SES AI Corp (SES) 2022 Q4 法說會逐字稿

Hello, and welcome to the SES AI Corporation Fourth Quarter Earnings Call. My name is Alex. I'll be coordinator for the call today. (Operator Instructions), I'll now hand over to your host, Eric Goldstein, Vice President of Investor Relations. Please go ahead.

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 website 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.

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 development, 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 3 8-sample lines: 1 in Shanghai, China; and 2 in (inaudible), South Korea, one for each of our 3 OEM JDA partners, GM, Hyundai and Honda. The necessary level of dedicated engineering, quality and production output requires us to have dedicated line for each OEM. Importantly, we achieved ready-to-use status for all 3 Ali 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 Mpower lithium metal cells. The first to enter an automotive A-sample JDA with a major OEM and the first to encounter all the start-up issues that come with producing 100 Mpower lithium metal cells at pilot scale. As we detailed on our previous earnings call, we encountered countless issues ranging from (inaudible) lithium anode, ("wrinkling") and (inaudible) during large-format rolling and lamination. Novel electrolyte solvent scale up, electrical stacking misalignment and overhead, (inaudible) during (inaudible) pressure and voltage stability, finding efficient ways to do image scanning on large format cells and developing proper ways to store, handle, tests and recycle lithium cells. One really important thing we have learned 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 top sell 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 algorithms, Avatar. By end of 2022, Avatar could predict 100-Mpower cell safety and live with more than 60% accuracy compared to 0% in the beginning of 2022. In comparison, Avatar could predict for (inaudible) cell safety and life was 99% accuracy after 3 years of data training. Our 3 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 work 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 investment in the province of (inaudible) in South Korea. Our investments followed LG Energy Solutions investment in the same province, making (inaudible) the province with the highest value 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 rents from the South Korean Central government represented by the Ministry of Trade, Industry and Energy, (inaudible) province in (inaudible) City, which will help us expand our capabilities in South Korea. The thing I am most proud of over the past year has held the entire SES team has worked as one -- our Boston team is developing new electrolytes and annual materials. Our (inaudible) team focuses on assembly equipment and ("catalytic") processes. -- and our Shanghai team focuses on electrolyzed annual manufacturing processes and cell assembly processes. All of these contributions from our global team are being integrated into a system for our 100-mpower looking metal cells. We recently summarized our latest large cell test data and published the results on our website. We believe this is the most complete data report on large format listing 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 sales, 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 ion cells and interpret data. We are sharing this information with a better community to help set new industry standards. To that, we participated in the recent workshop on literal batteries in San Diego. It was great to see so much excitement from (inaudible), industry, national labs and government agencies for the future of lithium metal batteries. We expect 2023 to be an exciting year for SCS as we are upgrading our manufacturing lines, -- here are a few things we are working on internally and with our OEM partners. We're adding CT and X-ray imaging tools custom built for our large 100 cells. We're adding new powder removal tools to remove all metal (inaudible) rising from the electrical tuning process. We're developing entirely new annual processes from (inaudible) to (inaudible) oils to think foils and to the final ("anode") to better control quality and performance. We are holding 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 software 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 5 minutes per cell. These sample lines will be fully automated with about 5 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 advertise 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 policy team. This increase in our head count 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, they 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 unchartered territory. SES is profoundly American with its roots in the baseband lab of MIT back in 2012. At the same time, SES is also profoundly global with his 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 the 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 2 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.

Thank you, Qichao. Good afternoon, everyone. Today, I will cover our fourth quarter financial results and discuss our operating and capital budget for full year 2023. In the first 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, an increase in net consumables and material supply. -- and the increase in development costs related to our advanced AI software and battery management systems. Our gross R&D spend in the fourth quarter was $13.5 million, which was offset by $5.2 million bill to our OEM partners, which are treated as (inaudible) 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 the change in fair value of our softer earnout liability. As we have previously outlined, certain tranches 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 for materials still (inaudible). Despite the lower level of spending, we were moving forward with our OEM partners and are 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 to transition from A samples to B samples in 2023. Significant areas of spending in 2023 includes 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 to improve our battery performance, establish a robust sales 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 fundamentally electrolyte and (inaudible) material development capabilities. equipment and manufacturing facilities. We will work with our OEM partners to build highly automated production lines and highly efficient manufacturing facility to support B sample development. We will also work closely with our OEM partners on quality and yield improvement 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 partners' 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.

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

(Operator Instructions) our first question first day comes from Winnie Dong of Deutsche Bank.

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 cells? And then for B-sample cells shares (inaudible), perhaps many sense of time line for delivery? Is it still sort of like a midyear target...

Yes, Winnie, so we've been sending samples to our 3 JDA partners for testing really since the beginning that we entered into a sample back in 2021. And then just over the past 2 years or so, we may allow progress, both in terms of the material performance as well as manufacturing feasibility. And the one key aspect of all 3 A-sample JDAs is basically to demonstrate the manufacturing feasibility of lite metal cells. And the fact that we built 3 A-sample lines. And then we delivered total -- well, we both tested and delivered total about 1,000 of these large lithium metal cells just last year. and then also improve the performance of these sales 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 this is 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 also go from A-sample to B-sample. It's a process. And then for us, one or the speed sample itself is not really about marketing for us. Is 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 very core milestone and the asset validation both to the material improvements as well as the manufacturing feasibility that we have demonstrated.

As you look ahead to sort of like 2023, I know you've talked about sort of like 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 sort of like miles going to achieve by year-end. What can we look to as sort of like the scorecard by this year?

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 have sort of a start-up organization. And now as we prepare for the next phase and the B-sample and the project management, 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. So one key thing is not just band-aid improvements to improve the quality, but fundamentally improving the organization. So it's capable of a much higher level of quality and manufacture management. I think this is probably the biggest milestone. And then at the same time, I mentioned earlier. So the A-sample is about 0.2 cpm to 5 minutes per cell, decent roughly is about 5 cells per minute. So the speed at which we need to build these cells will be much, much higher, while entering into a new level of quality. And then a couple of other milestones, including some of the new materials that we've been working on, new electrolytes new anodes and then the scaling up of these materials because we'll be making sells at much higher speed. That means all these new materials that we've developed, we also need to make these materials at much higher volume.

If I can squeeze one in, just one for Jing. I guess, on your cash using operation and CapEx spend for 2024, you came in sort of much lower. Can you just remind us what were the factors that contributed to sort of be lower spending? And could that also be some conservative and take into your 2023 numbers.

So for 2022, the lower level of spending is part of that is just being conservative and be careful with our cash. And then the second part is really, as Qichao mentioned in the last earnings call that we are focusing on building cells just to solve issues, not just to build cells for the sake of building them. So we build less sales in 2022 comparing to the original plan. So those are some of the drivers for 2022. For 2023, I think the -- as I mentioned during the call, a lot of these fundings go into the growth part of our business. We have a pretty aggressive hiring plan, and we're pulling forward some of the spending to build B-sample ions so that we can be ready to transition into B-sample this year with our OEM partners.

Our next question comes from Gabe Daoud from TD Cowen. (Operator Instructions)

Qichao, I was hoping maybe just at a high level, you could provide some of your thoughts around, one of your OEM partners, (inaudible) potentially shifting towards cylindrical cells versus (inaudible) with Samsung, has it been kind of reported recently in the news. Just curious if you worry or you just think about maybe OEMs continuing to make a shift towards (inaudible) a way to optimize cost at the expense of higher-performing anodes via Pat cells? Just any color on that would be helpful.

Yes. I can't comment on the particular source of formats, especially for GN. I mean, one thing that we are working on with all the OEMs, is basically trying to find the optimal form factor at the end. For example, is it going to be a 100 Mpower pouch cell is going to be a 100 mpower stack, but in prosmatic cells? Is it going to be a 70 Mpower -- it's going to be a 60 Mpower, -- there's going to be a 60 Mpower, -- what is the final optimal basically cell design? That's actually part of this A-sample and B-sample work. And then we are testing if its 100 Mpowers, 70 Mpower 60 Mpowers. -- with, for example, high nickel cathodes, blend cathodes, different types of cathodes because the final cell, the final format is going to be based on a holistic consideration of safety, performance cost, several factors. And the fact that we build 100-mpower/stack ("pulp") cells doesn't mean that we will end up actually putting 100 Mpower cells inside the car, as most you understand the boundary of the limitations. The final cell ("mine able") be a 70 Mpower cell. But all this -- we built A-samples and also B-Samples and then we improve the quality and then increase the production output so that we can collect more data and then also run more experiments faster. So we can make all these -- so we and our OEM, JDA partners can make all these decisions based on data. So we have not -- and that's what we've been focusing on, stack pulp cells, maybe stack prosmatic cells and then also with different cathodes and also just the capacity of the cells will also test a range of different capacities. So we can find the optimal final cell design that we can actually put inside the vehicle based on a complete -- a very holistic consideration of lots of different factors.

And then you mentioned data. So maybe it's a going into question on Avatar. You noted some of the challenges that actually enabled you to drive an improvement in tracking or predicting cell safety on the larger Mpower cells with 60% equity versus 0% in the beginning of the year. So -- and then the smaller cells have 99% accuracy. So could you maybe just talk a little bit more about Avatar and the progression there and some of the improvements there that you're seeing?

Yes. So we really found Avatar is a necessity. And then beginning of last year, beginning of 2022, because we didn't really have any large cell data and Avatar is basically very data driven. So we had 0 capability to predict anything to the larger cells because we just didn't have any data to begin with. And they will be collecting more data and then these larger cells are actually quite different from the smaller cells. For example, the impedance is much lower. And then any variation in impedence and a lot of the parameters that we use to predict health and life in small cells, just simply don't work when we scale to the larger cells. So we act develop new parameters. And then also, we also had to collect a wider spectrum of data. For example, the small cells with the current voltage and temperature now we're doing current voltage temperature and pressure. Pressure is a really important factor in production health and safety of these large multi-metal cells. And then also based on the data that we collect, we also both through a combination of internal service-based models, where we actually predict health based on actual fundamental physics mechanism as well as just machine learning models that actually recommended very interesting parameters. So now with more data, so last year 2022, we had B-sample lines, A-sample line. And then we built and we tested about 1,000 of these cells. Now -- and then based on that data pool, we got about 60% accuracy. Now that as we prepare to enter B-Sample with much better quality, much beter consistency and much higher output than we expect both the quality of the data as well as the size of the data pool to significant growth. And then that will significantly improve the accuracy of Avatar for the larger cells even faster.

(Operator Instructions) Our next question comes from Shawn Severson from Water Tower.

Qichao, I wanted to go back to the samples this year and look at kind of what gives 2 things. What gives you the confidence that that will be achieved this year? And then second to that, has this economic environment or call it the volatility? Have you sensed any changes in how OEMs are looking at things and timing? Or if they're just kind of (inaudible) right through this because they have to.

Yes. On the first one, Well, so I mean A-Sample, B-Sample, these are not really magic, right? There's a formula behind it. It's a step-by-step very clear process behind it. And so lastly, we were in A and then we have a lot of quality issues and the volume was just not so so high. So we've addressed and solved a lot of them. And then also to accelerate the learning. So lithium metal is a totally new thing. And then before the industry puts lithium-ion into cars, lithium-ion was using consumer electronics and laptops and other industries for a long time. So the automotive industry already has a lot of data and then a lot of experience with lithium-ion. Now because lithium metal is totally new, -- and also, we improved the quality and manufacturing feasibility to a level so that we were ready to take this to a new level. So we can actually manufacture more cells and then collect more data. One of the key reasons of doing A-sample is of doing B-sample is a sample was still not fast enough. And just the amount of data and the amount of experience that we and our OEM partners collected just was not fast enough. So we want to go to B-samples so we can have this data and learning much faster. So -- and this is why we are preparing to enter into B. We couldn't do that earlier because we still have some pretty key quality issues, and then it doesn't make sense to enter into B without solving these issues. But now we've solved a lot of the core quality issues and also we are putting systems and then also upgrading the organization. So it's time to enter into B, it will be accelerated learning complete example. So yes, this is what we and the OEM partners are planning to (inaudible) B. It's not magic. It's greater than the...

And he knows that economically sensitive or anything like that. This is just a natural progression that isn't going to be really delayed for any reason, I guess, because you think you said it's all formulaic, right?

Correct. And I mean the economic environment so far hasn't really played a -- I mean, has it really impacted the A-sample, B-sample sample decision.

And in your conversations with OEMs, I know it's a bit of a guessing game, but when you look out when they're thinking in a model year production for something like this, if you're in A and you're going to this year, what does that translate into timing when in their minds may be thinking about production scale.

Yes, I can't really go into details of that. I mean if you think about we're going to be this year and then end of '24, so it'll took about 25, 26 basically a new model vehicle being... Introduced...

Last question is on the supply chain. Obviously, lots of focus in the industry, domestic production and all the things we all know very well. And you've been focused on that for -- even before the inflation Reduction Act and all of these things. Just wanted an update. Are you seeing that really come together? I mean has there been a good push as you see it through your supply chain to meet those deliverables when the time comes for art-scale production.

Yes, as I mentioned earlier, we're really targeting 25, 26 for the larger-scale introduction of lithium-metal into vehicles. And then already right now in 2023, we and a few suppliers were planning to implement capabilities for within salt, electrolytes and then also lithium refining capabilities in North America. And then a lot of these implementations will take about 2 years. So by the time 2025 comes and then Lithium Metal is ready for commercial, several of the key materials, at least (inaudible) from our perspective, Electrolyte and lithium annual will also be sourced in North America. So we are preparing both the cell level as well as the material level in parallel.

Thanks to back in the queue Thank you. We currently have no further questions for today. So I'll hand back to Qichao for any further remarks.

Yes. So back in 2021, we were the first to enter automotive A-sample. And last year, '22, that's some we already started manufacturing Lithium metal cell in pilot scale. It was really difficult because it was something no one has done before. And we encounter a lot of issues, and we're very transparent all those issues, but we also made tremendous -progress solving these. Now entering B sample, it's not a magic. It's just a natural next step. And it will be a huge milestone, not just for us, but the entire industry. It will be a huge validation for our practical approach to making lithium metal cells using lithium-ion manufacturing process. It's something that we've been talking about since the beginning. And also, it will be a few step forward for our OEM partners. So -- and so we made a lot of progress, but still a lot of work to do, and I hope everyone will stay tuned, and we will provide a lot more exciting updates later. So thank you...

Thank you for joining today's call. You may now disconnect your lines.