SES AI Corporation (NYSE:SES) Q3 2023 Earnings Call Transcript

SES AI Corporation (NYSE:SES) Q3 2023 Earnings Call Transcript November 7, 2023

SES AI Corporation beats earnings expectations. Reported EPS is $-0.04, expectations were $-0.1.

Operator: Hello, everyone, and welcome to the SES AI Corporation Third Quarter Earnings Conference Call. My name is Bruno and I’ll be operating your call today. [Operator Instructions] I will now hand over to your host, Eric Goldstein, Vice President of Investor Relations. Please go ahead.

Eric Goldstein: Thank you, operator. Hello, everyone, and welcome to our conference call covering our third-quarter 2023 results and financial guidance for 2023. Joining me today are Qichao Hu, Founder and Chief Executive Officer; and Jing Nealis, Chief Financial Officer. We issued our shareholder letter earlier this morning, which provides the business update, as well as our financial results. You’ll find a press release with a link to our shareholder letter in today’s conference call webcast in the Investor Relations section of our website at ses.ai. Before we get started, this is a reminder that the discussion today may contain forward-looking information or forward-looking statements within the meaning of applicable securities legislation.

These statements are based on our predictions and expectations as of today. Such statements involve certain risks, assumptions, and uncertainties which may cause our actual or future results and performance to be materially different from those expressed or implied in these statements. The risks and uncertainties that could cause our results to differ materially from our current expectations include, but are not limited to those detailed in our latest earnings release and in our SEC filings. This morning, we will review our business as well as results for the quarter. With that, I will pass it over to Qichao.

Qichao Hu: Thanks, Eric. Earlier this year, we laid out the goal to transition to B-samples and I’m happy to report we’re almost there. We expect to sign a B-sample joint development agreement, JDA, with one of our OEM customers in the next few weeks. This will be the world’s first automotive B-sample for lithium metal. This will be a historic milestone for SES, for the battery industry, and for the future of transportation. We had to overcome monumental challenges to get to this point, one of the most important challenges was safety, and we’re not talking about labs-scale safety, we are talking about practical real-world safety. In the battery industry, there’s is an inherent trade-off between energy density and safety. Many companies improve safety by using safer chemistries such as lithium iron phosphate, LFP cathodes, or solid-state electrolyte.

LFP is indeed safer than high nickel cathodes and in theory, solid-state appears to be less volatile than liquid lithium metal. So why don’t we switch to these safer chemistries? While these safer chemistries appear to improve safety, we believe they make unacceptable compromises to energy density, manufacturability, and other important parameters. For example, an LFP cathode has about half the energy density of a high nickel cathode, and solid-state has yet to prove its manufacturability and performance in a cell that can actually be used in a real-world application. So what’s the point? We don’t want ourselves to be impractical, let’s say. We want ourselves to be alive, powerful, and safe. Our goal all along has been to improve safety without any compromises to other parameters.

We start with a high energy density approach that has inherently higher safety risk than a lower energy density solution and we make it safe. It’s extremely difficult, but we have always chosen do things the hard way. That is what we will have achieved to qualify for automotive B-sample for lithium-metal. No one thought lithium metal with a high nickel cathode could achieve the level of practical safety that we recently demonstrated in our internal testing. This was a combination of very exciting fundamental breakthroughs in materials and engineering. Even advanced lithium-ion with a high nickel cathode can have severe safety risks and we believe our advancements address the safety issues in both lithium-ion and lithium-metal. For example, our new high nickel cathode active materials have the same capacity as equivalent traditional high nickel cathodes, but are much more stable.

Our new cathode electrode coating and treatment process allows the same cathode to pass rigorous safety tests, including nail penetration and heating, has new pouch cell engineering with a self-venting mechanism that allows gradual safe release of energy during the thermal runaway. A new electrolyte that is safer with no compromise on performance, a newly protected lithium metal anode, and a new charging protocol that improves overall safety. These are fundamental breakthroughs in both engineering and materials, not just for lithium metal, but also for lithium-ion, especially our developments in the cathode. We are now able to delay the thermal runaway onset temperature and reduce peak temperature and pressure during thermal runaway, significantly.

Some companies that are in earlier stage of lithium metal development talk about dreams of perfectly safe batteries. In most cases, the battery capacity or energy density is so low, that it’s useless. To be in automotive B-sample, which we believe is the most advanced in lithium metal development anywhere in the world, we deal with practical safety concerns, not dreams on paper. It’s exhilarating to see our batteries during safety tests, going from big explosions to small explosions to big fires to small fires to just smoke. It feels like witnessing a successful rocket launch after many failures. We recently completed our second testing bunker. Now we have even greater resource to test new things. For many people, risk means danger and should be avoided.

For us, risk means innovation and we embrace risk by creating a safe environment to test unsafe things. Without these bunkers, without this safe environment to test unsafe things, we will not be able to understand the mechanism, we will not be able to make unsafe things safe, and next-generation batteries and transportation would not be able to move forward. At our upcoming Battery World 2023, in December, we will demonstrate some exciting videos of high-energy density lithium metal batteries passing very rigorous safety tests. We never thought we could achieve such safety, while maintaining high energy density. This is a big milestone towards our goal of commercializing large-capacity high-energy density lithium metal cells for automotive applications.

In terms of manufacturability, last quarter, we indicated we would increase our A-sample lines to 1,000 large capacity 100 amp hour cells per line per month from approximately 500 per month. November will be the first month that we will attempt to build 1,000 A-sample 100 amp hour cells at our Chungju line in Korea. These cells will be used for both internal testing and OEM sample qualification, and avatar safety prediction algorithm training. We currently have three A-sample lines in operation and two B-sample lines under preparation, one line for an EV application and one for a UAM application. For the two B-sample lines, we are in the final stages of completing our vendor qualification review. We expect to continue to use the A-sample lines for B-sample cell development until the new B-sample lines become operational, which we expect to occur in 2024.

By running our lines up to 1,000 large 100 amp hour cells per month, we will also gain valuable experience in avatar cell traceability and quality system development. We have even hired a dedicated field data collection team to help ensure that the data are correct and collected through the correct process. This team helps our avatar algorithm safety prediction tremendously by providing verifiable and complete data. In summary, earlier this year, we established a milestone to transition to B-sample and we are almost there. This is a major milestone for us and for the battery and transportation industry. And as a result of solid fundamental hardcore material chemistry and cell engineering breakthroughs in safety for high energy density lithium metal batteries with a high nickel cathode.

From A-sample to B-sample JDAs with EV OEMs, the most important value of these JDAs is helping us build a solid foundation in technology development, process development, engineering development, policy development, and manufacturing development. With this solid foundation, we are now able to expand into other applications that are ideal for our unique high energy density and high power density lithium metal batteries, such as drones and urban air mobility, UAM. These applications also represent early-stage commercialization opportunities for us. We are very excited about the UAM opportunity and believe that lithium metal will enable UAM in the 2020s the same way that lithium-ion enabled portable consumer electronics 30-years ago in the 1990s.

The world’s first lithium metal B-sample will be a small step for SES, but has the potential to be a giant milestone for the future of sustainable transportation, both on land and in air. Now, I’ll hand the call over to Jing.

Jing Nealis: Thank you, Qichao. Good afternoon, everyone. Today, I will cover our third quarter financial results, and discuss our operating and capital budgets for full-year 2023. In the third quarter, our operating expenses were $19.4 million, down slightly from the same period last year. Stock-based compensation expense was $2.4 million in the quarter. We reported research and development expenses of $8.5 million, up $0.1 million from the same period last year. Our gross R&D spending in the third quarter was $11.4 million, which includes $2.9 million that was built to our OEM customers and is treated as counter R&D expense. Our G&A expenses were $10.9 million, down $2.4 million from the same period last year. This decline was primarily driven by lower insurance premiums and lower marketing, accounting, and audit-related expenses.

Through the first nine months of 2023, cash used in operations was $43.9 million, and capital expenditures were $12.3 million. Importantly, our balance sheet remains very strong. We ended the third quarter with combined cash, cash equivalents, and marketable securities of $342 million. We continue to believe our liquidity is sufficient to reach commercialization. Our updated guidance for cash usage in 2023 is now $85 million to $105 million. This is comprised of cash usage from operations of $65 million to $75 million and for capital expenditures in the range of $20 million to $30 million. We continue to be very prudent with our cash. We have a very practical process to evaluate where we should spend our cash in order to execute on our business plan and drive our commercialization roadmap forward, while we keep investing in core material innovation with the goal to always stay ahead of the competition.

As Qichao mentioned, we’re in the final stages of completing our vendor qualification review for Line 4 and Line 5 in preparation for B-sample. We expect the bulk of our capital expenditures for Line 4 and Line 5 to fall in the first-half of calendar year 2024. We’re making significant progress and remain on track for transition to B-samples by the end of this year. Our strong liquidity position allows us to continue investing in our next-generation manufacturing lines to support our OEM customers, while continuing to innovate at the forefront of battery material science, and to attract and retain top talent. We are very thankful for all the support we have received from our OEM customers and shareholders. With that, I will hand the call back to Eric.

Eric Goldstein: Thanks, Jing. Bruno, let’s open the line for questions.

Operator: Perfect. Thank you. [Operator Instructions] Our first question comes from Winnie Dong from DB. Winnie, your line is now open. Please go ahead.

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Q&A Session

Winnie Dong: Yes. Thank you so much for taking my question. I was wondering if you can describe sort of how the next amount of work will look like in the — in the context of transitioning to B-sample. What are some of the key data points or transition to look forward within the next few months heading into 2024 as you’re preparing Line 4 and 5?

Qichao Hu: Yes, good question. So from a contractual perspective, basically, we’re going through the standard legal and the financial process to getting the documents signed. And then from a practical work perspective, so one key thing that we have demonstrated is safety at Level 5. And then we’ve already demonstrated at Level 5 a small cell level. And then in the next few months, we need to further verify at Level 5 at larger cell level. So the safety is a key thing. And then A-sample was really about demonstrating the chemistry and the cell design and then now B-sample. In B-sample, we are going to build about five to 10 cars worth of batteries. So now safety and then practical safety actually becomes really important. So they want to see very detailed testing under very detailed testing parameters and then both at the small cell level and also the large sale capacity level.

And also, we are also in the process of completing vendor qualification so that we can start building the line for B-sample. So the B-sample will likely take about a year to 1.5 years. So complete by end of 2024 to mid-2025.

Winnie Dong: Got it. And then earlier on this year, I think you guys have spoken about talent acquisition as one of the key initiatives this year. I was wondering with the year almost ending, are you where you hope to be or need to be with your sort of like talent composition?

Qichao Hu: Yes. It’s the talent, I mean, we always want more and better. And we’re never satisfied with talent acquisition and the market is very competitive, which is a good thing. I mean, it’s a really exciting market. And then — and you can probably tell the kind of people that we’re trying to hire, battery engineers, material scientists, AI scientists, these are very much in demand, almost around the world. So I’m sure we can always do better. But actually, recently, we actually made some pretty impressive hires. For example, on the material science side, we hired our Chief Scientist, Kang Xu. He is one of the world’s most renowned experts in battery electrolyte and also with — on the cell engineering side, we also hired — we also made a few hires recently.

And then — and these guys have extensive experience from the big Korean battery companies. So actually recently, we made quite a bit of progress. And then that allows us to beef up our team for the B-sample and also to expand to eVTOL. So we currently have — so in the past, we had three teams for the three A-samples. And now we’re going to keep beefing up our team to go from A to B and also expand into eVTOL. So we’re making good progress, but never enough.

Winnie Dong: Thanks for that. And then maybe a more high-level question just in the context of like recent narratives around EV adoption curve that may be not coming as strong as expected, you sort of get hear that from suppliers and you hear that from OEMs. Understanding that you guys are sort of in the product development phase, but do you hear any of this from your end of JDA partners in terms of the adoption curve looking for not coming as strong or you can color — any color you can provide there? Thanks.

Qichao Hu: Yes. I think, I mean the adoption curves can always be impacted by, for example, the economy and then other factors. But the overall trend, that’s unstoppable. And then especially these OEMs like GM and Honda which, I would say, are behind the newcomers like the Tesla and NIO, they are very much committed to EV adoption. So there might be some impacts by the economy and other factors. But in terms of the battery road maps, no change there.

Winnie Dong: Thank you so much. I’ll pass it along.