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spk04: Hello, my name is Jean-Louis. Welcome to the Proterra Inc. Q1 2023 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, again press star 1. I will now turn the call over to Erin of Sylvester Relations.
spk02: Thank you, operator, and thank you all for joining us for Proterra's first quarter 2023 conference call. Joining us today from Proterra are our CEO, Gareth Joyce, and our CFO, Karina Padilla. During this conference call, we will make statements related to our business and industry that are forward-looking statements. These statements are not guarantees of future performance. They are subject to a variety of risks and uncertainties, including those noted in our quarterly letter and our filings with the SEC. For a discussion of the material risks and other important factors that could affect our actual results, please refer to our SEC filing available on the SEC's website and via the investor relations section of our website. Additionally, non-GAAP financial measures will be discussed at today's conference call in addition to financial information prepared in accordance with U.S. GAAP. These non-GAAP financial measures should be considered in addition to but not as a substitute for the information prepared in accordance with GAAP. That said, we will kick off the call today by introducing our Chief Executive Officer, Gareth Joyce, for his opening remarks. Gareth.
spk05: Thank you, Aaron, and to everyone for joining us here today. For the call today, I will open with an overview of our strategic priorities in 2023 and the progress we have made on them in the first few months of the year. Then I will pass it off to Karina, who will provide the operating and financial details of the quarter. And finally, I will close with comments on our 2023 guidance and overall outlook. First and foremost, on our strategic priorities for 2023 and how we are tracking on them so far this year. We have established three critical strategic priorities for Proterra in 2023. One is to continue to manage our cash. Two is to build on our foundation for our margin improvement goals. And three, is to ramp powered one production output and ultimately achieve our revenue growth targets in an effort to be a leading technology supplier to the electric commercial vehicle market in the US and Europe. I am pleased to report key accomplishments in each of these areas in the first quarter of 2023 and April. First, we managed cash and working capital well in Q1 2023 with cash cash equivalents and short-term investments down by less than $2 million from the end of Q4 2022, driven by $7.1 million in net cash provided by operating activities in Q1 2023. Though our Q1 2023 adjusted EBITDA loss of $50 million was approximately flat sequentially, the $7 million in net cash provided by operating activities in Q1 was achieved through improved collections on receivables, higher customer prepayments, and management of accounts payable to support growth in our inventory of battery cells, which we view as a key strategic asset for us that is expected to help feed the planned production ramp of Powered One in 2023 and 2024. Our net cash flow provided by operations in Q1 was driven by working capital management and not profitability. All in, our cash, cash equivalents, and short-term investments ended Q1 at $296 million compared to $298 million at the end of 2022, and we also had $43 million in available capacity with our ABL as of the end of Q1. Next, on gross margin. In line with our projections last quarter, we reported a gross loss in Q1. But we're encouraged by a few key developments to start the year that we believe are supportive of our gross margin improvement goals going forward. First is the expected impact of Powered One now that it has moved from construction phase to production phase. Q1 2023 gross margin was adversely impacted by low fixed cost absorption with Powered One operating well below capacity, leading to inflated labor and overhead costs per pack until we achieve higher utilization rates. Start of production at Power One began in early January, and in this initial phase of the ramp, we experienced some growing pains, as may be expected with any new manufacturing facility. We've been making progress with each successive month. Battery pack output at the facility in March was more than double that in January. And in April, it was up another 15% from March. Module production at the facility is doing even better, with total megawatt hours of modules produced in April more than double that in March. As output grows and we achieve higher operating efficiency, we not only expect higher revenue recognition but less margin pressure, as well as the overarching benefits of non-cell cost reductions that we expect from Powered One compared to our California facilities where all of our batteries have historically been produced. We expect this to gradually benefit gross margins going forward. Second is the benefit we expect to gross margins from the consolidation of bus production in Greenville. As we discussed on our last call, the average labor hours required to produce a bus in City of Industry were 250 hours higher than in Greenville in 2022. But the facility was not closed until the end of March 2023, and the expected benefits are therefore only anticipated to begin to be realized in Q2 and beyond. Third, Q1 2023 was the first period in which we recorded the Inflation Reduction Act 45X battery production credit of $10 a kilowatt hour for domestic battery module production that we expect to qualify for. Though cash is not expected to be received for this credit until 2024, assuming we ultimately qualify, we are accruing for it as a contra cogs starting in Q1 2023. The contribution this quarter was not material, but we expect it to rise along with battery production at powered one. We believe that our battery packs will qualify for the credit, but it should be noted that we're still waiting final IRS guidance for assurance. Finally, with the help of the start of production at Power One, we grew revenue by 36% year over year to just short of $80 million in Q1 2023. Before we shift to the financial update, last week we announced that Karina is resigning from her role as CFO effective May 15th. And David Black has been appointed as our new CFO effective following Karina's resignation. David comes to Proterra with 30-plus years of experience in roles including CFO, Chief Accounting Officer and Controller for Babcock & Wilcox, and its power generation spin-off, BWX Technologies. We're excited to have David join the Proterra family, and you can expect to hear from him at our next conference call. Let me now pass it over to Karina to discuss our Q1 operating and financial results in more detail.
spk01: Thanks, Ferris. As recently announced, I made the difficult decision to step down as CEO of Proterra for personal reasons. I thank Gareth and the whole Proterra family for the opportunity to be a part of this journey. I continue to believe in Proterra and its mission, and I look forward to working with David over the next few weeks. Now I'll provide you with a summary of our Q1 revenue, gross margin, adjusted EBITDA, and cash. First on revenue. Total revenue was $80 million for the first quarter of 2023. up 36% year-over-year, and approximately flat when compared to Q4 2022, consistent with what we have experienced with flat-to-down sequential revenue in both 2022 and 2021. Proterra Powered and Energy revenue of $35 million represented growth of 49% year-over-year and up 10% sequentially. Proterra Powered and Energy accounted for approximately 44% of total revenue in this quarter, of approximately 4 percentage points both on a year-over-year and on a sequential basis. Proterra powered megawatt hours delivered grew 18% year-over-year. So deliveries on a vehicle unit basis were down 15% year-over-year to 243 units due to a higher mix of larger battery systems per vehicle. Proterra Energy delivered 9 megawatts of heavy-duty fleet-specific DC fast chargers in Q1 of 173% year-over-year and 38% sequentially. Proterra Transit revenue in the quarter was $45 million of 27% year-over-year due to both higher delivery and average price per bus. We delivered 42 new electric buses in the quarter of 5% year-over-year but down 11% sequentially due to the timing of delivery. Proterra Transit represented 56% of revenue in Q1 down from approximately 50% in Q1 2022. Moving on to gross margin. We reported a gross loss in Q1 2023 of $6.6 million compared to a gross loss of $3 million in Q1 2022 and a gross loss of $20 million in Q4 2022. The sequential improvement from Q4 levels was enabled by approximately $13 million in Q4 2022 period charges related to supplier penalty, inventory, and other true-ups, which were not repeated in Q1. In addition, while we had higher fixed cost absorption from early stages of the Powered-1 ramp, we benefited from improved efficiency in labor and manufacturing overhead costs in Q1 compared to Q4. For example, in transit, direct labor hours per bus improved 10% versus Q4 and was essentially flat year over year even as we were implementing the closure of the City of Industry facility during the quarter. We expect the consolidation of bus production in Greenville to continue to drive greater labor and overhead efficiency while maintaining the equivalent volume of output. And, as the Power to One grant is expected to continue to accelerate throughout the year, we expect further labor and overhead efficiency at our powered and energy businesses as well. In addition, The start of production at Powered One also weighed on our margins in Q1 of 2023. With capacity utilization at the facility below 10% in Q1, we incurred the additional burden of higher fixed cost absorption. As Powered One operating efficiency increases and production ramps, we expect Powered One's contribution to gross margin to improve. Operating expenses in Q1 were $54 million. representing an increase of $14 million year over year. Approximately 50% of the operating expense growth was driven by research and development costs dedicated to our strategic growth program and the rest of the growth from higher costs specifically related to sales and general and administrative expenses to support the growth of our business and expenses related to operating as a public company. As a reminder, we executed a workforce reduction towards the end of the first quarter that we expect to lead to lower quarterly operating expenses starting in Q2 of 2023. Sequentially, operating expenses only grew $1 million compared to Q4 2022. Our adjusted EBITDA loss in Q1 was $50 million, driven largely by a growth loss of $7 million and operating expenses of $54 million, offset by depreciation and amortization of $5 million, and non-cash stock compensation expense of $4 million. Finally, on cash, as Gareth highlighted, our cash performance in Q1 was our best on record, with positive net cash provided by operating activities of $7 million and our cash, cash equivalents, and short-term investments down by less than $2 million compared to the end of 2022. Primary drivers We're deferred revenue of $18 million, driven largely by prepayments from certain empowered customers, a net collection in our receivables in Q1 2023 of more than $30 million, an increase in our payables and accrued liabilities of approximately $30 million that helped offset a $36 million increase in inventory. Even with transit inventory down, our total inventory increased largely due to our purchases of battery cells. which, as Gareth noted, we view as a key strategic asset for us to support the planned production ramp of Powered One. In addition, CapEx and Q1 was down $9 million, or 52%, sequentially to $9 million following the completion of Powered One at the end of 2022. As a result, we ended the quarter with $296 million in cash, cash equivalents, and short-term investments, down only $2 million compared to $298 million at the end of 2022. To be clear, our cash performance was driven by working capital management, not EBITDA, but still underscores the assets we have in our working capital and our capability in managing our cash. And with that, I will pass it back to Gareth for a discussion on guidance and his closing remarks. Gareth?
spk06: Thanks, Karina.
spk05: So bringing it all together, we made good progress on our 2023 strategic objectives in Q1. Ramping Powered One production and revenue, further building on our foundation for gross margin improvement, and continuing to manage our cash. Looking ahead to the rest of 2023, we maintain our outlook for full year total revenue in a range of $450 million to $500 million, representing growth of between 45% and 61% year over year. On gross margins, we continue to expect gross margins to remain negative through the first half of 2023 and are targeting positive gross margins in the second half of the year. Of course, a lot of the improvement depends upon the pace of Powered One's production ramp. We believe we have set ourselves up for improvement in gross margins in the future, taking into account expected higher operating efficiency at Powered One and the anticipated benefit of the planned closure of the City of Industry facility and consolidation of bus production in Greenville. On OPEX, we continue to expect operating expenses to decline year-over-year in 2023, although now by less than our original projections for a $15 million year-over-year decline due to higher than expected R&D, legal, and professional fees. On cash, Following our Q1 performance, our cash, cash equivalents, and short-term investments are tracking better than we expected. We continue to expect capital expenditures of approximately $25 million for the full year 2023, and we also aim to continue to prudently manage our working capital. However, as we build our strategic inventory of cells and other battery components to feed our planned production growth at Powered One this year, We expect cash usage in Q2 to be substantially higher than in Q1. But we plan to continue to manage our cash through the rest of this year and into 2024. Meanwhile, demand continues to grow for our battery electric technology offerings. First and foremost, electric school bus is really starting to pick up. Awards from the first year of funding from the EPA's Clean School Bus Program have begun to lead to growth in orders for the industry overall and Proterra in particular. In fact, in March, the South Carolina Department of Education placed the largest electric school bus order from the Clean School Bus Program to date for 160 C2 Julie electric school buses produced by Daimler Trucks' Thomas Built Buses that we are supplying batteries for. In April, the EPA released the first $400 million of grants from the second year of the Clean School Bus Program, and the next $600 million is expected to be awarded later this year. In addition, Komatsu displayed in the U.S. for the first time its new PC-210E Proterra-powered 20-ton electric excavator at ConExpo in March. Volta Trucks announced the start of series production in April of its Class 7 Volta Zero truck, which Proterra is supplying batteries for, with customer deliveries expected in Q3 2023. And at the ACT Expo last week, Proterra itself unveiled its next generation battery concept with targeted energy density north of 200 watt hours per kilogram that we believe will open up new opportunities in commercial vehicle electrification and pave the way for future growth the back half of the decade in closing with our cash cash equivalents and short-term investments of 296 million dollars and available capacity on our abl of 43 million dollars as of march 31st 2023 we are in compliance with our debt covenants as of march 31st 2023 and we are exploring potential options to raise new capital we believe we have put the pieces in place that provide a path to a higher gross margin profile in the future helping support our efforts to secure a central role as a battery and electrification technology provider to the North American and European commercial vehicle sector just as it begins to blossom. I can't express enough gratitude to our employees, our customers, our suppliers, and our investors for their support as we continue to build on our foundation to be a leader in commercial vehicle electrification.
spk06: With that, I'll open it up to Q&A. Thank you.
spk04: So we will now begin the question and answer session. Again, if you would like to ask a question, press the star 1 on your telephone keypad.
spk06: Just one moment, please, for first question.
spk04: Your first question comes from the line of Michael Schlinke of D.A. Davidson. Please go ahead.
spk09: Good afternoon. This is David Johnson on for Mike. Just a question. There are so many new EV truck and bus platforms coming out. If you take a look at what's in the trade shows, what's the size of Proterra's powered pipeline of new business, say, compared to, let's say, a year ago?
spk05: David, first of all, we, as a standard, provided backlog and auto pipeline information once a year. Excuse me, in our call at the end of Q4, which occurs in Q1. So we're not going to provide any updates on our backlog today. Suffice it to say, though, I would suggest that if you spent time at the ACT show last week, you would have noted that our Proterra-powered batteries have found their way into a number of products there. And we're very encouraged to see the momentum that's building in the market with the adoption of clean energy products. Battery electric technology is definitely finding its way into the commercial vehicle platforms across a number of segments, whether it's school bus, transit bus, light commercial delivery vehicles, medium-duty and even heavy-duty vehicles. it was all there to see on display at the ACT show last week. So we're very encouraged by that and we're very pleased to see our brand and a number of the products that were on display there. Great.
spk09: Then one last one for me. You mentioned the investor letter and your remarks that Proterra is exploring raising capital going forward. In what form do you think that might take place? And would any kilowatt hour credits end up reducing what you need to raise?
spk05: Well, yes, we did note we're exploring potential options for raising additional funds as part of our capital and business strategy. We're actively engaged in that process, but we're not able to provide further details on that right now. As far as the second part of your question goes around kilowatt hours, I guess you may be referencing the Inflation Reduction Act. Yes, we obviously are very encouraged by that legislation. We believe that our product complies with what would be required to achieve those credits. Yeah, we feel fairly certain it applies to our manufacturing and sale of batteries. To date, we've received guidance from third-party advisors. You know, that should be treated as a contra cogs item, and therefore it will improve gross margin. But we are waiting on our IRS guidance on that still, as are any others that are in a similar position in this market. But nevertheless, we feel very encouraged by the tailwinds that that legislation was provided.
spk06: Thank you.
spk04: Your next question comes from the line of Gregory Lewis of BTIG. Please go ahead.
spk00: Yeah, hi, thank you. Good afternoon, and thanks for taking my questions. I had the first question around the working capital. I mean, clearly you guys did a great job of managing that in the first quarter. You know, just kind of as we kind of work through the various components, was any of this seasonal, i.e., should we see reverses as, you know, maybe in something like receivables as the year plays on? And is this kind of – should we think about Q1 being, you know, kind of the average, or are there certain things about Q1 which impact the ebbs and flows of working capital?
spk05: Hi, Gregory. The first quarter cash management was a very good effort by the team. We did mention in our previous call that Q4 was a challenging quarter for us for a number of reasons that we laid out there. In Q1, obviously, we continued to work hard at our cash management. We saw day sales outstanding, improved by more than 30%. Our payables increased by more than 80% and our inventory increased. So there were a number of factors that contributed to the cash management in Q1. And we're going to continue to focus on it. But I would just point out to answer your question more specifically that In high growth environments like we're in, your cash consumption is a nonlinear item. We noted in our prepared remarks that we expect Q2 to be an increase in cash burn again due to the investment in cell purchases that we're continuing to make ahead of the second half production ramp that we're expecting given the ramp up at powered one. But we consider that a strategic investment. You know, for us, cells are critically important raw material to be able to access and have in inventory because, you know, that gives us the ability to meet the demand. And we've worked very hard to put ourselves in the position to have access to such critical raw material. So it's a nonlinear product.
spk00: And that kind of follows up on my next question. I was hoping to get a little bit of an update on where battery production is at the new facility and how we're thinking about that capacity ramp, however you're comfortable talking about it, whether it's through your end or on a quarterly sequential basis. And as we think about that ramp, is there any way to kind of back into what type of inventory number we need to get to as kind of we ramp capacity, which I believe is the plan here in the medium term?
spk05: Yeah. We started production at our powered one facility in Q1. And, you know, it obviously goes through a production ramp as one would expect a new production facility will go through. We're still running at less than 10% of operational efficiency there. But as we noted again in our prepared remarks, we've seen improvements through January, February, March, and into April. And therefore, we expect that production efficiency to continue to ramp and grow. And through that, we're going to get better fixed cost absorption. And obviously, this was a key strategic investment in helping us build a high-scale production facility that ultimately is a core part of our ability to generate better gross margins in the business.
spk06: So we're very excited by the opportunity that presents us. Thank you.
spk04: Your next question comes from the line of Steven Fox of Fox Advisors. Please go ahead.
spk08: Thanks. Gareth, I was wondering, you know, from my visit to the Expo last week, I noticed, you know, you guys have a technological advantage over some smaller companies, newer startup types that seem like they're fast followers. But there's also a whole range of sort of legacy companies that are, you know, sort of going into your space. establishing business units, willing to take EBITDA losses for a period of time. So I was just wondering any thoughts on how the competitive landscape is developing as these markets become the realization of the scale that's coming, hits a lot of different players.
spk05: And then I had a follow up. Yeah, we have long made the following statement, Stephen, as you know, our belief is that the commercial vehicle market will continue to behave consistently with what it has done in the past and specifically with reference to powertrain sourcing there are a number of oems who for certain products have found sufficient volume and scale to vertically integrate and produce their own powertrains but equally there are many oems out there who given the breadth of diversity in vocational applications of certain trucks, for example, have sourced powertrain solutions from Tier 1 OEMs. It's a well-established model, and we don't believe that changes just because we're transitioning towards battery electric powertrains. So we're actually quite encouraged to see a number of the OEMs reaching into this space now because we know they have existing customers with existing demand patterns that are likely to transition to clean power trains. And we believe we're well positioned to take advantage of that opportunity. But we've also worked very hard at building an order book that not only exposes us to existing OEM incumbents, but also some of the new entrants, the disruptors in the market. For example, Volta Trucks is building a sort of ground-up purpose-built battery electric powertrain refrigerated box truck that you're going to do deliveries into inner city markets in Europe, for example. And they recently announced their desire to bring that truck to the U.S. So we like the fact that we've built out our order book with exposure to both dimensions of the market.
spk08: Great. That's helpful. So basically, you haven't seen anything at the trade show that, I guess, changed your view on the landscape or your technology, where you see your technology playing out, I guess.
spk05: No, I don't believe so. As I say, if anything, we're encouraged to see the incumbents and some of the larger, more established brands in the market moving more aggressively into the space. We think that's going to provide continued momentum in the market. And as I said, we like where we're positioned with our product. You pointed it out at the start of your question that we have a technology advantage. As you said, we believe we have... Yeah, very, very strong technology position in the space, and the team and the skill to be able to deliver it. We have the production facility to be able to meet the demand, and we've been working hard to develop our supply chain capability to fulfill that demand, too.
spk06: Thank you.
spk04: Again, if you would like to ask a question, press star, then the number one in your telephone keypad. Your next question comes from the line of Sharif El-Sabbahi. of Bank of America. Please go ahead. Hi. Good afternoon.
spk07: So you've discussed a little bit your guide on the gross margin and where capacity has kind of trended on Powered One. But with the assumption of gross margin turning positive in the back half, are you able to give us what the underlying assumption on capacity is at Powered One?
spk06: I wouldn't sort of put out a number on what our
spk05: production efficiency and particularly capacity is because we see that as competitively sensitive information. Having said that, we do have confidence that we'll continue to ramp as we not only scale what is the first line that's operational currently, but we're busy commissioning the second line. And so we believe we're well positioned to meet the demand that we have in our customer book as we move towards the second half of the year. I also mentioned that we are investing in the inventory to be able to feed that. I would point out, for example, that if you look at our inventory from Q4 to Q1, you will note that it's increased by around about $35 million. Our transit inventory is, in fact, down from quarter to quarter. The increase is primarily in our investment in cells and other raw material for our battery production in Greer as that ramp continues into the second half of the year.
spk07: Understood. And then just on the noted cash ramp in Q2, how should we think about that trending in the second half as production ramps?
spk05: Well, I think it's probably intuitive to consider that you've got to invest in your raw material and inventory ahead of the production plan. And so we see Q2 and even Q3 having increased investments into inventory to feed the remainder of the year as the way we would expect the raw material build to occur.
spk06: Thank you. Your next question comes from the line of Jordan Levy of Truist Securities.
spk04: Please go ahead.
spk03: Hi, guys. It's Henry on for Jordan. I just want to start on the OpEx side. So obviously, you guys have had the workforce reduction at the end of 1Q. But I noticed in your letter you talked about not looking like you're going to get to that 15 million reduction year over year in 23. I just want to ask if there are kind of any other
spk05: know levers or anything we can look for that you could they could possibly get you back to that 15 million reduction yeah hi jordan um as we noted there we we have executed on the uh workforce restructuring program that we discussed on our last call um and uh yeah i'm very pleased that the team was able to to execute that uh on time. It's always a very difficult thing to do, and I don't say that without sensitivity. Nevertheless, we did see, as you mentioned, some offsets given continued investments in our R&D programs and also some pressure on professional fees. We will continue to work at offsetting those cost pressures as we continue to navigate the rest of this year. We are focusing on There are other kinds of levers that might be in place, tight cost controls on discretionary spend, for example. We continue to look forward to the benefits of consolidating our transit footprint in our Greenville production facility, which is going on as we speak. We have now completed production of buses in our City of Industry facility, also on time and on plan. And then we expect to complete our battery production there at the end of the third quarter. and then consolidate those operations in Greer by the end of the year. So we continue to work at the levels that we have in place and recognize that it's a very important piece of the equation to control expenditure and help us expand the overall improvement in the P&L.
spk03: Awesome. Thanks for that. And then just a quick follow-up. On the e-bus side, you're still seeing very strong demand from several players. I just want to look on the battery demand side. Do you guys, have you seen any kind of indication or line of sight to potential, you know, headwinds to demand if there would be going to a recession, you know, later in the year? Or do you see pretty good insulation from that?
spk06: Excuse me.
spk05: I would say, yeah, at this point, first of all, your comment around transit, yes, we continue to see healthy demand there as the Infrastructure Act and the Inflation Reduction Act have continued to sort of boil the momentum in that market. On the rest of the market, the transformation towards clean energy power trains has remained a high priority from what we can see in our customer base. And at this point, given the effects of the Inflation Reduction Act, which is Really providing both supply side support and demand side momentum given some of the incentives. I would say at this point we haven't seen any noteworthy impact.
spk06: Thank you. There are no further questions at this time.
spk04: I would like to turn it over to the Proterra Management for closing.
spk05: Well, I'd just like to thank everybody for joining us here today. I would also extend a thanks to Karina. She's put an enormous amount of personal energy into this business over the past 15 months and grateful to have had her commitment to helping us develop and grow Potera to what we believe it can be. So thank you all. We appreciate your time today and we'll talk to you on the next call.
spk04: This concludes today's conference call you may now disconnect.
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