SES AI Corporation (NYSE:SES) Q4 2022 Earnings Call Transcript

SES AI Corporation (NYSE:SES) Q4 2022 Earnings Call Transcript March 14, 2023

Operator: Hello, and welcome to the SES AI Corporation Fourth Quarter Earnings Call. My name is Alex, and I will be coordinating the call today. I would now hand over to our host, Eric Goldstein, Vice President of Investor Relations. Please proceed.

Eric Goldstein: Thank you, Operator. Hello, everyone, and welcome to our conference call covering our fourth quarter 2022 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 just after 7:00 a.m. today, which provides a business update as well as our financial results. You’ll find a press release with a link to our shareholder letter, and today’s conference call webcast in the Investor Relations section of our Web site at ses.ai. Before we get started, this is a reminder 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 afternoon, we will review our business as well as results for the quarter. With that, I’ll pass it over to Qichao.

Qichao Hu: Thanks, Eric. Good afternoon, everyone, and thanks for joining our fourth quarter conference call. As the leader in lithium-metal batteries, SES continues to evolve and innovate, despite all the challenges that come with new battery developments. We have made some exciting progress that we would like to share with you. 2022 was a difficult, but productive year. We built and completed three A-sample lines, one in Shanghai, China; and two, in Chungcheongbuk-do, South Korea, one for each of our three OEM JDA partners: GM, Hyundai, and Honda. The necessary level of dedicated engineering, quality, and production output required us to have dedicated lines for each OEM. Importantly, we achieved ready-to-use status for all three A-sample lines, under budget and ahead of time.

This experience strongly supports our strategy of building lithium-metal cells using lithium-ion manufacturing process, and building A and B-samples in Asia, so that we can come back to the U.S. for C-samples, and commercial production in the most efficient way possible. SES was the first battery company in the world to introduce 100 amp-hour lithium-metal cells, the first to enter in automotive A-sample JDA with a major OEM, and the first to encounter all the start-up issues that come with producing 100 amp-hour lithium-metal cells at pilot scale. As we detailed on our previous earnings call, we encountered countless issues ranging from ultra-thin lithium-anode wrinkling and tearing during large format rolling and lamination, novel electrolyte solvent scale up, electrode stacking misalignment and overhand, powder formation during electrode punching, formation pressure and voltage stability, finding efficient ways to do image scanning on large format cells, and developing proper ways to store, handle, test, and recycle lithium-metal cells.

One really important thing we have learnt over the past decade of development, when our team can identify a specific issue, we are not that far from solving the problem. Over the past year, we have leveraged the deep lithium-ion stack pouch cell engineering, manufacturing, and quality experience of our own team, and our OEM partners, and made a lot of progress. Identifying and solving these issues has provided great know-how and knowledge for our human engineers and scientists, and our machine learning based algorithm, Avatar. By end of 2022, Avatar could predict 100 amp-hour cell safety and life with more than 60% accuracy compared to 0% in the beginning of 2022. In comparison, Avatar could predict 4 amp-hour cell safety and life with 99% accuracy after three years of data training.

Our three A-sample lines provided a platform for us to work closely with each of our OEM partners and get hands-on live feedback. Our partners were stationed in our facilities for months at a time, and we attracted top engineering talent and worked with top vendors from around the world. It was accelerated learning for us in manufacturing and quality control. During the year, we also made significant investments in the Province of Chungcheongbuk-do in South Korea. Our investments followed LG Energy Solution investment in the same province, making Chungcheongbuk-do the province with the highest battery production capacity in South Korea. During the fourth quarter of last year, I met with the President of South Korea Suk-yeol Yoon, to thank him for supporting the industry and helping to build a robust supply chain around the world.

I am extremely honored that we were recently awarded cash grants from the South Korean Central Government represented by the Ministry of Trade, Industry, and Energy, Chungcheongbuk-do Province and Chungju City, which will help us expand our capabilities in South Korea. The thing I am most proud of over the past year is how the entire SES team has worked as one. Our Boston team is developing new electrolytes and anode materials. Our Chungcheongbuk-do team focuses on assembly equipment and cathode processes. And our Shanghai team focuses on electrolytes, anode manufacturing processes, and cell assembly processes. All of these contributions from our global team are being integrated into a system for our 100 amp-hour lithium-metal cells. We recently summarized our latest large cell test data and published the results on our Web site.

We believe this is the most complete data report on large format lithium-metal cells anywhere. And we will continue to publish similar data reports to keep the industry updated. We believe in transparency, and are confident that a year from now when we publish additional reports on our large cells, the data will be even stronger as we continue to improve everything from materials to engineering, to manufacturing quality. As the pioneer in lithium-metal, we are also writing new protocols for the proper way to store, handle, and test lithium-metal cells, and interpret data. We are sharing this information with the battery community to help set new industry standards. To that end, we participated in the recent workshop on lithium-metal batteries in San Diego.

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It was great to see so much excitement from academia, industry, national labs, and government agencies for the future of lithium-metal batteries. We expect 2023 to be an exciting year for SES as we are upgrading our manufacturing lines. Here are a few things we are working on internally and with our OEM partners. We are adding CT and X-ray imaging tools custom-built for our large 100 amp-hour cells. We’re adding new powder removal tools to remove all metal powders rising from the electrode punching process. We’re developing entirely new anode processes from ingot to thick foils to thin foils, and to the final anode to better control quality and performance. We are coating cathodes in-house to better control quality and experiment with new formulations.

And we are scaling up novel solvent and salt production lines to better control quality, and speed up the feedback cycle from designing new solvent molecules to getting data and making conclusions. Perhaps the most important thing for 2023 is that we are preparing for B-samples. This year, we plan to take our collective knowledge and experiences from our A-sample lines, and we will design and build new B-sample lines. Our A-sample lines are semi-automated, with a capacity of about 0.2 cells per minute or five minutes per cell. B-sample lines will be fully automated with about five cells per minute. Having the ability to produce more cells and generating more meaningful data on the far greater universe of experiments will further accelerate our human and machine learning, which will also allow Avatar’s prediction accuracy for cell life and safety to increase quickly.

Importantly, these new lines will also go a long way to proving the manufacturing feasibility and scalability of our practical approach to making lithium metal cells. As part of our preparation for B-samples, we plan to double our material R&D team, double our cell engineering team, double our manufacturing team, and nearly triple our quality team. This increase in our headcount is a natural evolution of our growth as a company and is reflected in our financial guidance for 2023. We will also hire a new Chief Manufacturing Officer who has experience in running cell engineering, manufacturing and quality management, and working with global OEMs to commercialize new battery technology. Compared to the major lithium-ion producers like CATL and LG Energy Solution that have more than 3,000 quality checkpoints, we currently have about 200 quality checkpoints.

Once we enter B-sample agreements with our OEM partners, we can no longer benchmark ourselves against other battery startups. We will be playing in the big leagues and will be held to the same standards that the OEMs currently use for commercial lithium-ion producers. With the dedication of our global team, the accelerated learning of Avatar, and the support of our OEM partners and vendors, we are confident that we will face the new challenges and overcome them as we continue to enter uncharted territory. SES is profoundly American with its roots in the basement lab of MIT back in 2012. At the same time, SES is also profoundly global with its talent and partners from around the world as we prepare for B-samples and commercial production beyond that, we are preparing to expand back home in the U.S. This includes preparing for production capabilities for lithium-metal cells, novel lithium salts and electrolytes and lithium-metal anodes.

SES plans to leverage experiences from global lithium-ion players, new material innovations, new machine learning tools for safety and life prediction and quality management, and the abundant natural resources in North America. In 2021, we were the world’s first to enter Automotive A-samples for lithium-metal. In 2022, we laid the groundwork for transitioning to B-samples. In 2023, we will transition to B-samples and lay the groundwork for C-samples, commercial production beyond that and building a robust next generation EV battery supply chain here in North America. I will now turn the call over to Jing Nealis, our Chief Financial Officer to review our fourth quarter results and outlook.

Jing Nealis: Thank you, Qichao. Good afternoon, everyone. Today I will cover our fourth quarter financial results and discuss our operating and capital budgets for full-year 2023. In the fourth quarter, our operating expenses were $20.7 million, an increase of $10.6 million from the same period last year. Stock-based compensation expense was $6.8 million in the quarter. We reported R&D expenses of $8.3 million, an increase of $3.1 million from the same period last year. This increase reflects higher personnel costs due to increased headcount to support battery cell development, and increase in lab consumables and material supplies, and the increase in development costs related to our advanced AI software and battery management system.

Our gross R&D spend in the fourth quarter was $13.5 million, which was offset by $5.2 million built to our OEM partners, which are treated as contour R&D expenses. Our G&A expenses were $12.5 million, an increase of $7.5 million from the same period last year. Similar to the third quarter, this increase was primarily driven by higher personnel costs to support our operations as a public company, higher insurance costs, and an increase in professional fees and outside services. We incurred a non-cash gain of $9 million at the end of the quarter associated with a change in fair value of our Sponsor Earn out liability. As we have previously outlined, certain trenches of our Sponsor Earnout shares are accounted for as a derivative liability measured at fair value based on the price of our common stock at the end of the quarter.

For full-year 2022, cash used in operations was $46.5 million and was less than our previously provided guidance of $55 million to $60 million. The lower level of spending reflects a combination of some conservatism on our part and lower overall spending from materials built south. Despite the lower level of spending, we were moving forward with our OEM partners, and they’re on track to transition to B-samples this year. CapEx for the full-year was $14.7 million and was below previously provided guidance of $20 million to $25 million. Lower CapEx in 2022 was mainly due to payment timing. Looking at liquidity, our balance sheet remains very strong. We ended 2022 with a much higher than expected level of cash and short-term investments of $390 million, which we continue to believe, is sufficient funding to get to commercialization.

For 2023, we are providing the following financial guidance. We expect cash usage from operations to be in the range of $80 million to $100 million and capital expenditures in the range of $50 million to $70 million. We expect total cash usage for the year in the range of $130 million to $170 million. This higher level of spending is necessary to support our growth as we expect transition from A-samples to B-samples in 2023. Significant areas of spending in 2023 include the following headcount, we expect to double the size of our teams in material development, cell development and system development, and triple the size of our quality team in order to continue improve our battery performance, establish a robust cell engineering, design, manufacturing platform, and significantly improve our safety prediction algorithm.

Lab expansion, we plan to expand our U.S. lab space to further strengthen our fundamental electrolyte and anode material development capability. Equipment and manufacturing facilities, we will work with our OEM partners to build highly automated production lines and highly efficient manufacturing facilities to support B-sample development. We will also work closely with our OEM partners on quality and yield improvements initiatives and will upgrade our existing manufacturing lines by adding new tools as outlined by Qichao. Last, materials; we expect to spend more in this area as we anticipate manufacturing at higher volumes to meet our OEM partner’s needs as well as our own development needs. 2023 is shaping up to be an exciting year of growth and investment for SES.

We appreciate the support of our shareholders, employees and OEM partners. With that, I will hand the call back to Eric.

Eric Goldstein: Thanks, Jing. Alex, can you open the line for questions now?

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Q&A Session

Operator: Thank you. Our first question for us today comes from Winnie Dong of Deutsche Bank. Your line is now open. Please go ahead.

Winnie Dong: Hi, thank you so much for taking the questions. First question is could you give us a sense of like maybe the type of feedback that you’ve been getting from your JDA partners from the A-sample cell. And then are there any for B-sample cells this year, perhaps maybe a sense of timeline for delivery as you fill sort of like a mid-year target? Thanks.

Qichao Hu: Yes, Winnie, so we’ve been sending samples to our three JDA partners for testing really since the beginning that we entered into A-sample, back in 2021. And then just over the past two years or so we made a lot of progress both in terms of the material performance as well as manufacturing feasibility. And then one key aspect of all three A-sample JDAs is basically to demonstrate the manufacturing feasibility of lithium-metal cells. And the fact that we’ve built three A-sample lines, and then we delivered total — well, we both tested and delivered total — about a thousand of these large lithium-metal cells just last year, and then also improved the performance of these cells quite a lot. So, that overall gave the OEMs confidence with both the performance that we demonstrated as well as the manufacturing feasibility.

And then so that’s why we are preparing to enter the next phase. And then in terms of timing of the B-sample, I mean the B-sample is really — it’s not like a single-point milestone. It’s not like today you, all of a sudden, go from A-sample to B-sample; it’s a process. And then for us when — or this B-sample itself, it’s not really about marketing for us, it’s this gradual progress that will happen this year, basically continue to demonstrate the manufacturing feasibility at a much higher level, much better quality, much higher output. So, it will happen around mid this year. And then whether when we’re going to make announcements, that’s another story that I really don’t care about. But fundamentally, the company will enter into B-sample, and then it’s a core milestone.

And then it’s a validation both to the material improvements as well as the manufacturing feasibility that we have demonstrated.

Winnie Dong: Okay, thank you so much. As you look ahead to 2023, I know you’ve talked about headcount expansion, and equipment and manufacturing facilities, and then continue to invest in materials and things like that. If you were to maybe like boil it down to a few key milestones to achieve by year-end, what can we look to add the scorecard by this year?

Qichao Hu: Yes, a few things. One is quality. And then, last year, I would say that was the first year we started doing pilot scale manufacturing of these large cells, and the quality was actually pretty bad. And this is why we had a lot of issues that we addressed. And then this year, the quality basically needs to be at an entirely new level. And then also SES, as an organization, when we were in A-sample, we still had sort of a startup organization. And then now, as we prepare for the next phase, and then B-sample, and then project management and quality management manufacturing supply chain, all these managements will really enter into an entirely new level. And then we are putting systems in place to really make SES, as an organization, a lot more capable at manufacturing and quality.