to support the smooth progress of our business development in the future.

Although the transition may lead to a potential decline in the short-term sales revenues, we will continue to vigorously advance the preparations and the gradual implementation of our 100 Air Mobility Routes Initiative, which we view as more important through continuously expanding our operation spots and routes, increasing the frequencies of trial flights, expanding the existing professional air mobility operation team so as to create income from our operations and make it eventually become our main pillar of revenue soon. And to enable EHang to be the world's first company to start the commercialization of urban air mobility operations.

And last, I would like to say that EHang will move step-by-step toward our strategic goal of becoming an urban air mobility platform operator. Meanwhile, we are very pleased to see that more and more upstream and downstream companies are joining the emerging UAM industry. We are confident that EHang will continue to lead the way and maintain our comprehensive competitiveness in the global UAM market. Thank you for all our investor support. Those were Mr. Hu's remarks. Following his remark, I'm going to elaborate on our strategic transitioning in the first two quarters and our plan for the future.

As we have defined our goal as to build an advanced global UAM operation platform, we have switched our focus more toward AAV operations in second quarter of 2021, which led to a scale down in our sales level. Moreover, the reattack by COVID-19 in South China had adverse impact on the sales and the deliveries of our AAVs in the period as well.

On the other hand, we started to explore the field of practical UAM operations. Specifically, we built our UAM operation team by recruiting industry professionals from world class organizations. We believe we are able to leverage their valuable experiences and backgrounds in leading aviation and mobility companies such as Airbus, Hainan Airlines, Hong Kong Express, Hong Kong Airlines, CITIC Helicopter, BMW, IBM, etc, and to build a whole new operation platform for AAVs, one we call UAM 3.0.

More importantly, we have started to implement our 100 Routes Initiative by screening and testing appropriate spots for UAM routes. So far, we have screened and tested seven spots for AAV operations, mostly located in South China. We position our operations to offer a new transportation mode for Island hopping, low altitude aerial tourism and suburban transportation. Our initial focus is on the Guangdong, Hong Kong-Macao Greater Bay Area and a plan to expand gradually to other areas in China. Based upon our latest operation plan, we have targeted 15 self-run operation spots, including six in Guangdong and six in Eastern China.

We are also planning to help our customers to launch operations in 21 spots, including 10 in Guangdong and four in Guangxi. In achieving our operational goals, we are working broadly with our local partners, including government authorities and business organizations from industries such as real estate, tourism, construction, transportation and aviation, who are able to share their valuable resources, especially in island and -- in the land and infrastructure. Our goal is to build a moat to give us first mover advantage in the UAM industry.

Meanwhile, our cooperation with the Civil Aviation Administration of China for EHang 216 Type Certification is going on very well. The CAAC has officially accepted our application on January 19th of 2021. It has set up a project team by recruiting over 20 experts nationwide to start the certification process. We have held several rounds of meetings and inspections to conduct airworthiness reviews of the design, safety and operations of our EHang 216 AAV. We are hopeful that the further reviews and tests will be completed in the next four to six months when the Type Certification for EHang 216 could be granted by CAAC, which shall pave the way for larger scale operations of our AAVs.

Looking ahead, we will continue to implement our 100 Urban Air Mobility Routes Initiative by accelerate the testing process. We will strengthen our existing partnerships with key entities, including CAAC, local government and business organizations. We expect to acquire new resources by demonstrating our successful models, which should further expand our operational scale. Meanwhile, we will also actively look for various business opportunities to better monetize our model at this stage. By generating ancillary revenues from advertisement, static displaying of AAVs, student camps, training schools, wedding shows, etc.

I will now turn the call over to our CFO, Mr. Richard Liu, to provide the financial results. Richard, please go ahead. Thank you.

Richard Jian Liu -- Chief Financial Officer

Thank you, Edward. And hello, everyone. Before I go into details, please note that all numbers presented are in RMB, unless stated otherwise. All percentage changes are on a year-over-year basis, unless otherwise specified. Detailed analysis are contained in our earnings press releases, which are available on our IR website.

I'm going to highlight some of the key points here. As our business is strategically transitioning into a more operation platform oriented model, we sell AAV product to third-parties and at the same time are shifting toward an operation platform oriented model. The shift is gradual and important. Our revenues indicated a delicate balance during this strategic transition period. In Q1 2021, total revenues were RMB23 million, an increase of 22.1% year-over-year.

The EHang 216 series of passenger-grade AAVs sold in Q1 was 15 units, compared to nine units in Q1 last year. Q2 revenues were RMB12.2 million, a decrease of 65.9% year-over-year, because three units of AAVs were sold in Q2, compared to 16 units sold in Q2 last year. This revenue decrease in Q2 is sending anticipated impact of this strategic transition.

We continue to optimize the cost structure of our air mobility products and improve overall gross margin. Q1 gross margin was 63.2%, an increase of 3.9 percentage points from that in Q1 last year. Q2 gross margin reached a record high of 68%, 10.4 percentage points increase year-over-year. This was mainly due to the completion of a higher margin command and control system for smart city management project in addition to continuous cost structure optimization in Q2.

Adjusted operating expenses, which are operating expenses, excluding share-based compensation expenses, increased by RMB3.4 million to RMB34.5 million in Q1 and by RMB24.5 million to RMB59.9 million in Q2, compared to the numbers in the same period of last year. The increase in Q2 was mainly due to the continuous increase in R&D expenditures for developing and upgrading AAV models, including the newly released long range VT-30 designed for intra-city air transportation and increases in prudent provisions related to the new virus outbreak impacts and additional expenses related to the extended filing of our 2020 annual report.

Adjusted operating loss in Q1 2021 was RMB17.3 million, RMB1.9 million improvement, compared with that of RMB19.2 million in Q1 last year. In Q2, adjusted operating loss was RMB49.4 million, compared to RMB11.1 million in last Q2, due to lower revenues and higher adjusted operating expenses in Q2 this year. As a result, adjusted net loss in Q1 2021 was RMB13.7 million, compared with that of RMB18.5 million in Q1 last year and in Q2 2021 was RMB49.1 million, compared with that of RMB11.7 million in Q2 last year.

In respect of the balance sheet and the cash flow, we ended the second quarter with RMB406.5 million of cash and cash equivalents and short-term investments, which we believe are adequate to support operations for the next 12 to 24 months.

More importantly, we achieved again positive quarterly operating cash flow in Q1 this year of RMB16.2 million. Last time was in Q4 2019. This again reflects the unique inherent value in our business and continuous efforts that the company has been taking to run a healthy operation and minimize the cash burns in the development process.

And now, let's turn to the business outlook. We expect to maintain the annual revenue forecast in 2021 in the range between RMB130 million and RMB180 million, as we strategically transition into a more operation platform oriented model and the commercialization of EHang 216F, the firefighting model, among other products.

That conclude our prepared remarks. So let's now open the call for questions. Operator, please go ahead.

Questions and Answers:

Operator

Certainly. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question coming from the line of Tim Hsiao from Morgan Stanley. Please go ahead.

Tim Hsiao -- Morgan Stanley -- Analyst

Hello. Hi, thanks for taking my questions. And congrats on the results. Question from my side. The first one I think Mr. Hu said at the beginning of this call mentioned that the company has a good progress in terms of transforming into the urban air transportation operator. So on a full-year basis, could you please share some further information, how much of the revenue or how many percentage of the revenue could be contributed by this kind of air or urban transportation related operation?

And my second question is about the volume sales, because you mentioned EHang shipped 18 units in the first half. So just based on your guidance, it means that second half we still need to have some progress. But in light of the rising COVID lockdowns, what's our latest guidance regarding the volume? And how many of the units would be contributed by something like the government project, for example, EHang 216F? So those are my questions. Thank you.

Edward Huaxiang Xu -- Chief Strategy Officer

Okay. Thanks, Tim. This is Edward. I'll answer your first question, I'll try to answer your first question, because we may not have everything -- you know, the numbers there. As you know that in the first half, we have been moving gradually from sales-centric model more toward the operation -- platform operator model, right. And -- but now the key bottleneck is still the regulatory issue, i.e., the Type Certification. So that's why we are also very focusing on this Type Certification.

But why we are moving toward the operation so early is because in order to achieve this goal, we need to do more preparations and especially to set up our team. As you know, we recruited professionals from world class organizations and set up a very talented team. And also, we need to accumulate enough experiences.

And so as you can see, especially in the second quarter of this year, we made a lot of this preparation technically and in human resources. And also we visited so many places and did screening and testing of different spots for real operation, right. So that's all. I think we are in still in the very early stage to prepare all these necessary elements. This is a very necessary step for us to do, right. And so far, I think we mad a very good preparation and looking into the second half, we are going to launch the operation very smoothly. And yes, in the next few months, you are going to see the release of more operational routes and so which is a proof of our work.

But in terms of revenues, as I said, so far, based upon our estimate for each AAV, our target is to generate about RMB1 million of revenues. But this is based upon the approval by the CAAC, which means that after the obtaining the type certificate. So at this stage, we are trying to explore the business opportunities from the ancillary revenue.

For example, we made a very good contract with our advertisement client who would like to pay for displaying their logos in the bodies of our AAV, right. And also we round up with some corporate customers. For example, one corporate customer in second quarter, they contributed about RMB100,000 for revenue, right, which is with only this one customer. So we are trying different ways of generating revenues from our existing equipment, right?

But still, we acknowledge that it is too early to tap the full potential of commercial revenues, because we are not able to explicitly sell ticket for passengers taking ride of our AAV, right? But with a lot of trial flights and experience accumulated, this would definitely pave the way for our further commercialization, which is planned after the certification. So I think, as Mr. Hu mentioned, we did very well in terms of this CAAC collaboration. And so we are very hopeful that the Type Certification could be obtained within next four to six months right?

So yes, I hope, I made myself clear to you. And the next question will be answered by Richard.

Richard Jian Liu -- Chief Financial Officer

Tim, this is Richard Liu. Thanks for the question. The second question I understand regarding the kind of the product sales situation. As we discussed a lot in our remarks, we're in the strategic transition from a product sales focused model to an operation platform oriented model. And also, as Edward mentioned earlier, in the second quarter, the reattack by the COVID-19 outbreak in Guangdong had adverse impact on the product sales of our AAV in the quarter.

But looking into the second half or the remaining period of this year, it is expected that our product sales focus will be more toward the firefighting model, EHang 216F, which -- that the technical examination by an SFE has been completed. After the technical examination completion, we actually have been working with the local emergency department and fire department of several cities, as we explained in our earnings release such as Qingdao City, Guangzhou City, Hezhou City, etc, to utilize EHang 216F in the urban fire rescue drills in those cities with those departments.

So this has helped laid a good solid foundation for ongoing onward commercialization of EHang 216F. And our business teams have been following up with the relevant department in those cities trying to materialize the actual order. And there will be more cities in the progress.

Tim Hsiao -- Morgan Stanley -- Analyst

Great. Thank you very much. Appreciate all the details, Edward and Richard. Thank you.

Richard Jian Liu -- Chief Financial Officer

Thank you.

Operator

Thank you. [Operator Instructions] We have a -- pardon me. [Operator Instructions] We have the next question, this is coming from the line of Vittorio [Phonetic] from Grimaldi [Phonetic]. Please go ahead.

Vittorio -- Grimaldi -- Analyst

Okay. Yes. Just one question to try to better understand the shift of your business. Basically you are saying to our -- to the investors that you are not more interesting to sell product. But you still have some facility as far as I understand going forward. So going into the future, do you think that the product making would be the big guys, like just to mention some guys like Boeing, Airbus and so on?

And you will be only -- let's say, you say managing the routes infrastructure, all this kind of new frameworks that these aerial urban mobility will you need. But I don't know if you have a sort of projection when you say, OK, we need authorization, we need approval. You mentioned you already have 16 routes, you may add 20 routes. But the difficulty I have, maybe you have as well, which is, lets say, it's a completely new business is how to tend to translate effect you get, let's say, 35 routes into potential free cash flow?

So the question is, can you give to me, if you may a flavor of one authorized route, let's say, in China or in Spain and Italian or in Italy, can translate for you in term of operating free cash flow. And -- because I think vis-a-vis the product -- because I never believed that we could make the product, because to make the product, frankly, you need a lot of capex, maybe. Or frankly speaking, investors doesn't like to make a lot of capex for a pretty interesting really new company like you, because the capex for units to have a lot of money that you have for your current business, but you don't have lot too much. So if you just can give to me a flavor of how to tell, let's say, one at the right route with one platform move into operating free cash flow? Thank you.

Edward Huaxiang Xu -- Chief Strategy Officer

Thank you for your question. Let me clarify that we are not saying that we are not selling our products. Actually, we are -- our new facility in Yunfu has just been launched and -- which increased our capacity to 600 units per year, right? So basically, as Richard mentioned, our sales were still going on and maybe we'll be more focused on the EHang 216F, the firefighting version, and as well as maybe some logistics version as well.

But in terms of the standard EHang 216, we are more focusing on the operation because operation is very important. Without operation, there is no way for the ultimate commercialization. So -- but meanwhile, we still receive a good interest from our customers who are willing to buy. So the reason we are launching our sales operation model is just to set the model for our customers. And we are launching our operation route successfully and so that it can demonstrate the real value, right? Because as we estimate the operating margin of the -- of operating AAV can be as high as about 35% or even 40%, right, depending on the scale. So which can prove to be a very successful investment, right? So be attractive for our customers who would buy our AAVs for commercial purposes, right?

So we are actually doing two ways. On one hand, we are launching the operation on our hand. And we are also helping our customers to launch operation. And so that's what this 100 Air Mobility Route Initiative is about. But on the other hand, we are welcoming our customers and new customers to buy the AAVs from us. And we -- but we integrate, you know, consolidate all the operations on our platform, so that's the value of our platform. So I hope I make this very clear. And hopefully, this answers your question.

Vittorio -- Grimaldi -- Analyst

Okay. Yes. Thank you. Yes, so when you say you shift internal is still an integration between your production and this, let's say, all other kind of peculiar facility? But still -- you still are going to produce for the retail basically?

Edward Huaxiang Xu -- Chief Strategy Officer

Yes. We will still remain the OEM producer. We will continue to produce our AAVs, yes. That's for sure.

Operator

Thank you. Seeing no more questions on the line, I would like to hand the conference back to Mr. Xu. Please go ahead, sir.

Edward Huaxiang Xu -- Chief Strategy Officer

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

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Huazhi Hu -- Founder, Chairman and Chief Executive Officer

Edward Huaxiang Xu -- Chief Strategy Officer

Richard Jian Liu -- Chief Financial Officer

Tim Hsiao -- Morgan Stanley -- Analyst

Vittorio -- Grimaldi -- Analyst

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