Proterra, Inc. (PTRA) CEO Gareth Joyce on Q4 2021 Results - Earnings Call Transcript

Proterra, Inc. (NASDAQ:PTRA) Q4 2021 Earnings Conference Call March 1, 2022 5:00 PM ET

Company Participants

Aaron Chew - VP, IR

Gareth Joyce - President, CEO & Director

Karina Padilla - CFO

Conference Call Participants

Courtney Yakavonis - Morgan Stanley

Brian Johnson - Barclays Bank

Sherif El-Sabbahy - Bank of America Merrill Lynch

Steven Fox - Fox Advisors

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: revenue growth to accelerate from 2021 levels to between plus 24% and plus 34% year-over-year to a range of $300 million to $325 million in revenue. Our order backlog supports even faster growth. But given the state of the supply chain, we think it's prudent to establish guidance assuming no material improvement in supply chain and in turn, transit production rates for the balance of the year. And importantly, our guidance does not reflect any potential impact from Russia's invasion of Ukraine.

This revenue level isn't where we would like to be for 2022. But the fact is the manufacturing environment is very challenging right now. We will grow as fast as the supply chain and our production capacity allow us to this year. But our guidance assumes, 1, that our Transit manufacturing operates only on one shift for the rest of the year; and 2, the expansion of our battery manufacturing capacity at Greer does not come online until Q4 and doesn't contribute meaningfully to volumes until 2023. Nevertheless, even incorporating these constraints, we are still confident in the opportunity to generate at least 24% revenue growth in 2022.

While production is facing constraints, demand is most certainly not. We have booked a healthy book of business, supporting strong growth across all of our businesses for the next few years. Our contracted orders at Powered, combined with our Transit and Energy backlog was approximately $1.3 billion at the end of 2021.

First on Transit, orders grew 45% last year, topped by record orders in Q4, which were 50% better than our next best quarter and our backlog is now at approximately $450 million. This is all before the electric transit bus funding has become available from the Infrastructure Investment and Jobs Act that was just enacted last November. Previously, for example, Low-No funding totaled approximately $130 million in 2020, when approximately 400 electric buses were deployed in the U.S. Low-no funding for zero-emission buses in the U.S. will increase more than 5-fold to approximately $800 million per year through 2026, supporting a step change in growth in transit bus demand.

Powered experienced even better growth. The fact is, commercial vehicle electrification is no longer only about buses. Demand has truly broadened to the rest of the commercial vehicle landscape. Proterra Powered had partnerships with 5 OEMs early in 2021, four of which were for buses. In 2021, we expanded Proterra Powered partnerships to 13 OEMs, covering 19 vehicle programs spanning trucks to buses, to off-highway equipment. 10 of these programs are currently scheduled to be in serial production by the end of 2022. Altogether, Proterra Powered has $800 million of contracted orders, representing close to 2/3 of our total backlog and contracted orders.

Meanwhile Proterra Energy is starting to book some large depot scale charging projects that our solutions are designed for. One, a 3-megawatt installation for the Santa Clara Transportation Authority; and the other, the 7.5 megawatts one for the LADOT we disclosed in our last call. These projects are orders of magnitude larger than a typical public charging station for passenger vehicles. Both will be built with a solar/storage microgrid that will support critical vehicle charging even in a power outage. This is the size and type of fleet scale charging infrastructure that will be increasingly required for higher commercial vehicle adoption and that we believe we have the experience and capabilities to deliver.

So while I covered our accomplishments for the full year of 2021 and our outlook for 2022, I will now hand it over to our new Chief Financial Officer, Karina Padilla, who will discuss our Q4 results in more detail, and in particular our gross margin. Karina?

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: they can't just have a strategy, but must have the ability to execute on it. Two, people: the team with ingenuity, competence and passion to succeed. And finally, three, technology: that can break new barriers in performance and actually accelerate adoption.

Proterra has demonstrated our capability in all 3 dimensions already. First on execution. Designing a product is not the same thing is producing it, and producing it is not the same thing as high-volume manufacturing. We have not only produced 500 megawatt hours of batteries as well as 800-electric transit buses through the end of 2021, but are poised to be producing batteries at a multi-gigawatt hour scale in 2023.

Proterra has already built a mature manufacturing supply chain operation. We have the capacity in place at 3 facilities already up and running for years and have demonstrated the ability to rapidly scale. We built our City of Industry bus factory in less than a year for under $20 million and our second 675 megawatt hour battery factory also in less than a year for under $20 million. And now we are on track to build in less than a year our third battery factory with 327,000 square feet of manufacturing space to produce multiple gigawatt hours of batteries per year as well as drivetrains and ancillary electrification components. And critically, we had the wherewithal to establish a long-term contract with LG Energy Solution to supply our most critical raw material, battery cells, through 2028, including from a U.S. facility.

Second, on the team, our people are our most valued assets. As passionate for the mission as they are focused on execution. Able to take the initiative on their own as they are able to work together towards a common goal. Without our world-class team, there is no product, and that means to service it too.

We are all here to make a difference, to build a better future for all of us. I'm as grateful for all the work our team puts in every day throughout the year as I expect our shareholders will be when they see the results of this effort over time.

Finally and most importantly, we have the technology. Batteries are not easy, there are hard. Very hard. And we are not talking the light-duty batteries for passenger vehicles, but heavy-duty batteries capable of meeting the much larger payloads and tougher duty cycles required for commercial/industrial vehicle applications. Batteries are not like semiconductors, as you jam more and more transistors onto a square inch, the chip is not likely to become more volatile. With heavy-duty commercial vehicle batteries, it takes a unique balance of technology, engineering, manufacturing and electrical integration into the vehicle to be able to maximize the amount of energy on board one vehicle to handle payloads of tens of thousands of pounds, in some cases, and achieve long cycle life that can handle daily charge and discharges for around 10 plus years. And still, of course, maintain an exceptional safety profile that minimizes thermal risk, all at a total cost of ownership that is viable for fleets that profit on a cost per mile basis.

Because the first applications of our technology were in transit buses and school buses, with high safety standards, we have honed in on every one of these factors for years and not only intimately know what fleets need, but more importantly what we must do to meet those needs.

Demonstrating our excellence, Proterra's battery technology has been adopted by 13 OEMs, across 19 vehicle programs spanning Class 3 cargo vans and Class 4 to 6 work trucks through Class 6 and 7 delivery vehicles and Class 8 tractors—including even fuel cell trucks—to school, shuttle and transit buses. And has also broken new barriers in industrial electrification, in powering multiple off-highway categories that many didn't even think viable for electrification years ago, like mining equipment, construction equipment and container handling at ports.

We are on course to see our battery technology powering everything from delivery vans bringing packages to your door, to school buses, bringing your children home in the middle of the week, to tractor trailers carrying goods between cities, or 20-ton excavators digging up dirt at construction site, and forklifts and container handlers that carry loads up to 75,000 tons at ports.

Technology leadership is not about the performance of your current product. It's about your ability to continue to improve your product and stay ahead of the curve, not only leading the market, but accelerating it, setting the bar, not chasing it.

Our fourth-generation battery already lead the market in optimizing energy density, life and safety. With our new battery factory in Greer coming online later this year, we will be launching our fifth-generation battery that is targeting another leap in energy density while still offering thousands of charge and discharge cycles to support an approximate 10-year life, while of course still maintaining our exceptional safety profile and further lowering our cost per kilowatt hour.

We believe we have the technology and manufacturing platform that centers us in the middle of the commercial vehicle electrification ecosystem and positions us to grow as electric adoption of commercial and industrial fleet accelerates.

So we've covered a lot on this call. If I sum it up in simple terms, 2021 hasn't been easy, but our team did an excellent job managing through all of the unexpected challenges. 2022 is not starting off any easier, but our biggest constraint to growth this year is not demand, but how much supply chain and production capacity allows us to produce. We grew revenue 23% year-over-year in 2021 and have now grown revenue at a compound annual growth rate of 25% since 2018.

Assuming no major deterioration in production and supply chain dynamics, revenue growth in 2022 should accelerate to between 24% and 34% year-over-year, to between $300 million and $325 million in revenue, while we have a plan in place to improve gross margin over time as the supply chain environment normalizes. Short-term uncertainty aside, over the next 3 plus years, the world is going to need tens of gigawatt hours of heavy-duty batteries, purposely developed for commercial vehicle duty cycles. And Proterra has the technology, the team and the ability to execute, to play a major role in this emerging market.

Critically, we also have the capital to fund our technology development and expansion plan. The first priority is to capture the opportunity, the next stage is optimizing the results. We are no longer a start-up. We are a scale-up. We have done an excellent job so far in capturing the opportunity, now we can also start focusing on optimizing the results.

I can't imagine a company better positioned for this opportunity and I'm excited to be able to shepherd Proterra on the path to get there.

So with that, we will open it up to Q&A. Operator?

Question-and-Answer Session

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

Your next question is from the line of Q - Sherif El-Sabbahy with Bank of America.

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.