ESS Tech, Inc. (GWH) Earnings Call Transcript

So we have Eric Dresselhuys, from -- CEO, and then we have Anthony Rabb, CFO. So gentlemen, thank you for taking some time to be with us this morning.

No, thank you for having us.

Sure. I know you have a busy morning as well. You have some [ com ] meeting as well. So we've got 15 minutes, where we're going to talk about the solution that you bring in terms of energy storage to the market, and that can be, obviously, very applicable to solar. But then I think the big question that everyone asks us today is the new tariff that we'll talk about. So I know you have a very good connection with -- in Washington. So if you want to talk about it, how you view the potential impact on energy storage and the grid battery storage, specifically.

Yes. No, thanks for the question. It is the topic of the last few days and all over the news. And I think for a good reason, the pricing activity we've seen from Chinese batteries has been really aggressive. And so for grid storage, just so people are aware, there's a specific call out, a specific line item for grid batteries. The tariff previously was 7%, the proposal was to move it to 25% and so that's an important move. I would call it kind of a down payment against some of the pricing activity that we've seen. But it's, I think, welcome to see it get called out specifically. Like some of the other proposed tariff increases, this one as it currently stands, doesn't take effect until 2026. But I think that's got some people scratching their heads, why not sooner?

Yes. I mean there are risks that maybe to whether the upcoming U.S. election, right? I would [ actually might ] say, there is not really a risk [ perceived ] coming differently, right? I mean I would assume if Republican come back, they were the ones bringing those tariffs [ on the basis ]. So I would ask -- I mean, I would expect that it's remain, right? Maybe if we have -- yes. I just feel that there is actually varied risk that we have a reversal of this. Is that something that you think as well or...

No, we agree entirely. I think that some of the other provisions that the Biden Administration have put forth, there's been, of course, there are a lot of them. Some of them have -- are more controversial and are likely to come under some challenge. In the category of batteries in general, that's been one area where there's been generally bipartisan support, even before the tariffs came up. Maybe we'll get into talking about the IRA. With the production tax credits and things for building batteries in the U.S. enjoy very broad support. They've gone across blue states and red states. I think we feel very good about that. On the tariffs, specifically, I think that's -- I think, very safe. As you pointed out, this move started under the Trump Administration. The Biden Administration is now kind of increasing the dollar value about the percentages. I think it would be nearly impossible to imagine that Trump Administration or Trump 2 Administration would reverse these.

Yes. Fully agree. Same view here on the IRA [ just particular ] of the location of many of those, not just Florida, but battery EVs in [ North American states ] it seems very [ remark ] at this stage. [ Moving just to ] solar, do you want to give a little bit of a view [ of what you feel ] maybe like a quick 2-minute view on what ESS exactly does because some of the people aren't fully aware here. And then how -- which solution you can bring here, obviously, in terms of energy storage to the solar industry?

Sure. Well, look, at ESS, what we do is what's known as long-duration energy storage. So that storage that lasts longer than the lithium batteries were all accustomed to today. Lithium typically is deployed in 2- or 4-hour durations max. And there are a lot of reasons that we can get into why it becomes less effective when you get it to greater than 4 hours. So people have been looking for longer duration. It's one of the -- Department of Energy is kind of holy grail 5 Earthshots to make decarbonization work. What we focus on is what's known as the [ inner burrow ], so kind of 8- to 24-hour time durations. And so kind of back to solar, what that allows you to do is taking a battery with that characteristic, pairing it up with solar, whether it's a mass utility scale or even at a microgrid scale. It allows you to create a 24-hour a day, 7-day a week kind of resilient electricity system using renewables. And so that's the thing we've all been looking for. It's getting a lot of discussion these days for folks that followed the solar universe closely. You're hearing a ton of call for what are known as green PPAs, right? So how do I -- you've got the big data centers, the Googles and the Microsofts of the world, saying I want a green PPA, 24-hour a day matched electricity, where I know it's actually green and decarbonized and of course, with the AI impact that everybody expects that number is just going to go up. And the way to do that is to pair solar with long-duration storage.

Yes. That really makes sense. Very interesting as you're bringing the AI with -- I think we're [ solar development ], prior session was like [ 15 ] minutes ago is where we kind of bringing up the AI topic because I think it's really going to be something that could change the way that data centers are also going to be developed in terms of [ pace of it ], so I just think it's interesting. You guys at your 1Q business update and kind of, for instance, like, 2 weeks ago, [ that I attended ], if I think remember where, do you want to talk a little bit about kind of what's going on more at the company level? You bring in more automation lines as well. And then so, maybe some of the challenges that you're facing and, kind of, how you're going to navigate through them?

Sure. So we had a nice Q1 and that we're on a growth trajectory. Unlike the very mature businesses like lithium, we're still a high-growth emerging technology business. The biggest thing we've been focused on is we're ramping up our production is driving costs down. We've been a subscale manufacturer to this point, and that's starting to change. And the automation that we're deploying is a big part of that, taking labor cost out, so our direct labor numbers are dropping dramatically and our capacity increases pretty dramatically along the way. And as we shared on the call, we have a very cost-effective capital model for increasing capacity, so we think that's one of our advantages. Our plan is to continue to ramp up through the end of the year. And then as we get into '25, really, we're bringing a second line on and more lines to come after that, and that's really when we start to hit the inflection point of growth in the business.

Good. All right. And then maybe, so I think you're trying to be -- improving gross margin, obviously, kind of, at some point breaking -- breakeven at EBITDA. So can you talk about the -- maybe the timing of these 2 [ points ]. So for investor, I think obviously, it is probably more like a long-term investment, right? You're not really [ play in ] the quarter or also [ it's more actually more for ] investor looking at the names. So kind of, can you give like a road map of, maybe, also like, maybe some catalysts that investors could be looking up for, maybe, the stock price to move [ operator base ].

Tony, do you want to take that?

Yes, sure. In terms of expectations on margins and EBITDA breakeven, I think what we've communicated previously is that with all of the progress that we've made on the energy warehouse, the cost-out initiatives, we made significant progress last year, over 60% cost reductions. And we have a number of projects this year, which will continue to reduce costs through a number of different means, both through value engineering, some strategic supply chain management and the production on our fully automated stacks production line. And we anticipate that will be at unit cost breakeven by the end of this year. So we cross through that threshold at the end of this year. And so that's all the direct costs associated with producing the energy warehouse. And so that's the point where we're hitting that inflection point of wanting to produce more units because as I produce more units, once I cross over that point, then I can start covering my fixed overheads and moving towards gross margin and EBITDA profitability. A lot of those cost-out projects and initiatives translate into our energy center which currently, we're moving to production in the second half of this year. The energy center, we anticipate we'll reach that crossover point for unit cost profitability after this year, so moving forward into the out years. And then similar benefits there that once we reach that crossover point, and we anticipate a lot more volume with the energy centers, then we'll be scaling up production and getting to the point where we're able to crossover to EBITDA breakeven that can cover our fixed cost. So we do anticipate that the scale of volume in the fourth quarter going into next year is going to ramp up considerably as we meet those cost-out targets.