Q2 2022 ESS Tech, Inc Earnings Call
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This earnings release is available on the Investor Relations section of the company's website.
As a reminder, the information presented today will include forward looking statements, including without limitation statements about our growth prospects and strategy for 2022 and beyond.
The forward looking statements that will be made on this call are based on information currently available to us as of today's date.
These statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied on this call.
In particular those described in our risk factors set forth in more detail in our most recent periodic reports filed with the SEC as well as current uncertainty and unpredictability in our business the markets the economy.
Current geopolitical situation.
You should not rely on our forward looking statements as predictions of future events.
All forward looking statements that we make on this call are based on assumptions and beliefs as of the date hereof.
We disclaim any obligation to update any forward looking statements, except as required by law.
During the call. We will also present certain financial information on a non-GAAP basis.
Management believes that non-GAAP financial measures taken in conjunction with U S. GAAP financial measures provide useful information for both management and investors by excluding certain items that are not indicative of our core operating results.
Management uses non-GAAP measures internally to understand manage and evaluate our business and make operating decisions reconciliations between U S. GAAP and non-GAAP results are presented within our earnings release.
With that I will turn the call over to <unk> CEO , Eric just one offs.
Thank you for joining us.
We'll discuss our progress with installations customer wins and production initiatives and then hand, it over to Amir to cover the financials.
Q2 was another quarter of strong execution by the team and continued progress for esos.
Notably we cleared the final milestones with our two initial energy warehouse customers and recognized revenue on these units.
Work collaboratively with these customers through the process and learned a great deal about installation and deployment that will carry into future projects.
We are confident that the steps, we navigated to achievement of milestone them off where necessary for our growth as a company.
Build critical institutional knowledge and will contribute to our ongoing success.
We also built and shipped additional units in the second quarter, including those for <unk> and our partner <unk>.
With all six of the EW they've ordered now on site, we are working with <unk> to complete commissioning and a couple of our batteries with onsite solar array.
The power of the Cameron corners micro grid to mitigate the effects of public safety power shut offs for Sps.
<unk> of last resort to reduce wildfire risks during extreme fire weather conditions.
We continue to see micro grids has been an integral part of the solution to California's climate and wildfire challenges.
They can operate independently of the grid at large.
Provide continuous power during PSP us and other emergencies.
Our delivery to our partner <unk> has deployed mixed Sycamore international technology recycling firm in Pennsylvania.
Will complement a solar installation to provide business continuity and energy cost savings.
In fact, <unk> has contracted for a second.
So they took a more can participate in the local frequency regulation market.
And we certainly have some promising news from Washington recently, we are delighted that over the weekend.
That found a path forward with the passage of the inflation reduction act or IRR.
Groundbreaking piece of legislation that can provide meaningful incentives across a range of technologies and applications to accelerate de carbonization and the U S energy system.
For energy storage in DSS.
There are a number of important provisions, including an extension of the renewable energy ITC, which includes storage when coupled with wind and solar.
The accretion of an ITC for Standalone energy storage projects.
And advanced manufacturing credit for domestically manufactured energy storage technology.
And finally, a number of really smart provisions like direct pay and tax credit transferability, which will ensure more money goes to doing the job and will allow everyone to move faster.
In most cases incentives available increase meaningfully.
When the manufacturer meets certain domestic content and workforce requirements all of which are currently met by ESI.
This would leave us extremely well positioned to be a vendor of choice for those implementing energy storage.
We remain optimistic that this important legislation will proceed through the house and be enacted quickly.
While our business plan does not rely on these provisions. We believe there is an opportunity for it to provide meaningful financial tailwind to our plans.
We continue to monitor the Bill's progress and hope to share more on its potential benefit to ISS.
Yes.
And just two days ago, we were delighted to host the secretary of energy, Jennifer Granholm, along with Oregon Senators, Ron Wyden, and Jeff Merkley in Oregon, Governor Kate Brown for a tour of our advanced manufacturing facilities.
As a tireless advocate of the energy transition Secretary Graham home has been a staunch supporter of the drive to a carbon neutral economy by 2050, while creating American jobs.
Given the passage of the inflation reduction Act and the Senate, we were particularly excited to be the first stop for the secretary the Governor and Senators.
That makes sense.
Somebody's everything that the IRR is intended to support domestic manufacturing of the key technologies required to address climate change.
On the customer front, we are excited to share details of two new important relationships. We are proud to announce a landmark partnership with energy storage industry, It's Asia Pacific or ESI.
We will initially sell ESI energy warehouses and in the next two years put in place the infrastructure to sell assemble and service Vw's MBP seats.
As currently planned this agreement would result in USS delivering over a gigawatt hour of energy storage studio site in the next five years.
ESI has already placed multiple orders for more than 70 energy warehouses, and we began shipping them UWS last month.
In the coming quarters, ESI will ramp facilities in Queensland, Australia that will take key components. The DSS will ship from our Oregon factory like energy module, some proton pumps.
Some of them with the balance of plant.
ESI conducted an exhaustive evaluation of technologies to address the need for long duration energy storage in Australia, and we are thrilled to be working with them as partners.
This agreement provides further validation of <unk> technology in the global market opportunity in front of US and we believe this relationship will be foundational to driving scale in our U S manufacturing facility as well as creating a salesman support foothold in an extremely important market.
I'm also thrilled to announce that we've signed a contract to deliver an energy center to the Tampa Electric company or Pico.
This installation will support <unk> Big Bend Solar project, which powers 3300 homes.
Expected to ship early next year, the energy Center will deliver 10 hours of energy storage will be used for silver peak shifting.
So fuel displacement.
We're thrilled to be working with this for we can can utility and an important market.
We see this is great progress towards our goal of supporting a decarbonize grid.
On the operational front, we continue to implement our design for manufacture ability initiatives and are confident that the numerous improvements queued up for the remainder of this year, we will continue to drive reductions in unit economics.
However, as we work to improve our supply base, we continue to battle various supply issues with components that make up our AWS.
We have ramped new vendors, we have seen their delivery times push out due to their own supply challenges.
This is already slowed our production schedule and while we still see a path to our original plan of shipping 40% to 50 energy warehouses. This year, we would likely be near the low end of the range and possibly below it depending on our ability to resolve the supply chain issues.
With that said the expansion of our manufacturing capacity remains on track and regardless of the number of UWS. We ship in 2022, we expect our production exit velocity to remain the same as we cross into 2023.
We received our second semi automated line in the second quarter and I am pleased to share that we have it up and running this line doubles, our annual production capability to 500 megawatt hours.
We have already begun to receive our next fully automated line and expect to have it up and running in the fourth quarter, which will bring our annual capacity to 750 megawatt hours Triple where we started the year.
The development of our customer success team has progressed well.
As mentioned last quarter, we brought on a leader for this team and I am thrilled with the energy and focus he has brought to the effort.
This team will bring a wide gamut of disciplines to maximizing our success with customers from early engagement and site preparation to onsite installation and grid connection final testing commissioning and support.
Importantly, as DSS broadens its customer base. This.
This team will drive the expand activities on our land and expand strategy.
The team is not only working with existing customers, who have received their units, but also customers we've contracted to ship ew's too and even customers were exploring agreements with.
And working on our initial energy center installation with Portland General Electric later this year the team will build a blueprint to ensure future energy center deployments go smoothly.
At the highest level.
Tim will create the recipe for success and repeatability across our products it will be critical to ensuring customers realize the value of our solutions quickly and seamlessly.
And I am thrilled with the progress they've made in a short time.
We're pleased to see market dynamics continue to move in our favor and the team at DSS is working hard to execute on our operational objectives.
While supply externalities may impact our progress near term, we are confident in the trajectory of our business and how we are perfectly suited to solve the grid scale energy storage challenges in front of us.
And with that I'll pass it onto them here to discuss the financials.
Thank you Eric now I'll review our results unless otherwise noted all numbers, we talked about today will be on a non-GAAP basis.
You will find a reconciliation of GAAP to the non-GAAP financial measures in our earnings release, which is posted on our Investor Relations website.
As Eric shared we continue to make strong operational progress across the business and with customers.
In previous calls we shared with you that we've taken a deliberate approach to revenue recognition working to balance legacy customer contracts initial field experience deploying our SD 100 battery modules and ramping up our customer success organization.
We're very happy to report that we've met all of the revenue recognition criteria for our first three energy warehouse units and a recognized revenue of 686000 in Q2.
Additionally, we have made significant progress aligning new and existing customer contracts internal manufacturing testing and shipping processes and customer success initiatives to begin the process of optimizing our revenue recognition process moving forward.
We expect to continue to make progress on this front in the coming quarters.
As a reminder, we remained under development accounting rules for Q2, so the material overhead and labor cost to be incurred in producing the products, we ship fall into opex, resulting in zero cost of goods sold.
Our non-GAAP operating expenses for Q2 were in line with our expectations at $21 9 million.
With that we reported Q2, adjusted EBITDA of negative $21 million.
We ended the second quarter with $192 2 million in cash cash equivalents and short term investments.
In the second quarter cash used by operations was $15 2 million.
Our current cost reduction efforts remain largely on track and we still expect to take 80% of the labor out of manufacturing in EW by the end of the year.
We have brought up our second semi automated line and remain on track for the fully automated line to be operational in Q4, which in total will bring our production capacity to 750 megawatt hours.
With this additional capacity combined with many of the process improvements I mentioned previously the team is now working with the next wave of customers to receive Vw's to help ensure smooth site prep and bring our processes for our product deliveries.
Given our current plan and their assumption that will remain under development accounting for the rest of the year. We continue to expect our non-GAAP operating expenses to come in at about $100 million.
As we execute our plan. This year, we currently have ample liquidity to run the business and expect to end the year with cash cash equivalents and short term investments in excess of $120 million.
And with that we can open up the lines for questions.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad well pause for just a moment to compile the Q&A roster.
Your first question comes from the line of.
Colin Rusch Khan your line is now open.
Solid progress so with this ESI.
Relationship can you just talk about the financial implications. So youre outright selling a number of systems. Later this year, but next year and then you are working with them on.
Manufacturing facility in my understanding that right.
Thanks, Eric here Collyn I'll take that Youre exactly right. So for in the near term through the balance of this year and through next year.
The relationship is largely about us building fully completed products here.
Here in Oregon, and shipping them to to Australia.
The facility is being built in Queensland, Australia today.
Soon the broken ground they had a ceremony on it and as that gets up and running the idea will be will ship power modules proton pump. So all of the core IP and they will assemble what we think of as the balance of plant. So the tanks and the pump the containers in Australia.
And do you have any economics for you guys.
Those are sales of components, along with the licensing revenue on top of that or is there something more substantial and thus from an investment perspective from you guys noticed.
It's a super straightforward agreement to resell them those components at an agreed to price they license the IP on top of it.
You spend the capital to build their facility out and take on the delivery and the local service work.
Excellent that's exactly what I needed I appreciate that.
And so then in terms of the rest of the sales pipeline.
It's great to see some conversion here the ability to recognize some revenue can you talk a little bit about the breadth and depth of the customer pipeline at this point and how that's evolved over the last quarter.
Sure.
Pipeline continues to grow the top line pipeline, just a little under $9 billion.
In total at this point and it's largely focused on the U S.
Australia, New Zealand and Europe , as our core markets. Although as you know there are there are some deals that are coming up in other parts of the world as well.
I would say that.
<unk>.
Sure.
We think it is going to change even more accelerated now that IRA has been past, we think that the push from the domestic market will increase even more because of these tax incentives that have been put forth.
Great I've got a handful.
My question is on the demand side, but I'll take those offline. Thanks, so much guys.
Your next question comes from the line of Juan Korean Renshaw. Your line is now open.
Hey, guys. Thank you for taking the time and my question.
The first one would be on the supply changes.
That's U S.
Can you just give any more detail what exactly you can do.
For the truly ups to play out what can be done to improve it.
Sure I'll take a shot and Im your consignment afterwards.
I don't think Theres any silver bullet here, it's really just coming down to planning and frankly, not trying to work on too much of a just in time basis.
So we're trying to police and orders and make sure that we have alternative sources of supply for all of the critical.
<unk> as we start to ramp up our volume as you appreciate our volumes have been relatively slow small historically and so we're trying to get ahead of that going forward with additional sources of supply and more confirmed.
Pipelines with our suppliers to take out the risk going forward.
Thank you.
Just one on pricing.
So there is some inflation cost increases away from from the supply.
Are you able to increase your price on.
On the center in the World and to pass it through.
Yes.
Kind of feedback.
Okay.
Sure. So yes, there has been a little bit of ability to exert some pricing power in the market both in part because of the.
Inflation in the broad sense, but also limitations in the various specific inflationary pressures that have come to lithium have changed the market dynamics for storage. So it isn't too dramatic at this point, but it is noticeable.
We expect that there is some potential in the very near term that is the.
Investment.
Recent reduction act comes into play in 2023 that could continue regardless of completion, specifically simply because of the demand that we think will be put into the market.
Alright, thank you.
That takes time.
Your next question comes from the line of Juan Thomas Boyes. Your line is now open.
Okay, great. Thank you for taking my questions maybe the first one.
Kind of build off of maybe the pipeline.
Krishna comment is just around kind of duration requirements that youre looking at from customers.
How quickly are we moving beyond.
The traditional two to four hours and what kind of systems are you being asked to look at longer term.
Yeah, Great question. So I would say increasingly we are seeing specific rfps coming out of column 468, and 10 hours, we don't see too much in the 12 hour yet although a few rfps in specific solicitations have come in in the 12 hour range I would say that the vast majority of what we're seeing now is coming in.
And in the eight to 10 hour range, but it is interesting that we are now starting to see.
Rfps formal RFP processes come out looking for that longer duration, whereas a year or more ago, you wouldn't have seen that.
People, who are interested in long duration would have probably been more in direct bilateral conversations with the vendor or about a specific project or target.
Got it and I appreciate the color there and then.
Maybe could you just give us a sense what you are seeing kind of on the interconnection side of the equation certainly that's been an issue for solar wind and everyone. I was just kind of wondering what your view is of impairment escape.
We've been fortunate to this point, we haven't had too many interconnection issues.
Based on the projects, we've done to date and to have queued up over the next few months, but were certainly very sensitive to the issue and as the projects get larger in scale.
Interconnect Q challenge will come up more and more.
Lucky for US good news for us as many of the times the customers that we're dealing with have been in that process for some time and in most cases in many cases those interconnect Qs have already been cleared and they already have clearance to go.
Got it and then if I could sneak one more and then I'll hop back in the queue is just I, maybe I might have missed it but on those.
Supply chain shortages is this for semiconductor equipment well I was just wondering if you could kind of frame what the specific items that were in delay.
Yes fair question and I wish there was a single thing we can point to that say if thats the issue, but it's really.
Ben.
Kind of a low grade or what we see around the supply chain team whack a mole it depends on.
Week to week.
Components will be delayed none of this is long term.
Concern to us its really more related to ramp up.
As an example, we have had pcbs and other electronics components that rely on.
Chips.
The chip supply constraints to our suppliers have caused the delay of the delivery to us so that certainly is.
The number of times.
Got it that's helpful I'll hop back in the queue. Thanks.
Thank you.
Yes.
And it's into a reminder, if you would like to ask a question Press Star then the number one on your telephone keypad.
Your next question comes from the line of Juan Joseph Osha. Your line is open.
Okay.
Hi, guys. Congratulations on the results a couple of questions.
You've talked a lot about the revenue recognition issues that came up on those those first few units and talked about some of the <unk> from that in terms of the contracts that you are writing I'm wondering are you feeling comfortable that revenue recognition on the units that you are talking about shipping now is going to go a little more smoothly.
Yeah, Hey, Joe This is Samir I'm happy to take that question, we do feel like it's going to go more smoothly and there are a handful of legacy contracts with some key strategic customers that we have remaining that may follow the more purposeful route that we described before but certainly.
We have revamped not only our internal process, but the contracting process in some of the existing contracts that we have out there. So like I said on the call I do anticipate over the next couple of quarters here that that that process will get much more efficient.
And just to put a finer point on that let's imagine that the first quarter of next year, you imagine we would be able to expect that revenue gets booked in the same quarter a product that's on site just got it.
The general rule.
Yes, I'd be hesitant to put an exact date on it but that is certainly what we're what.
What we're looking for in terms of aligning the customer contracts and the shipment to be able to do that.
A much tighter period of time, including the same quarter. So thats certainly what were working toward.
Okay.
A question Eric this might be more for you I know, there's been a number of cost down initiatives, but yes. There were a couple of really interesting once youre trying to get precious metal out of the yard.
The catalyst in the proton pump for example, I'm wondering if you can update us on some of the.
Cost reduction initiatives and how they're going.
Yes, we're making we're making progress we feel like we're on track part of that is related to some of the supply chain initiatives by the way, we're moving we've redesigned some components.
To take out cost.
And that runs the gamut from rebalancing systems to tanks and beyond So every time you change to a new supplier.
We're adding a small amount of risk into that conversion and so we're working through those the biggest cost reductions. We've had this year and this was always the plan is on the labor side, and we're making great progress against that in the.
Good news is it's not only more efficient, but we build faster with less labor. So of course, it helps put our increase our velocity.
That always helps just one or two more quick ones can we.
Perhaps that you'll be out of development accounting next year would that be a reasonable expectation.
Yes, I think thats, probably a reasonable expectation I mean, certainly when you start shipping more units and.
And recognizing revenue I think it would be logical next steps are hopeful added development accounting in the first of the year is always a logical time to do that so I think that's a fair expectation.
Okay, and then the last one.
Just looking at you've got 750 megawatt hours coming out.
You ended this year lots of learning lots of things to digest.
Could we maybe expect that that cadence of expansion.
Moderate a little next year are you get things sorted out or or is this going to continue to sort of double and re double over the course of 2023.
We haven't made any announcements on that at this point in general a very dynamic market environment right now with the IRA Bill coming in we're going to be very keen to see how the market.
Demand starts to shift and we certainly feel like we've got a kind of a time to market advantage versus others. So we want to make sure we fully exploit our opportunity there.
And in a very measured and rational way.
Okay that was my.
Backdoor way of trying to get out of 2012.
No worries.
Thanks, very much I'll jump back in queue. Thank you Joe.
There are no further questions at this time.
I will now pass the call over to the presenters.
We want to thank everybody for joining us on our Q2 call and for your support of our business and we will look forward to talking to you again next quarter.
That concludes today's conference call you may now disconnect.