Microvast - Q4 2022
March 16, 2023
Transcript
Operator (participant)
Greetings, welcome to the Microvast Holdings fourth quarter 2022 earnings call. At this time, all participants are in listen only mode. A question and answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to our host, Cassidy Fuller, Investor Relations for Microvast. Thank you. You may begin.
Cassidy Fuller (Investor Relations)
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, ir.microvast.com. 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 about views as of any subsequent date, and management undertakes no obligation to revise or publicly release results of any revisions 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 website. With that, I will turn the call over to Mr. Wu for some opening remarks.
Yang Wu (Founder, Chairman, President, and CEO)
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 three as I cover a few highlights from the fourth quarter of 2022 and the full year. We recorded a revenue of $64.8 million in Q4 2022, and $204.5 million for the full year.
We ended the fourth quarter with a 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 or ESS, 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 our new ESS container offering.
This expands our addressable market to include energy storage sector, where annual deployments in the U.S. alone reached to 13.5 gigawatt hour 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 manufacturer 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 continued 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 anticipated this solution to be a key driver of our growth in 2023. Led by demand across commercial vehicle applications, including light Commercial Vehicles, electrical buses or E-Bus, and commercial trucks as well as ESS. To meet this demand, we expanded our production capacity in Huzhou by adding a fully automated 2 gigawatt hour cell module and a pack line dedicated to the production of 53.5 amp hour battery products. Our 2 gigawatt hour capacity expansion at our new U.S. facility in Clarksville, Tennessee, is in full construction mode, with 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.
Sascha Kelterborn (CRO)
Thank you, Mr. Wu. I would like to start by reviewing some of our key wins during the fourth quarter. Besides the already mentioned highlights from Mr. Wu, I would like to mention further on slide five 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 six, which highlights some of our key awards in the commercial vehicle market. We have four major highlights to share that reflect the diversity nature of our presence in the market. Starting with our ongoing strategic partnership with the French-based technology company, Gaussin, that offers one and 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, logistic hubs, container depots, and other industrial application. 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 us for nonstop daily operations and can charge to 100% in one hour. 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 ampere-hour pouch cells. The Gen 4 battery packs will meet cross-regional battery standards such as ECE R100.3, GB 38031, and UL 2580. 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 ampere-hour cells will play an important role. Now please turn to slide seven, which displays our major orders in Q4. We received a nearly $10 million order for a cargo handling application from 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.
Light/medium commercial vehicle is predicated as the next frontier for the electrification in India due to the surging energy costs and propelled by the steep demand projections in mid mile and last mile transportation business. The Indian market will experience a doubling in light/medium-duty vehicles sales within the next 15 years. Similar developments can be observed with E-Buses, where the share of E-Buses of 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 their E-Bus and light commercial vehicle portfolio, as well as JBM with their 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. 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. We are the new battery supplier for the Iveco Crossway, produced by Iveco Bus. The new Crossway uses our industry-leading high energy density battery pack system, iPack, ranging from 400-466 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 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 this segment and are currently executing our recently announced technical partnership with a consortia 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 a formal customer commitment is anticipated later this year. As we noted over the last few quarters, raw material prices remain at elevated levels as a result of supply chain disruptions as well as worldwide inflation. Our unit costs across the board continue 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. We continue to expect raw material prices, especially for certain key materials like lithium, to be volatile through the end of 2023 and possibly all the way in 2024. Over the course of 2023, we expect our order volume to increase meaningfully as we ramp up our new manufacturing capacity in Huzhou, securing additional ESS wins, and bring new manufacturing capacity online in Clarksville. I will turn the call over to Craig to review our financial performance.
Craig Webster (CFO)
Thank you, Sascha. I'll spend the next few minutes discussing our Q4 2022 financial results. Please turn to slide nine. I will summarize the main line items from our Q4 P&L. We recorded revenue of $64.8 million in Q4 2022, which is 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 a legacy product, which was not repeated in Q4 2022. Our growth 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 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 loss, is as 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 adjustment for full year 2022, our adjusted gross profit was $16.8 million, compared to an 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 negative 25.3% in full year 2021, a 33.5 percentage point improvement. After adjusting for non-cash SBC 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 adjustment 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 SBC expense adjustments and accounting for changes in 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 those 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 ending 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 increases using our technology, especially the 53.5 amp hour cell. Revenue in our U.S. region for full year 2022 hosts 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 meet the opportunities in the U.S. market from our Clarksville facility.
The award of the 1.2 GWh 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 a 53.5 Ah cell, allowing each container to deliver 4.3 MWh 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 cost, easier and faster installation, and reduced maintenance with far fewer containers to maintain over the life of the project. Additionally, the energy retention performance of our cells far outperforms 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's estimated 396 GWh 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 equivalents, restricted cash, and a short-term investment. We never banked with Silicon Valley Bank and have no exposure as a result of its collapse. Our cash position gives us a very strong balance sheet to execute our 2023 plan, especially our 4 GWh of capacity expansion, which will come into production, giving us 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 cell makes up over 80% of this 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 were 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 1st quarter will be in the range of $50 million-$75 million and will primarily be used for milestone payments on completion of our Huzhou expansion, ongoing construction at 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 45X 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 in which we will be able to demonstrate tangible and material results from 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.
Yang Wu (Founder, Chairman, President, and CEO)
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%-75%, or total revenue in the range of $336 million-$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 recent introduction of 53.5 amp hour high energy cell. The recently announced 1.2 gigawatt hour ESS project and the ramp-up of multiple commercial vehicle projects in Europe. In the first quarter, we expected 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. 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 significantly to our 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 equate to $45 per kilowatt on all cells and the modules produced. On 2 gigawatt-hour 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, anticipate having an 10 million square meter production line for our polyaramid separator in operation. In parallel, we will also been working towards its 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 two to three years.
I'd like to finish by saying that at the start of 2023, this is strongest position that my company has been in. We believe that the market has finally caught up with our technologies. Customers has been testing the 53.5 amp hour cell since 2021. We started to receive multi-year orders later that year. We started to initiate our capital investments to meet the demand. 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 multi-year high growth space. With that, I would now like to turn the call over to your questions. Operator, please provide instructions for the Q&A session.
Operator (participant)
Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, to ask a question, press star one on your telephone keypad. Our first question comes from Colin Rusch with Oppenheimer. Please state your question.
Colin Rusch (Managing Director and Senior Research Analyst)
Thanks so much, guys. just, I've got a handful of questions, can we start with, you know, just giving us some insight on what specific customer needs are being met with the 53.5 Ah cell and why demand is so strong, you know, with that product?
Yang Wu (Founder, Chairman, President, and CEO)
Thanks, Colin. Oh, sorry. A good question, Colin. You know, this is Yang Wu. To answer your question, you know, the 53 amp hour is especially designed for, you know, the commercial vehicle and the well-balanced for the long life and fast charging capability. You know, this is going to be the primary, you know, products to deliver to the Commercial Vehicles. For example, you know, the Iveco Group, they choose most of their platform is going to use these products.
This product's given very long life, and we put a long life, five thousand cycles, you know, on our spreadsheet, and actual testing is much longer than that. You know, right now we have the testing data reached to four thousand cycles, and the battery still maintain 95% performance, which is amazing. We move this product to ESS energy storage, you know, application. Since energy storage applications only have 0.25 C, like a four-hour system, and 0.25 C, you know, the charging and discharging rates, this given the battery much, much longer life. We simulated, you know, we never tested for, you know, 10,000. That's gonna take us, I guess, you know, five, six years for testing.
But we simulated, you know, the lifespan is going over 10,000 cycles, which, you know, with this high energy density. The energy density is relatively higher than the competitors, you know, in the same, you know, same category. This long life, much longer. That's why, you know, you see we're using a ESS container, give us much higher energy density and 30% less container, number of containers you're gonna install, the customer install in the field. We will see the market is going to very much welcome this product in the coming years. Thank you.
Colin Rusch (Managing Director and Senior Research Analyst)
Perfect. Thanks so much for that. You know, 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 move through the sales pipeline towards closing those sales?
Yang Wu (Founder, Chairman, President, and CEO)
Yeah. For sales pipeline right now, to be honest, you know, we do not have enough capacity to supply. We need a bunch of money to expand the factory. You know, our factory is, we have a lot of projects lined up waiting for products. Our ESS, you know, we couldn't sign more contracts, and that's the situation.
Colin Rusch (Managing Director and Senior Research Analyst)
Got it. That's super helpful. Just speaking of the CapEx funding, can you talk about how mature your conversations are around potential equipment finance or other options for asset-backed financing for that expansion, particularly in the U.S.?
Yang Wu (Founder, Chairman, President, and CEO)
Craig, can you answer that question?
Craig Webster (CFO)
Yeah. Absolutely. Colin, good to hear from you. CapEx-wise, I mean, do you want a summary on, what we've got? You know, do you want to sort of promote the whole top way down, like available cash, you know, CapEx this year?
Colin Rusch (Managing Director and Senior Research Analyst)
No. You know-
Craig Webster (CFO)
Yeah.
Colin Rusch (Managing Director and Senior Research Analyst)
I think that's pretty clear. You know, mostly what I'm looking at is any sort of debt or, you know, asset-backed instruments that you guys are thinking about to support some of that CapEx here this year.
Craig Webster (CFO)
Okay.
Colin Rusch (Managing Director and Senior Research Analyst)
To offset some of the pressure on your cash balance.
Craig Webster (CFO)
Yeah, sure.
Colin Rusch (Managing Director and Senior Research Analyst)
Okay. Okay.
Craig Webster (CFO)
I don't think that we've got that much pressure on the cash balance, Mandy. We mentioned before, this is what we did in Huzhou, right? Once we've gone through the construction phase and it's de-risked, and we can show banks that you've got contract cash flows, then we will look to put in really conservative, you know, financing. You know, later last year, we closed that 111 financing line for the Huzhou capacity. That was at a 4.8% interest rate. I'm hearing some echo on the line. Can you hear me clearly?
Colin Rusch (Managing Director and Senior Research Analyst)
Yep, we sure can.
Craig Webster (CFO)
I just heard somebody else, if they can go on mute, please. You know, we've still got $75 million left to draw on that. That fully funds the remaining amounts going Huzhou. You know, on Clarksville, you know, what we're seeing now, just what Yang Wu alluded to is, it's more of a production capacity challenge, right? Where we're bringing 2 gigawatt hours up this year in Clarksville. The backlog that we have already, you know, we said is like 410. Most of that's for the 53.5 amp power cell. When we look at available capacity in 2024, you know, you know, the ESS contracts we have, the projections from commercial vehicle customers, going into 2024, we'll already be full in Clarksville.
You've seen this, and you've seen the data we've given you. It's because the, the energy storage market in particular is growing so fast, you know, in the, in the US. Already we're looking to put in place additional capacity, you know, a further two gigawatt hours. Financing to do that, I think it's easy structure-wise. There'll be some senior secured financing on the first phase. You know, what we can do on that second phase where there's no construction, it's just equipment. You know, we add some equipment. That equipment cost to add is worst case, you know, $150 million. In terms of the cash flows, you've got the cash flows from your customers.
The real kicker in this is that, you know, as Yang Wu mentioned, 2 gigawatt hours gets you $90 million a year in IRA credits. We add 2 gigawatt hours that might cost, that equipment cost I just mentioned. With your, with your IRA credits, you're getting that, you know, you're paying it back in 2 years. Really, that's what IRA's doing for this sector is it's incentivizing us all to, you know, add the capacity, make sure you've got customers, which is what we're proving, right? Your payback periods are shortened.
Colin Rusch (Managing Director and Senior Research Analyst)
Perfect. That's super helpful, guys. Just a last one. You know, in terms 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're at in terms of your ability to pass on those higher prices that we saw late last year, you know, the cadence of gross margin improvement as we move into the balance of 2023? That's it for me.
Craig Webster (CFO)
Sascha, do you want to talk about customer engagement on that, and then.
Sascha Kelterborn (CRO)
Sure.
Craig Webster (CFO)
I can speak a bit more on gross margin improvement at the end, if that's all right.
Sascha Kelterborn (CRO)
Yeah, sure. Sure. I will do that. Colin, nice to have you on board here. Generally speaking, with most of our customers, we do have raw material price clauses in place. First of all, speaking about that, it is not about the question, can we raise prices? It is more about finding common grounds and then moving ahead with that. Everybody knows that the raw material prices went up, and everybody knows that the situation will level back to a normal level. At the end of the day, it is like, you know, we have a lot of strategic projects in front of us, so we have strategic partners, and with these strategic partners, we always have strategic pricing at the end of the day. We look forward in a positive way.
It's not like that we cannot pass on these raw material increases, at the end. It's an intensive discussion, but at the end of the day, we are all on the same line also with our end customers.
Colin Rusch (Managing Director and Senior Research Analyst)
Okay. Thanks so much, guys.
Craig Webster (CFO)
Colin Rusch. I'll just add a little bit, you know, on the gross margin, you know, 'cause it's really relevant. You know, I mean, this year we did adjusted 8.2% and, you know, it's pretty fair. You know, we adjust out that non-cash SBC expense from production. It's not true production cost. Now, to do that, we made nine different cells this year to get to that adjusted 8.2%. Now, this is a real good thing that we're highlighting on the backlog. Like, over 80% of the backlog is 53.5 amp hours. The gross margin improvement is gonna come from the introduction of that cell and then as we scale it, right?
What we're pointing you towards is let's assume as, and I hope you can make the assumption, we've given you the forecast, you know, we've given you the backlog. We've told you what the Asia Pacific and China business was and how not much of that is in backlog. I think we're telling you that we're really confident on 2023. Let's start to think through how do we get to profitability in 2024. You know, we end the year, you know, we have $1 billion of revenue potential for 53.5. I'm not saying it's gonna be at 100% utilization in 2024, but it's gonna be a high utilization because of the demand we have and demand that's being created by how good that technology is.
Let's say we can get to 75% utilization in 2024. That's $750 million just on 53.5 amp hour alone. Given where we are with demand and how tight our capacity is, I think we can make about $150 million gross profit. Then, it's our job as a management team to manage our cash operating expenses through to that time. Now, they've got to grow because we're in high growth phase. I think realistically we can manage them to about $150 in 2024, and at that point, you're getting to breakeven. I didn't even put any IRA numbers into that 2024.
Sascha Kelterborn (CRO)
Yeah. Colin, for, you know, for the cost control side, you know, the most of cost, you know, come from raw materials. Since we have a one single product, you know, with big volume, this gain us a lot of negotiation power with our suppliers. Now we have a long-term contract, you know, the fluctuator with the lithium index and with discount from lithium index which guarantee, you know, our profitability. That's a very good. We never had this before because we used to have lots of different products in a small volume. Right now we have one single product, one supply source, and firm up all the supplies.
Colin Rusch (Managing Director and Senior Research Analyst)
Perfect. Thanks so much, guys.
Operator (participant)
Thank you. Just a reminder to the audience, to ask a question, press star one on your telephone keypad. To remove yourself from the question queue, press star two on your telephone keypad. Our next question comes from George Gianarikas with Canaccord Genuity. Please state your question.
George Gianarikas (Managing Director and Senior Analyst)
Hey, good afternoon, everyone. Thanks for taking my question. I'd like to start with the energy storage market. Curious as to how you were able to put all the pieces together and turn around the product so quickly. Thank you.
Sascha Kelterborn (CRO)
Thanks. A good question, you know. I constantly ask myself that as well. you know, actually, the battery cell and the battery technology we put on the vehicle is, you know, is testing for a long time already, like, three years testing. you know, the vehicle application is much difficult than container. Container is never move. Vehicle is vibrating, you know, moving in a different conditions.
you set the products in a container. We have a similar modules, you know, set in the container. it's, you know, it's pretty easy. you know, if we have, we have experience to put it on the vehicle. That's why, you know, we set up a manufacturing in Mexico to take advantage of the low labor cost to make more competitive also. at the border of Mexico, you know, the Mexicali, is very close to most of the ESS application fields, which is in a south- west south of United States. Thank you.
George Gianarikas (Managing Director and Senior Analyst)
Great. Maybe this is a follow-up. Could you kind of help us understand the potential margin difference between the U.S. businesses and other Geographies?
Craig Webster (CFO)
Sure. Yang Wu, do you want me to take that one?
Yang Wu (Founder, Chairman, President, and CEO)
Yeah. I'd say, George, a lot of it really comes down to the IRA benefits. You know, unless, you know, the, you know, the EU announces something similar, you know, what we're getting is, you know, Clarksville production. You know, Clarksville does both cell and module. We're getting $45 a kilowatt hour and, you know, what you translate that through is probably a 15%-20% uplift in your growth margin. The other part of it is just how incremental it is to cash flows because, you know, what we see is maybe a, you know, as short of a two-year payback on your capital investment, you know, that you've essentially got free cash flow after that.
George Gianarikas (Managing Director and Senior Analyst)
Great. Thank you, everyone, for taking my questions. Have a great-
Craig Webster (CFO)
Thanks, George.
Monica Gould (Investor Relations)
This is Monica Gould, investor relations for Microvast. We do have a few questions that came in through the web, and we'd like to ask those now. First, is your Clarksville capacity spoken for already?
Craig Webster (CFO)
You just broke up a little bit at the end, Monica.
Yang Wu (Founder, Chairman, President, and CEO)
The question is that Clarksville, you know, Clarksville factory will be ready at the end of this year scheduled. We are on the fast speed and also, you know, for the construction. The equipment is fabricating in China, I saw. Actually, I went there last week. I saw all the equipment laying on the floor and, you know, for FAT and the factory testing. You know, we right now, after factory testing, it's qualified and, you know, we are gonna ship it. Ship to U.S. and install in U.S.. You know, the expectation, you know, the is going to be end of this year to produce the battery.
Monica Gould (Investor Relations)
Okay. I'm sorry, I'm not sure if you heard me clearly enough, the investor was asking if the capacity is spoken for already.
Craig Webster (CFO)
You heard, yeah. Getting very close to spoken to already for 2 gigawatt hours, we're already planning to add an additional 2 gigawatts. When we do that, it's based on actual contracts.
Monica Gould (Investor Relations)
Okay, great. Another question that came in, is about the current status of the DOE grant. If you could talk about that.
Yang Wu (Founder, Chairman, President, and CEO)
Yeah. The DOE grants we are working on, you know, right now, it's very close to close the deal and, it's in a, you know, contract negotiating stage. We still need to engage the contract with DOE. That's, we are in the first batch of the negotiation. We'll see the results soon, you know.
Monica Gould (Investor Relations)
Okay, great. I think we addressed this mostly in the prepared remarks about our China 3.1 expansion capacity, if that's producing cells already and when we'll begin production. Maybe you just wanna review that one more time.
Yang Wu (Founder, Chairman, President, and CEO)
Yeah. The, I'm in the China factory right now, we have a little bit delayed, maybe, in the end of this month. We already produced the first cell. We just need, you know, the ramp up. Slowly ramp up, you know, to ensure the process. To reach the full production, you know, design and production, you know, takes a few months. We are producing small volume right now.
Monica Gould (Investor Relations)
Okay, great. The last question, going back to gross margin progression 2023, the investor was curious about the impact of the automated production on the gross margins.
Craig Webster (CFO)
I think we'll definitely see it, but, you know, let us show you the actuals from Q2, Q3 onwards. You know, as we just said, right, we're really looking now to focus around one core technology on fully automated lines, efficiency of production planning, negotiating with suppliers, and, you know, we're confident that we will report that progression throughout the year.
Monica Gould (Investor Relations)
Terrific. The final question has to do with our 2023 guidance and how much of that, what's the assumption for ESS in the guidance?
Craig Webster (CFO)
Is about around 20%-25% is ESS. The rest is Commercial Vehicles. Commercial Vehicles still growing, like, really positively. You know, as we mentioned, you know, we still expect really strong showings from, like, India, China. Getting into the back end of the year, like, it's more we've just got capacity constraint to actually grow the revenue beyond that.
Monica Gould (Investor Relations)
Great. That does it in terms of our questions. We'd like to turn the call back to Mr. Wu for any closing remarks.
Yang Wu (Founder, Chairman, President, and CEO)
Yeah. In general, you know, the Microvast starting the high-growth, you know, for our business, you know, I'm super happy right now. You know, you know, I don't see any problem for the sales side. The only, you know, concentrate on our business is delivery, you know. You know, we need to deliver as much as possible our products. Find the money to do the expansion. You know, I think I'm seeing an, you know, multiple year high-growth, you know, this is a very positive, you know, gonna make us super busy, you know. Thank you, all. You know, thank you all for joining this meeting.
Operator (participant)
Thank you. That concludes today's conference. All parties may disconnect.