ESS Tech, Inc.
Q4 2021 Earnings Call Transcript

Published: 24 Feb 2022

[Operator:]

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. . I would now like to turn the conference over to Erik Bylin. Please go ahead, sir.

[Erik Bylin:]

Welcome to ESS's 20-21 Fourth Quarter Fnancial Results conference call. Joining me on the call today from ESS are Eric Dresselhuys, CEO, and Amir Moftakhar, CFO. Following management's prepared remarks, we will hold a Q&A session. Earlier today, ESS released financial results for the fourth quarter of 2021. This earnings release is available on the Investor Relations section of the company's website. As a reminder, the information presented today will include forward-looking statements, including, without limitation, statements about our growth prospects and strategy for 2022. The forward-looking statements that will be made on this call are based on information currently available to us as of today. These 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, the markets, and the economy. 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. Management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide useful information of the role of management and investors by excluding certain items that are not indicative of our core operating results. Management uses non-GAAP measures internally to understand, manage, and evaluate our business, and make operating decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented within our earnings release. And with that, I will turn the call over to ESS CEO, Eric Dresselhuys.

[Eric Dresselhuys:]

Thank you. And welcome to ESS ' first earnings call as a public company. I will start today's call by giving you some context on the market, then share some details on our fourth quarter performance and product deliveries, and then discuss our go-forward plan. After that, I will hand off to Amir to discuss financials and our outlook. 2021 represented an unprecedented transition not only for ESS, but also for long-duration storage. The forecast for long-duration storage at the beginning of the year were dwarfed by those exiting the year, and the momentum is not slowing. It has become abundantly clear that scalable, safe grid storage that last for more than four hours is imperative to moving to a clean energy future. In the past, storage has met lithium-ion because it was the only available technology. Now with continued proliferation of intermittent renewables, like solar and wind, the need for storage that can discharge over 6, 8 and even 12 hours has become imperative. The acceleration of storage installations supporting longer durations and more varied operating environments and use cases is the catalyst for the industry to move from legacy technologies to those tailor-mades for these applications. And it's easy to find evidence of this transition in the news on a regular basis. Just last month, California dedicated $380 million to support long-duration energy storage projects over its next two fiscal years. These funds are targeted to support grid reliability, adding resilience against emergencies such as wildfires. Certainly applications lithium-ion is not suited for. Our project with San Diego Gas and Electric is a great example of this coming to life. Long-duration storage paired with renewable generation to provide resiliency to critical infrastructure, while also helping to safely decarbonize the grid. In November, the newly formed Long-Duration Energy Storage Council, released a study with McKinsey delineating the needs for long-duration energy storage, focusing on the need for storage that can discharge for more than eight hours. Among the findings, the authors concluded that by 2040, LDES needs to be scaled up to 400 times present day levels, to between 85TWh and 140TWh of capacity, which would require between $1.5 and $3 trillion in investment. Leading companies such as Microsoft, Google, Shell, Rio Tinto, and dozens of others have joined the council, highlighting the importance these large energy users and producers plays on long-duration storage and its place in driving the energy transition. Finally, earlier this month, the State of California approved plans to add over 25 gigawatts of renewables and 15 gigawatts of storage by 2032, effectively raising the state's renewable portfolio to 73%. But this is not some promise land off in a distant future. The inbound inquiries we receive continue to rise, and the quality of the opportunities behind those inquiries is improving as well. These are organizations that know that the future entails a move away from lithium-ion. And although we have only recently begun to build our sales and marketing efforts, we already have direct visibility, through customer relationships into vast opportunities that have grown almost exclusively from inbound inquiries. There's an undeniable need to solve for long-duration storage. And while the flood of LDS demand has brought new technologies into the fray, we remain confident that we have the best solution across cost, reliability, safety, environmental friendliness, that can be deployed in the market today and comes with UL Certification for battery modules, energy storage systems, and fire safety. We believe the design work that got us to this point was ingenious. Our iron flow battery technology is relatively simple to build, reliable, and has at its core very inexpensive input components for a grid storage system

[Amir Moftakhar:]

Thank you, Eric. Now, I will review the financials. While we shipped five Energy Warehouses in the latter part of 2021, we did not recognize revenue from these units in Q4. Revenue recognition will be deferred until customer acceptance has been received for each unit, or until we've established a history of successfully obtaining acceptance from each customer. In the near-term as our products are new, this is likely to be a longer process than when our products are more mature and we have more of a history with customer acceptance. As we are in the early stages of ramping the production of these units and are still under development accounting. We expensed the material overhead and labor cost be incurred, making the products we shipped to-date, resulting in zero cost of goods sold. Our non-GAAP operating expenses for Q4 were in line with our expectations at $15.5 million. With that, we reported Q4 non - GAAP adjusted EBITDA of $24 million in losses. Q4 GAAP net losses were $180.7 million, or negative $1.33 on a per-share basis. Moving to the balance sheet, we ended the year with $238.9 million in cash and short-term investments. In the fourth-quarter, cash used by operations was $23.5 million. As Eric shared, we have adjusted our production delivery expectations for 2022, due to the impacts and delays brought on by supply-chain challenges. To a great degree, this decision was out of our hands as we are navigating an unprecedented supply environment that began to impact us just as we were ramping manufacturing. Given that, our focus on production for 2022 will be in three key areas

[Operator:]

At this time. I would like to remind everyone in order to ask a question, please We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Jed Dorsheimer from Canaccord Genuity. So, Jed, please go ahead when you're ready.

[Jed Dorsheimer:]

Hi. Thanks, guys. Wondering if you could just elaborate and provide some more details on the specifics of the customer acceptance. It sounds like three of the five are actually running. So, what specifically needs to be achieved for that acceptance to occur for the rev rec. Thanks.

[Eric Dresselhuys:]

Sure. Thanks, Jed, I'll take it. You're right. We've shipped a number of units. At two of the sites, the units have gone through the full installation, commissioning system startup, and actually, as of the time of this call, one of those units is totally completed with its revenue recognition process, so that's full testing and customer sign off. Another one we expect to be done in the next days to maybe a week. And then for some of the other units still, or being delivered, they'll go through that start-up routine and then they go through this very rigorous, complete testing when that's done. The customer signs off, and we'll get rev rec at that time.

[Jed Dorsheimer:]

Got it. Thanks. And you mentioned the supply chain and in particular chips. I know the containers were an issue at one point, but the chip issue sounds like that's a bigger I guess near-term. Headwind. Are there any others that you see as potential supply chain headwinds, or have all of the other ones been resolved and it's just about the redesign of the PCB?

[Eric Dresselhuys:]

Yeah. Thanks. Good memory. We have -- at one-point last year, we were having delays in getting shipping containers, but we were able to work through that. We've got plenty of containers now. On the chips, we're, we think, through that problem now. We had to do some redesign; it slowed us down back in the fall, but we've got alternative solutions now when we've pre -bought stock to not have that be a constraint. But you call out the right thing, which is these come up and you just have to work through them as they come up. So, at this -- as we sit here today, we feel good about having the supply that we need, and as we said in the release, we're working hard to ensure that we have alternative sources of supply so we have a bit more robust supply chain at every turn.

[Jed Dorsheimer:]

Great. Last question for me, then I'll jump back in the queue. Given the learning curve that you've gone through or continue to go through with the EW, I'm just wondering, has that changed any of the expectations around the EC either positively or negatively as you think about that and what you know now versus a year ago?

[Eric Dresselhuys:]

I think modestly positive inclinations towards the EC in the sense that we're just getting more experienced of all of the interface to our systems with renewable systems or grid systems out in the field. So, the more experience we get, the faster we get at a return. And so, I think that'll help with ECs as they come out online later this year.

[Jed Dorsheimer:]

Thank you.

[Eric Dresselhuys:]

Thank you

[Operator:]

Thank you, Jed. You now have the next question from Colin Rusch of Oppenheimer. Colin, please go ahead.

[Colin Rusch:]

Thanks so much. Can you talk a little bit about how much of manufacturing process is left because at this point as you move towards automation, is all the engineering done or is there still some work to be done process labs?

[Eric Dresselhuys:]

I think the engineering is done for the automation line that's coming online here this year. So, I don't see any engineering on our side. Of course, we have partners working with us that are building out the line so that design is complete. We're just waiting for all of the components of the automation to arrive.

[Colin Rusch:]

Okay. That's helpful. And then as you build this pipeline of business and you look at the pricing environment, we're seeing prices go up on lithium-based solutions. Generally, there's going to be a tight environment for supply with chemical storage for a number of years. I'm just wondering about your pricing power here and how you're thinking about the pricing model as you go forward.

[Eric Dresselhuys:]

Sure. Well, I think our pricing approach has always been trying to work on really being focused on a value approach. What's the value of our solutions versus the alternatives, versus doing nothing? And so, to that extent, as lithium prices have not only stopped declining, but starting to go up a little bit. I think that might give us a little bit of pricing power. But really for us, it's more about making sure that our total value proposition is being appreciated out by the customers.

[Colin Rusch:]

Okay. That's the point. Perfect for notifying. Thanks, guys.

[Eric Dresselhuys:]

Thank you.

[Operator:]

Thank you. Your next question comes from the line of Thomas Boyd of Cowen and Company. Sir, Thomas, your line is open.

[Thomas Boyd:]

Excellent. Thank you for taking my questions. Just the first one I was wondering if you can give us an update with the booking’s composition look like for 2023, how much has been awarded? How much is still being negotiated? And really what's in kind of a qualification phase.

[Amir Moftakhar:]

Good question, Thomas. Right now, with just given the shift in production schedule that we're seeing in 2022, we're not guiding towards what's booked, awarded, or negotiating right now in 2023. As Eric alluded to, we continue to have healthy, robust conversations with customers. We do anticipate the EC shipments starting this year. I think you'll see that shift in 2023 with the continuation of our EW product and the introduction of more EC projects. But at this time, we're not guiding to what's booked or awarded for 2023.

[Thomas Boyd:]

Understood. Then would it be fair to categorize maybe that pipeline, is it still around $8 billion as it was in 3Q? I know obviously that things have continued to expand as far as overall demand. So, I was just wondering about an update there.

[Amir Moftakhar:]

Yeah, so what we've shared is that our global opportunities are in that $8 billion range of customers that we've connected with for named projects that we have either exchanged some type of information such as an NDA or participated with them in in an RFP that there is no shortage of those opportunities. And that pipeline remains robust. And now it's about our execution through that pipeline for both the EW and EC products.

[Thomas Boyd:]

Great, and I appreciate it. A last one if I could sneak in really quick. Just what is the feedback that you've gotten from customers who have received the second-generation unit that maybe have also had a chance or opportunity to work with kind of that first-generation unit?

[Eric Dresselhuys:]

I think there's a lot of excitement around it. As we said, it's really a more ardent product, it's just at every turn products in terms of its delivery and its performance. So, people are excited about that. I think frankly the other thing that's probably come up since the first-generation products were shipped, is that the awareness of the market need for longer duration is more well-known, more acute today. So, people see the same product or same functionality, and they're more excited about it, than they've been before. One of the more surprising things that at least to me that we've heard when we shipped two of the Energy Warehouse s down to a customer in Southern California. And there's a video of this, I think on the website. The units were installed right next to the building. And people when they think about batteries, they think about something that's got to be remote, it's got to have a big safety perimeter because with Lithium that's what you do. And I have just been amazed at how many people see that picture and they're drawing hits the table and they can't believe that you can install long-duration storage in that easier package. It gets hoisted into place. The system is brought up and they can be installed so close to a building. And so, with the wildfires and other kind of safety issues that you've heard out in the marketplace. That's the number one thing we hear about from people when they see the installation happens.

[Thomas Boyd:]

Excellent. Appreciate the call to address the questions. . We now have the next question from Jayson Osha of Guggenheim. Your line is open.

[Jayson Osha:]

Hi there. Hi Eric?

[Eric Dresselhuys:]

Hello there, how are you?

[Jayson Osha:]

I'm good. Just a couple of questions here to go back to the guidance in that $10 million in revenue. And I believe that core waited to 50 EW units, is that -- that's what you said, right?

[Eric Dresselhuys:]

Yeah. That's right.

[Jayson Osha:]

Okay. Now is the idea that those 50 -- those would all be 50 units that were actually recognized for revenue? Or is it more that you're going to have 50 units out by the end of 2022, but only some of those would actually have manifested as revenue at that point? I just want to understand what's being said here.

[Eric Dresselhuys:]

Yes. So, what we've said is we expect to ship that many units. How the rev rec will play out as we alluded to in the call is a little hard to predict. If they would all get rev rec or where that cut-off would be depends a little bit on time and how much we're able to accelerate the commissioning process to move through the revenue recognition process.

[Jayson Osha:]

So that 50 units is units that you'd like to have in the field by the end of the year and some of those will be recognized and some modest. Is that the best way to think of it?

[Eric Dresselhuys:]

Well, I would tell you that certainly we would expect the vast majority of them to be recognized. There will be a question of whether they could all be recognized or not.

[Jayson Osha:]

Okay. That's fine. And just a follow-up on Jed's question. Obviously, the EC is a different thing. Can we expect to see any of the larger form factor EC is in the field in 2022.

[Eric Dresselhuys:]

As you said, we expect to start shipping units this year. Again, same question on revenue recognition. We’ll be -- get fully revenue recognized within the year. We've at this point not made claim to that, but we do expect to ship -- start shipping units this year. And as we've said, we expect that that ramp up will continue more dramatically as we get into '23.

[Jayson Osha:]

Sure. Got you. That makes sense. And then just seems out some folk’s stuff here. New one you'd mentioned that you're expensing a 100% of -- essentially a 100% of the cost of some of these units that are in the field awaiting recognition. When you talk about that, a 100 million in OpEx for 2022, does some of that a 100 million includes the absorption of potential product costs that are out there but not recognized yet, or is that all like real OpEx?

[Eric Dresselhuys:]

Yeah, good question. So as long as we're under development accounting, the OpEx would also include the product costs and future inventory purchases were making for future quarters or future years will all be expensed in that period. So that OpEx number includes the inventory and purchases for those products.

[Jayson Osha:]

Okay. Good. Would you care to break that $100 million down in terms of that product absorption versus like R&D and the normal course of business OpEx run-rate?

[Eric Dresselhuys:]

Yeah. We've not guided to that and wouldn't comment on that right now. I think as we get our fully automated line up and running and the cadence of shipments finds its way to a more normal state of business, we could provide more guidance on that.

[Jayson Osha:]

Okay. And then the last question from me -- sorry to beat you guys up. When you do recognize revenue, does some of that OpEx reverse back to COGS or do you just add revenue with 100% fall-through or how does that actually work?

[Eric Dresselhuys:]

So, we'll wait until we get to that point. I mean, there's certainly the opportunity to recognize revenue without the COGS recognize the revenue, and then the COGS would match the revenue or go to formal inventory accounting where you would see that. And we will guide on that when we get to that point.

[Jayson Osha:]

Okay. Thank you very much.

[Eric Dresselhuys:]

Thank you, Joe.

[Operator:]

Thank you. There are no questions at this time. Mr. Erik Dresselhuys.

[Eric Dresselhuys:]

Well, thank you all for joining the call today. In summary, we're more excited than we've ever been to be delivering our solutions in contribution to the global effort to de -carbonize the energy system. Governments and corporations have set ambitious goals and we are extremely well-positioned to help them meet those needs. As a well-funded public company, we now have the resources to make that vision a reality. In the coming months, we encourage you to mark our progress with announcements on customer shipments, new projects, and continued expansion of our production facilities. Until then we thank you for your time today, and we look forward to keeping you apprised of our progress.

[Operator:]

This concludes today's conference call. You may now disconnect your lines.