Q2 2023 ESS Tech Inc Earnings Call
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Ladies and gentlemen, thank you for standing by.
At this time, all participants are in listen only mode.
Later, we will conduct a question and answer session at that time. If you have any questions you will need to press star one on your push button side.
I'd now like to turn the conference over to Eric.
Rick pilot. Please go ahead Sir.
Welcome to <unk> second quarter financial results Conference call.
Joining me on the call today from E. S. S. R Aircastle House CEO , Tony Robbins CFO .
Following managements prepared remarks, we will hold a Q&A session.
Earlier today, Yes, that's released financial results for the second quarter of 2023.
Earnings release is available in 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 partnerships financial performance and strategy for the remainder of 2023 and beyond.
The forward looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call.
In particular those described in our risk factors set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission as well as the current uncertainty and unpredictability in our business issues with our partnerships.
The markets the economy and the current geopolitical situation.
You should not rely on 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, and 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.
Hold a highly skilled and dedicated team and they are working tirelessly to optimize the product design improve the speed of manufacturing throughput and deliver a great product for our customers.
We feel this quarter is another positive step on this journey.
We delivered nine energy warehouses to four different customers in the second quarter.
Importantly, we began shipments for the first phase of our relationship with Sacramento Municipal utility district for what we expect to be a long and mutually beneficial relationship.
We recognized a record $2.8 million in revenue as we continue to make progress on deliveries and improve our revenue recognition process.
Importantly, we maintain fiscal prudence and tightly managed our balance sheet and in the quarter with just under $100 million in cash and equivalents.
We have continued to drive great progress optimizing our internal operations, most importantly, sourcing components for our product and streamlining assembly and test processes.
Our automated and semi automated lines are performing well in the effort you put into optimizing the injection molding vendor and assembly technique has resulted in improved deficiency and consistency.
As mentioned last quarter, we are implementing lean manufacturing techniques to continue to perfect. The processes for assembly of our balance of system and this is yielding strong results.
While our capabilities to serve the long duration energy storage market has the potential to make us a market leader.
We have an engineering roadmap to further optimize the numerous components of our systems across the electric power modules proton pumps and balance of system to improve energy density and field performance.
We are in a meeting within the core components and IP proton pump some power modules to improve the capacity, while we design further enhancements to the balance of system to simplify and speed assembly and maximize durability for transport and longevity.
Is it a sign of our progress on these friends in the second quarter alone. We were granted 10, new patents and filed an additional 13.
We now have a total of 238 patents granted pending or an application.
We feel confident that the Motorola R. I P portfolio will safeguard our iron Plough technology approach for your <unk>.
As we perfect our processes around our gen to read to design, we lowered our bill tied by 29% and reduce direct costs by 30% in the second quarter alone.
These are impressive accomplishments in a short time and I am proud of the great work. Our team has performed to drive these improvements.
We intend to continue to push on innovation as we lower cost and improve performance.
We begin 2023 with the intent to carefully manage our manufacturing output. So that we can focus on optimizing design, an assembly and I'm pleased with our results.
Our team is a line to maximize the assembly efficiency and quality of our product will continually improving our processes to lower unit cost on our drive to profitability.
Well these are clearly steps to scaling a profitable company. They also allow us to deliver to customer needs any more timely unpredictable manner.
Ah customer facing team is hitting its stride as well.
<unk> ability to support the appointments across the globe the customer success team. This building out its infrastructure with a CRM platform to expand our field service capabilities through knowledge sharing and enabled deeper customer engagement through.
Through the customer portal.
The team has reduced the time required to commission individual E w's by 70 per cent compared to a year ago.
And is driving to take it down by the end of their 30 per cent two weeks by the end of the year.
The new business front, we were thrilled to announce another transformative deal in the second quarter.
Subject to finalizing the contract, which we expect to this quarter Liang a major German energy provider and E. S. S plan to build a 500 megawatt hour iron flow battery system at Lee X box Bird Powerplant say with design work beginning this year and plans to commission by 2027.
This installation is expected to create a repeatable building block currently replicated across their energy infrastructure.
They work to transform their powerplants to clean renewable energy.
Leah Guthrie too many large scale <unk> and cold by your generation sites in Eastern Germany.
Implementing the vision to transform the coal dependent region into Germany screen powerhouse.
The company plans to develop seven to 14 gigawatts of renewable generation paired with two to three gigawatts of energy storage and two gigawatts of green hydrogen production.
Combined these technologies will create a zero carbon baseload energy system.
With the Sacramento Municipal utility District energy storage Industries Asia Pacific and now Liang.
Yes S has three transformational customer relationships with well respected energy transition pioneers each of which could generate significant revenue in the coming years.
We congratulate yes, hi for the recent Queensland government announcement regarding the project with energy Queensland.
We are grateful that these forward thinking customers put their trust in E. S. S. As they embark on a path between clean sustainable energy future and believe their work will serve as a model for many others around the world.
Although we are pleased with the improved pace, a burger appointments and gratified for the trustees, leading operators are placing any S. S.
We are keenly aware that launching new technologies in this industry is often a bumpy road.
Last quarter, we mentioned the delay of an overseas project and although there has been good progress we remained delayed with hope resolution soon.
Other legacy projects, some five years ago.
Have struggled with the leaves are project requirements shifted.
We tried to keep everybody appropriately informed of our activities, but we remain committed to abiding by our customers requirements disclosure.
We've learned a lot over the last year and continue to improve our predictability and execution as we establish iron clothes storage as the long duration energy storage leader.
Is there a recently again now it's been shows are opportunities worldwide are expanding rapidly here.
Here in the U S. We continue to actively engage in the implementation of the inflation reduction at the bipartisan infrastructure Bill and various state level initiatives to accelerate the deployment of energy storage.
These are large initiatives and the pace of activity isn't as fast as I'd like.
That said, we're very encouraged by some of the recent IRS guidance on domestic content, which strongly fevers companies like E. S S, which actually build battery modules here in the U S.
As well as the deal we use recent announcements on the energy.
Energy storage Grand Challenge, which we hope will accelerate implementation of the many initiatives and the infrastructure Bill and the I R. A.
On top of those national efforts, many states are taken action.
As an example, California has just included over $170 million in additional incentives for energy storage in its budget and we hope to see similar efforts across the country.
And with that I'll turn it over to Tony to cover our results.
Thank you <unk> <unk>.
Unless otherwise noted all numbers, we discussed today will be on a non-GAAP basis.
You will find the reconciliation of GAAP to the non-GAAP financial measures and our earnings release, which is posted on our Investor Relations website.
We recognized $2.8 million in revenue in the second quarter, and we delivered by an energy warehouses for customers as we discussed last quarter, we've made tremendous progress with our revenue recognition process.
During the remainder of 2023, we expect to recognize revenue one's control of the energy warehouses are transferred to the customer.
Under the contractual shipping and transfer terms of most of our newer contracts revenue recognition could occur as soon as the energy warehouse was picked up by the customer from our dark in the case of exports terms.
Or upon delivery to the customer site in the case of delivered at place or D. E. P terms.
We expect these kind of terms to apply to all of our deliveries during the second half of this year.
We remained under development accounting rules in queue too so the material overhead and labor costs, we incurred producing the products we've delivered fallen topics, resulting in there all cost of goods sold.
We have also determined that we will be transitioning out of on the accounting and into commercial inventory accounting in the third quarter. So we will be reporting our cost of goods separately from our operating expenses.
Or non-GAAP operating expenses for Q2, we're in line with our expectations at $24.3 million.
With that we recorded queue to adjusted EBITDA negative $20.5 million, we ended the second quarter $99.5 million in cash and short term investments.
We will continue to effectively manage our cash burn rate in the coming quarters and the cash on hand should last as well into 2024.
With the continued operational progress Eric discussed we were able to reduce the direct variable costs of R. E. W's by 30% in the second quarter related to the benefits and results of our cost out of issues.
With that progress and the additional ongoing and future Cossat initiatives, we're planning.
We continue to expect E w's to be profitable non-GAAP gross margin basis in the second half of 2024.
We expect the average of our quarterly revenue for the second half of the year to be similar to our second quarter revenue.
However, we may experience some variability in our quarterly revenues due to timing of completion of various customer projects until we reached greater scale.
In addition, we expect our cash burn rate to be similar to or slightly below what we experienced in the second quarter as well.
This aligns with what we have stated previously.
About curbing, our production volume levels to mitigate our cash usage, while progressing on a cost reduction and efficiency improvement initiatives.
And with that I'll open it up for questions.
This time I would like to remind you one in order to ask a question. Please <unk> then the number one on your telephone keypad.
Polls suggest amendments to compile to kill the name <unk>.
First question today comes from the line of Thomas beliefs from T. V talent talent. Please go ahead tell US your line is the only thing.
Thank you very much for taking the questions maybe the first one just talking about you know kind of expectations for revenue for the balance of the year. It sounds like the end of the whole approach here is just to do as premium as possible. While you continue to make gains on on the the cost side of the equation, there's a limiting factor.
Here and access to computer components I know a couple of quarters. You. Obviously there was some some challenges and you you've gone through the process as onboarding.
I'm, putting the supplier. So I was just wondering how that process is going the vendors coming on line still in the in the second half of the year.
Yeah. This is totally rad. Thanks, thanks for that so you know, we we continue to make progress with with our vendors and you know the the constraints that.
We've put in place are primarily based on the fact that we wanted to curb production.
To minimize our cash burn as it relates to the material cost.
Ah the Ew's.
While there are intermittent types of supply chain and vendor tape delay.
Delays.
A lot of that has and has been mitigated, but it is something that that we continue to deal with but it is progress is progressing nicely.
Got it and then just as my follow up I I kind of wanted I wanted to check it on the on the revenue recognition of the legacy units I saw deferred revenue declines the junior around 90 minutes, but I'm sure I wasn't sure. If those were the nine use that word ship this quarter.
Just any color that you could provide their it'd be helpful. And then maybe.
Maybe you just <unk> what is the current Rover timing for the units that were kind of shipped this quarter is still <unk> and enter quarter or where where in it.
So.
Just so I'm understanding your question.
Regardless of regarding the first part.
Were you referring to just the change in the balance in the deferred revenue.
The first one was just around their revenue recognition of the legacy unit. So it was kind of first three to five units that had gone out that that we're the ones that were kind of the challenge and then I was just trying to better assess if the nine units that were shipped and delivered today. We're also the 19th that you know about were recognized as revenue.
Quarter, they're still again.
A time delay.
Yeah.
Talk about specific customers in terms of the units that were ship, but I will say that that we feel like we've resolve the revenue recognition challenges that we've been facing and we do anticipate that.
The customers that we make deliveries to within the second half of the year those will all be under our our updated and newer contract terms and conditions.
Great. Thanks.
Thank you.
Next question today comes from the line called in much from Oppenheimer. Please go ahead, Colin your lines.
Thanks, So much now yeah, I'm curious about the dissembling strategy going forward, you know you've been able to announce like a couple of different avenues to having central manufacturing on corporate problems, but then welcome manufacturing on other elements in the system can you talk a little bit about how.
Oh, Yeah, how do you plan to replicate that in in how much. That's you know contributing to some of these potential customers are existing customers hanging out right now.
Sure.
Thanks for the question Eric here I'll take that you're right I think for the foreseeable future. We anticipate building all the battery modules.
Wilsonville, it's very efficient for us to do that in a in a central location because of the automation requirements and of course, we liked building those in the U S. Because of the P. T C an application.
There we go with the I R a cyst.
[noise] system side for the very near term, we expect to bill.
Those units also Wilsonville and we've got plenty of capacity to do that to meet our near term delivery needs.
Out of that facility and we've announced the project it.
It would be assigned to eventually start building balance of system in Australia, I expect that maybe not out of the blocks will look to Europe to do that as well in in the future simply because it's more efficient to to do the assembly obnoxious completed units over over.
She is when we can avoid it but to get to that we want to get to some level of volume and we want it perfect.
The repeat ability of the process that we're doing here in Oregon.
Excellent and then if you look at the fleet of systems that are out in the field right now.
Speak to the performance relative to name plate and what you're seeing right now in terms of how the systems are operating relative to expectations.
Yeah, they're generally working well the the one thing we have learned a lot about is how customers use the battery, which isn't always in a straight linear you know turn it on charge it up discharge. It all the way you know where you would expect so one of the things it's been really interesting is to see.
[noise] usage patterns.
Had some great results in places where units are deployed where they are now fully integrated them with the micro grid operations.
The customers are experiencing power outages the units are dropping right in immediately recharging the customer sites.
But one of the things we're hoping now as we start to increase the unit shipments is to get more and more units out in the field and operate them.
Because we're learning something new every time, we go to the field.
Excellent really appreciate it thanks so much.
Thanks, So thank you.
The next question today comes from the line <unk> Bleach Bank <unk> your lines now I think.
Hi, good afternoon, and thank you for taking my question.
Try not to take your phone line to the medium can can like maybe once maybe.
Maybe she can talk anytime anytime I try to instill <unk> 2024 and.
And 23, five you know in camera maybe.
<unk> you know I thought he was supposed to come maybe that can make <unk> just trying to get that 90, basically where you want to see the <unk>.
Going over the next agent within 24 months.
Yeah, great. Thanks for thanks for the question, we have that given any guidance you have for 24, we certainly expect.
We've said in the past that will continue to ship it more modest space. It was Tony said roughly at the pace. We're doing right now through the end of this year and then we'd expect as we get into 24 and beyond and.
And we get to the cross the cross points on our cost of goods that we're targeting that we would've been feel more comfortable ramping that up and then of course the E. C. As you mentioned is a big part of that as well our ability to ship Ah energy centers and core components, we see ramping up in the later part of next year, but we haven't put a none.
<unk> to it at this point.
Mmk, Thank you and May I ask.
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Camping out on the 20th.
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Canceled Yankee or a text.
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Yeah, Hi, it's Tony Thanks to that question.
We were always.
You don't Wanna be considering any.
We could add two and strengthen our balance sheet as long as we can do that unfavorable terms.
At this point, we are very comfortable with our cash balance in our cash burn rate, where we are and the fact that the the the cash balances that we have on hand and are expected burn rate, we gotta get us well into next year.
And then.
You know the appropriate times, we will we will highlight the folks.
Exactly how and why do we plan to supplement that.
Thank you I appreciate that thank you all right. That's my question that plan.
Thank you.
As a reminder, if you would like to ask a question. Please <unk> followed by one on your telephone keypad.
Next question today comes from the line of Leon hidden from clinical Genuity. Please go ahead beyond your line is no way.
Good afternoon, everyone. Thanks, so much for taking my question and congrats on the corner.
And just to start can you. Please help us understand the level of customer interest you are currently seeing in the marketplace.
What sort of projects to be invited to date on currently.
Sure I'll I'll take that and thanks for the question. It's it's really a variety mostly what we're seeing now is this drive to Ah Ah for in terms of the front of the meter business.
Drive to Green Baseload, what's becoming increasingly clear through all of the regulatory mandate. The 12 or 13 states now in the U S that have come out with specific targets.
They need to create 24 seven.
Green energy and so that's been the biggest driver the the the project that league that we announce it's interesting in German and you have to do the translation, but they call. It Green Baseload, which is how do you replicate what you're used to get out of coal fire or a combination of coal and gas to create a 24 hour seven day a week.
Base load and then the second driver that we're seeing.
In the behind the meter business is really all about resiliency, we're fortunate that the west coast has been spared. This here from some of the worst weather that's going on but if you look across the rest of the country power outages.
And ER grid resiliency are really getting pressured so we're seeing a lot of demand from large commercial industrial customers, who of course have been interesting carbonization, but are really focused on resiliency and reliability as their primary driver. So in some cases.
Those are paired with renewables on site, but in other cases some of the of the project that we've announced then I think of things like the Burbank project.
That's a good example, some parts of the Smug project I really just designed before its resiliency unreliability, how can we make sure that we're gonna have power in this world, where we're gonna rely more and more electricity the fuel that drives the economy.
Okay. Okay, great. Thank you very much and just a second question do you still intend to become non-GAAP gross margin positive over the next 12 to 15 months or has that timeline change can you offer any color on them.
Yeah, It's Tony our timeline is that we still expect to be non-GAAP gross margin a positive in the second half of next year.
We've got a number of ongoing initiatives that we're making very good progress.
And a number of additional projects and initiatives that that won't be launching a later this year that aren't gonna progresses towards achieving that objective in the second half of next year.
Alright, great. Thank you that so much.
Thank you.
Again, if you would like to ask a question. Please stop and the number one on your telephone keypad.
The next question today comes from the line all day descendant from Bad. Please go ahead, you might understand lately.
Hey, guys. Thanks for taking my question.
Just one quick moment for me you talked a little bit about the state of initiative from California, having a specific car bumper stationary storage and I think particularly long duration energy storage could you maybe talk about anything you're seeing outside of Iran. Maybe in Europe , Australia, or maybe any incentives you guys should be getting some will be egg project or anything else. Thanks.
Sure sure Thanksgiving things for the question, it's it's frankly, a lot, but it's not one thing so you're right. The I R. A is the single largest initiative in terms of incentives describing the business as.
As we get more and more I R. S. Rulings, we expect that to continue to gain traction of course. There is also money on a federal level in the in the infrastructure Bell.
Starting to come through and realized an actual project you've got state specific states. Some states like California, putting 100 170 million you're correct.
He was specifically targeted towards long duration storage and that gets combined in California with a mandate that the public utility commissions put out to all of the load surfing entities to hit certain targets by 2030.
And then some further targets that go into the 20th thirties, If you look around the.
The world the incentive structures, because the change a little bit based on what the regulatory structures are so if you look in Australia. As an example, they don't have an I R. A equivalent they just do it as grant money and the project that yes, I announced last week was actually announced if you saw by the state of Queen.
Glenn who is the sponsor and they're they're the one that puts the bill because we have a vertically integrated market in Queensland, Australia, there'll be a little bit different and some of the other states because of the market structure and.
And then finally in the in the case of Liang there are a number of different pools of money there.
[noise] exist in Europe to help.
Defray the cost of what's known as the kind of the green premium to help with capital reductions, but they are more on the kind of grant model, So utilities, including the league brothers would apply for the grants.
And then use those as Capex reduction, it's not a taxes based incentive the way. It is here in the U S. So I know, it's a lot to manage what we like to see is the combination of the regulatory mandate plus a financial mechanism whether death is attacks mechanism oriented Graham mechanism to help the for a call.
Cost him, we think that's the thing that's going to start to really accelerate the <unk>.
Appointment.
That's helpful. I appreciate it thank you very much.
Thank you.
Thank you.
As a reminder, if you would like to ask a question. Please buy stuff on the buy one on your telephone keypad.
Let me know additional questions waiting at this time, so we'd like to pass a cool.
Yeah, just ask for any closing remarks.
I'd just like to thank everybody for joining the call and for your support we're making great progress. If you saw this quarter in are excited to come back to you in another quarter and give a further updates as we build what we think it's going to be a very transformative and meaningful business in the world of energy storage. So thank you again for your support and have a.
Safe and Pleasant evening.
Thanks, everybody.
This concludes today's conference cool. Thank you for your participation you may now disconnect your lines.
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