Good day, ladies and gentlemen. Thank you for standing by and welcome to the EHang First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct 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 Blueshirt Group Asia. Ms. Qian, please proceed..

Hello, everyone. Thank you all for joining us on today's conference call to discuss the Company's financial results for the 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. Huazhi Hu, 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. 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's public filings with the SEC.

The Company does not assume any obligation to update any forward-looking statements, except as required under applicable law. Also, please note that unless otherwise stated, all figures remain, during the conference call, are in Chinese RMB. With that, let me turn the call to our CEO, Mr. Huazhi Hu. Mr.

Hu will speak in Chinese, then our CFO Edward Xu, will translate his comments into English. Please go ahead, Mr. Hu..

[Foreign Language].

Thank you, Mr. Hu, and hello everyone. Let me first do the translation of what Mr. 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. Despite the unprecedented global COVID-19 pandemic that has started this year, we are pleased to report a solid first quarter financial results with significant top line growth. Total revenues were RMB18.8 million, increased by 80.3% year-on-year.

Gross profit grew by 82.7% year-on-year and the sales volume of EHang 216 reached nine units in the first quarter of this year versus only three units in the first quarter of 2019. During the first quarter, China implemented strict controls contain the virus. The country was a 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 demand, including delayed orders from the customers. However, we were able to create a new business opportunities from this crisis.

We successfully introduced a practical application for both EHang 216 and Falcon B in medical emergency transportation. Our flight tests in Hezhou People's Hospital in Guangxi, has fully demonstrated our ability to apply AAV technology in an emergency situation.

We will continue to actively develop more UAM applications such as emergency response and air tourism. We will expand the e UAM pilot city network and achieve regulatory breakthroughs in the U.S. and the 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 the quarter. 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 a significant business development opportunities in air tourism, emergency response and passenger transport. Notably, we obtained the words first commercial pilot operational 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% of revenue growth in 2020. We believe our first-mover advantage, sound growth strategy and ability to execute can drive robust growth..

White Paper on UAM Systems. This paper explores the potential for UAM and to transform transportation globally. We cover vehicle design, potential applications, the current and regulatory landscape and how to optimize the UAM's path to commercialization. As Mr. Hu mentioned, we found new opportunities during the outbreak.

Importantly, both the EHang 216 passenger-grade AAV and the Falcon B non-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 AAV's can operate with efficiency and effectiveness. To conclude, although we started 2020 in an unprecedented and challenging environment, we still achieved solid business results. This demonstrates our attractive growth strategy and ability to execute.

We believe our first-mover advantage will enable us to drive a robust growth in the promising UAM industry. Now, I will turn the call over to our CFO, Mr. Mr. Richard Liu. Thank you..

Thank you, Edward and hello to everyone on the call. Before I go into details about our financial results, please note that all numbers presented are in RMB and percentage changes refer to year-over-year comparisons unless otherwise specified. Detailed analysis is contained in our earnings press release, which is available on our IR website.

I'm going to highlight some of the key points here. Although our business was firstly affected by the global pandemic, we still achieved significant top line growth. Total revenue was RMB18.8 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. Sales of EHang 216, our flagship passenger-grade AAV reached nine units in Q1, compared with three units in Q1 2019, a 200% increase. Gross profit in Q1 amounted to RMB11.2 million, up 82.7%.

This led to gross margin of our 59.3%, up 0.8 percentage point versus the same period last year. The improved gross margin was due to a favorable revenue mix, reflecting the inherent value in our industry leadership and the first-mover advantage, which gives us pricing power.

Adjusted operating expenses, excluding share-based compensation increased by 32.9% to RMB31.1 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. It was mainly volume driven spending and strategic support for global commercialization.

We also increased our R&D expenses as we are strengthening our product development efforts. As an innovative technology driven company, pioneering a new sector, we have always kept high control of operating expenses.

However, we have built a 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 RMB19.2 million, while adjusted operating margin improved by 52.7 percentage points from negative 154.7% to 102%.

And adjusted net loss in Q1 was RMB18.5 million, increased by 13.4% year-over-year. 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 RMB257 million in cash, cash equivalent and short-term investments. In summary, we generated solid financial results in Q1, despite unprecedented coronavirus impact. The lock-downs and restrictions implemented in China and elsewhere has some adverse impacts on customer demand and supply chain.

Nonetheless, we are pleased to have achieved 80.3% revenue growth. 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're confident in our ability to lead this industry. As a newly public company, EHang 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. We were pleased to see many interested investors, 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're not changing our annual guidance at this time. We're 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. [Operator Instructions] Our first question comes from the line with Vincent Yu of Needham & Please go ahead..

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 that a blanket approval to carry out commercial pilots operation 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 demand in April and May.

Can management give a sense of how demand recovery is on April to May? Thank you..

Thank you, Vincent. This is Richard. I will answer your first two questions, they are correlated. On, first of all, the approval is an area specific approval. It is not just route specific. So that means, EHang 216 can fly different groups for air logistic uses within that area.

Is you refer to our press release? We described at least two use scenarios, which are between ground and hill top and between shore and islands, as a tighter -- as it is a coastal area of in the Taizhou city, where there are hills and islands. And there is a video attached to the release, and you are welcome to watch it.

With that, you can get a more concrete idea. And on your second question, also as we put in our press release, we intend to expand it to other areas in China. And we are working on applications for other areas or sites in different cities, such as at Guangzhou we're headquartered and [indiscernible].

With the first one accomplished and the pattern established, the following ones would be less, you can imagine that will be less difficult, and it would be quicker to accomplish. Also the CAAC regulator has been very supportive along the way for this innovative AAV solution..

Sir, do you have any follow-up questions?.

Yes, maybe I can answer the third question regarding the pipeline, right. So this is Edward. So regarding your question on the demand for the April and May, currently our order pipeline is approximately on a quarter rolling basis.

We have largely resumed that from the impact of the COVID-19 outbreak and basically we see our order pipeline for the second quarter back to the roughly at the level of the 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 a 200% growth year-on-year. Thank you..

Got it. So, a very quick follow-up.

Do we have any capacity expansion plan for the rest of 2020 as of now?.

I will take this question of yours. Basically in light of the pandemic right now, we are very cautious at 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 of fuselage manufacturing is potentially a capacity bottleneck in our own facility in China. And we have been exploring and outsourcing approach and discussing with some potential third-party carbon fiber manufacturers in China to support the needs for the -- for this year at least.

And on, looking to the second half of this year, we may resume our full capacity expansion plan, as you know, given the pandemic situation would be contained and there will be more stronger business momentum going forward..

Thank you for the questions. Next question comes from the line Hsiao Tim from Morgan Stanley. Please go ahead..

Hi, Mr. Hu, 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 remember that management highlighted deal was impacted by supply bottleneck of certain components.

So, may I know if the component has been removed, that bottleneck has been removed at the moment? And have we secured enough inventory for the upcoming delivery? And secondly, as we stay -- 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 or crucial to our 200% year-over-year revenue growth? And my last question is that, could you provide some update regarding our overseas business? Have we received a delivery? And if not, where would we start to do so? So those are my questions.

Thank you..

Thanks, Tim. This is Edward here. So, regarding your first question, I'll answer. So, yes, you're right. So, basically at the beginning of the year due to the pandemic, we did experience some of the 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 -- fuel the older existing orders..

Presenters, may I move to the next questions..

Your second question....

I beg your pardon. Please continue..

Yes, sorry.

Your second question was?.

That was about, because we restate your original guidance for the full-year, so based on current situation, what would be the potential swing factor after the pandemic that management, including Edward, and Mr.

Richard, you guys will keep a close watch? What would be the case or the factor? And which project we should be -- we should pay more attention to, which would be crucial to our 200% year-over-year growth, which clients, yes..

So basically, this 200% growth is based upon our assessment of the current situation, including the ongoing impact of the COVID-19 on the overseas market. So on the domestic market, we think it is, basically it should be OK, 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 little bit concerned is about this Air Show performance.

Air Show performance because, these -- 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, etc. So this could be some swing factor, but no harm for our core business. Our core business is the EHang 216 AAV, so which is so far we think offline.

And if we are lucky, if the COVID-19 can be contained the overseas market and the demand comes back, we should be some upside. But now we keep our guidance at the 200% growth year-on-year. So going forward we would watch the situation of the pandemic a closely.

And also on domestic markets, we are also in talks with different business organization and government 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 ForEx consumption demand. So the risk can come from people's reluctancy to consume or to travel.

And so which will in turn affect that demand and also the real delivery of our AAVs. So that can be a risk. So -- but from a management perspective, we are all watching these factors closely and we will report as soon as we see any issues. Thank you..

Got it. So, just a quick follow-up on my third question.

So regarding the overseas business, have we received a delivery or if not, when will we start to do so?.

Yes, for the overseas market delivery we are still doing the delivery even in the first quarter. For example, we delivered 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 one delivering one, this 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 then if it goes smoothly, we do expect further follow-up orders from them. So, but yes, as I said, the biggest risk is the pandemic, so 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 U.S. for the first time, although, we did obtain the operation -- the test flight permit from the Norway government. I think that those are very good things. And we did a partnership with two Spanish cities.

So, yes, so from a long-term perspective, we are quite comfortable about our overseas expansion plans. Thank you..

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

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..

Sorry, the incorporation with what? DC?.

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 I say, for example, a car, which allows you to charge battery more quickly, so, yes..

Yes, yes, that's right. So we've got two modes of charging. The quick mode can finish around, 60 minutes, and the longer one can take longer than that 1 hour and 1.5 hours, yes..

Okay, so, and that is a direct current charger or is that just high energy AC? I'm just trying to understand what the technology is..

Yes, direct current charging is quicker. So we are talking about the 100%, the full charge at 1 hour. But normally, if you -- we can fly if we have a 90% full. So for 0% to 90%, it only takes like 40 minutes, 45 minutes. But if you charge to 100% it may take about 60 minutes..

Okay, thank you. Second question is as regards to battery chemistry. Obviously, I think your NCA, 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 sell or very low cobalt? I'm just wondering what your thoughts are about the path for battery chemistry for your platform?.

Yes, of course, that's a good question. 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, and but this is not enough. We are always looking for better solutions and we look for better technology.

We take which can effectively improve our range and also by reducing the total weight of our AAV. However, we are not a battery company, and we design the B&P ourselves and we also, we have our own scientists in looking at different options for the batteries.

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

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

I'm sorry, this is very professional word. I don't know how to translate into English. So, we are using [indiscernible] battery.

Richard, do you have the term in English?.

So, I don't have it..

Yes, could you send us email? We'll get back to you on that..

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

Okay..

Thank you..

[Operator Instructions] Next question comes from the line of Charles Alcock from AIN. Please go ahead. Sir, Alcock, your line is open. You may un-mute locally..

Thank you very much..

Mr. Alcock, go ahead please..

Yes, hello, can you hear me?.

Yes..

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 to achieve type certification, not just temporary operating permission..

Yes, of course, our goal is to get the permanent certification. But I think it's good enough for the CAAC authority to ground the temporary certificate first. And so this is all due to our safety record, and also the standard that we have achieved.

So going forward, according to our ongoing conversation with the CAAC officials, we already set up a team with experts from both CAAC and from EHang to make the standards -- to set the standard to assess the future, the permanent certification. So we are working with the CAAC closely.

And so you should understand that, this is a very new product and a new technology, and the basically there is no precedence in the world. So both the government officials and us, we are working on an appropriate way and standard for the certification..

Thank you.

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

Yes, of course. We do have a European team based in Vienna to work with EASA officials..

Thank you..

Thank you for the questions. Our next question comes from the line of Tim Hsiao of Morgan Stanley. Please ask your question..

Hi, Edward and Richard. Sorry just a quick follow-up question regarding the competition. So, could you please provide some update regarding our -- like our peers, for example, like Volocopter's, the Kitty Hawk or Archer's.

Did you hear anything about how these competitors and when would you expect to face more in terms of head to head competition with all these players? Thank you..

Tim, this is Richard. The name you mentioned as our peer company in other countries, they are still probably not like us, already public. So the information, 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, EHang probably will continue to be the only one that has entered commercialization or are doing commercial deliveries in the market for a while. And on -- 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 attached to it.

So even though we were 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..

Thank you for the questions. [Operator Instructions] Ladies and gentlemen, thank you that does conclude -- can I take another question from the line, it's a follow-up questions? Yes, you do have a follow-up question is from Charles Alcock from AIN. Please go ahead..

Yes, thank you. Since there is a bit more time.

Can you tell us about your plans to continue flight testing in the U.S., will you build on the test that you started in North Carolina at the beginning of this year?.

Thank you for the question. This is Richard. Yes, we do have the plan cooperating with North Carolina DOT to continue the flight tests 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, kind of speaking, because of the pandemic at this point it 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 and plan as soon as possible in the U.S. And secondly, we have a partner, a U.S.-based biotech company called United Therapeutics.

They are actually being passed with our 216 to -- for the -- basically for the use case of medical emergency transport to be more specific to transport 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, it will move to the U.S.

to do the further test in the U.S..

Thank you..

Thank you. Our next question comes from the line of Damien Donnelly of Equitas Fund [ph]. Please go ahead..

Hi. Yes, just on, 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 EHang is like 30 kilometers, 40 kilometers in the nearest offshore oil platforms are 50 kilometers offshore?.

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, we will test and fly AAV as soon as the situation is stabilizes.

I believe that we will have their the plan and to implement the the test flight, and with that EHang will also send a technological team to Norway to assist the local flight. But right now, I can now to tell you with the detailed plan at this stage. Sorry..

Okay. All right, thank you, thank you very much..

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..

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 line..