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spk08: Greetings. Welcome to the Proterra Inc. second quarter 2021 conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. And at that time, if you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your hand tape before pressing the star keys. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I'll now turn the conference over to your host, Proterra's Investor Relations, Aaron Chu. You may begin.
spk04: Thank you, Operator, and thank you all for joining us for Proterra's second quarter 2021 conference call. Joining us today from Proterra are our Chairman and CEO, Jack Allen, our Chief Financial Officer, Amy Ard, as well as President of Proterra Power & Energy, Gareth Joyce. After the market's closed, we publish a quarterly letter on our website and in an SEC filing, which we encourage everyone participating in the call to read for insights into our operating and financial results and a detailed discussion of industry dynamics and our 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. Our actual results could differ materially from expectations reflected in any forward-looking statements. For 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 by the Investor Relations section of our website, as well as the risks and other important factors discussed in today's quarterly letter. Additionally, non-GAAP financial measures will be discussed on today's conference call. A reconciliation of these measures to their most directly comparable gap financial measures can be found in today's earnings release. We'll kick off the call today by introducing our chairman and chief executive officer, Jack Allen, for his opening remarks.
spk09: Thanks, Aaron, and thanks to everyone who's on our call today. We're incredibly excited to announce our inaugural quarter results for Q2 2021. This is an opportunity to not only show how we are distinguished from a crowded field, but also to highlight how our business is performing today and poised to grow tomorrow. So just a kind of a quick table of contents of what we're going to do. We're all going to keep our prepared remarks to a minimum. I'll spend a few minutes highlighting not only the extent to which we have already grown our business today, but also how we have put the pieces in place that give us confidence in our future revenue growth outlook. Amy will discuss the financials, including gross margins and cash, But we're going to leave the bulk of the call to Q&A so we can address the topics most important to you. So first things first, three takeaways for this quarter. Number one, we are delivering strong results today. So we may be a new public company, but we're not a new company. We are a technology company that's been innovating on battery electric commercial vehicles for over a decade. We're now on our fifth-generation bus and our fourth-generation battery. We have achieved serial production of batteries and buses many years ago. So let's go to Q2 in a quick summary. We produce 41 megawatt hours of batteries for both powered and transit. That's up 30% from Q2 2020. We delivered 54 buses, up 50% from a year ago when production was curtailed due to COVID. More than 50% of the deliveries in the quarter were to existing customers. including a dozen to the Los Angeles Department of Transportation to bring its fleet of Proterra Transit electric buses to 25. We also delivered buses to six new customers across the map from Go Raleigh in North Carolina to Bow Valley Regional Transit in Alberta, Canada. We also announced a sizable follow-on order for 42 transit buses from Miami Transit, which will bring its Proterra fleet to 75 buses, and importantly, And this deal also includes Proterra energy charging solutions as well. Proterra Power delivered battery systems for 30 vehicles. We also established new partnerships last month that expand our reach further with two established companies. The first is Roush Cleantech for its electric F650 truck platform. This is a very popular work truck. It's often used for box trucks, utility trucks, and shuttle buses. And the partnership is launching with a very important first customer, Penske Truck Leasing. Next is Taylor Machine Works for our second partnership in off-highway equipment after the electric excavator with Komatsu that we announced in Q1. This one is focused on vehicles used in ports, including both an electric forklift as well as an electric container handler. This serves to really highlight the energy density and safety of our technology. by packing in almost one megawatt hour of energy on board, which can carry loads up to 75,000 pounds. Ironically, not far away from the weight of a Class A truck with a full payload. Patera Energy installed four megawatts of charging solutions to bring the cumulative total to 55 megawatts installed since 2016. So altogether, this translated into record revenue of $59 million in Q2. up 39% year to year. Transit accounted for 82% and powered and energy for the other 18%. Gross margin was 2%. We've now been positive in gross margin for six quarters in a row. We'll readily admit that's not where we want to be, and Amy will get more into that later. Most importantly, we're executing on our plan and we're following through with what we said we would do. Entering into the year, we expected revenue of $246 million. Halfway through the year, we've generated 46% of that, or $113 million of revenue. We did this even in the face of all the challenges that you all are probably hearing about in every Q2 call in just about every industry. We also are experiencing widespread turbulence across the global supply chain. It's led to shortages, delays, and increased break costs. The supply chain inconsistency has also leaned into inefficiency on our production lines. We've had price hikes from everything from metals to plastics, and now this new resurgence of COVID is further complicating plant efficiency. But so far, we have been doing what's been necessary blocking and tackling to get the job done in spite of these challenges. And as a result, while there's still plenty of hurdles for us to overcome in the second half, we are affirming 2021 revenue guidance of $246 million. The second takeaway is that all three of our businesses, transit, power, and energy, are all incredibly well positioned to capitalize on commercial vehicle growth trends. Transit is already putting up strong results today and is poised for strong growth in the years ahead as electrification of the North American transit bus market grows from around 10% over the last couple of years toward the 50% level that third-party forecasts have by the middle of this decade. We believe Proterra Powered offers even a larger opportunity that is poised to accelerate our growth further, starting in 2022 and 23. Just using North America as an example, there are 5,000 or 6,000 transit buses sold per year, but the medium and heavy-duty commercial vehicle market is 100 times that at a half a million plus units per year. And we expect Proterra Energy not only to serve as an enabler of electrification, for our transit-powered customers, but position us to capture a higher portion of lifetime customer value. These two businesses are demonstrating their growth prospects already. We have 10 powered partnerships to develop and supply electric commercial vehicle products across nine different OEMs. This demonstrates the wide applicability of our technology, as well as the breadth of adoption by a range of different vehicle OEMs, from incumbents to startups and from vans to excavators. This is providing us with early scope that will ultimately enable the scale needed to grow our volumes and our margins even further. Terra Energy has cumulatively installed 55 megawatts of charging solutions for both transit and school buses. Included in this is the first installation in Q2 of our new one megawatt capable charging system, which could connect 40 vehicles with no need for a new transformer or switchgear while reducing square feet utilized by up to 30%. So a couple of points to highlight and better understand the growth outlook for power. An initial development deal for a new vehicle program, that doesn't hit the income statement immediately. It could take a year or two of development before it turns into a high volume supply contract. So you may not see it in our financials today, but we are priming the platform for revenue and margin growth in the years ahead. So out of our 10 partnerships, seven of them are in supply contracts. And while we provided battery packs to eight of our partners by the end of Q2, it's really important to understand that only one of them is actually in serial production today. And to better understand the near-term revenue growth, one more of our partnerships will enter serial production later this year. Another three to four are expected to enter serial production next year, and the rest in 2023. So, let's think about what's beyond that. You know, though we have 10 partnerships in place, we aren't standing still. We entered the year with five, and not even eight months into the year, we've doubled that. So, we expect to continue to announce new partners regularly. which would support our volume growth ambitions. So Patera-powered revenue growth has only just begun, and it's poised to accelerate next year and the year after. The third takeaway is one I'm incredibly excited about, and that's our new expanded agreement with LG. So along with our Q2 results, we also announced a major expansion of our partnership with LG Energy. This is an important step to address one of the most prominent supply chain risks to our growth prospects over the next couple of years. First, we're making an upfront commitment for a low nine-figure dollar sum, securing dedicated production lines at a US manufacturing facility in which LG will be producing cylindrical cells with chemistry optimized for commercial vehicle applications. This represents an upright commitment for a steady supply of U.S.-made cells totaling multiple gigawatt hours per year. So by providing this demand visibility and this financial commitment, we are helping to enable LG to pioneer U.S. manufacturing of cylindrical battery cells completely customized for the heavy-duty applications. In turn, we have secured a high volume of cell supply through 2028, and we believe these will be the first cylindrical cells produced for commercial vehicles that can qualify as tariff-free under the USMCA. This also creates new American jobs in battery technology and manufacturing that is really poised to grow through the rest of the decade. Second, we are extending our existing contract that was set to expire at the end of 2022. We expect that this contract will provide sufficient cells for our production needs before the U.S. facility starts production, as well as potential incremental volumes above and beyond what the domestic facility can provide if and when demand requires it. So this is a really big deal. It solidifies our partnership with a critical cell supplier like LG, It locks in supply, which allows us to provide sufficient visibility and reliable supply to our OEM customers. Most importantly, it's USMCA compliant. And all in, we believe this provides us a significant competitive advantage over the next few years. So a couple of final points from me that we think will be of interest. We're also announcing that we'll be reporting two separate business segments starting in Q3. transit will be separate from power and energy. And as a part of this, we've also announced that Josh Ensign will be moving from chief operating officer to be the president of Portera Transit, continuing to report to me. And finally, I can't end this call without expressing our gratitude to all of our employees for their incredible hard work and dedication to our mission. All in, we are positioning ourselves to ride the wave of commercial and industrial vehicle electrification this decade, having demonstrated the breadth of demand for our products from transit to our 10 commercial vehicle programs, being able to secure battery cell supply to ensure we can fulfill that demand, and finally demonstrating an important ability to execute on our plan. I'll now pass it off to Amy for a couple of highlights on the financials.
spk00: Thanks, Jack, for the overview of our operations and strategy. Jack also just highlighted our record revenue of $59 million. But I will offer a few comments primarily on margins and cash in the quarter. First on gross margins. On one hand, we delivered gross margin of 2%, positive for the sixth quarter in a row. This is important, as it is difficult to get to gross margin positives in an unscaled but growing hardware manufacturing environment. On the other hand, we are not satisfied with this performance and believe we can be doing better. We have been impacted by anomalous factors throughout the last few quarters. The first is COVID and its impact on supply chain and production. While we have not had any significant supplier shutdowns, we have experienced slower deliveries of parts, specifically resin and plastic parts, which have impacted productivity on the line. We have also seen global logistics challenges affecting parts delivery, which again, constrains production and limits our ability to optimize productivity. The second factor is the startup inefficiencies at our LA battery factory. We started production in Q4 2020, but we really began to ramp production in 2021. Startup inefficiencies associated with the early ramp of the new automated line have led us to maintain incremental staffing that will not be duplicative once we're fully ramped. Additionally, new equipment and new processes have led to higher initial levels of scrap, though this is already returning back to more normal levels as we calibrate the automation process. At the end of the day, we believe the key factor driving growth margin improvement will be scale and higher volumes, and we think that's just a matter of time. Once the impact of COVID has passed, we remain confident in our ability to drive margins higher as volumes ramp over the next few years. Next, on to cash. The first thing I'd point out is our cash flow can be lumpy. Depending on customer delivery timing and the number of buses that each customer receives, accounts receivable and inventory can be highly variable and have an outsized effect from one quarter to the next. Two notable impacts in Q2 on cash. The first was AR. It was a use of cash of $14 million in the second quarter, but this was largely related to a delay in one customer's payment that was subsequently made in July. Also, to mitigate the aforementioned COVID impact, raw material inventory increased by $10 million as we secured battery supplies well in advance of production. As our production is scaling and we are adding new customers to our pipeline, we are trying to ensure that no unforeseen supply chain constraints will impact our customers. So while free cash flow is negative 38 million in Q2, 35 million in Q, I apologize, it was negative 52 million through the first six months of the year, which is a more normalized run rate. All in, we ended the quarter with over $750 million in cash, and we continue to believe we have more than sufficient capital to fund our business until we achieve positive free cash flow within our five-year planning period. One quick final point about an accounting issue that has increased our net loss but is not reflective of the underlying health of our business. We have certain derivative and warrant liabilities associated with our convertible debt and merger transaction that require quarterly adjustments to fair value. These adjustments amounted to $130 million loss in the quarter. But to reiterate, this loss is not only non-cash, but not reflective of our business or underlying trends. With that, I'll pass it back to Jack for some closing comments before opening it up to Q&A.
spk09: Thanks, Amy. So in closing, a couple of points. And we put up a solid Q2. And we're executing on our plan for 2021 so far, despite really an onslaught of challenges. Transit's putting up strong results already. And as power starts to recognize material revenue for more than one customer, revenue growth should improve. And obviously, as Amy said, we have sufficient cash to execute our growth plans. I'm incredibly excited about the expanded LG relationship. So thank you for your interest and your support. We look forward to the chance to update you on how we are executing on our plan each quarter. So with that, the operator, I'd like to open it up for Q&A.
spk08: Sure. And at this time, we'll be conducting our question and answer session. One moment, please, while we poll for questions. And our first question is from E.T., Mike Kiley with Citi. Please proceed with your question. Mike Kiley with Citi.
spk05: Please proceed with your question. Greg, great. Thanks. Hi, everybody, and congrats on the first earnings call.
spk08: Thank you.
spk05: Just maybe a first question, maybe for Amy, on the gross margin in the quarter. I think you mentioned some of the supply chain headwinds that you incurred. Any way to quantify what those were, either from a dollar margin perspective, and then maybe how to think about gross margin in the second half of the year?
spk00: Sure. First, I'd say I do want to continue to highlight that we have had positive gross margin for six quarters in a row, which I think is really a testament to where we are in our life cycle. What I would say is the factors that impacted Q2, both of those factors combined probably would have added 200 basis points if they hadn't occurred. And as we look forward, I guess what I would say is We do not know the impact of COVID, but we do continue to expect to have positive margin as we go through the second half of the year.
spk05: Great. Terrific. And just a second question. With some of the new business development progress you reported, any update at all to the prior backlog or order book of about $750 million? Any update to that at all?
spk00: We are not going to be – discussing our backlog or our bookings on a quarterly basis. We're going to annually provide an update on our backlog. The reason for that is because bookings can be lumpy, and therefore we think an annual measure is more demonstrative of how the business is doing. We focus on deliveries because deliveries equal revenue, and we think that's what's most important for us on a quarter-to-quarter basis. Go ahead.
spk05: Just a last question. I'll sneak one in. I think through the OPEC's guidance for the fourth quarter of $35 million, any rough sense of how to think about that from the R&D and SG&A split? Just to talk more about the incremental investments that you're making.
spk00: I'll tell you the three reasons. I won't split it for you into R&D and SG&A, but I'll give you some context into why we're doing that and how we're thinking about this. The reason why OpEx is increasing, we have three things that have changed in the last several months. I think we have higher clarity of cell technology developments. We've had meetings with dozens of OEMs that have clarified their needs and requirements. And quite frankly, we raised additional capital, so we felt like we had more capital to spend in order to meet the needs of our customers. So with that money, we're going to broaden our offerings. We're going to increase our integration capabilities. We're going to expand our geographic reach. And we're going to build out additional infrastructure, compliance, regulatory service. So it will split between R&D and G&A, but that's how we're thinking about it in terms of the incremental OPEX for Q4.
spk05: Perfect. That's all very helpful. Thank you.
spk08: And our next question is from Sean Milligan with Williams Trading. Please proceed with your question. Thanks for taking the question this afternoon. I think in the In the letter, you talk about a pipeline of 1,000 buses on the transit side. Can you talk about, you know, some of the hurdles that you're seeing in terms of getting those to convert to orders? Is it really just timing of kind of funding clarity from the infrastructure bill? Or what are you seeing there? And kind of how can we think about converting that to backlog?
spk09: Sure. So, you know, the transit industry or, you know, has really been quite severely impacted by COVID. But we do see the ridership is coming back up. And as indicated on our analyst call, we did see that there was a significant number of RFPs out there, certainly more this year than last year. But they were taking longer to convert with just the uncertainty that's out there. And we certainly hope that the infrastructure bill if it's passed, helps provide a lot of clarity around that to be able to convert that pipeline into backlog and into production.
spk08: Okay, thanks. And I guess in terms of the infrastructure bill and potential funding there, you obviously have a large competitor that's international. Is there clarity on whether they're able to compete for the transit awards? I realize that there may be some nuances about state level or, you know, municipality, but can you provide us some information about that?
spk09: I mean, are you referring to BYD here? Is that who you're referring to? Yeah. BYD mainly. Right. So the NDAA that was passed in a bipartisan fashion a year or so ago provides a restriction on funding to be used from a federal transit agency to a Chinese-owned or operated company. And I believe that kicks in in the beginning of 2022.
spk08: That's really what we know about it right now. Okay, great. Thank you. I'll go back to the queue. And our next question is from John Lopez with Vertical Group. Please proceed with your question.
spk06: Hi, thanks so much. I apologize, I'm coming over from another one. So if I'm asking anything you guys have covered, we can take it offline. I wanted to start just on the OpEx side. First of all, the $35 million that you referenced, Amy, that's a gap figure?
spk00: Yes.
spk06: Okay. And are we expecting the stock comp number to continue running around where it's been running $5 million or so, as was the case in Q2? Yes.
spk00: There was, I would say, a one-off larger charge in Q2 related to some milestone grants of about $2 million, but it will run at sort of an adjusted rate from Q1. It will be probably the Q2 rate less that one-off adjustment, I'd say.
spk08: Okay, so closer to $3 million.
spk00: I'm not going to give you the exact number because we're continually hiring, and so that number may change period over period, but I will tell you that there was a one-off that is not going to continue into Q3 and Q4. Okay.
spk06: I got you. I got you. The second one is just on the LG announcement. I'm guessing you've covered some of this before, but when does the cash disbursement take place, and what's the timeframe over which you begin to get access to that capacity?
spk09: So the LG agreement provides a number of things for us. First off, it's an extension of the current contract as well as the U.S. bill and the U.S. MCA. So we are partnering with LG, but this is an LG facility. So all of the information around the specific timing and the location and startup, things like that, is going to have to be answered by LG and They're not quite ready to answer that yet, and that's why we really have a multi-pronged agreement with them to extend the current agreement as well as have supplies from the U.S. when those manufacturing production lines come online.
spk06: Okay, I understand. And sorry, just related to the extension, do you have visibility into what your cell availability will be for 2022?
spk09: That we do, yes. We have provided them, you know, a range of what our production needs to be in 2022, and we have, you know, a secure agreement from them to provide those.
spk06: Okay, great. And sorry, my last one, I just want to come back to the infrastructure bill. In your take, the number that seemed to have been earmarked for buses looks a bit smaller, and I guess from our end, it's still a little unclear how much of that is school versus transit. As you think about the impact of that on your business, how do you view that now versus perhaps how you might have viewed it six months ago?
spk09: Sure. So, you know, I guess it all depends on what lens you're looking at it. If, you know, compared to the first number that was thrown out, yeah, it's smaller, but compared to where it is today, you know, it's significantly more. So, for example, a low-no program in 2021, was $180 million, and that program is not guaranteed. It has to come up and get approved each and every year, where within the current infrastructure bill is $800 million a year for five years guaranteed. And that's just for transit. So we view that as being quite positive. In addition to that, there's a minimum of $2.5 billion, up to $5 billion for electric school buses. I talked about our agreement with Taylor for port equipment. There's $2.25 billion to electrify the ports in the United States. $7.5 billion for charging infrastructure. So there's money in there for airports that can be used for shuttle buses. So there's a lot in there that is positive for electrifying the United States.
spk06: That's really helpful. Thank you very much for the thoughts.
spk08: Our next question is from Ben Carroll with Robert W. Baird. Please proceed with your question.
spk02: Hey, Jack, Amy, and Aaron, Mr. Ensign. Thanks for taking my question. One thing we're trying to figure out is the competitive environment. There was an announcement by one of your competitors today for a big deal, and they had You know, it almost seems like the commercial market is more competitive than, I guess, the passenger vehicle market. So maybe can you talk to that? And then on those lines, like how much do you have to compete with price? And maybe, Amy, could you talk about just the levers you have in that margin? Congrats on the sixth quarter in a row of positive gross margin. I know you've got a ways to go. But just how much does price factor in that with the competitiveness and What do you pull for levers there? Thank you.
spk09: Sure, Ben. I think what you're referring to is the agreement between Lightning and Forest River. Is that correct?
spk02: Yes, sir.
spk09: Okay. So I'm going to let Garrett Joyce, our president of Proterra Power and Energy, answer that as he's very close to Tim and his team at Lightning.
spk01: Yeah, thank you. First of all, Lightning is actually – someone we enjoy a very good relationship with, fortunately, and they're a good vehicle engineering organization. So we're proud to partner with them already on their Class 3 van platform, and we have active discussions with them for the supply of batteries for this new agreement they just announced. So that's work in progress. very fortunate that their product platform that spans from class three all the way up to class seven is something that aligns very well with our battery platform that spans that same spectrum so we look forward to continuing to partner with them just on the margin front maybe how cells work into that as well just competitive this is margin and then cells
spk09: Sure. So I guess what I would say about that, Ben, is certainly this is a competitive market. There's no question about that. But we have been in this market longer than others. We have a solid relationship with LG. We have an automated manufacturing line. We have more scale than what our competitors do in this space today. So sure, it's a competitive price market, but we're comfortable with you know, with where we are, you know, from a cost standpoint relative to our competitors. But I think one of the big things here is that this agreement with LG provides us the opportunity to be USMCA compliant. And from a commercial vehicle manufacturer standpoint, I can just tell you from my Navisar experience, that's going to be paramount. You're not going to want to build a vehicle in the United States and pay a tariff if you want to ship that to Canada or Mexico. So having a US MCA compliant battery cells is a big competitive advantage for Proterra.
spk02: Great. Thank you, guys.
spk08: And our next question is from Brian Johnson with Barclays. Please proceed with your question.
spk07: Yes, I've got a couple questions. You know, first of all, a bit more on kind of modeling housekeeping. The LG announcement, you mentioned an upfront payment to that. I might have missed it in the conversation, but what is the rough timing of when that is contingent on them actually getting ready to produce at that facility?
spk09: There's a number of milestones, but they're, you know, they haven't been specifically laid out from a timeline standpoint. So, you know, we're, we're not in a position to talk about that, you know, today. Hopefully we will be in the fairly near future as LG makes more announcements.
spk07: Okay, good. Secondly, you know, there's been some press, particularly amongst opponents of EVs, around issues at the Philadelphia Subway Transit System and then Foothill Transit with electric buses. Some of the articles claim it's pro terra. I just want to kind of give you a chance to comment on those. And then if there's work for Terra buses, what's different about what's being delivered currently?
spk09: Sure. You started off right. There's a lot of reporting out there from people that are against EVs. And we do strongly feel that we've been misrepresented in the media. And we're not overly surprised by that. Whenever you're bringing progressive technology and disruptive technology to the market, there's always someone who's being disrupted who doesn't you know, isn't going to like it and, you know, they're going to try to figure out a way to fight back. And so we're experiencing a little bit of that going on. You know, relative to, you know, to SEPTA, you know, this is, you know, we're bringing new technology here and, you know, and to a new customer and an excellent transit agency. And I've met personally with their CEO, Leslie Richards, and, you know, we've had challenges to integrate into this existing fleet. But we're confident that, you know, our teams are working together with SEPTA to resolve these issues. Foothill Transit was our first customer. They're absolutely the pioneers in bringing zero emission electrification to the United States. And where they got misrepresented is all they're really trying to do is take their vehicles that were first generation that they you know, stuck their neck out and brought to market. And what they really just like to do is retire those and get fifth generation Proterra vehicles. So that's all they're trying to do. And it was, you know, just misrepresented that there were, you know, there was something else going on that complicated the matter.
spk07: And just following up on Septic, Jack, with your experience at Amistar, obviously truck frames are a big part of what Navistar successfully delivers. Are there changes to the actual body frame, in particular suspension, of the buses that you've overseen in your time at Proterra?
spk09: The composite bodies that we're building is just fine. Any cracks that we have seen, they're non-structural in nature. They don't impact the safety. They don't impact you know, the integrity of the vehicle at all. You know, we've run our vehicle through the strenuous Altoona test now over eight times. So, and the FTA has certified, you know, that vehicle as being, you know, as dead past. So this is not a structural issue. This is a cosmetic issue where, you know, we have opportunities where there are blemishes and it's really just, it's not impacting the safety or the integrity of the performance of the vehicle.
spk07: Okay. Thank you.
spk08: And our next question is from Dan Levy with Credit Suisse. Please proceed with your question.
spk03: Hi. Good afternoon. Thanks for taking the question. First, following up on some of the new terms, gross margin dynamics maybe you could just give us a sense on on the battery side just to what extent has uh well not cost impacted your battery cost how much has that been a drag on gross margins given there's some lumpiness and when that materializes what does that say about um potential drag in subsequent quarter giving again there's lumpiness and then that actually materializes per your agreements i'm sorry i didn't hear the first part of that question you broke up Oh, yeah. Just wondering how much raw mass cost inflation is going to drag on your battery cost and thus the drag on gross margins. I think you've talked, you mentioned earlier on some of the other, it's more specific to raw mass on the battery side and how that has crept through to your margin structure, if at all.
spk00: I would say thus far, yeah, raw material price increases have not had a significant impact because they started in the, say, Q1, Q2 timeframe, and the timing between when we start to see that and it converts into revenue occurs later. I think we'll start to see that as we roll into the next year, but we're already thinking about that and working on additional cost-down initiatives to cover for those potential raw material price increases. We do have locked-in pricing on some of the highest value raw materials we have, so it would be a more limited impact.
spk09: One point I would make to that is on many of our transit contracts, we do have CPI provisions that would allow us to recover some of those material price increases if they do materialize also.
spk03: Great. And then as a follow-up, maybe you can just, on the LG agreement, if we could zoom out, help us appreciate the agreement with LG. I think we know, obviously, there's some supply constraints out there. So generally speaking, how does this position you against your suppliers or your competitors, rather? Do they have similar supply commitments? And then is there... Does the agreement say anything about the floor or ceiling of volume over the coming years? And then just lastly, if you need additional supply, can you flex up on this agreement? Or would you have to pursue other agreements with other suppliers?
spk09: A lot there. So to me, the biggest impact of the LG agreement starts with secure supply. You know, you hear on many other conversations of people in the industry that what's impacting their ability to hit revenue is that they can't get a battery supply. And so we've taken that off the table here at Corteira. The second is the U.S. builds commitment to this. U.S. MCA is a big deal. And we will be certainly the first to announce that we'll have cylindrical cells for commercial vehicles that will be built in the U.S., You know, in terms of supply, you know, we have, you know, a big range of volume here, opportunity with, certainly with LG. So we're confident that between, you know, what they do today in Korea and what they'll do in, you know, here in the United States, that we have that supply. But there's also other avenues, you know, for us beyond that in the years down the road.
spk03: Great. Thank you.
spk08: And we have reached the end of the question and answer session, and this also concludes the conference. And you may disconnect your lines at this time. Thank you for your attention.
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