Microvast Holdings, Inc. Q4 FY2022 Earnings Call

Greetings and welcome to the Microvast Holdings’ Fourth Quarter 2022 Earnings Call. Please note this conference is being recorded. I will now turn the conference over to our host, Cassidy Fuller, Investor Relations for Microvast. Thank you. You may begin.

Thank you, operator, and thanks to the audience for joining us today. Yang Wu, Founder, Chairman, President and CEO; Sascha Kelterborn, Chief Revenue Officer; and Craig Webster, Chief Financial Officer, will host today’s call. Ahead of this call, Microvast issued its fourth quarter and full year 2022 earnings press release, which can be found on the Investor Relations section of the company’s website. In addition, we have posted a slide presentation to the website to accompany management’s prepared remarks. As a reminder, please note that management will be making forward-looking statements on this call. These statements are based on current expectations and assumptions and reflect the company’s view only as of today. They should not be relied upon as representative of views as of any subsequent date. Management undertakes no obligation to revise publicly released results or any revision to these forward-looking statements in light of new information or future events. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. For further discussion of the material risks and other important factors that could affect the company’s financial results, please refer to Microvast filings with the SEC, including the Annual Report on Form 10-K and 8-K filed earlier today. In addition, during today’s call, management may discuss non-GAAP financial measures, including adjusted gross profit, adjusted net loss, and adjusted EBITDA, which the company believes are useful as supplemental measures of Microvast performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. These non-GAAP measures have been reconciled to their most comparable GAAP metrics in the tables included at the end of the company’s press release. A webcast replay of this call will also be available on the Investor Relations section of Microvast's website. With that, I will turn the call over to Mr. Wu for some opening remarks.

Thank you, Cassidy, and thank you all for joining us today. I would like to start off with a high-level overview of the quarter. Before providing the key highlights for 2022, I will then turn the call over to Sascha Kelterborn, our Chief Revenue Officer, who will discuss some of our key wins in the quarter, followed by Craig Webster, our Chief Financial Officer, who will discuss our financials in more detail. I will then address our outlook for 2023 before opening the call up to your questions. Please turn to Slide 3 as I cover a few highlights from the fourth quarter of 2022 and the full year. We recorded revenue of $64.8 million in Q4 2022 and $204.5 million for the full year. We ended the fourth quarter with record backlog of $410.5 million driven by a robust order intake of $364.7 million led by the large win we announced in December for our energy storage division and a strong demand across multiple commercial vehicle platforms in Europe. We are proud of our achievements last year and are looking forward to executing on the many opportunities ahead of us in 2023. Some of our most notable achievements last year include the establishment of the Microvast Energy Division in Colorado and the introduction of our new energy storage system container offering. This expands our addressable market to include energy storage in a sector where annual deployments in the U.S. alone reached 13.5 gigawatt hours in 2022, and our large 1.2 gigawatt hour utility scale project has been a big boost for our push into this market. In our commercial vehicle business, we expanded our partnership with IVECO, one of the largest commercial vehicle manufacturers in Europe, for a number of additional vehicle platforms and expect to ramp production and begin deliveries this year. We were also selected for a $200 million grant by the U.S. Department of Energy to build our most advanced high-temperature separator plant in the United States to help enhance battery safety for the industry. We continue to expand our industry-leading technology. We introduced our 53.5 amp hour high energy cells and began initial shipments in the fourth quarter. We anticipate this solution to be a key driver of our growth in 2023 led by demand across commercial vehicle applications, including light commercial vehicles, electric buses, and commercial trucks as well as energy storage systems. To meet this demand, we expanded our production capacity in Huzhou by adding a 40 automated 2 gigawatt hour cell module and a pipeline dedicated to the production of 53.5 amp hour battery products. Our 2 gigawatt hour capacity expansion at our new U.S. facility in Crossville, Tennessee is in full construction mode with the start of production targeted for Q4 this year. I would now like to turn the call over to our Chief Revenue Officer, Sascha Kelterborn, who will discuss some of our key wins and achievements in the quarter.

Thank you, Mr. Wu. I would like to start by reviewing some of our key wins during the fourth quarter. Besides the highlights from Mr. Wu, I would like to mention further on Slide 5 that Kalmar and Microvast have extended their supply and purchase agreement through 2026. We are proud to support Kalmar on their global electrification journey with our new Gen 4 packs. With our technology roadmap and deep understanding of Kalmar’s heavy-duty business, we look forward to many more years of close cooperation. Please turn to Slide 6, which highlights some of our key awards in the commercial vehicle market. We have four major highlights to share that reflect the diversity of our presence in the market. Starting with our ongoing strategic partnership with the French-based technology company, Gaussin, that offers on-road zero emission smart vehicles for freight transportation and people mobility. The Gaussin ATM, as an example, is a full electric yard tractor designed for deployment in distribution centers, logistics hubs, container depots, and other industrial applications. It has a loading capacity of up to 38 tons. The ATM will be powered by Microvast high-tech Gen 4 battery packs. Thanks to our strategic cooperation with CNH Industrial, IVECO Group, our batteries are now powering their new prototype of the New Holland agriculture tractor, which will be produced starting late 2023. Our Gen 4 battery pack solution allows for nonstop daily operations and can be charged to 100% in 1 hour. Then we have our battery supply agreement with REE Automotive, which is aiming to revolutionize the future of commercial vehicles with its innovative full electric skateboard platform. Our Gen 4 battery pack is designed to address the requirements of commercial vehicle fleets, which our partner, REE Automotive, is targeting. The newly deployed Gen 4 battery packs contain Microvast high-energy 53.5 amp hour pouch cells. The Gen 4 battery packs will meet cross-regional battery standards, such as ECE R100.3, GB 38031, and UL2580. Additionally, the outlook for ongoing business with our customer Dongfeng Trucks, China’s leading truck brand, is very promising. Especially for the hybrid heavy-duty truck segment, our new Gen 4 battery packs with 48 amp hour cells will play an important role. Now please turn to Slide 7, which displays our major orders in Q4. We received a nearly $10 million order for a cargo handling application for MAFI & TREPEL, a German-based leading manufacturer of industrial trucks for the transport of heavy payloads, including for airports, seaports, logistics, and distribution centers. We remain very active in India. The light medium commercial vehicle sector is predicted to be the next frontier for electrification in India due to the surging energy cost, propelled by the demand projections in mid-mile and last-mile transportation business. The Indian market will experience a doubling in light medium-duty vehicle sales within the next 15 years. Similar developments can be observed with e-buses, where the share of e-buses in the overall bus fleet is expected to reach over 40% by 2040. To reinforce our standing in the Indian market, Microvast has established strategic partnerships with two of the leading commercial vehicle manufacturers. Our customer, Switch with the e-bus and light commercial vehicle portfolio, as well as JBM with the bus portfolio, are well positioned to meet the growth. During the fourth quarter, we received an order in excess of $6 million from Switch, a subsidiary of Ashok Leyland, for an e-bus application in India where Microvast is an exclusive supplier. In addition, we are working with JBM Group to leverage further growth opportunities in the Indian e-bus sector, using our fast charging batteries, allowing for up to 300 kilometers daily commutes. Furthermore, we have a new battery supplier for the IVECO Crossway produced by IVECO Bus. The new Crossway uses our industry-leading high energy density battery pack system, with a capacity ranging from 400 to 466 kilowatt hours, accelerating IVECO’s transition to zero emissions. During the quarter, we also continued to benefit from ongoing orders from Ashok Leyland, IVECO Group, ZF, Shell, and others. Our strategic partnership with IVECO Group continues to strengthen, and we expect it to expand in 2023 and beyond. The IVECO eDaily is now available for the European market and has already won the One to Watch award, while the IVECO Bus has issued multiple press releases announcing municipality tenders it has won using Microvast battery solutions. For 2023, in addition to delivering on these projects with IVECO, we are looking to grow our business with them across other vehicle platforms and projects. We have multiple initiatives to further grow our commercial vehicle business in the U.S. For example, we are in the process of finalizing a strategic partnership with a proven market-leading specialty OEM. Our high-power, long-life high charge rate battery technology is a perfect fit for mining applications. We see tremendous opportunities in the segment and are currently executing our recently announced technical partnership with a consortium led by Shell to support the decarbonization of the mining industry. We will provide high-powered battery solutions with ultra-fast charging capabilities in support of a modular truck being designed for the mining industry. Production deliveries are expected in 2025. In the Commercial Truck segment, we have an exciting partnership in the works with a leading global truck manufacturer for a medium-duty application in the U.S. Testing is expected to be completed this summer, and the formal customer commitment is anticipated later this year. As we noted over the last few quarters, raw material prices remain at elevated levels due to supply chain disruptions as well as worldwide inflation. Our unit cost across the board continues to track significantly higher than we anticipated at the beginning of last year. In the second half of 2022, we implemented mitigation strategies, including optimization, longer-term supply contracts, identifying new and/or additional sources of supply, and increasing our selling prices wherever possible. However, we continue to expect raw material prices, especially for certain key materials like lithium, to remain volatile through the end of 2023 and possibly all the way into 2024. Over the course of 2023, we expect our order volume to increase meaningfully as we ramp up our new manufacturing capacity in Huzhou, secure additional energy storage system wins, and bring new manufacturing capacity online in Clarksville. I will turn the call over to Craig to review our financial performance.

Thank you, Sascha. I will spend the next few minutes discussing our Q4 2022 financial results. Please turn to Slide 9. I will summarize the mainline items from our Q4 P&L. We recorded revenue of $64.8 million in Q4 2022, which was down slightly from $66.8 million in Q4 2021. The year-over-year decrease was due to a delayed order shipment that we will recognize in Q1 2023, along with currency headwinds. On a full-year basis, despite facing continued challenges from COVID lockdowns in China and dealing with high infection rates in our Huzhou facility as China’s zero-COVID policy was abandoned, we achieved revenue of $204.5 million, up 35% from $152 million in the prior 12-month period. We posted gross profit of $2.2 million in Q4 2022 compared to gross profit of $1.2 million in the prior period, a 93% improvement. On a full-year basis, our gross profit was $9.1 million compared to a gross loss of $42.7 million for the prior year, a 121% improvement against the prior year. In Q4 2021, we provided for higher warranty costs associated with the legacy product, which was not repeated in Q4 2022. Our gross margin for full-year 2022 was 4%, whereas in the prior year, it was negative 28%. Operating expenses were $37.3 million in Q4 2022 compared to $52.2 million in Q4 2021. The largest contributor to the decrease in operating expenses was a decline in our share-based compensation expense, which totaled $16 million in the quarter compared to $22.6 million in Q4 2021. As mentioned previously, non-cash share-based expenses were a large contributor to the increase in GAAP operating expenses and operating loss. Full-year 2022 operating expenses were $170.7 million compared to $157.4 million in the prior year, an 8% increase. GAAP net loss was $33.7 million in Q4 2022 compared to a net loss of $46.6 million in Q4 2021. GAAP net loss for full-year 2022 was $158.2 million compared to a net loss of $206.5 million in full-year 2021. We believe a more accurate representation of our financial performance, especially as it relates to cash operating expenses and operating losses, is illustrated in Slide 10. After adjusting for non-cash settled share-based compensation expense in our cost of sales, adjusted gross profit was $4.2 million in Q4 2022 compared to adjusted gross profit of $3.1 million in Q4 2021. This translates into an adjusted gross margin of 6.4% in Q4 2022 compared to 4.7% in Q4 2021, a 1.7 percentage point improvement. We were pleased to see another quarter of gross margin improvement despite higher raw material prices. This demonstrates our continuous efforts throughout the year to improve our long-term gross margin. When making the same adjustments for full-year 2022, our adjusted gross profit was $16.8 million compared to adjusted gross loss of $38.5 million in full-year 2021. This translates into an adjusted gross margin of 8.2% in full-year 2022 compared to a negative 25.3% in full-year 2021, a 33.5 percentage point improvement. After adjusting for non-cash share-based compensation expense in SG&A, our adjusted operating expense in Q4 2022 was $21.4 million compared to $39.6 million in Q4 2021. When making the same adjustments for full-year 2022, our adjusted operating expense was $96.5 million compared to $97.6 million for full-year 2021. After making those non-cash share-based compensation expense adjustments and accounting for changes in the fair value of our warrant liability and convertible notes, adjusted net loss was $15.9 million in Q4 2022 compared to $33.4 million in Q4 2021. On a full-year basis, adjusted net loss was $77.3 million in full-year 2022 compared to $135 million in full-year 2021. Reconciliations of these non-GAAP metrics to the most comparable GAAP metrics are included in the table at the end of our earnings press release. Slide 11 shows the geographic breakdown of our revenue for the 12 months ended December 31, 2022, compared to the prior year period. As you can see, our two largest markets were Asia Pacific and China, growing 38% and 42%, respectively, year-over-year. Revenue in our European business declined 19% for the 12-month period ended 2022 compared to the prior year period, mainly due to the delayed start of customer projects. However, we expect sales in the region to see a strong rebound in 2023 as these projects begin to ramp up. We are pleased to note that a good percentage of our backlog is from European customers who are launching electrified models for the first time and should achieve year-over-year volume improvements using our technology, especially the 53.5 amp hour cell. Revenue in our U.S. region for full-year 2022 posted a strong 298% growth rate compared to full-year 2021. We have very high expectations for U.S. revenue growth in 2023 and beyond and are ideally positioned to capture the opportunities in the U.S. market from our facility. The award of the 1.2 gigawatt hour ESS contract, one of the largest of its kind in the U.S. to date, has accelerated our business plan for Microvast Energy. That project is utilizing our ME-4300 container solution with the 53.5 amp hour cell, allowing each container to deliver 4.3 megawatt hours of energy. With that energy density, we estimate that our battery solution allows for 30% fewer containers relative to those from competitors. This gives the developer a smaller construction footprint, easier and faster installation, and reduced maintenance with fewer containers to maintain over the life of the project. Additionally, the ambition retention performance of our cell far outperformed those of other suppliers. Given the clear performance benefits of our ESS container, the utility-scale energy market in the U.S. is a huge opportunity for us. By 2030, it is estimated that 396 gigawatt hours of energy storage capacity will be added in the U.S. alone, with around 70% of it being projected for energy shifting applications. I will now take you through our funding position and other significant metrics from our 2022 financial performance, as you will see on Slide 12. We ended the year with a cash position of $327.7 million comprised of cash, cash equivalents, restricted cash, and a short-term investment. We did not bank with Silicon Valley Bank and have no exposures as a result of its collapse. Our cash position gives us a very strong balance sheet to execute our 2023 plan, especially our 4-gigawatt hour of capacity expansion, which will come into production and provide an additional $1 billion of revenue potential. We also closed the year with a very healthy backlog of $410.5 million, which is our highest total to date. This underpins our conviction that 2023 will be the start of many high-growth years for Microvast. Our high-energy 53.5 amp hour makes up over 80% of our backlog, and we expect to realize margin improvements as we further scale this technology. U.S. and European projects account for approximately 90% of our backlog, and we will see a much more even distribution of our revenue by region in 2023 compared to 2022. Although Asia Pacific and China only currently account for approximately 10% of our backlog, these regions represented a $185 million business for us in 2022, and we expect these regions to have another strong year in 2023. Moving on, capital investments we made in 2022 totaled $128.7 million and were predominantly utilized to bring the additional 4-gigawatt hours of capacity online that I just mentioned. We estimate that capital expenditure for the first quarter will be in the range of $50 million to $75 million and will primarily be used for milestone payments on completion of our Huzhou expansion, ongoing construction of Clarksville, and our upcoming plans to use Mexico as an ESS container assembly hub. We will provide more details on this Mexico project in our Q1 update. As we mentioned previously, we fully expect Clarksville to be a direct beneficiary of Section 45 IRA credit. It should also qualify as domestic content for all of our U.S. customers. Looking ahead, we see 2023 as a standout year, which we will be able to demonstrate tangible and material results in the R&D initiatives and capital investments we made in prior years. With that, I will turn it back over to Mr. Wu to review our outlook.

Thanks, Craig. Please turn to Slide 14. Based on strong visibility from our backlog position, along with positive industry tailwinds pushing electrification forward in our key markets, we expect to achieve very strong year-over-year revenue growth in 2023 of 65% to 75%, totaling revenue in the range of $336 million to $358 million. As Craig just mentioned, our backlog is mostly composed of orders from customers in Europe and the United States and is driven by our introduction of 53.5 amp hour high-energy cell, the announced 1.2-gigawatt hour ESS project, and the ramp-up of multiple commercial vehicle projects in Europe. In the first quarter, we expect to begin deliveries of our 53.5 amp hour cell from our new fully automated line in Huzhou. In the second half of the year, we anticipate starting deliveries of our ESS containers from our Mexico assembly plant. And in Q4, we expect to have an additional 2-gigawatt hour capacity up and running at our Clarksville plant on the fully automatic production lines dedicated to the 53.5 amp hour cell. As a result, we anticipate closing out 2023 with 7-gigawatt hour total production capacity, including 4-gigawatt hour dedicated to the manufacture of our new 53.5 amp hour high-energy cell. We expect to add a significant backlog over the course of 2023 with orders from our commercial vehicles and ESS customers. Once our 2-gigawatt hour Clarksville expansion is up and running, we will begin to realize the benefits of IRA, which equates to $45 per kilowatt hour on all cells and the modules produced. On 2-gigawatt hours of production, that has a potential of $90 million per year in IRA credits. We will also progress our separator business in 2023, and by the end of this year, we anticipate having a 10 million square meter production line for our polyaramid separator operation. In parallel, we will also be working towards full-scale operation in the United States starting in 2025. All of those initiatives position us well for continued strong revenue growth over the coming years, which we believe will enable us to achieve profitability in the next 2 to 3 years. I’d like to finish by saying that at the start of 2023, this is the strongest position that my company has been in. We believe that the market has finally caught up with our technologies. Customers have been testing the 53.5 amp hour cells since 2021, and we started to receive multiyear orders later that year. We then started to initiate our capital investments to meet the demand, and those will be finished this year. All the foundations are now in place to see the large-scale industrialization of our technologies, which puts us in a very strong competitive position as we enter our multiyear high growth phase. With that, I would now like to turn the call over to your questions. Operator, please provide instructions for the Q&A session.

Thank you. Our first question comes from Colin Rusch with Oppenheimer. Please state your question.

Thanks so much, guys. Just – I’ve got a handful of questions. But can we start with just giving us some insight on what specific customer needs are being met with the 53.5 amp hour cell and why demand is so strong for that product?

Good question, Colin. This is Yang Wu. To answer your question, the 53.5 amp hour cell is specifically designed for commercial vehicles and is well-balanced for long life and fast charging capability, and this is going to be primarily our product to deliver to the commercial vehicles. For example, the vehicle group that chooses this platform is going to use these products. This product provides very long life, and we project a lifespan of 5,000 cycles on our spreadsheet, and the actual testing shows it's much longer than that. Currently, we have testing data that has reached 4,000 cycles, and the batteries still maintain 95% of their performance, which is impressive. We also moved this product to energy storage systems as it meets their requirements as well. Since energy storage applications only have a 0.25c charge/discharge rate for a 4-hour system, this significantly extends the battery life. We have simulated lifespan tests that indicate it could exceed 10,000 cycles, which would be remarkable given its high energy density. This is why we are seeing strong market demand for this product in the coming years.

Perfect. Thanks so much for that. And just on the ESS side, can you guys speak to the scope and scale of the sales pipeline that you’re seeing already? And how you expect those opportunities to progress through the sales pipeline towards closing the sales?

For our sales pipeline right now, to be honest, we do not have enough capacity to supply. We need significant funding to expand the factory. We have numerous projects lined up waiting for our products. In terms of our energy storage systems, we cannot sign more contracts due to capacity constraints, and that’s our current situation.

Got it. That’s super helpful. So just speaking of the CapEx funding, can you talk about how much of your conversations are around potential equipment finance or other options for asset-backed financing for that expansion, particularly in the U.S.?

Craig, can you answer that question?

Yes, absolutely. Colin, good to hear from you. CapEx-wise, I mean do you want a summary on what we’ve got? Do you want to sort of go through the whole top way down, like available cash, CapEx this year?

Yes, I think that’s pretty clear. Mostly, what I’m looking at is any sort of debt or asset-backed instruments that you guys are considering to support some of that CapEx this year or to offset some of the pressure on your cash balance.

Yes, sure. I don’t think we have that much pressure on the cash balance. Indeed, we mentioned before. As we did in Huzhou, we want to go through the construction phase and it’s de-risked, and we can show banks that we have contracted cash flows, then we will look to secure conservative financing. Last year, we closed out 111 financing line for the Huzhou capacity at a 4.8% interest rate. Currently, we have $75 million left to draw on that line, which will fully fund the remaining amount for Huzhou. On Clarksville, which is more of a production capacity challenge, we are bringing 2 gigawatt hours up this year. The backlog that we have is about $410 million, and most of that’s for the 53.5 amp hour cells. When we look at available capacity in 2024, the ESS contracts we have, and the projections from commercial vehicle customers, we will already be full in Clarksville. The energy storage market, in particular, is growing rapidly in the U.S., so we are looking to establish additional capacity, a further 2 gigawatt hours. Financing for this can be structured easily; there will be some senior secured financing for the first phase. As for the second phase where there is no construction, just equipment, we expect the equipment costs will be around $150 million. The real kicker here is that as Wu mentioned, 2 gigawatt hours gives you $90 million a year in IRA credits. This IRA structure incentivizes us to add capacity and ensure we have customers, which we are proving right now.

Perfect. That’s super helpful, guys. And then just the last one, in terms of some of the raw material inputs and the price pass-through and how it’s impacting gross margin, can you talk a little bit about where you are at in terms of your ability to pass on some of those higher prices that we saw late last year and the cadence of gross margin improvement as we move into the balance of 2023? That’s it for me.

Sascha, do you want to talk about customer engagement on that? And then I can discuss a bit more about gross margin improvement at the end, if that’s alright?

Yes, sure. Colin, nice to have you here. Generally speaking, with most of our customers, we do have raw material price clauses in place. It's not so much a question of whether we can raise prices, but more about finding common ground. Everyone understands that raw material prices went up, and it's known that the situation will likely normalize eventually. At the end of the day, we have many strategic projects ahead of us, and with our strategic partners, we often have strategic pricing as well. So, we look forward in a positive way. It's not that we cannot pass on these raw material increases; it involves intensive discussions. However, we are all aligned with our end customers.

Okay. Thanks so much, guys.

Colin, sorry, I will just add a little bit on the gross margins because it’s relevant. This year, we achieved an adjusted gross margin of 8.2%, which is quite fair. We adjusted out the non-cash share-based compensation expense from production. We made nine different cells this year to achieve that adjusted 8.2%. Now, this is a good thing we are highlighting: over 80% of our backlog is the 53.5 amp hour cells, so we expect gross margin improvement from the introduction of that cell and as we scale it. Let's assume, and I hope you can make this assumption, we can give you the forecast and the backlog. We are telling you we are really confident for 2023. By the end of the year, we anticipate a revenue potential of $1 billion in 53.5; that’s not necessarily at 100% utilization in 2024, but it will be a high utilization due to demand. So, conservatively, if we reach 75% utilization in 2024, that’s $750 million just on the 53.5 amp hour cells alone, and we project about $150 million in gross profit. Our job as management will be to manage our cash operating expenses until that time, which will grow as we are in a high-growth phase but can realistically be managed to about $150 million in 2024. At that point, we should be breakeven, and I have not included any complicated numbers for that year.

Yes. Colin, to discuss the cost control side, most of the cost comes from raw materials. Since we have one single product with a large volume, this grants us significant negotiation power with our suppliers. Currently, we have long-term contracts that fluctuate with the lithium index, which guarantee our profitability. This is a positive shift for us, as we used to have numerous products with small volumes. Right now, we have one single product, one supply source, and contracted all the supplies.

Perfect. Thanks so much, guys.

Our next question comes from George Gianarikas with Canaccord Genuity. Please state your question.

Hey. Good afternoon, everyone. Thanks for taking my question. I would like to start with the energy storage market. I'm curious about how you are able to put all the pieces together and turn around the products so quickly. Thank you.

Thanks. That's a good question. I constantly ask myself the same. The battery cell and technology we utilize on vehicles have been tested for a long time, already around 3 years. The vehicle application is much more difficult than in containers since vehicles vibrate and move in various environments. Selling the product in a container is relatively easier. We have experience placing similar modules in containers. That’s why we are setting up manufacturing in Mexico to take advantage of lower costs and make our products more competitive. Additionally, Mexicali is close to most of the ESS application fields, which are primarily located in the Southwestern U.S.

Great. And maybe as a follow-up, can you help us understand the potential margin difference between the U.S. businesses and other geographies?

Wu-san, do you want me to take that one?

Yes.

Yes, George. A lot of it comes down to the benefits of the IRA unless the EU announces something similar. What we are getting is on cloud of production, which applies to both our cells and modules. So, we are securing $45 per kilowatt hour, translating to a 15 to 20 percentage point uplift in gross margin. The incremental cash flows are significant because what we see is around a 2-year payback on capital investment, meaning you have free cash flow thereafter.

Great. Thank you, everyone, for taking my questions.

Thanks, George.

And this is Monica Gould, Investor Relations for Microvast. We do have a few questions that came in through the web, and we would like to ask those now. So first, is your Clarksville capacity spoken for already?

You just broke up a little bit at the end, Monica.

The question is the Clarksville factory. It will be ready at the end of this year. We are speeding up the construction, equivalently fabricating in China. I saw all the equipment laid out for SAT and factory testing last week. The equipment is qualified and will be shipped to the U.S. with an expected production start at year-end.

Okay. And I am sorry, I am not sure if you heard me clearly enough, but the investor was asking if the capacity is already spoken for.

Yes. We are very close to being fully spoken for already for 2 gigawatt hours, and we are also planning to add an additional 2 gigawatts. When we do that, it will be based on actual contracts.

Okay. Great. So, another question that came in is about the current status of the DOE grant; if you could talk about that.

Yes. The DOE grant we are working on is very close to closing the deal, and the contract negotiation stage is currently ongoing. We are in the first batch of negotiation, and we will see the results soon.

Okay. Great. I think we addressed this mostly in the prepared remarks about our China expansion capacity, whether that is producing cells already and when we will begin production, but maybe just want to review that one more time.

Yes. I am in the China factory currently, and we have a slight delay. It should be ready by the end of this month. We are producing a small volume right now and will gradually ramp up to the full production design and capacity, which will take a few months.

Okay. Great. And the last question, going back to gross margin progression in 2023; the investor was curious about the impact of the automated production on our gross margins.

I think we will definitely see it, let us show you the actuals from Q2, Q3 onward. As we mentioned, we are focused on one core technology with fully automated lines, optimizing efficiency in production planning, and negotiating with suppliers. We are confident that we will report that progression throughout the year.

Terrific. And the final question has to do with our 2023 guidance and how much of that – what’s the assumption for ESS in the guidance?

It’s about around 20% to 25% is ESS; the rest is commercial vehicles. Commercial vehicles are still showing positive growth. We expect strong performance from markets like India and China. Towards the end of the year, we might be facing capacity constraints to grow revenue beyond that.

Great. So, that does it in terms of our questions. I would like to turn the call back to Mr. Wu for any closing remarks.

Yes. In general, you might find us targeting high growth for our business. I am excited right now. I don’t see any issue on the cell side. Our main focus is delivery. We need to deliver as much product as possible while securing funding for expansion. I see potential for multiple years of high growth ahead. This is a positive outlook for our makers, and we are busy. Thank you all for joining this meeting.

Thank you. And that concludes today’s conference. All parties may disconnect. Have a great evening.