Earnings Transcript for PTRA - Q4 Fiscal Year 2021

Aaron Chew: Thank you, operator, and thank you all for joining us for Proterra's Fourth Quarter 2021 Conference Call. Joining us today from Proterra are our CEO, Gareth Joyce; as well as our CFO, Karina Padilla. After the market closed, we published our quarterly letter on our website and in a SEC filing, which we encourage everyone to read for details on our financials and insights into our operating results and strategy, industry dynamics and outlook. During this conference call, we will make statements related to our business and industry that are forward-looking statements under federal securities laws. These statements are not guarantees of future performance. They are subject to a variety of risks and uncertainties, and our actual results could differ materially from expectations reflected in any forward-looking statements. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filings available on the SEC's website and via the Investor Relations section of our website. Additionally, non-GAAP financial measures will be discussed on today's conference call. A reconciliation of these measures to their most directly comparable GAAP financial measures can be found in today's quarterly letter. We will kick off the call today by introducing our Chief Executive Officer, Gareth Joyce, for his opening remarks.

Gareth Joyce: Thank you, Aaron, and to everyone joining us on the call today. I'm honored to lead my first call as CEO of Proterra and thrilled about the opportunity that lies ahead. I am fortunate not to have to start from scratch, but I'm taking over as CEO, hitting the ground running. I couldn't be more grateful to continue the work that Ryan Popple began in Proterra's foundational years, putting us on the map as a leader in electric transit buses and bringing onboard our Chief Technology Officer, Dustin Grace, to develop our proprietary battery technology. And for Jack Allen’s subsequent leadership in maturing our manufacturing operations, carrying us across the COVID chasm and helping us raise nearly $650 million in the transaction to take us public. Because of their efforts, I have the luxury of taking the reins of a leading horse in the race. I'm inheriting a company that is on its fourth generation battery technology, that has broken new boundaries in the size and weight of vehicles that can be electrified, has produced more than 500 megawatt hours of batteries to date, is on pace to increase its battery manufacturing capacity from around 1 gigawatt hours today to multiple gigawatt hours in 2023, and has a decade of vehicle manufacturing and electric powertrain integration experience with more than 800 vehicles produced and delivered, including more than 200 electric buses in 2021, and a fantastic team of employees who not only bring their experience, intellect and ingenuity to the table, but the passion to help us pursue our vision of Clean, Quiet Transportation for All. Let me start first by reflecting on our 2021 accomplishments. Second, I will provide our revenue guidance for 2022, and then I will discuss our order backlog growth before handing it off to Karina to discuss Q4 in more detail. First, on 2021. Leveraging our technology and manufacturing platform, we reported strong growth. Even in the face of well-publicized supply chain dislocations affecting manufacturers across the globe, in 2021, Powered deliveries of battery systems increased by 155% year-over-year to 273 vehicle sets. Proterra Transit deliveries grew 22% year-over-year to 208 new electric transit buses. Battery production grew by 70% to 189 megawatt hours for the year, and total revenue grew 23% year-over-year to $243 million. In addition, broad order growth across all of our business lines drove our backlog and contracted orders in total to $1.3 billion at year-end. This growth we achieved in 2021 did not come without its share of challenges, though. The impact of global logistics, supply chain and COVID-related complications has been widely reported across the industrial landscape, not only for Q4 but early in 2022 as well. We have continued to manage through this well, but we aren't immune to the effects. Not only has the production challenges not improved since Q3, but they have gotten worse in some areas. We are somewhat in a perfect storm of part shortages, shipping delays, inflation in material costs and all of the resulting production line inefficiencies. On top of that, since December and the spike in Omicron, there has been widespread labor absenteeism at our suppliers, our customers and our facilities that have further complicated operational efficiency. But we don't expect all of this to last. But for now, these complications are not only constraining our growth, but as Karina will discuss in more detail shortly, impacting our gross margins as well. Even in the face of these headwinds, we're establishing 2022 guidance as follows

Karina Padilla: Thanks, Gareth. I'm excited to join on my first conference call as CFO of Proterra and I'm even more excited to have joined Proterra as commercial vehicle electrification continues to gain momentum. First, I'll give you a quick intro on my background and our guidance into our fourth quarter results. For those who don't know me, I've spent my entire career in finance, spanning over 20 years at technology companies like Dell and Motorola Semiconductors, industrial firms like Ingersoll Rand and JELD-WEN, all of which were in very different stages of their maturity and growth. I've held leadership roles across a wide range of functions, ranging from divisional CFO with responsibilities spanning multiple countries, to Investor Relations and everything in between. I'm excited to join Proterra at this critical juncture for both the company and the industry. I'm passionate about the industry as I want to do my part to leave the world in a better place for my children and the generations that follow them. Proterra to me is the perfect mix of green tech and industrial. I'm looking forward to working with all of you in the years ahead. Now jumping on to our fourth quarter results. We achieved strong growth in deliveries and revenue across both business units. However, our margins were adversely impacted by a wide range of supply chain challenges compounded by the impact of inflation and plant inefficiencies. Our total revenue in Q4 grew 26% year-on-year to $68 million, driven by record Proterra Powered deliveries of battery systems and Proterra Transit delivery of new electric buses matching our prior record quarter. Powered and Energy revenue grew 19% year-on-year to $13 million, representing 19% of our total revenue. Proterra Powered deliveries for battery systems grew more than 300% year-over-year to 139 vehicle sets. Proterra Energy installations were down 24% year-over-year to 2 megawatts primarily because charging hardware shortages constrained our ability to complete installations in the quarter and have been pushed into 2022. On the Transit side of the business, our revenue grew 28% year-over-year to $55 million, representing 81% of our revenue. Fourth quarter delivery of new electric buses grew 13% year-on-year to match our highest quarter of deliveries at 54 buses. We also for the first time sold 9 pre-owned buses during the quarter, which demonstrates the potential for a pre-owned market in the electric transit buses. We entered this quarter with a healthy order book of $1.3 billion in backlog and contracted orders. With record Proterra Transit orders in the fourth quarter and Proterra Powered adding 3 new partnerships in the quarter to grow our contracted orders to $800 million, this positions us well for growth in 2022 and beyond. On the gross margin side, we reported a negative gross margin of $2.8 million in Q4 2021, as compared to gross profit of $1.1 million in Q4 of 2020. While we typically focus on year-on-year comparison, I will focus my margin commentary on the sequential comparison to our third quarter 2021 performance. It is useful to compare to Q3 2021 because it is most representative of the price cost dynamics we are facing today. In Q3, 2021, we generated a gross profit of $2.7 million, a sequential decline of approximately $5 million in Q4, 2021. Increases in material costs from inflation, volume and product mix accounted for almost $4 million of the variance and over $1 million from increased freight costs and volume. Both of these were driven by 2 unexpected impacts largely stemming from supply chain disruption. First on freight. Container shipping rates have more than doubled since the start of 2021 to approximately $10,000 per container. While ports remain congested, they can delay shipments for weeks if not months. In many cases, we have resorted to pay for expedited premium freight to meet customer delivery time. Second is the impact of product mix and inflation. We are excited to see the market opportunity with the sale of 9 pre-owned buses, as this substantiates the longevity of our products. However, this new market opportunity resulted in a revenue mix down impacting the quarter. In addition, we had one last contract shipped in the quarter that was originally signed in 2018, A marquee customer presenting a large long-term opportunity. This opportunity was priced aggressively and did not account for the rate of inflation we would see 3 years later, creating a headwind on our margin. We are facing similar headwinds across our portfolio from inflationary pressures this global supply chain is experiencing, in particular on our long-cycle contracts. We are taking actions to mitigate some of these headwinds. These actions in progress will be more permanent in nature, so they will take time to work through, and will not provide immediate relief. As a result, the current environment will challenge gross margin improvement in 2022. However, we have a 3-point plan in place to improve gross margin as supply chain normalizes. First, we raised pricing of our electric transit buses in December, not only for new bus orders, but we are also evaluating existing contract with inflation pass throughs. Second, we should see production efficiencies as supply chain improves, which should lead to lower freight pricing and the need for fewer expedites, lower material costs as we will depend less on alternative suppliers, and gained efficiencies across both areas of the production floor. Third, as supply chain and logistics normalize, we will execute on our capacity expansion, currently limited by parts shortages. Over time, the increased capacity through the addition of shifts and the expansion of our new battery facility in Greer, South Carolina will enable revenue growth, scale and better asset utilization. As a result, we expect gross margin to continue to steadily improve in subsequent years. With that said, as of today, we have not seen evidence of the supply chain normalization and the effects of the war in Eastern Europe are unknown at this stage. Moving on to cash. Our balance sheet remains healthy, ending the year $661 million in cash and short-term investments. Proterra has the balance sheet strength to enable us to scale and give us room to ride out any short-term turbulence, while providing flexibility to invest in both manufacturing capacity expansion and R&D. Our free cash flow burn for the year was $150 million. This was inflated by higher than normal working capital consumption in Q4, mainly from an increase in accounts receivable due to a large number of buses that were delivered late in the quarter, and an increase in inventory stemming from the strategic decision to stock up on battery cells. Normalizing for these two items, free cash flow burn would have been closer to $120 million. Our cash position gives us ample flexibility to fund our operations, while continuing to invest for future growth. The last important part of our Q4, and 2021 financial statements, I want to mention is that we will be filing a 12b-25 form today with the SEC as we need extra time for our auditors to finalize the review of our fourth quarter and our full year financial statement. We do not anticipate this filing extension to lead to any material adverse change in our financial results. Given, it's our first year as a public company with large accelerated filing requirements, we managed some staffing limitations impacted by COVID on our end, so we just need a bit more time to file. And with that I'll pass it back to Gareth for his closing commentary.

Gareth Joyce: Thanks, Karina. I'm very excited to have someone who is as capable and dynamic as Karina on board to help us find the right balance between investment in growth and operational discipline on items like margins and cash. When I was provided the opportunity to move to Proterra, it was an easy decision. I did not leave a Fortune 500 company to join an up-and-coming technology company like Proterra because of what I thought could be accomplished in 2022 or even 2023. But for what Proterra is poised to do in 2025 and beyond. Vehicle electrification is one of the great secular themes offering one of the select multi-decade growth opportunity before us today. Moreover, the transformation in how we transport ourselves and goods around the world is absolutely imperative for us to accelerate if we ever expect to address the existential environmental challenges confronting the world over the next few decades and leave the world in a better shape, not only for our children, but our children's children to enjoy it as much as we did. This is not about the cliché of saving the world. This is about saving humanity and its standard of living that we have taken for granted not only our whole lives, but for generations before us. Proterra's path forward is clear. The way I see it, and I'm sure a lot of you on this call agree, the global fleet of vehicles is on the path towards zero emission. It has begun with passenger vehicles and the next phase is commercial and industrial. And the electrification of the global fleet of commercial vehicles will require an enormous supply of batteries, forecast for electric penetration of trucks and buses from ACT and Morgan Stanley suggest the market for commercial vehicle batteries in North America and Europe of approximately 40-gigawatt hours in 2025 and close to 100 gigawatt hours in 2030. So please stop and think about the magnitude of those figures for a moment. This is a lot of batteries and this from a base of maybe a few gigawatt hours today. I believe there are few players in the world that will be able to achieve the necessary safety, performance and cost attributes required for commercial/industrial vehicle batteries and even fewer, that can provide the scale. The winners in this space that will capture most of this opportunity will exhibit leadership in 3 areas. One, execution

Operator: [Operator Instructions]. Your first question comes from the line of Courtney Yakavonis with Morgan Stanley.

Courtney Yakavonis: If you could just give us a little bit more color on the guidance for Powered and Energy revenue to more than double to $100 million. How should we be thinking about how the Powered side should ramp versus the Energy side? I think you talked about a couple large infrastructure charging projects that should be flowing through, but then also, I believe you talked about some contracts that were creating -- that were priced aggressively from '18. Are those also included in that $100 million and will there be any margin dilution associated with that?

Gareth Joyce: Courtney, thanks. I appreciate the question. So as far as the $100 million for Powered and Energy goes, we have a strong order book for Powered production through our contracted orders going into next year. So we have pretty clear line of sight to the production requirements there. The Energy business, a little harder to have a clearer line of sight to the timing of those projects as we've highlighted on some previous calls and again today. The infrastructure projects can be less predictable given just the nature of the environment we're working in where the land is not ready for us to be able to install equipment at a given time for whatever the reasons. It does create some delays for us in certain environment. So a little harder to be accurate on the timing of those programs. So without -- we don't split the revenue forecast for Powered and Energy, but certainly we have a much clearer line of sight to the order book and the production timing of what's on the Powered book than we do on Energy.

Courtney Yakavonis: I appreciate that you guys don't split it out. Maybe if you could give us any guidepost for battery systems targets versus megawatt charging infrastructure installed for the full year, just to help give us some framework there?

Gareth Joyce: So again, we don't break it out into what portion of the revenue is coming out of Powered and what portion is coming out of Energy. I think it would be fair to say that in 2022, it biases towards Powered given the clarity we have on the order book and the production planning we have for that product. And as I say, on the Energy side, we have a little less control over the timing of the site implementation and so bias is towards Powered.

Courtney Yakavonis: Okay. Fair enough. And then just one follow-up on the Transit side. I think you were originally intending to add a second shift next year. Now it sounds like guidance is only assuming one shift. Can you give us any color on what type of improvement in the supply chain or specifically what the bottlenecks are? And if those do improve, what would be the lead time to adding that second shift to Transit in the back half of the year?

Gareth Joyce: Yes, first of all, let me just say as we go in to 2022, demand is not the challenge for us. We've shared with you that our contracted orders and backlog for both Transit and Powered Energy is healthy at the roughly $1.3 billion mark. So we're confident in the demand that lies ahead of us. Your point about Transit production, yes, we are still constrained running on a one-shift operation intentionally because until we can ensure that we have stable material flow to the line to be able to keep an efficient second shift running, it really doesn't make sense to ramp up and scale from a cost efficiency point of view. So we're eager to get a second shift running, but right now the challenges we see on the supply chain side like we reported last quarter, I mean resin is still a significant material constraint for connectors in wiring harnesses. Until we have a good stable flow of product like that, it’s very hard to scale up a second shift in your production line. I would also say there’s the actual physical product where we had some constraints on supply, but also the situation around distribution and freight across the globe is still very challenged. Ports are still clogged up. We see long delays in getting product from point of manufacturer to point of our production line in some cases, but more importantly, it's still a little unpredictable. So ultimately what we're looking for to be able to ramp up our second shift is, stable supply of raw material to our production line in a way that we have confidence, we can run it efficiently and cost effectively. As I said, the demand is not a challenge, we have the demand and we are ready to meet it, and we have the team to execute on it. We have the production capability, we have the quality management systems, we just got to make sure we get stable material flow.

Operator: Your next question is from the line of Brian Johnson with Barclays.

Brian Johnson: Just continuing in that -- the $1.3 billion backlog, just want to confirm, that's up from $750 million last year, which would imply a pretty healthy book-to-bill ratio. Is that correct? I know you're not doing backlog quarterly.

Gareth Joyce: That's right. I mean we committed to report our backlog once a year and this is the time we're doing it. And as you can see the book has built nicely and is well balanced between the portfolio. As we noted, you have around $450 million on Transit and round about $800 million on Powered and Energy.

Brian Johnson: Okay, so clearly that $1.3 billion supports more than the -- your $300 million next year. But if you don't find anything else, that would only be $330 million year in '23, '24, '25. So I guess a couple of things, kind of, one, in terms of the pipeline that's not backlog, can you give some comfort in growing well beyond that $300 million? Then two, and I think you kind of were circling around this in the last question, if there weren’t shift supply constraints, given the Greer factory had opened, what would be the theoretical max production for this year, '22.

Gareth Joyce: As you know from our single shift operation, we are running at around about 200 units. If we can run two shift operations for transit bus, we have a capacity of around 400 units. So, once we can get the line fully supplied with raw material, we certainly have growth potential from a production point of view and the ability to feed into that order backlog.

Brian Johnson: Okay. And in terms of pipeline negotiated, but not yet signed, does that support further backlog growth into next year?

Gareth Joyce: For maybe little bit of clarity, when we talk about contracted orders, that's typically on our Powered side of our business and the way we build those contracts is we report on minimum order quantities. On the Transit side, we talked about backlog, which is typically what comes from the LOIs that we would receive from transit authorities. And in all cases, yes, we know that they have the funding in place to support those LOIs. We don't count options in our backlog and so what you have in that number is essentially what we know under the LOI. Again, I think demand is clear on both sides of the business with fairly good line of sight to those numbers.

Operator:

Q - Sherif El-Sabbahy:

Sherif El-Sabbahy: So first off, not to over discuss the guide a bit too much, but looking at some of the numbers that have been provided around 2022 outlook prior to this, would you say that without any of the supply chain constraints that those numbers would likely be achievable given the demand backdrop?

Gareth Joyce: Yes, I think, if we think about the growth outlook -- as I noted, the demand is there and yes, we talk about, so that -- meeting roughly 40 gigawatt hours of batteries by 2025 for trucks and buses, just in Europe and the U.S. from what today is just a couple of gigawatt hours. The demand is there. But if you consider what sort of disruption we seen to supply chain and production in the past 12 to 18 months, the demand curve does shift to the right simply because we were unable to fulfill the demand. So the curve does move to the right, and so the rate at which we continue to build our growth is a little different to what we saw 12 to 18 months ago. What I'm confident in though is that when you have the demand out there, we've demonstrated with a 25% compound annual growth rate since 2018 and now a guidance towards 24% to 34% growth for 2022. We have a constant drumbeat of growth building in this business, so we know that we're able to scale and meet demand and, but -- but we're not going to give a forecast on an outlook that's just not clear enough for us to see 4, 5 years out from now given the kind of disruption we've seen in the supply environment and how it's impacted production. And the final thing I probably comment on there is, yes, that speaks a lot to the transit environment. I do also just want to mention that battery factory 3.0, when that comes on stream in Greer, South Carolina, it's fourth quarter of this year. We know that the greatest benefit of that comes in 2023. There we’re also very excited to be able to set up a large-scale facility where we have the opportunity to not only meet demand, but also do it in a cost-efficient way, because it's a large-scale production facility. So there is a lot of positive opportunity ahead of us that we can lean into as we continue to secure a better supply chain performance in order to meet that demand.

Sherif El-Sabbahy: Understood. And just a follow-up on the gross margin, you mentioned that there were pass-throughs that would take some time to come into effect. What's sort of the lag that's currently built into those contracts? And are you taking a different approach to your long-term contracts after this last year of turbulence?

Gareth Joyce: Sherif, I'm sorry, I missed the first part of your question, because here was a dead spot on the line for a moment. Would you mind just repeating it for me?

Sherif El-Sabbahy: Of course. So you had mentioned the -- there is a bit of a lag with some of the pass-throughs in long-term contracts. What's sort of the timeframe of that that's built into the portfolio of long-term contracts and are you taking a different approach to those contracts going forward given the turbulence in the past year?

Gareth Joyce: Yes, that comment was specifically relating to the Energy business, where we are building charging infrastructure that's sort of fleet-scale solutions to meet the needs of these depot charging requirements for multiple vehicles running out of a single depot. As you can appreciate, those are pretty large-scale infrastructure project and as I mentioned infrastructure projects are not always that easy to predict where you might see delays. I mean it could be anything from permitting to site readiness to -- and candidly, in our case, we've had again issues with on time supply of product. So, yes, it's something where I can't say with any certainty what kind of impact that might bring, but we certainly continue to plan as best as we can with the parties that we're working with them on those site developments.

Operator: Your final question comes from the line of Steven Fox with Fox Advisors.

Steven Fox: Two questions. First off, can you address a little bit more in detail the inflation pressures you're seeing from 2 aspects. One is, I think you mentioned that you're going to try to reprice some of your backlog, which doesn't seem to be having much success in the supply chain to date. So where do you think you could have success on that? And then secondly, when we think about sort of some of the guidance you gave for this year, what are you sort of thinking in terms of inflation going forward from the year, and then I had a follow-up?

Gareth Joyce: Sure. Yes. First of all, I think on inflation specifically what I would say is, we are seeing the cost pressure already in our business. We responded to that and have engaged in discussion with existing customers around the opportunity to see price relief, given that input cost pressure, we continue to have those discussions on an ongoing basis. Equally, also for product that is out being sold at the moment by our team, we have taken price action already. So I expect that we will see some benefit from that action being taken, but there will be a lag, right, because we've really seen the cost pressure coming on the supply side. We responded on the demand side and there is a lag effect that occurs between the timing of that and the opportunity to recover some of that impact.

Steven Fox: And what about repricing the backlog? Is that a significant effort or is that sort of on the margin? I'm trying to understand the comment if I heard you right.

Gareth Joyce: No, I think there is a significant effort. There are some contracts we have in place with customers that allow us to respond to inflationary pressure and others do not. So we don't have a homogenous contract environment and you can appreciate the Transit authorities and contracts for transit buses are very different to what contract might look like for a Powered customer and equally for an Energy contract. So it's not a homogenous contract landscape, but we do have opportunity in some of them.

Steven Fox: Okay. That's helpful. And then just lastly, just bigger picture understanding that, obviously a lot of these impacts are out of your control, but trying to set expectations correctly. I'm thinking about the new battery plant coming online by the end of the year, the risk that that gets pushed out, the risks that you continue to see constraints on wiring harnesses, even though you have a massive backlog that could grow a lot more this year. Like how do you leverage that backlog in order to become sort of get a bigger pencil in the supply chain and make sure that you start hitting a lot of these aggressive plans?

Gareth Joyce: Yes. Thank you, Steven, that's a great question. As I said, we are a business that is run from start-up to scale up. And so, first of all, we have a leadership team in place and a broader team that is experienced in running production systems, operations, management system, supply chain systems, quality systems, that's an important tool to have at a time like this. So we have in our supply chain team a continuous process on looking at how we can find opportunity to, in some cases consolidate volume to get volume opportunity with the supplier where we think that, that will be beneficial. But in other cases, we actually have to look for alternative sources of supply and diversify our supply base that we de-risk it. That's a constant series of actions that you have to go through to make sure that you're optimizing your supply chain risk. So there is no single action around that. That's a process of continuous optimization given that we're in a dynamic market where it is in fact sometimes very difficult to predict where the next constrains might come. So I think one of the big assets we have is the management operating system to be agile. We able to respond to the market and we are continuing to invest in that and improve our capability. One action as we shared with you on our calls that strategically we knew is very is very important was to lock in a long-term supply agreement on cell supply with LG Energy Solutions. That was a very important strategic step on our supply chain -- a mark around our supply chain team and it's continuing to think about opportunities like that to ensure the security of supply.

Operator: There are no further questions at this time. I will now turn the call back over to Mr. Gareth Joyce.

Gareth Joyce: Well, thank you. And I'd just like to express my sincere thanks to everyone who joined us today and certainly looking forward to the exciting journey that lies ahead of us. Appreciate your time. Thank you.

Operator: Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.