Q1 2023 ESS Tech Inc Earnings Call
In our industry. This was particularly disappointing given the timing, where we are as a business and how it affects our predictability.
We are making important progress scaling the business as you know we are transitioning from batch to scale manufacturing as is typical for emerging technology companies. We are balancing near term financial performance with our long term focus on building a commercial powerhouse and energy storage.
While we know the former is important the letter will ultimately determine our long term success and the potential to generate shareholder value.
We've learned a lot over the last 12 plus months made significant improvements to all facets of our business and have a clear set of focused initiatives that we'll execute in 2023 to capitalize on the significant market opportunity for long duration storage.
<unk> trends remained strong and we are confident we will be an integral part of solving for a zero carbon energy grid.
The initiatives, we are focused on for the remainder of 2023 are being put in place to help us not only capture the revenue opportunity, we see but also to allow us to drive down cost and move the company toward profitability.
These initiatives fall into four key areas.
First scaling our manufacturing capacity, including ramping automation and injection molding processes.
Second improving our supply chain quality and outsourcing noncore components.
Third optimizing our product designs through the simplification of the electrical and plumbing installations and fourth reducing the time to commission our solutions at customer sites.
These initiatives are critical to our long term success and are designed to help us shorten our path to profitability.
Now, let me turn it over to Vince can you know to provide some additional detail on our scaling and supply chain initiatives.
Thanks, Eric I joined <unk> in October and I spent my career scaling manufacturing operations and delivering precision products for major manufacturers, including GE and train.
As you May know our energy storage system incorporates four main technologies battery modules proton pumps electrolyte and the balance of system. Each technology can be scaled for high precision and low cost of those for the heart of our intellectual property is in our battery modules and proton pump.
These are will give our iron flow battery its unique advantages for long duration storage equally important are the electrolyte and balance of system, our electrolyte, where the energy is stored as low cost non toxic and the elements that make it up are readily available. We are working to scale. The production of this proprietary recipe as we optimize the transportation.
All of this material due to its weight and volume.
With the balance of system, we are focused on optimizing the integration of many components, which are mostly plumbing and electronics.
Balance of system is very much like a washing machine, but with more stringent requirements for reliability. The parts are not complicated or limited in supply. It's just a matter of orchestrating the assembly to achieve the best system efficiency and durability.
If we look deeper into the construction of our battery modules, we find an interesting challenge, especially in this space of injection molding.
67% of our battery module is made up of precision nonmetal parts of that 67%, 70% have very strict tolerances. When you apply that to a large injection molded part it takes craftsmanship and collaboration to consistently deliver these parts inspect expertise and tool design.
And perfecting the right parameters during the injection molding process is paramount.
Once we have the tooling and automation dialed in you have a process with scale and repeatability, which can be sustained.
We have made great progress on this front already with a focus on what we call. The stack frame, we build up many of these stack frames together with a battery module since they are approximately three feet long our injection molding suppliers were having challenges delivering to our specifications.
Think of it this way and these parts are being stacked on top of each other and we are off by just 110th of a millimeter we could easily be out of total spec by over 10 millimeters or about a half an inch over the entire length of the stack.
But we've worked through tool designs materials and processing techniques and now have parts that consistently meet our stringent tolerances let.
Let me give you. Another example focused on the <unk> on the power module.
This N play transmits electricity tuned from the energy cell stacks in the past we would have this component machine. In addition to the high cost of precision machining. The raw materials stock is also very expensive due to the nature of its thickness. Today. We are now manufacturing this part using an injection molding process, which lowers.
Cost by one third but also provides us a highly repeatable and consistent part.
During the remaining quarters of 2023, there are three key areas, which were focused to drive improved results supply chain inventory management and data management systems in manufacturing automation.
All are equally important but for right now I would like to discuss some of the supply chain improvement strategies, we have on our radar.
She will help drive costs down and improve quality.
One example is our supply chain for electrolyte we.
We have developed a multi pronged set of strategies to expand volume production in combination with driving down cost and maximizing energy capacity.
As in all energy storage and renewable technologies electronics also play a major role in performance and cost collab.
Collaborating with firms that not only have the industry knowledge in the DC space, but also the ability to scale and lower production costs. As key. This is an area. We have found significant successes.
But having strong supply base is only part of the equation, ensuring they are providing the best components at the best price is meaningless unless they are of high quality. This is where our supplier quality team intimately integrates with product engineering to drive the highest quality and repeat ability at scale. We have been actively building this team out.
And giving them the best measuring systems tools and processes to ensure our suppliers quality is consistently high I will now turn it over to Dr. Ben Hang to walk you through some of the progress, we're making on automation and product design.
Thanks Ben.
One of the most important element underpinning our transition from prototype to scale production over the past year has been integrating automation in our process at.
At the lids through my prior experience at Tesla.
Time consuming that critical part of the company's ability to develop a high quality cost effective energy storage solution at scale.
A real differentiation in Esa product lagging our polymer and put a pump technology. So we invested in output automation line are there.
We're able to leverage our manufacturing and our engineering teams to establish their critical processes and control develop preventive maintenance procedures and has put up quality and increased output.
We have tremendous savings from our automation with us David reduction of 35% of cycle improvement.
60% and our overall manufacturing footprint decrease of 75% all of these but really well for our efforts to deliver on our goal of two gigawatt hour of annual capacity from Oasis.
The pictures on the slide shows at sample automation line using.
To accurately correct.
<unk> and test all callable you can total claims as.
As well as compete the precise stepping off the call volume.
Now I'll know energy warehouse systems side, we have successfully re leased our rescue product with a focus on simplifying the design.
We have identified and implemented many design optimization, which reduced the piping connections as well as simplifying the wiring and electronic components.
This improvement not only lower cost, but also improve our product quality and reduce the number of possible failure points.
We plan on building on this momentum as we move into our <unk> product and beyond with a focus on continuous improvement the manufacture ability and cost reduction.
Now I'll hand, it over to Mark who will talk more about how this is working to improve the customer journey Mark.
Thanks, Dan and good afternoon, everyone I am Mark <unk>, Vice president of customer success of DSS.
And in May of last year, having spent much of my career building excellence in delivery of complex technology projects and companies such as Bloom energy turned site. So it would bring networks to name a few.
Some of our first customer projects required USS to implement everything as a turnkey model versus simply commissioning our product.
It was intentional.
As it enabled us to really see what it took to deliver our solutions in the field.
We certainly learned a lot in the process, but similar to our broader transition to scaled manufacture our product delivery needed to evolve as well.
The deployment model going forward is expected to be more in line with typical engineering procurement and construction model.
We are developing a standardized playbook to enable our teams to successfully commissioned and support their technology as efficiently as possible.
We are constantly collaborating with different customer sites as well as with the team back at Wilsonville to refine our customer experience.
This playbook combines the knowhow new tools documentation and training. So we can scale the business and ultimately enable partners to help us scale, our commissioning and support capabilities globally.
We're working hard to ensure the recipe for success is well defined and leveraging continuous improvement with each new deployment.
During learnings with new customers early in the contracting and planning process helps to eliminate surprises down the line for everyone.
Since Q3 of last year. This approach has resulted in a 50% reduction in the effort. It takes to commission system compared to our early deployments.
But we will see a similar rate of improvement as we commissioned multiple systems across multiple customer sites throughout the remainder of 2023.
Further efficiency gains.
As excited as we are to get these products in the field, we couldnt do it without the help and support of our customers two of whom.
We have offered to share their perspectives with you today.
Steve <unk> CEO of Sicker more international will talk about early lessons learned in our collaboration to ensure the product was ultimately delivered.
Then Paul Lang CEO of Sacramento Municipal utility District will talk about the key role of DSS technology in achieving their ambitious zero carbon goals.
My name is Steve <unk>, and I am the founder and CEO . The Sycamore International Sycamore is an asset disposition company with a focus on sustainable electronics recycling and data six.
We refurbished secondary technology for reuse and responsibly recycle all non sandwich or electronics or operations per move in or designed to integrate into the circular economy with the most significant financial and environmental impact for Sycamore sustainability has always been a competitive advantage in the past when we lost power we lose.
An entire day or more of production due to the nature of processing and data destruction procedures, we employ across various types of servers individual devices and storage media each power outage was completely devastated.
Our solution was to partner with tariffs will energies to develop a solar powered micro grid on site, which uses in DSS energy warehouse for energy storage since.
Since completing our deployment and declaring our energy independence availability of electricity is now guaranteed and our energy prices are now effectively fixed for the next 25 years and Sycamore, we're very familiar with the safely handling batteries of many types and chemistries for end of life recycling. Yes. This is iron full energy warehouse was the idea.
Battery to use at the heart of our micro grid as it contains no toxic chemicals is designed to be cycled daily with a 25 plus year lifespan and has a very reasonable ROI IFC and then potential for this technology in my industry and across many other applications.
And many industries in all candor because it was such a new technology. There has been a lot of lessons learned as we deploy DSS solution as we navigated through some of the initial funds.
<unk> was responses in a really great partner to have ordered another energy warehouse to deploy after we complete construction of our new building, which is slated to be done later this year as <unk> scales up their production I am really excited to see this technology out there to safely and sustainably provide the long duration energy story.
Ridge capacity need to Decarbonize, the grid will enable greater distributed renewable power generation.
Hi, I'm, Paul Al I'm, the CEO and general manager of Spud the six largest publicly owned utility in the U S and for <unk>, we have a very very aggressive mission and goal something we call between 30 zero carbon coal we plan to Decarbonize our powerplay.
<unk> Angola are 100% carbon free resources by 2030.
And so this is one of the most ambitious goal of any large utility in the U S and as part of the plan deploying long duration batteries is definitely one of the things that we need to do successfully in order for us to have this clean energy transition and we are extremely happy that we actually have us we've partnership with ESF that'll actually help deploy <unk>.
Duration batteries in the second one the area and the very very near future.
Hi, I'm, Charlie Robb CFO DSS.
As Eric shared we recognize revenue on two energy warehouses in Q1 for approximately $4 million.
In addition, we completed production on nine energy warehouses in the quarter slated for delivery this year.
We remained under development accounting rules in Q1 sort of material overhead and labor costs, we incurred in producing the products. We've delivered fall into opex, resulting in zero cost of goods sold.
Our non-GAAP operating expenses for Q1 were in line with our expectations at $22 8 million.
With that we reported Q1, adjusted EBITDA of negative $21 4 million.
We continue to take a prudent approach to our ongoing ramp this fiscal year we.
We're balancing our customer commitments with our desire to scale up our operations and further reduce our cost of goods sold and what continues to be a challenging supply environment.
Finally, we continue to manage our cash judiciously, while investing in projects and infrastructure and scaling up production.
We ended the first quarter was $119 million in cash and short term investments, which was in line with our expectations and we feel very good about our cash and liquidity position.
We have retooled, our operating plans going forward to optimize and scale our production processes and in doing so have extended our cash runway.
We believe we have sufficient capital to support our plans for 2023 and take us into 2024.
While we still have work to do DSS has made considerable progress in our efforts to work through some of the early challenges associated with revenue recognition on our energy warehouse deliveries.
Earlier contracts from 2020 and 2021.
<unk> terms and conditions that led to lagging revenue recognition.
Those terms largely put a greater harvest on NSS to have project level responsibility and included items like completed system level deliverables and site acceptance testing post commissioning.
Moving through 2022 and into 2023, our new customer contracts now contain much more standard delivery and acceptance terms and conditions, which reflect that we are responsible for delivering our product.
While some of our legacy contracts still remain in place many of our EW shipments this year will be under our new contract structures, which should allow for revenue to be recognized in a more straightforward and expedited manner.
A number of you have asked about our financial reporting.
We are required as a part of standard accounting practice to use what is known as development accounting, which is typical for companies of our stage.
We are preparing to transition out of development accounting in the second half of 2023 and continue to standardize our processes and controls to support this change.
Obviously, the ultimate success of DSS will be tied to a path and timeline to profitability. We are commercializing a new technology product and scaling to increased manufacturing volumes. So we recognize there will be a learning curve associated with that progression.
Since 2021, as Vince and been a shared the company has made considerable progress in moving from low volume high direct labor to more efficient production and improved yields and cycle times.
Why are we still have some challenges in our supply chain in particular with vendor lead times, we've made considerable progress reducing the cost and labor of the product with labor alone being reduced by 60% and our Gen. Two Rev to design of the E. W.
We have a number of projects and initiatives that should continue to reduce the cost both labor and materials that is going into the EW.
These initiatives are also expected to increase our manufacturing yields and further lower labor costs VR automated production line.
With these projects and initiatives. We believe we have a path to non-GAAP gross margin profitability in the next 12 to 18 months.
Once passed that point, our path to company cash flow breakeven will be more dependent on how quickly we ramp up our volumes to cover the existing indirect and fixed costs in the business.
While scaling.
Ailing the business to profitability as a critical next step we believe our long term business model has some very attractive characteristics.
Fortunately, we do not see a demand problem with our product and the long term Esf's model is one that is expected to generate a higher return on invested capital over time.
Within our long range planning horizon, we expect our gross margins with production tax credits to expanse north of 30% along with operating expenses trending towards the mid teens coupled.
Couple this with the increasing volumes, we expect to achieve over the next five years in.
In addition to the expansion of long term service agreements, we believe we will be able to deliver considerable profitability to the bottom line.
Investments in capacity expansion drive, our Capex and our product and production process does not require considerable capital investments to grow capacity.
For every gigawatt hour of additional capacity, we require approximately $40 million of Capex and we currently already have about 800 megawatt hours of battery cell capacity in our existing lines.
The resulting business model is therefore relatively simple and straightforward one that is capable of delivering strong returns over the longer term.
And with that I'll pass it back to Erik to wrap up.
Thank you Tony the initiatives. We have discussed are critical to our long term success as we increased scale drive down cost and improve the customer experience importantly by executing on our internal initiatives will be positioned to take advantage of what we believe is one of the most impactful market opportunities in the energy.
Transition.
Let me touch on a few of the market tailwind that are accelerating demand for our solutions.
As we've discussed customers can receive significant investment tax credits for deploying our solutions and we can access a meaningful $45 a kilowatt hour production credit for the solutions we build.
This is now working its way through the market.
Here in the United States. These investment tax credits, which can reach 50% for more have resulted in 11 states announcing targets and incentives for energy storage.
This in addition to major regulatory announcements in Europe , and Australia have continued to drive interest in our solutions.
Although we expect it will take some time to realize the full benefits of these tailwind we are already seeing significant increase in customer activity as the entire energy system prepares for a surge in energy storage requirements.
In closing launching a transformative technology has many challenges and we are working diligently to address those we've discussed today.
I am pleased that we are making good progress, but we recognize the work we have yet to do to improve revenue recognition and scale our manufacturing.
While we realize it is impractical for many of you to visit our facility in Wilsonville. We wanted to give you an opportunity to learn more about how we manufacture our products and to see the progress we are making.
On the Investor page of our website.
We've posted a tour of our factory and I would encourage you to watch it at your convenience.
We are also pleased with our customer adoption, including the announcement of pulp mill solar as a new client as well as achieving <unk> certification to UL standards and an ever expanding IP portfolio all of which we believe were widening our competitive moat.
We are building a meaningful presence in a fast growing market and have a value proposition that customers are seeking made in America with safe abundant materials to provide the long term stores that our customers require for their energy transition needs.
With that I'll open it up for questions.
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And our first question comes from Chris Colin Rusch from Oppenheimer. Please go ahead Colin.
Thanks, so much guys.
Now that you've got some product in the field for a couple of years can you talk a little bit about the round trip efficiency that you're seeing on those appointments.
Sure I believe mix it depends a little bit on what the customer use cases column, but we're seeing kind of in the 60% range.
We're working hard to improve data. If you always are working hard to improve efficiency brown curve proficiency and kind of walks loads on a battery.
But.
We've seen good performing termed.
We're satisfied with where we're at.
Okay. That's super helpful and then on.
On the sales front, obviously, you guys are making some nice progress with customers and can you talk a little bit about the diversity of opportunities you guys are looking at the total pipeline.
Growth over the last year or so as you think.
<unk> gone through this process.
Sure Eric again here.
Well two things I would say the first is the IRS has definitely.
Juiced up the number of customer conversations we haven't seen that convert into actual orders yet we've got.
Some hesitation on customers across the whole spectrum of use cases, where trend youre waiting to see what the IRS rules.
Interpretations are going to be so it's generated a lot of conversation, but not a lot of close at this point.
What we've seen is a couple of shifts. So you know of course, we always see a lot of interest from IPP and developers who are trying to.
Move to more firmed renewable assets, but the real change is come on things like the municipal side.
So municipal utilities, who have always been an interesting market for us that those conversations have really ramped up.
Around resiliency reliability use cases and of course, those are folks who can get direct pay from the IRI with up to 50% or more <unk>. So that's really encourage those conversations.
Excellent really appreciate it guys. Thanks, so much.
Thank you Colin.
And our next question comes from Chip Moore from Jeff Hutton. Please go ahead chip.
Good evening, thanks for taking the question.
Eric wanted to ask about the units that are sitting in the port.
Can you maybe expand on the delays there at the project and then.
Your ability to.
I think you mentioned kind of rework clubs or the nine more that are being built to that project can you expand on that.
Plentiful.
Sure. So two parts to that answer the first is that we are hopeful as we said that the project is just shortly delayed and then it's going to get back on track and in that case, both the units that are already import.
Plus the units we have here will just continue to ship off to.
With the customer and we hope that that's going to happen relatively quickly, but because of the product we build as a relatively standard product we have.
Already going off and looked at the rest of customers in our in our pipeline I remember looking at rearranging the schedule. So if there is a further delay than we like.
It's immediate project, we'll just take those units and ship them off to other customers what are the ones who are probably here in the states for the for the units that are still in the in country and.
In Australia for the others.
That's helpful. And then we'd expect the of course, the lag there on commissioning and everything else right.
And then a little bit we're not dependent of course on the specific projects, but there could be a delay a month's two a quarter, it's a little hard to predict at this point.
Got it okay. That's helpful.
And then I appreciate all the color you guys gave operationally in and around the play out and progress on manufacturing I guess.
Curious I guess more on the contract side you referenced.
The newer contracts are much more straightforward is there.
Can you quantify how much of those sort of legacy contracts are out there the chip that you need to work through us or when those kind of work wind down.
Yes, there is still.
A number of the contracts that we're going to continue to work through.
But the majority of the contracts going forward, a new contracts should have the new terms and conditions. So so we're aligned.
Those down this year, but there's still a bit in the pipeline that we're going to work through.
Okay, Thanks, and if I could sneak one more in just on.
Any thoughts on sort of cash burn for the year you talked about.
That 12 to 18 months.
Online to get the gross margin positive.
Any sense of where you think you exit the year in terms of cash thanks.
Okay.
Yes.
We haven't given any guidance on cash.
Like I said, we feel pretty good about the cash position and the way we've structured our plan for this year.
To manage through production that that we feel very good about being able to execute on our plans through this end of this year and taken us into 2024.
Okay, Great I appreciate it thanks very much.
Thanks, Adam as a reminder, if you would like to ask a question. Please press star one on your phone now.
And our next question comes from Chris with Katz from Loop capital. Please go ahead Chris.
Hey, this is <unk> on for Chris perhaps good evening, Thanks for taking my question.
Part of the ESF, Steve Burke with a long duration.
The <unk> battery system.
Is that seeing Andy is that translate into an increase in commercial interest in their systems.
Sure I'll take a crack at that I mean, I think the interest is growing pretty dramatically for a couple of reasons. The first is.
That.
Use cases across the country and we've highlighted in the past, Steve pointed, California, but you've seen this in Australia Europe now in.
In about a London states that have announced ambitions for <unk>.
Increasing grid storage.
We are appealing for giving longer we're seeing for our rfps used to be kind of the Max now, we're seeing eight plus our rfps and and rulemaking happening quite broadly. So that's driving a lot of interest student just longer duration. The interest in the iron flow part of it I think is really driven by two things the safety aspect is becoming.
Something that's very broadly talked about in the world of energy storage, how do we ensure that we're putting out.
Systems that are safe to be around people.
And are going to last for a long time, and then of course the second piece.
Okay, now I'm lithium versus lithium in the absolute in some in some cases people are probably indifferent to the technology. They just want something that needs to performance criteria and they don't say I want lithium or non with them. They just say give me the best product that meets my needs at the best price I wouldn't want to take a guess.
S as to how 'bout index, the interest, but I do think that it's getting built into the longterm planning processes at the public utility commission level and at the state excuse me at the utility what's known as you know the integrated resource planning level or we're now seeing people come out with very specific goals.
Four big ramps and storage over the course of the next five years, plus and I think that's what will translate into you know volume in the field.
Got it thank you.
And at this time there are no further questions I would like to turn the call back over to Eric for closing remarks.
Thank you all for joining US today, we hope that the extended time that we spend talking about operations was insightful and I'd remind everybody on the call to go to the website and watch the video tour that we've posted on the Investor page at E. S. S Inc. Dot com, we're making <unk>.
Progress in scaling the business. We appreciate the support of our customers employees and all of you as an investor and we hope you have a great day.
This concludes today's conference call. Thank you for attending.