Energy Vault Holdings, Inc.

Greetings and welcome to Energy Vault fourth quarter and full year 2022 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce to your host, Lawrence Alexander, Chief Marketing Officer for Energy Vault. Thank you. You may begin.

Thank you and good afternoon and welcome to Energy Vault's fourth quarter and fiscal year-end 2022 earnings conference call. As a reminder, Energy Vault's earnings release and an updated fourth quarter earnings presentation is available now on our investor website, and we will be referring to the presentation during this call. A replay of this call will be available later today on the investor relations page of our website. This call is now being recorded. If you object in any way, please disconnect now. Please note that EnergyVault's earnings release and this call contain forward-looking statements that are subject to risk and uncertainties. These forward-looking statements are only estimates and may differ materially from the actual future events or results due to a variety of factors. We caution everyone to be guided in their analysis of EnergyVault by referring to our 10-K filing for a list of factors that could cause our results to differ from those anticipated in any forward-looking statement. We undertake no obligation to publicly update or revise any forward-looking statements except as required by law. In addition, please note that we'll be presenting and discussing certain non-GAAP information. Please refer to the Safe Harbour disclaimer and the non-GAAP financial measures presented in our earnings release for more details, including a reconciliation to comparable GAAP measures. Joining me on the call today is Robert Bocconi, our Chairman and Chief Executive Officer, and Jan Yankees Van Garland, our Chief Financial Officer. At this time, I'd like to turn the call over to Robert Bocconi. Robert Bocconi. Robert Bocconi. Robert Bocconi.

Lauren, thank you, and thanks to everybody for joining the call today. Just a few weeks ago, we finished our first year as a publicly listed company, a year that saw us launch in February while delivering our first $146 million in revenue throughout the year, $100 million of which was achieved in Q4 alone, due to strong execution and customer focus by our people in our first start to deployments and project revenue. I was on the floor of the NICE two weeks ago with Judy Shaw from the New York Stock Exchange, who was interviewing me for a year in review perspective, as we had met the year before during the IPO. And it really struck me to step back and look at all that was accomplished. Starting the year, having strategic investors like Korea Zinc and Atlas Renewable step into the IPO with an additional 100 million of investment from the start, and then immediately breaking ground on our first EVX gravity system outside of Shanghai in March 2022 for the highlights of the first quarter. Note that this first 25 megawatt, 100 megawatt hour system, once operating this year, will be only one of two operating long-duration energy storage systems at this scale, that is not a pumped hydroelectric facility. And it really just shows you that the energy storage industry is still in its infancy, particularly for longer duration, which is in its own early development stages. We're real excited to show the world what we're capable of here as the EVX system comes online this year. Sticking with gravity, we broke ground in Snyder, Texas in September with Enel Green Power with our first US-based EVX system. And we finished the year signing more territory expansions and licensed royalty agreement territories outside the United States in Europe and the Middle East, all of which set the platform for future builds and subsequent high-margin royalty streams as the longer-duration storage markets develop and become more important as renewables become a greater portion of our power generation. Turning to where there is much larger and immediate demand in the short-duration energy storage market, our EVS team executed with velocity and quality in development of our energy management system, enabling the signing of about 1.6 gigawatt hours of battery, hybrid, and green hydrogen energy storage projects with multiple regulated utility companies and some of the largest leading independent power players in the world. This is further proof that customers see and value not only our differentiation and unique hardware architectures and software design, but perhaps most importantly, they recognize the seasoned operational and prior energy storage project experience of our team, trusting us to deliver on very large scale and complex projects as we will be turning over this year. The type of customers that we're working with do not take risks on execution, full stop. Their jobs are mission critical, providing power, and our energy storage needs therefore have to support that. And we are excited this year to turn over our first systems. Our current backlog in awarded contracts now exceeds five gigawatt hours and approximately $2 billion. And I could not be more proud in supporting the team here at Energy Vault. We set some benchmarks in 2022 while executing well with a strong Q4 finish. demonstrating significant market validation via our strategy across short, long, and ultra-long duration storage winds across multiple storage mediums enabled through our software and innovative energy management system. And we look to continue to build upon this momentum in 2023. Let's spend a minute here on Q4. And regarding Q4, we announced our 2022 revenue of approximately $146 million. which is within the midpoint of our pre-announced higher range of revenue, with gross margins of approximately 16%, reflecting a mix of gravity license revenue from regional expansions in Europe and the Middle East, and execution on battery-related projects in the United States. Our adjusted EBITDA of approximately negative 11.4 million was slightly under our prior guidance, driven by upticks in investments in employees in Q4, to support the aggressive projects ramping into 2023, as well as some compensation-related expense given the overperformance achieved in Q4 and the year. Young Case will be reviewing more financial details of the Q4 performance shortly. Before we get there, I do want to talk in some detail about the 2023 forecast, which I know many of you are very interested to understand. As we had already announced and pre-announced a stronger than expected Q4 revenue, I would like to spend some time talking about that forecast. And before jumping into the specifics and our financial guidance, I first want to outline our framework and philosophical approach as we begin to share more financial details with investors. Transitioning from a first year in 2022 marked by large contract wins, announcements, and deployment starts with top utilities and global independent power providers, to now in 2023 where we will be commissioning and turning over our first gravity and battery energy storage systems globally. Let me first talk a little bit about the shape of the year and how we see our progress ramping. As we saw in Q4 with the significant revenue upside achieved through executing ahead of schedule for a 275 megawatt hour California deployment, we continue to expect a level of lumpiness in our results, which could result in potential timing shift quarter to quarter and really not unusual at all given our stage of executing on our first deployments as a company. Our outperformance in the fourth quarter is expected to result in successive quarterly growth ramps starting low double-digit million revenue to high double-digit revenue into Q2 and getting quickly into triple-digit revenue quarter to quarter in the second half of the year. Our second half of 2023 will thus represent our largest quarterly revenues in Q3 and Q4, coincident with our first project turnovers as expected and per contractual commitments, so a progressive build to our year based on contracted bookings from 2022. I want to talk a little bit about the macro factors and talk about how those could potentially impact our forecast as well. We are approaching the revenue forecast that we've given, and specifically our cash and operating expense management, with a level of tightness and conservatism as we prudently plan for, one, continued uncertainty in the macro interest rate, inflationary environment, and thus general financial market volatility. Two, the potential for further regional impacts of COVID-related pandemic issues and work stoppages. Three, general supply chain and labor tightness, and four, the potential for geopolitical and unforeseen escalation that may occur. At the same time, and given our strong liquidity and cash position with no debt, we are well positioned and poised to take advantage of the industry growth tailwinds for energy storage globally and specific growth in economic accelerators in the U.S. market driven by the passage of the IRA. And we'll talk more about that in just a minute. Third, let's talk about how we're playing to our strengths. Compounding the momentum we're seeing across our business is our portfolio of proprietary and differentiated storage solutions that is unmatched in the market and our unique ability to address short, long, and ultra-long duration needs across multiple customer use cases under the same asset management digital platform. The perspectives that we garner from our customers, from their short-term shifting needs given peak demand cycles, to fossil fuel asset retirement tied to longer duration needs, and even very specific regional needs for backup and microgrid solutions requiring ultra-long or multi-day storage, are all contributing to Fortify EnergyBot's role as a true strategic partner, helping our customers manage through this complexity. In fact, we're very proud to have recently had our energy management system selected by one of the largest US public utilities over other current leading platforms, which we believe demonstrates our innovation, our advantaged economics, and the velocity of our Energy Vault Solutions team. Fourth, I'd like to talk about the IRA, which was really a game changer to our industry and just really refreshing to see the United States lead in this area given the priority on solving the climate change problem. And first to note that we haven't baked any of its expected benefits into our current forecast. In the U.S. market in particular, we uniquely can take direct advantage of the IRA monetizing one, the ITC, which represents up to 50% CapEx reduction thanks to our domestic content and project site in energy communities as defined. For our gravity projects in particular, given we can be 100% domestic content and for the projects that we initially owned for gravity, but in addition, the advanced manufacturing credit, which is a $45 per kilowatt hour for our hybrid green hydrogen storage solutions that we integrate, deliver under EPC contracts. While the general energy storage market is made up of players that are more single-threaded in their technology and selling into broader growth trends, Energy Vault uniquely can capture significant direct benefits on top of the broader market growth for projects we may initially own. And we have optimized our strategy to do just that, pending the Treasury guidance that we expect is forthcoming, especially with our gravity energy storage portfolio, given its optimal positioning enabled through the IRA for the U.S. market. Just to remind, we are not currently including these benefits in our forecast for revenue, cash, or margin as we await final guidance from the Treasury Department on the actual mechanics, but we strongly believe the legislation, as intended, can and will have significant benefits to our company in an outsized way. Fifth, I'd like to dig in a bit more on the unit economics for our business, which is an area that many of you have asked about as we began our project deployments in 2022. And as evidenced in our 2022 project wins, we will continue to generate higher returns than the industry average because we are continuing to focus on large projects with unique needs that we can match with our high energy storage solutions from a megawatt hour per acre, high density, and more efficient design for augmentation, as is the case with batteries, no degradation in the storage medium, as is the case with our gravity energy storage solution, and for ultra-long durations in small footprints, as we did with our hybrid green hydrogen solution for PG&E. This means a move from the mid to high single gross margin percentages on our initial projects to mid teen gross margin percentages across the board on all content and value added that we supply. And in fact, our 2023 gross margins will reflect this as our projection reflects of 10 to 15%. This includes allowing customers who wish to do so, or if we strategically decide, to contract directly with suppliers to pass through product, such as battery packages, and utilizing Energy Vault to deliver our proprietary hardware architecture across the gravity, battery, and hybrid systems, coupled with our energy management system. Importantly, our business model and approach is flexible, to be able to adapt to each specific customer and project, whether customers choose to procure batteries on their own or not, for example. This may result in lower total revenues for some projects, but importantly in those cases, we will be exclusively focused on the higher margin opportunity set associated with the project development, which we target in the mid-teen to 20% margin range. While our revenue will be growing in the 2 to 3x range year over year, we are holding our operating expense flat. off of our annualized Q4 2022 run rate as we exit the year. This will allow us the potential to achieve positive adjusted EBITDA in Q4 2023 as we exit the year, assuming that we execute within the high end of the revenue range, and perhaps more importantly, allow us subsequently to enter 2024 on pace to achieve positive operating cash flow and adjusted EBITDA for full year 2024 results. Now back to the specific 2023 guidance that we highlighted in our earnings announcement sent out just 30 minutes ago. We hold all of the factors above to influence our 2023 outlook, but have taken a very conservative baseline approach that we're adopting in how we forecast our business and felt it most prudent to take a very measured approach to 2023, especially given the significant second half revenue ramp that constitutes our range of $325 to $425 million for the year. At the low end, our updated 2022 revenue forecast of $325 million reflects only contracted revenues already under execution with planned CODs within 2023. At the upper end of our range captures the potential associated with projects forecasted to be placed in service later in the year, some pending gravity and technology portfolio license agreements that are underway, other territory expansions, and other potential projects within the short listing or submission phase of our sales funnel. Importantly, we'd emphasize that even at the high end, we've adopted a level of conservatism that does not fully capture the various projects and discussions our team is working on. We plan to update this and refine this range throughout the year. as we gain greater visibility on the development and completion of our large-scale projects. Additionally, as I noted earlier, our forecast does not assume any benefits as well from the pending IRA legislation, pending the Treasury guidance. Based upon the revenue forecast above and projects contracted and under development and deployment, we are projecting gross margins in the range of 10% to 15% for 2023. This expected gross margin outcome reflects a blend across our wide-ranging project slate, including gravity, battery, and hybrid green hydrogen projects. Further, we believe it evidences our thoughtful approach to managing the returns of our business, as well as our ability to remain nimble and flexible in developing the right solution to our customers' energy storage needs.