Q4 2022 Ess Tech Inc Earnings Call
Scrap and warranty, which is really positive and of course reflects in higher quality.
<unk> been and this is where it gets a little bit complicated.
Is that there are indirect unallocated cost of building the facility. The supporting teams those really self cure in terms of the margin contribution as we get to higher and higher volume. So we're talking about driving to.
Unit profitability on the first three knowing that the fourth category takes care of itself with volume.
And we're in a great place with the cost would come out we haven't set a specific announced a specific target, but I think the way to think about it is we will cross the outlined on unit profitability in the next 12 to maybe 18 months under alongside it.
It's very much the focus of the company watching inflation, along the way, but a good piece of news for US is since our product doesn't really have a lot of high volatility commodities, we don't have lithium or nickel cobalt or any of the things.
That are subject to while commodity price swings, we have a very clear line of sight to get into that unit profitability.
Got it no I appreciate the color and then maybe just for my for my follow up.
Could you talk about some of the challenges around just the manufacturing of the EWC heading into the end of the year I believe the original target.
It was closer to 20 units.
Let's say the supply chain issues or logistical challenges were there I know.
Kind of semiconductor supply chain challenges have been.
Issue.
I was just wondering if there were specific shortages that you could highlight that you think will.
We will ultimately resolve themselves as maybe the next 12 months.
Yes, sure well most of the challenges have been on the balance of system. So it's not the core stack.
Battery stack part of it is in the balance of system and it is the things that have been problematic really skipped a route so chips as we've talked about in the past are an issue anything with power electronics as Scott.
Supply chain challenges, we've had some smaller challenges with things like pumps that I think are mostly resolved.
Part of what we've tried to do and I think we felt much better at the end of the quarter and going into this quarter is that as we move through and upgraded to more reliable more scalable vendors. We hope that we've leaned in enough visibility to take care of those problems going forward, we didn't see anything that we felt was a.
Systemic problem or was going to be an ongoing drag.
The kind of chipping away of individual components that seem to have issues.
And then resolve themselves.
Yeah.
Got it I appreciate it Jeff jump back in queue.
Thank you for your question.
Your next question comes from the line of Colin Rusch with Oppenheimer. Your line is now open.
Hi, there this is andre on for Colin.
With the completion of the automated line installation can you give a sense of what the yields are looking like so far and the rate of improvement.
I think too early to put a specific number to it because we just commissioned the lines. So we're ramping up its production through this quarter, we still have our semi automated lines, which are carrying most of the load.
In the near term, but it was certainly sufficient quality.
The team officially commissioned align and signed off from our vendor partner, who is helping to set it up so we feel very good about.
About the pathway to Tom.
Got it thanks.
Just as a follow up could you give us a sense Ken lines for Opex spending.
Yeah, I think hi, this is Tony.
So at this point I think we haven't provide.
Provided any guidance in terms of.
What that might look like going forward.
But if you can take a look at where we were in the fourth quarter.
We feel like that.
Very adequate level of spend and so.
<unk>.
The change between the third and fourth quarter, there was too much of a change there. So we're looking to maintain.
Great. Thank you so much.
Thank you for your question.
Your next question comes from the line of David Sunderland with Baird. Your line is now open.
Hey, guys. Thanks for taking my question.
No I just wanted to ask about <unk>.
Wanted to ask about any challenges you may have had with validating the technology to customers and then setting from that if a few of these bigger deals like spud in the Amsterdam airports have kind of been proof points or if you've seen any uptick in demand following those.
Sure well I'll.
So we.
We talked about the biggest challenges that we've had in the field that we've been working through is.
How our product interfaces with kind of the grid or third party system, but theres a lot of complexity that we've had to work through over the course of the year.
Two.
To demonstrate not just the core performance of our product, but really how it interacts with.
With other People's products so.
That's been a chunkier process than we had expected, but I think we've moved through a pretty well in some of the more recent units in particular that we've shipped.
Here in the states to folks.
In commercial applications or some of the some of the units that are shipped down even as far away as Australia have performed.
Well in the time to commissioning as I alluded to in my prepared remarks has really started to shorten so that's where we think fantastic.
The interest has peaked quite a bit I think it's a combination of some of the announcements and people seeing the different use cases for a long duration storage and where it comes into play I don't frankly think a lot of people think of something like the Schipol Airport and said Wow that was an obvious application.
I expected for a long duration storage when they understand what the application requirements are and how our technology is really uniquely well suited because of its safety.
Reliability to be in an airport environment.
The response, we get is Wow that's obvious.
You said it makes perfect sense.
The last thing I'd say is that there has been a big uptick in interest relative to the <unk>.
Completion reduction that but as I mentioned earlier.
It would be great to get the final rules.
Some of those.
The Irs's administration out the door, because we have had some people.
Where we're getting into conversations and planning projects, but they're hesitant to.
To go to full commitment until they know what those IRS rules are.
Thank you that's very helpful and actually your second bit on the IRA Theyre took away a big part of what I was going to ask for a follow up but any visibility you have into when you are going to realize those benefits. If it's direct pay or how you incorporate those benefits into the future contracts or any read I guess.
When we might know more thank you so much.
Sure. So I'll tell you what we know which is that the announcements that have come out public announcements that are available have indicated there will be further indication here at the end of March I don't know that that will be final rulings and it may be different across.
The two parts. So just to reiterate there are two parts of the IRR that we are really the most impactful to US there are a number of other benefits as well, but the two most important ones are the investment tax credit that our customers will qualify for.
And then the production tax credit that we will qualify for.
On the production tax credit we feel those rules are pretty straightforward and we have such a high domestic content requirement and we've been doing this for years now as we ramp up so.
So we don't feel there's any risk on that we're accruing right now for any unit. The chip we are keeping track of how many units we built how many units we shipped on the assumption that we will.
Get the get our production tax credit for those units in that.
We will have direct pay.
<unk> to us because the law has been pretty clear on that.
What's been a little bit more complex or some of the rules around things like the domestic content.
<unk> economic development zone adders to the ITC.
You may recall the base load.
The ITC is about 30% and now does include Standalone batteries as well as batteries when they are deployed with solar or wind.
But that 30% number goes to 40% and that I'm up to 50% or more based on qualifying for the domestic content editor or for these economic and energy of redevelopment zones and those are the rules that people are most curious because there are new so there really isn't as much.
Kind of history to go point too so I think once those rules are clarified.
That will help give people the comfort to move forward.
Thank you.
Thank you for your question.
Your next question comes from the line of Joseph Osha with Guggenheim. Your line is now open.
Hey, there guys. Thanks for taking my question I've got a few here.
First Eric.
Eric you talked about capacity and exiting the year at.
800 Meg.
Megawatt hours.
I'm curious the previous plan has been to continue expanding that number Mike we assume from the tone of your comments that youre going to.
That pace of manufacturing expansion.
Yes, I think at least as it relates to stack manufacturing, we've done a really good job with the three lines and now have plenty of capacity for a bit of time, So I think.
We will focus on ensuring that we've got capacity to build out more systems.
In addition to that.
And then keep a track of how the backlog is booking up there is a lead time for automation equipment that you have to be sensitive to so you can't if you order new automation equipment. It doesn't show up the next day, so you're really planning on where the puck is going to be 12 months into the future.
So that's the that's the one caveat I'd put to your comment.
Okay, Alright thats helpful. Thank you.
Second question just to drill down on your comment about the 14 units. So those are going to be recognized in Q1 as revenue is that correct.
Yeah, Hey, this is Tony so those are going to be recognized in 2023.
So these units.
As the company's been working aggressively to get get those units out at the end of the year.
We met contractual.
Terms legal terms to transfer.
Title and risk of loss to the customer at the end of the year.
They are under various different types of contractual terms.
Timing of when that revenue will be recognized.
Will will occur in the year How's.
However.
Basically for us to recognize revenue on those units control of those units must have fully to the customer and that either occurs when the customer picks it up from our doctor all the way to once it gets on the ship.
Or truck or trained.
All the way to the point, where it could be arriving at the port.
That customer so there's various titles that impact when that revenue will be recognized.
And it will be later.
Okay.
Can you remind me who those units we're headed for.
I think what we've disclosed so far is that there is units that were going to ESI and too.
Schiphol Airport.
And I believe thats been so.
So far and some of them in the Q4 units were the CMS unit, which was also announced as part of the delivery correct.
Okay and then the last question for me before I jump back in queue. If you look at the rate of cash burn here. Obviously, you spent some you've been building some stuff and it sounds like that's slowing down that you burned about $100 million.
Since the December quarter of last year.
Probably not sustainable given what it sounds like I'm hearing about this year or so can we assume that youre going to take some steps to attenuate that rate of cash burn.
Okay.
Yes look I think.
If you think about that cash burn a lot of that is ramp up of manufacturing.
Rework.
Scrap and.
Material use got earlier U S.
And warranty costs associated with those or is the company ramped up the business and our objectives. This year are going to be.
To focus on reducing the cost of the unit.
<unk> to improve yields.
And reducing our scrap rates.
So obviously, a big push for us will be to be a lot more efficient with how we manufacture which is a big point of or.
The usage of our cash.
Okay. Thank you.
Thanks, Joe.
Yes.
Thank you for your question.
Next question is from the line of Chip Moore with <unk>. Your line is now open.
Hey, good evening, thanks for taking the question.
I wanted to follow up maybe on that last one.
Joe's question.
You talked about driving towards profitability I think over the next 12 months to 18 months, maybe just expand on key initiatives. There is it sort of the blocking and tackling.
Some of the things you just talked about.
Or anything else, we should take into account.
Yes.
Thanks for the question Chip I think it's really a lot of blocking and tackling it's some of it as I say it comes from volume.
Some of it comes from the design improvements so that the balance which is the blocking and tackling balances too.
Implement the upgraded.
No.
Design could make it more manufacturer will improves quality.
Then as we hit those.
And implement each of those changes the profitability story of each unit gets better which narrows that loss GAAP and we kind of crossover somewhere outside of 12 months from now.
So, but it's not a it's not a cliff variety of.
It ramps down over time as you approach.
The crossover point and I should point out doesn't isn't there then we just keep driving and driving.
Two.
Keep taking cost out as we ramp up volume and that's what builds the margin story of the company.
Yeah makes sense. Thanks, Thanks, Eric.
Maybe one on an IRA incentives.
Good job talking about the dynamics there I think.
I guess, specifically I thought I had read it to do.
It's going to be some funding for some demonstration projects in our space I think it was like a 50% cost share is that an area.
Do you think you'd be active in or is that not as relevant for you guys.
Yes, well the way I think.
We would be active in that we've looked at some of those.
Funding buckets, our approach would be to partner with an end user.
To apply for the money together so in.
In our view since we're not we don't want to be in that kind of an owner operator developer.
I Wouldnt, probably go and apply for grants to do a project with <unk> own DSS operated project, but what I would do is get together with.
Our municipal commercial customer developer.
And look at a project that would qualify for grant funding.
Our technology would be involved and incorporated into the project.
Got it Okay makes sense and maybe just a last one.
Back to I think you mentioned.
Certainly lead times on automating emission automation equipment.
Not being overnight when would you have to make a decision, let's say, we get some more clarity on some of the Iris stuffing demand.
It really takes off.
That's sort of like a six month decision or any way to handicap that.
Yes.
It's at least six probably closer to a nine month decision and I haven't I will profess I haven't looked into all of the potential mechanisms for acceleration in the mediation of of those kinds of things. The good news is that.
A lot of the you know the way the industry works a lot of the project planning tend to be <unk>.
Nine to 12 months out into the future anyway.
So we do get really pretty good visibility into.
Into.
The shipment plans and the customer deployment plans and so I think that it won't be it.
It won't be a constraint to us in terms of building the capacity to fill it out.
Based on the time, the planning time horizons of the industry.
Got it that's perfect, yes, even you can align it to maximize.
The investment okay. Thanks.
Thank you for your question.
Your next question comes from the line of Chris cash with loop capital. Your line is now open.
Yes, good afternoon, mostly follow ups to some of the discussion items here. So just curious on the comments around cash burn and.
Just.
As you look to as you call dosing crossover to breakeven.
I'm, assuming you're back in production tax credits that will any way to quantify how much you anticipate that will diminish the cash burn.
And I'm curious, if you know yet whether you'd be getting those for.
For the.
There's still a lot of hours.
Manufactured to date or is it so including inventory it's worth it.
Have to be capacity, that's shipped or are recognized on a GAAP basis any any color on that.
Sure well I can tell you, what we know, but you've heard Chris a great point.
Hi, everybody so anxious to get the.
The details of the IRS rules out because.
The details matter and they probably met or more at the IRS.
Most places right so.
What we what we expect what we believe is that the production tax credit for US is about $45 a kilowatt hour.
Unit.
<unk> capacity, so it's a it's a.
It's a little bit of a derivative of.
Each of our battery cells and important to point out the production tax credit in our case.
<unk> the battery cell so the actual.
Energy storage unit balance of plants in this case doesn't matter.
That's $45 a kilowatt hour.
And what we know for sure is that it's.
Something that is sure.
Shifting to a customer it has to be shipped to a third party.
And that clock started on one one of this year. So there are anything that we've done.
We build our ship, even if we built it before but if we ship it and that transaction takes place.
After the first of the year should count towards the production tax credit I don't believe there will be any.
Direct lines to GAAP accounting rules, but I think that's a very different category, but.
I think you won't have to prove that you sold it to a third party.
And.
Then.
This is Tony.
Factored into our cash burn assumptions.
Any benefit of that so.
Anything that we could realize this year would be.
Positive for us.
So upside to that.
The cadence that you're sort of communicated in terms of the.
Cash burn it sounds like okay.
<unk>.
If I had that right and the other follow up I had was.
Got it the other follow up I had was on the.
The benefits from the IRA with respect to.
The commercial momentum behind this market development and just curious I know you are I.
And you're not really comfortable or in a position to provide guidance given all the dynamics, but can you just talk about the nature of the engagement with customers and how that's manifested in either discussions or backlog or funnel any way to quantify that or characterize.
That sort of market development, if you will from our engagement with potential customers.
Sure. So the way I guess I would describe it as and I would certainly hope that everybody would appreciate.
That.
Nothing about that providing guidance at this point in any way shape or form is a diminishment of our enthusiasm excitement about how the market is growing because it really has been.
Fantastic ramp up and the interest.
Across the board and I should add because I don't think we said anything in the prepared remarks, you may have seen that Australia has announced an IRA like incentive program and there has been progress made in the last 35 40 days in Europe to have a similar incentive program and I think it will look different than in the.
But directionally the same in Europe . So there is a ton of tailwind coming in to build market momentum.
Around that we haven't dimensionalize.
Total pipeline kind of impact because frankly those.
The number is kind of a crazy big.
Im more for my sense too.
Focused on the things that are more progressed through the through the sales process.
What I can tell you for sure is that with ire.
And the investment tax credit.
Now opening up new use cases that before people might not have thought to be cost effective and the one that I mentioned.
I mentioned earlier I think is really worth calling out we were at a conference last week, where.
Two weeks ago, excuse me, where we are.
Cal ISO the operator of the California grid hosted a panel on using batteries.
Hurdle for T&D investment and utilities are now looking at energy storage, which could go into their rate base.
At a very favorable set of terms because of the investment tax credit as a deferral towards T&D investments on their side those were conversation that we just weren't having a year ago before.
For the IRS came onto the scene so it.
It's not.
Not maybe orders of magnitude of growth, but it's multiples of growth in terms of the interest in the use cases.
And we just have to keep moving through the process to continue to move.
The sales funnel and ultimately move them to deal.
That's helpful color I appreciate that one last one.
You mentioned the revenue recognition in calendar 'twenty three for what's been chip is that a prelude to emerging from development accounting or my two completing.
Two different consideration thanks.
Well.
Sort of yes, they are.
Obviously as you as you recognize revenue.
Over time.
Doesn't make sense to remain in an R&D accounting, but there are two different criteria to transition so.
They're not linked together.
But but our expectation from an R&D accounting transition is that we will be transitioning this year.
And there's some more work for us to do too.
Chairman the appropriate timing, but.
We're still expecting to transition this year.
Right and Thats, what I was really getting at and then when that happens would there be sort of a pro forma reset too as if this happens lets just say it happens in the fall would there be approach former reset of the recast the entire calendar year.
On a.
Post development accounting basis. Thank you.
Yes, I think thats, a determination that we still need to work through in terms of what actually is reflected the depending on the timing of when we transition.
But at a minimum it would be our perspective.
Right.
Thank you for your question.
Again, if you would like to ask a question Press Star then the number one on your telephone keypad.
There are no further questions at this time, Mr Addressable House I pass the call back over to you.
Thank you and thank you all for joining us for the call. We couldnt be more excited about the progress we're making in the business and we look forward to giving you further updates on our subsequent calls.
Thanks, a lot everybody.
Yeah.
This concludes today's conference call you may now disconnect.