Q3 2024 ESS Tech Inc Earnings Call
Erik Dresselhuys, Anthony Rabb, Erik Bylin
Speaker Change: Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a Q&A session.
Speaker Change: At that time, if you have a question, you will need to press star followed by 1 on your push-button phone. I would now like to turn the conference over to Erik Bylin. Please go ahead.
Speaker Change: Welcome to ESS's third quarter of fiscal year 2024 financial results conference call. Joining me on the call today from ESS are Erik Dresselhuis, CEO, and Tony Rabb, CFO.
Following management's prepared remarks, we will hold a Q&A session.
Speaker Change: Earlier today, ESS released financial results for the third quarter of fiscal year 2024.
Speaker Change: Earrings release is available in the Investor Relations section of the company's website.
Speaker Change: As a reminder, the information presented today will include forward-looking statements, including, without limitation, statements about our growth prospects, partnerships, financial performance, capital raising, and strategy for 2024 and beyond.
Speaker Change: The forward-looking statements are also subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those projected or implied during this call.
Speaker Change: In particular, those described in our risk factors set forth in more detail in our most recent periodic filings filed with the Securities and Exchange Commission.
Speaker Change: as well as the current uncertainty and unpredictability in our business, challenges with raising capital, issues with our partnerships, the markets, the economy, and the current geopolitical situation.
Speaker Change: You should not rely on our forward-looking statements as predictions of future events. All forward-looking statements that we make on this call today 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.
Speaker Change: During the call, we will also present certain financial information on a non-GAAP basis.
Management believes that non-GAAP financial measures
Speaker Change: 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.
Speaker Change: Management uses non-GOT measures internally to understand, manage, and evaluate our business and make operating decisions.
Speaker Change: Reconciliations between US GAAP and non-GAAP results are presented within our earnings release.
Speaker Change: And with that, I will turn the call over to ESS's CEO, Erik Dresselhuis.
Thank you for joining the call today.
Erik Dresselhuis: There are many reasons to feel great about the future of the ESS. A massive emerging market opportunity, a global top-tier customer base, a truly differentiated and IT-protected technology, and a great team here in Wilsonville building the product with domestic content.
Erik Dresselhuis: However, the ramp of our revenue continues to be slow due to a variety of external factors.
Erik Dresselhuis: This was evidenced in the last quarter, as our ability to stay on schedule was compromised, specifically by further delays in the timing of customer funding.
Let me provide some more detail.
Erik Dresselhuis: As I mentioned last quarter, project approval and funding was held up at one of our longstanding partners, impacting our ability to ship and recognize revenue for product that was ready to go.
Erik Dresselhuis: The great news is that the agreement for public and private funding that totaled 65 million Australian dollars was announced at the very end of September.
Erik Dresselhuis: This funding was in support of a massive state mandate for long duration storage in Queensland, but unfortunately it did not complete in time for us to close out these transactions before the end of Q3.
Thank you for watching!
Since we closed Q3,
Erik Dresselhuis: Key contracts for our partner are signed, payments are flowing, and we've started to ship the additional units. So we are optimistic we'll ship to their demand and recognize revenue in the fourth quarter.
Erik Dresselhuis: We expect the fourth quarter will include previously planned EW systems and the initial commercial shipments of our EC product.
Erik Dresselhuis: As you'll recall from previous calls, the EC product serves as our next step in building products designed to support large-scale deployments.
which is the direction the market is clearly headed.
Erik Dresselhuis: The EC product has more than double the capacity of our energy warehouse product, but with the same footprint.
Erik Dresselhuis: Given the newness of the product, and the challenges customers are facing with on-site preparedness,
Erik Dresselhuis: We will moderate our ramp and plan to ship six EC systems in Q4 and defer additional units to the new year.
Erik Dresselhuis: This does not reflect any reduction in demand, as we already have contracts in place for these product deliveries.
Although delays are frustrating.
Erik Dresselhuis: They are a reality in our industry, and we're working to get better at both forecasting and mitigating these as we ramp the business.
Erik Dresselhuis: Looking at our internal progress, our team has done a great job of building the EC systems for Portland General Electric and have been gaining valuable experience operating them.
Erik Dresselhuis: The first EC unit has been operating since March and we have been cycling against the standard TNNL and RG19 testing regimes and have been seeing great reliability and availability.
Erik Dresselhuis: That experience allowed our team to incorporate further design for manufacturability improvements into the second unit, which is now in place and in testing, and we expect full handoff to PGE this quarter.
Erik Dresselhuis: We've never had units operating at more customers than we do today, demonstrating our iron flow performance and supporting a wide variety of customer use cases.
Erik Dresselhuis: From California to Amsterdam and beyond, our technology is proving the value of long-duration energy storage in addressing customer needs.
Thank you for watching!
Erik Dresselhuis: Some of you may have seen our founding board chairman and retired utility executive Mike Nigley's customer site tour, which kicked off at Burbank Water and Power.
Erik Dresselhuis: They are being posted on LinkedIn and X, and he is highlighting the many ways that our technology is being deployed. So please stay tuned as he continues this journey.
Erik Dresselhuis: Talking grid resiliency, bulk shifting carbon-free electricity, and the decarbonization of critical infrastructure at customer sites around the world.
https://www.youtube.com
Erik Dresselhuis: And importantly, Honeywell's initial units have been delivered and are being deployed.
Erik Dresselhuis: I'm pleased to share that this partnership is hitting its stride across multiple vectors.
Erik Dresselhuis: Our joint development agreement to leverage Honeywell's broad technical expertise to further the success of our iron flow technology is in full swing.
focused on lowering costs and achieving ever-improving performance.
Erik Dresselhuis: We're actively engaged in go-to-market activities, collaborating on joint proposals, and are excited to look at technology configurations that are even greater capacity than anything we've conceived to date.
Our broad market opportunity continues to grow.
Erik Dresselhuis: I attended three events recently that I think really speak to the growing opportunity for ELDES and for ESS specifically.
Erik Dresselhuis: First, at the New York Stock Exchange's Technology Day, I led a panel focused on AI and the transformational impact it is having on electricity usage.
Erik Dresselhuis: With data center energy consumption expected to double by 2028 to 540 gigawatt hours annually, more than the entire state of Texas consumes.
Erik Dresselhuis: Data center operators are looking to fuel this consumption growth cleanly and reliably.
Speaker Change: LDEZ will be key to fulfilling this use case, and we believe our technology is particularly well suited to the impending demand.
Speaker Change: I also addressed the panel at the next Grid Alliance Summit, an annual gathering in Boston hosted by National Grid.
Speaker Change: It was clear across many utilities, large users, and regulators that we all need to move faster to ensure the reliability of the grid as we increase demands on the grid in the transition to a carbon-free future.
Speaker Change: LVIZ was highlighted as critical to making this happen and it was great to hear about the regulatory mandates now being implemented from New England to the Midwest to create meaningful opportunities for ESS.
Speaker Change: And importantly, I joined our partners at SMUD in Sacramento for the Energy Thought Summit.
Speaker Change: Our relationship with SMUD remains on a great path and, like most of the other participants, I remain impressed by SMUD's ambitious plan to decarbonize their grid by 2030 while maintaining reliability and affordability for the people of Sacramento.
Thank you for watching!
Speaker Change: Our project was highlighted repeatedly by Paul Lau, their CEO, along with a variety of board members and senior leaders, and I did a fireside chat with Laura Engleway, their Chief Zero Officer.
Speaker Change: SMUD remains at the forefront of utilities driving towards decarbonization, and Laura did a fantastic job addressing both the challenges and the opportunities they face in implementing such an ambitious plan.
But they are creating a roadmap for others.
Speaker Change: and we are certainly very lucky to have such a close commercial relationship with them.
ESS continues to make progress in the face of challenges.
Speaker Change: I'm very proud of the team and we are laser focused on scaling our solution and driving the profitability as we demonstrate the value of Eldes in delivering the reliability needed to ensure the energy transition.
And with that, I'll hand it off to Tony.
Tony Rabb: Thanks, Erik. Unless otherwise noted, all numbers we discuss today will be on a non-GAAP basis.
Tony Rabb: We reported revenue of $359,000 in the third quarter, with the associated cost of revenue at $12.7 million.
Tony Rabb: As previously shared, our COGS are subject to an LCNRV adjustment that continues to significantly impact our results, especially at lower volumes while we're purchasing materials and producing products for sale in future quarters.
Tony Rabb: With this adjustment notwithstanding, we continue to make considerable progress towards unit profitability and our continued cost reduction initiatives benefits to the point where our NRV adjustment is down about 40%.
Tony Rabb: which we see as an indicator that we're heading toward more normal college reporting.
Tony Rabb: In addition, we've already realized unit cost reductions of 28% on our EC production through the third quarter of this year and expect to achieve nearly 50% in total cost reductions on the EC product for the full year of 2024.
Tony Rabb: This great progress is a result of the growing expertise of our teams in optimizing the design for manufacturability, along with leveraging EW product cost reduction initiatives.
Tony Rabb: Our non-GAAP operating expenses for Q3 came in below our expectations at $9.2 million.
Tony Rabb: Non-Gap R&D came in at $2.1 million, which again, we believe, reflects the company's run rate and continued investment in our cross-net initiatives and product roadmap improvements on reliability, durability, and the efficiency of the EW and EC products.
Tony Rabb: We were also able to monetize all of our 2023 production tax credits and are currently reviewing bids to monetize our 2024 production tax credits.
Tony Rabb: Based on our ability to monetize these PTCs, we feel very good about realizing the benefits of the PTC both from a P&L and cash and liquidity standpoint as we continue to scale up manufacturing and sales.
Tony Rabb: Turning to cash flow and liquidity, we ended the third quarter with $55.1 million in cash and short-term investments.
Tony Rabb: We remain focused on managing our cash burn rate, including driving ongoing efforts to continue optimizing our working capital.
Tony Rabb: While it was a bit delayed, we recently signed our credit agreement with the Export-Import Bank of the United States, or EXIM, as was seen in our filing on November 5th.
Tony Rabb: with the signing of the first tranche of the $50 million financing package.
Tony Rabb: We became the first energy storage manufacturer to be supported by the Make More in America initiative of Exxon.
Tony Rabb: I would also like to address the going concern disclosure we included in our time queue.
Tony Rabb: While we work towards the optimal path to clearing this analysis, we are continuing to manage our working capital tightly and are focused on extending our cash runway through securing new capital, continued efficient management of how we are allocating our resources and costs, and lowering our cash consumption.
Tony Rabb: In particular, we are actively evaluating a variety of strategic financing alternatives
Tony Rabb: Both non-dilutive and dilutive to choose the best possible means to strengthen our balance sheet to extend our cash runway Enable ESS to operate through 2025 and beyond
Tony Rabb: With such strong market tailwinds, we continue to see considerable investor interest in long-duration energy storage, and we are working to raise the necessary capital to fund us through to cash flow break-even.
while also aiding in our ability to identify and complete.
Our Future Capital Raising Needs
And with that, I'll open it up for questions.
Speaker Change: At this time, I would like to remind everyone in order to ask a question, press star then 1 on your telephone keypad.
Speaker Change: We'll pause for just a moment to compile our Q&A roster.
© transcript Emily Beynon
[inaudible]
Speaker Change: Our first question today comes from Justin Clare with Roth Capital Partners. Your line is now open.
Thank you for watching!
Hi, good afternoon.
Hey Justin, how are you?
Hey, doing well
Thank you very much.
Speaker Change: I'm wondering if there were other customers that were also waiting for financing.
Speaker Change: And then I think you mentioned something about site preparation. So I'm wondering if customers are, you know, working to get permitting or if there are interconnection constraints. Maybe you can just share a little bit more detail on the reasons for the delay.
Sure, Justin, Erik here, I'll take that.
Speaker Change: The projects in Australia, and you may have seen, you know, there was quite a big public announcement made when their funding was announced, but unfortunately, the timing was not sufficient.
Speaker Change: to get it all closed out in the quarter. So that was the source of that delay. As we look more broadly, there have been delays, not so much on the interconnect queue at this point.
Speaker Change: But certainly, we have experience and our customers have experienced certain site readiness delays. Sometimes that's due to third party equipment like inverters or transformers, which is, we probably know are quite popular these days and can sometimes be backordered.
Speaker Change: in some cases due to construction on site. So there's no one thing that causes an issue, but we've tried and continue to work to get better at predicting and managing around those delays.
I see. Okay, that's helpful.
Speaker Change: And then looking into Q4 here, I think you mentioned you expect to ship six of the EC units in Q4, if I heard right.
Speaker Change: Wondering, do you expect to recognize the full value of those six units in Q4? And then wondering when those units could be operating in the field and when you might have a sense for the performance of those units.
Speaker Change: Yeah, I'll take that again. On the performance, we think we have a very good sense of the performance. The two units that we currently have here in Oregon installed for Portland General are the same model and the same vintage as what we're shipping to the first commercial customer outside of the state. So I think we feel good about
Speaker Change: the performance, but the units will shift, the installation will happen, and I think that go live will probably be in Q2 of 25. So we won't see those operating in the fields of the second quarter based on their schedule for going live.
Thank you for watching!
Speaker Change: I see. Okay. And we do expect to work it. And we do expect...
Speaker Change: Yeah, we do expect to recognize the revenue on those units this quarter.
Speaker Change: Yeah, so as soon as they reach the site, that's when we can recognize the revenue.
Okay, perfect.
Tony Rabb: Yeah, this is this is Tony. So our expectation is that that line will still be operational by mid-year next year. It's currently being assembled at our vendors. We're going to be doing some testing out at our vendor site.
Tony Rabb: By the end of this year, and then it'll be shipped out to our site in the first quarter of next year, reassembled, and then we'll start testing here. And so we feel like we'll have that up and operational by mid-year.
Thank you for watching!
Okay, I appreciate it. Thank you.
Thanks. Our next question.
Speaker Change: Our next question comes from Kareem Blanchard with Deutsche Bank. Your line is now open.
Hey, good evening.
Thank you.
Speaker Change: you know, the timing, the delays, and maybe potential revenue we can also expect going into 2025. I know you're not going to give, you know, full guidance, but just, you know, as much detail of quota you can share because you, you know,
Speaker Change: The revenue guidance was decreased quite a lot, you know, talking about $10 million for this year. Can you go up to $40 or $50 million next year? Can we expect something higher? I'm just trying to, you know, get your brain on this.
Speaker Change: Thanks, Corinne. I'll take it. I think you said it right. We're not getting guidance.
Speaker Change: And we'll continue to see the ramp up happening in the first half of next year. I think the volume as we see it now is, as is often the case for us, back half loaded. So we'll see a ramp that goes in Q2 and Q3 and then picks up pace as we go Q3 and Q4.
Speaker Change: Again, without giving guidance, the numbers that you talk about are quite within the range of what we would see possible.
Thank you for watching!
Speaker Change: Okay, very important. And then the second question, maybe on the binary sheet. And so after you, I mean, the cast, I mean,
Speaker Change: Hello, right. Can you talk, I'm sorry if I missed it on the preparatory month, but can you talk about the financing? You had like a financing, I think, that you are expected to draw on. Can you just let us know like any update on this?
Thank you for watching!
Speaker Change: loan agreement so we closed that and and there was there was a filing noting that
Speaker Change: And based on our cash balances that we have today, we do not need to draw on that immediately. So we will be able to draw on that when we feel like it's necessary to draw on and is available to us.
Speaker Change: But we don't need to draw on it today. So we have sufficient capital today to operate without having to draw on it. But the good news is that it is there and available for us.
Speaker Change: Okay, just maybe if I just can follow up on that one. At which level of cash or like the short-term investment would you feel like you need to draw? Because I think if I add up everything you're 58 million or something, 57 million I think.
Speaker Change: Is there like a critical love where you will feel, okay, you need to start throwing the money from that line?
Speaker Change: Yeah, I don't anticipate needing to draw on it this quarter. If you look at our cash usage over the last couple quarters, we feel like we do have sufficient cash.
Speaker Change: without drawing on that to get us well into 2025. And so depending on our cash use needs at some point in 25 could be when we may decide we utilize that credit facility.
Okay, thank you.
Thank you for watching!
Speaker Change: Our next question comes from Karlyn Rush with Oppenheimer. Your line is now open.
Speaker Change: Thanks so much, guys. As you look at the customer activity, how many folks are looking at late-stage testing data or looking at site selection where they might use the technology, just trying to get a sense of what the sales pipeline looks like from a late-stage and earlier-stage perspective?
Speaker Change: Thanks, Colin. Well, I think it's getting, it's moving along quite...
Speaker Change: Corey Briscoe, the, you know, something we've talked about in the past is
Speaker Change: The long-duration storage has not historically had a lot of regulatory mandate to compel people to act. So people did it because...
Speaker Change: The value proposition and use case demanded it. We're starting to see changes around that, so specific states, and we've talked about them, states like New York and Michigan and others.
have come out with specific targets.
Speaker Change: around long duration and that has generated a fair amount of activity both in terms of new RFPs, new proposals going out
Speaker Change: and the proposals that have been out and issued moving through the process. So, you know, I think we've seen very good activity. I don't know that I have an exact number to put to it, but it's...
Speaker Change: certainly in the hundreds of millions of dollars of activities now in proposals, in citing, and in some cases going to a regulatory approval process. So we feel very good about that. It's interesting when we look around at markets.
that have higher removal penetration.
Speaker Change: Those folks tend to be further down the line in terms of the progression of specific projects and detailed designs.
Speaker Change: So it's hard to understand in the prepared remarks we made comment about of this presentation that I Helped lead a panel on at the NYSE
Speaker Change: to figure out how they're going to meet that demand. And historically, road growth has been at a very low rate, half a percent, 1% a year, so it's very modest. That's starting to change dramatically.
Speaker Change: where people are coming back and translating that into requests for very large projects in the hundreds of megawatt range that they're asking for deliveries in the 26 and 27 timeframe. That's a lot faster, a lot more urgent than it's been in the past.
Speaker Change: Super helpful. And then, you know, I appreciate the headwinds around volumes on the cost side, but
Speaker Change: I'm just curious if you can give us an update in terms of those efforts and when we might start to see some of the impact of some of that sale purchasing.
Speaker Change: Some of the design activity you guys have been going through and the cadence of that cost out as you begin to ramp up incremental volumes.
Speaker Change: Sure, the projects are kicking off, it depends on the nature of the product.
Speaker Change: Some of the supply chain improvements can happen, I think, a little bit faster. I think we'll see benefits starting end of this year, first part of next year. Things that are more engineering and kind of value engineering driven tend to have a little bit longer kind of incubation and implementation time. So I think we'll see some of those benefits start to kick in the middle part of 25 and accelerate as we get in towards 26.
Speaker Change: Our next question today comes from Cal, where are they at?
Thank you.
I'm sorry, I didn't mean to interrupt.
No, no, it's okay. Go ahead. I've done it.
Thank y'all, your line is now open.
Hey guys, thanks for taking my question.
Just in terms of
You know customers financing
projects.
Speaker Change: Do you think it's going to be a continuous type of thing that you have to facilitate them to finance the projects?
Speaker Change: And how long do you think until you can, like, you start getting, like, tax equity involved in a project? I mean, is it going to take, you know, a year or something that is going to take a long time just to get some new, you know, some new technology?
Thank you for watching!
Speaker Change: Great question, Ben. I think there's no one answer to that. The experience that we had in the third quarter was, I think, unique in that it was a non-U.S. customer, relatively new party, and they were in a negotiation with the government.
Speaker Change: But on the good news side is he's the owner of the utilities. So that one I think was a very unique deal. Obviously the credit worthiness of the government entity is quite high, but it was more of a timing and paperwork decision.
Most of our customers tend to be large, very well-established.
Speaker Change: are funding this out of their normal capital budget, so there's no delay at all. As we get into some of the projects that are independent, that can change, and I think, you know, we see that as a bigger part of our business in the late part of 2025 and going into 2026.
Speaker Change: For all the reasons you mentioned, there's going to be, you know, bankability work and studies, tax equity offtake agreements and things, and those definitely take longer. So we're, we're trying to build that into our planning and not count on that for near term deals.
Speaker Change: Thank you. You mentioned something, Erik, in the prepared remarks about Honeywell and like early discussions around I'm going to paraphrase, like making a larger battery size than we've even done now Could you tell me what you meant by that or tell us what you meant by that?
Thank you for watching!
Speaker Change: Sure, so as I mentioned in the previous question, one of the dynamics we're seeing in the market now, I think in no small part driven by just total load growths,
Speaker Change: across the energy system, is we would have very typically been having conversations in the single-digit to mid-tens of megawatt size projects before.
Speaker Change: One of the questions that come up now are people are looking at much larger projects.
100 megawatt, 200 megawatt plus projects.
Speaker Change: You know, it's definitely benefited by being larger and it's benefited by longer and longer durations. So as the market trends to larger projects and longer durations, that's a great, that's a great trend for us.
Thank you. My last one, just on... Thank you.
Speaker Change: How could you characterize how far along or down the road you guys are in being able to secure capital? Is it something that we should expect in the next two, three months, or is there still a lot of unknown around it?
Speaker Change: Well, I don't think we have any timing to announce, but I think we've been, as we've said for the last number of quarters, we've been off.
Erik Dresselhuys, Anthony Rabb, Erik Bylin
Alright, thanks guys. You all have a good night.
You, too.
© transcript Emily Beynon
Speaker Change: Our next question comes from George Gianerakis with Canapore Genuity. Your line is now open.
George Gianerakis: Hi everyone, thank you for taking my question. My question is with regard to pricing and some of the projects that you're seeing with
George Gianerakis: This relates to the impact of the drop, the dramatic drop in lithium-ion pricing. Has that at all guided some of the pricing discussions that you've had with regards to your solution?
Thank you for watching!
Speaker Change: In short, the short answer is yes, we're certainly, although the use cases and where people are looking to deploy our technology.
Speaker Change: tend to have some unique characteristics around the duration or the safety. At some level, lithium pricing is always a benchmark in the field, so you have to, you know, track to the to lithium pricing.
Speaker Change: We look at it on a levelized cost of storage kind of value perspective. So levelized cost of storage for everybody on the call is
Speaker Change: on kind of a total cost of ownership, when you look at...
Speaker Change: Capital cost, operating cost, and the number of milliwatt hours or megawatt hours you can transact to the battery over its life.
Speaker Change: And on a localized cost of storage basis, we have a very good story to tell. And that's something that people find very appealing about our product.
Speaker Change: in the segments that we address even at those lower and lower prices. So it's it's absolutely a real thing that's happening in the marketplace today.
Thank you.
Thank you for your question.