ESS Tech, Inc.

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. At that time, if you have a question, you will need to press star 1 on your push-button phone. I would now like to turn the conference over to Eric Byland. Please go ahead, sir.

Welcome to ESS's 2022 Fourth Quarter and Full Year Financial Results Conference Call. Joining me on the call today from ESS are Eric Dresselhaus, CEO, and Tony Robb, CFO. Following management's prepared remarks, we will hold a Q&A session. Earlier today, ESS released financial results for the fourth quarter and full year 2022. This 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 2023 and beyond. The forward-looking statements are subject to known and unknown risks and uncertainties that could cause actual results to differ maturely 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 SEC, as well as the current uncertainty and unpredictability in our business, issues with our partnerships, inflation, the markets, the economy, and the current geopolitical situation. You should not rely on our 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 for both management and investors by excluding certain items that are not indicative of 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's CEO, Eric Dresselhaus.

Thank you, Eric, and thank you all for joining us for our fourth quarter and full year 2022 earnings call. Today, I'll review our financial results, operational progress, recent wins, and the impact of the Inflation Reduction Act. I'm joined by Tony Robb, who recently joined ESS as our chief financial officer and is joining us for his first earnings call. We delivered 14 energy warehouses in Q4 and 20 for the full year. The 14 EWs in Q4 is a record for ESS, and we're extremely excited to see this growth. Although it is a bit less than the higher end we had targeted, it reflects our increasing ability to navigate a challenging supply environment and drive an upward trajectory in our production capacity. We expect to recognize substantially all of the revenues from the 14 EWs we delivered in Q4 later this year, and I'll let Tony cover that. We finished out the year having made strong progress on our operational initiatives. On the power module front, our target was to end the year at 750 megawatt hours of annual capacity, and we exceeded that, achieving 800 megawatt hours of annual capacity. The team did a great job of getting the fully automated line up and operational and delivering efficiencies across all three lines to help us achieve the additional capacity. During the fourth quarter, we successfully finalized a number of important design for manufacturability initiatives that lowered the labor we used to build EGW. With better processes and a second generation design that is easier to manufacture, we have also been able to dramatically reduce the time required for our final testing process, another key facet of getting our products out the door more quickly. All of this is difficult and complicated work. we started the year with aggressive ambitions to take cost and labor out of each unit we build as we aim to dramatically increase capacity. That effort unfortunately coincided with one of the worst supply environments and tightest labor markets the US has ever seen. ESS persevered and we expanded and strengthened the team. We redesigned a number of assemblies within our EWs to simplify manufacturing while looking to onboard new vendors that we believe could deliver reliably at lower cost and higher volume. We brought on new automated manufacturing processes. We built and trained a team from scratch to help customers deploy our products at their sites. Our technology team has increased the energy density of our electrolytes by 25%, improving our cost per kilowatt hour and increasing performance. Again, this has been hard work, and there have been bumps in the road as we scale a unique patent-protected technology in a fast-growing market that demands a new solution. But we've made significant progress in reducing cost, improving quality across the board. To accomplish this through 2022, we added key leaders across engineering, operations, finance, legal, and customer success that bring deep experience to the challenge of scaling a company for growth and profitability. These new leaders are professional operators, that are accelerating the progress we're seeing at ESS. As a notable example, our customer success team is working collaboratively with customers in the field and has made great progress accelerating the EW commissioning process. For consumers energy, despite temperatures as low as six degrees Fahrenheit at the customer site, the team was able to deliver and test the energy warehouse, a great sign for the team and our ability to manage the process to implement our technology on a customer site. Our internal collaboration between our customer success team and our Wilsonville operations team has played a critical role in this progress. In a virtuous cycle, our customer success team has provided valuable feedback from the customer sites to our ops team on changes they could implement to packaging and delivery to speed commissioning. It's great to see the teams working together to improve the customer experience. I'd also like to share some detail on two very interesting customer wins we recently secured. In the fourth quarter, we signed a deal with Schiphol Airport in Amsterdam, the second largest airport in mainland Europe. Schiphol is driving to be emission-free by 2030 and is looking to replace the diesel ground power units that provide electricity to airplanes while they're at the gates with fully electric versions. In this pilot program, REW will charge these electric ground power units with clean, renewable electricity. At Forward Thinking Airport, Schiphol also leads the tulips consortium of European airports that is working to accelerate the implementation of innovative and sustainable technologies to reduce emissions at airports. I had a chance to visit with the Schiphol team in mid-February and was impressed with their vision and the critical role they believe battery storage will play in decarbonizing airports. We believe this initial installation has the potential to unlock a huge market opportunity across Europe and beyond. We also signed a deal to deliver two EWs to Turlock Irrigation District. Coined Project Nexus, Turlock Irrigation District will conduct a test installing solar panel canopies over its irrigation canals, a first in the United States. This installation is expected to create the double benefit of producing clean electricity as well as mitigating the evaporation that occurs from irrigation canals, two critical needs in California. In fact, the cooling effect of the water can actually increase the solar panel's efficiency. Funded by the state of California, the pilot project is expected to be underway early this year and completed by the end of next year. This project creates an opportunity for up to 3 gigawatts of our environmentally safe, non-toxic batteries to be paired with 13 gigawatts of potential solar that could be installed over California's canals alone. We are proud to have been chosen to be paired with the solar installation and excited about our opportunity from this innovative approach to decarbonize in the grid. Each of these wins elicits a unique and valuable application for long duration energy storage that represents opportunities for projects that could generate significant additional revenue for ESS. ESS is certainly fortunate to have such a compelling technology to address a critical and burgeoning market with applications so broad that we could not begin to imagine them all today. And as such, ESS has shaped its go-to-market strategy to leverage our unique position in the market. We are focused on customer relationships and applications that, once the technology proves itself in the use case, have the potential for considerable upside. We are excited about these two programs and look forward to the many that come as we strive to help decarbonize the grid. I would like to quickly revisit the anticipated impact that the Inflation Reduction Act, or IRA, will have on ESS and our market. We are still waiting for the IRS to enact the IRA rules, so the full impact likely won't be known until that is done, but we are excited about how discussions around long-duration energy storage programs are accelerating with customers. With customer investment tax credits that could save them up to 50% off our product cost, Coupled with a production tax credit of about $45 per kilowatt hour for ESF, the economic viability of any battery storage project has dramatically improved. I'll give one example. Everyone has likely read stories recently about grid congestion issues across the United States and around the world. With incentives for standalone storage in the IRA, we're getting a lot of interest from traditional utilities to use long-duration storage as a deferral of grid investments. an application ideally suited for our solutions. With proprietary technology based on abundant and inexpensive iron, salt, and water, we believe ESS remains very well positioned to capitalize on the opportunities to come. Moving on to our plans for 2023, we aim to continue the progress we are making across manufacturing operations and market penetration. We built substantial capacity during 2022, but we're hindered from achieving our potential by continuing supply challenges largely across the balance of plant. Our focus in the coming year is clear. We are aiming to strengthen our supply base for consistent, timely delivery at greater scale while driving down costs across labor and cost of goods as we drive toward unit profitability. We also intend to take a responsible approach to growth in the coming year, as we balance delivering product with managing operating costs. We signed landmark deals in 2022, first with SMUD for two gigawatt hours, which has now given us notice to proceed in the first phase of this multi-year project, an ESI AP with potential to be even larger. This in addition to the numerous other initial deployment opportunities that have the potential for considerable upside. We entered 2023 completely booked for the year and believe by the impact of the IRA, we expect to sign deals to book out our capacity in 2024 and beyond. Given the ongoing uncertainties, we will defer providing guidance at this time. We look to provide further updates in the coming quarters. We plan to ramp deliveries and installations throughout the year and remain tremendously excited about how the prospects for the business continue to grow. But given the current environment, we believe it is best to refrain from giving specific guidance for the coming quarters or the year. And before I hand it off to Tony, I'd like to address the short seller report that was released in December. I want to set the record straight. The central claims of the report are that our customer ESI AP is a related party of ours and that it's new manufacturing facility that will complete final assembly of our EW systems in the future is not being built. That is simply not true. Let me be clear, ESS has no ownership interest in ESI, zero, and we would direct you to our SEC filings for further proof. As to the new facility, ESI broke ground last year and site preparations are progressing. The balance of the short seller report is mostly a combination of hearsay, misleading statements of facts we have already shared publicly, and various disparaging statements about members of our team. As the authors clearly stated in the introduction, and I quote, this report and all statements contained herein are the opinions of Grizzly Research LLC and are not statements of fact. We continue to explore our legal options and will vigorously defend ourselves against the false claims made in the short seller report.