Energy Vault Holdings, Inc. Q2 FY2024 Earnings Call

Good day, and welcome to Energy Vault's Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Michael Beer, Chief Financial Officer for Energy Vault. Please go ahead.

Thank you. Hello, and welcome to Energy Vault's second quarter 2024 financial results conference call. As a reminder, Energy Vault's second quarter earnings press release and presentation are 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 Energy Vault's earnings release and this call contain forward-looking statements that are subject to risks 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. Please refer to our 10-Q filing for a list of factors that cause our results to differ from those anticipated in any forward-looking statements. We undertake no obligation to publicly update or revise forward-looking statements except as required by law. In addition, please note that we will be presenting and discussing certain non-GAAP information. Please refer to the Safe Harbor disclaimer and 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 Piconi, our Chairman and Chief Executive Officer. At this time, I'd like to hand the call over to Robert Piconi.

Great. Thank you, Mike. And I also want to officially welcome Michael Beer for the first quarterly earnings that he's taking over for our prior CFO. He joined us in April, as we announced on our last earnings call. So welcome, Michael. Great to have you here. We're also taking this call from Lugano, Switzerland, from our International Headquarters here, where we conducted our Board meeting last week and our management meetings here this week. During our inaugural Investor and Analyst Day last quarter in May at the New York Stock Exchange, where we updated investors on our vision, strategy and two-year financial guidance, we outlined a bold plan with the following three strategic tenets. First, to address the largest and most attractive growth regions for energy storage, critically addressing them in the business model that is most cash accretive, most profitable and the lowest risk for investors. Just to emphasize this first point, as an example, how we address the storage market in China versus Australia versus the U.S., three of the largest markets in the world might be different considering the three factors I just mentioned, allowing us to choose from a licensed royalty model, a build and transfer model, or a build, own and operate model. Secondly, we outlined a plan to deliver more predictable and recurring revenue streams. This is especially important as a public company, as pure-play integrators, we'll continue to be subject to the EPC build schedules of customers that can move in three to six months increments pending permitting and other external factors that can expose us to lumpy quarters as we are experiencing here this year after the first two years of very strong growth. Our unique multi-technology and multi-business model approach to the market allows us flexibility to adapt our solution mix of licensed royalty, build-transfer, and build-operate to best optimize our future cash flow streams. Thirdly, we aim to offer high growth and profitability potential within the energy storage segment. This is about optimizing our product mix and business model to drive high unit economics in our sector, whether from our technology-agnostic fit-for-purpose approach to the solutions we develop under the umbrella of our AI-enabled EMS platform, or from the ability to utilize the most attractive commercial structures and business models, including project bonding capacity in excess of $1 billion. As we turn to our second quarter results, we demonstrated progress across all three dimensions of our strategy in line with our latest 2024 guidance and ramping revenue later in the year due to the timing of new project starts and the concurrent 2025 deployments. Firstly, relative to growth in the most attractive regions, we announced newly booked deals, as noted in the press release, with two projects with ACEN in Australia, a significant growth region with more coming. Additionally, as a region with the local industrial presence of investors like Korea Zinc and BHP, two of the largest mining companies in the world in their respective sectors. I'll be announcing another new regional expansion for our gravity technology shortly that has not been previously announced. Secondly, related to more predictable and recurring revenue streams, we have strong execution progress on two projects that we will own and operate. First, the largest green hydrogen storage project in the United States in Calistoga, California, for Pacific Gas and Electric, California's largest public utility, and the Cross Trails battery project in Snyder, Texas, both of which we chose to maintain on our balance sheet given the long-term IRR attractiveness of recurring high-margin revenue streams, which will help smooth top-line volatility over time. While these choices reduce revenue recognition this year in 2024, they will offer Energy Vault and investors additional high-margin contribution and revenue predictability going forward. As we are in the process of implementing project financing on these projects, we expect to return more than $40 million to the balance sheet in Q4 of this year while increasing the IRRs on these projects in the process. These projects are projected to come online in Q3 2024 and Q2 2025, respectively, and are expected to add $8 million to $10 million in recurring EBITDA profit streams annually over the next 10-plus years. And thirdly, regarding growth and profitability, we reported strong unit economics at 27.8% growth margins despite the lower revenue due to the mix of the projects, with adjusted EBITDA improving by 12% year-over-year, positively impacted due to lower cash operating expenses, which were reduced by 23% over the prior year due to proactive measures taken by the company in Q4 2023 and continued vigilance in cost containment, operating efficiency, and fine-tuning our business model for product and solution realization. I want to provide more insight on the commercial highlights from our release, and then we'll turn it back to Michael, our CFO, to review the detailed financials and move to questions. Regarding the overall sales funnel, we ended the quarter with a solid contribution of new commercial opportunities, aided significantly by the prior second-half 2023 and early 2024 successful completion of large-scale battery storage projects at Nevada Energy, just outside of Las Vegas, Wellhead in Southern California, Jupiter Power in Texas, and the recently announced NRQ2 expansion into the Australian market with the two projects with ACEN totaling 400 megawatt-hours. In line with our growing global presence, we've also deepened our leadership bench and investment in our commercial teams, and thus we are very pleased to welcome Wes Fuller, as our new Global Head of Sales. Wes has built a successful career, joining Energy Vault most recently from Powin, where he delivered on large growth initiatives in North America, building upon prior leadership roles of increasing responsibility at Sunfolding, Schneider Electric, and Siemens. I know I speak on behalf of our leadership and those employees who have had initial exposure to Wes, but it has been a pleasure to get to know him better over the last month. He brings a significant track record of delivering results in large-scale, dynamic, and high-growth environments, but perhaps more importantly for us, a cultural fit and alignment with our values, collaboration style, and shared passion to accelerate the world's clean energy transition. Returning to the numbers, the company ended the quarter with a developed pipeline of $2.8 billion, over half of which is associated with projects being developed by either existing customers or strategic partners and investors, giving us confidence regarding the conversion of that funnel into contract bookings. This figure rose about $100 million from our Investor and Analyst Day in early May. Meanwhile, our backlog of $264 million now reflects the projects with ACEN in Australia and new long-term service agreements at Nevada Energy, increasing roughly 17% since our Analyst Day. While we expect a substantial portion of the project-related work to be recorded over the next 18 months, the actual percentage of completion accounting can create lumpiness from one quarter to the next. As I highlighted earlier, with increased contribution from newly owned and operated assets, and a higher mix of software sales and long-term service agreements, we expect to improve this visibility while reducing volatility over the medium to long-term, ultimately resulting in a more profitable sales mix for the company. From a balance sheet and liquidity perspective, we remain in great shape, as Michael will cover more in detail, with over $110 million in cash and no debt. We are examining attractive project financing structures for our own projects, which will add cash back to our balance sheet while improving IRRs. Speaking recently to many of our investors, they appreciated our stewardship of their investment and management of our cost structure and cash in what remains a very dynamic and ever-changing market environment, and thus avoiding any cost-convertible debt or other dilutive financing structures. We will continue this approach. While we expect capital markets, as well as energy storage trends, to remain dynamic, we remain highly encouraged by the structural and secular trends across the energy storage industry, particularly related to the massive uptick in pure power demand from generative AI and data centers, thus creating downstream requirements for renewable energy storage and backup solutions. The demand for economical 24/7 renewable solutions has been accelerated by 5 to 10 years, as the world cannot meet the current and upcoming power demand through renewable means. That demand for 24/7 renewables exists today, yet no economical solutions have emerged. This not only represents a tremendous opportunity, but is also core to our mission and founding of the company, and a moral imperative for our planet, marking a massive inflection point for renewables and storage as the world seeks to return to all forms of power generation—fossil, small modular reactors, etc. Increasingly, as new chips heat up data centers, these same data centers will elevate the world's temperatures at an accelerated rate, thereby prompting innovations like those Energy Vault and similar companies are focusing on. It is our mission as a company, along with the passion of our team, to solve these challenges through teamwork, innovation, courage, fortitude, and pure execution despite the obstacles we face. Looking toward the balance of 2024 and 2025, we will continue to progress on our core objectives, leveraging our unique technology and solution-based approach across all durations and targeted geographies to create real and sustainable competitive advantages in an otherwise highly commoditized sector in conventional batteries. As demand for long and ultra-long duration storage continues to grow, Energy Vault is uniquely positioned to capture a growing market share. I would like to finish by discussing our recent announcement regarding our gravity energy storage expansion not previously announced. We revealed yesterday, in partnership with site and concession owner Carbosulcis, a new 100-megawatt hybrid gravity and lithium-ion energy storage project on the island of Sardinia at the site of the largest former operating coal plant and one of the largest bi-subterraneous coal reserve sites in Europe. This project is motivated by Francesco Lippi's courageous vision as CEO of Carbosulcis to transform the coal site into a carbon-free technology hub while preserving local jobs. Energy Vault is stepping in to accelerate this vision with a new hybrid energy storage system tailored to address the unique topology, which includes 500-meter deep mining shafts. This solution leverages Energy Vault's modular pumped hydro gravity energy storage technology called EV0. The first full-scale EV0 units will be delivered to Sardinia in the next 60 days, followed by installation, testing, commissioning, and operations set to be completed in 2025. This gravity system will be enhanced by a lithium-ion battery array with all power charging, discharging, asset management, and economic dispatch orchestrated by Energy Vault's VaultOS Energy Management Software Platform, or EMS. This first-of-a-kind hybrid system represents a unique solution to a specific need to capture energy storage through existing infrastructure, in this case, mine shafts and gravity—the basis of 90% of all energy storage in the form of pumped hydroelectric dams today. Lastly, I am pleased to announce that we are expanding our regional presence with our first EVx gravity energy storage system in Brazil, in partnership with Petrobras, Brazil's state-owned oil and gas conglomerate. Petrobras is committed to a clean energy transition in Brazil, and we are excited to support their efforts with our gravity energy storage systems co-located at one of their refining sites. We will share more details about this exciting relationship and regional expansion in the coming months. With that, I'll turn it back to Michael Beer, who will provide further financial details for the quarter.

Thanks, Rob. During the second quarter, the company reported revenue of $3.8 million, reflecting the successful completion of battery projects in the U.S., along with contributions from software and long-term service agreements. Consistent with our full-year guidance, revenue was down compared to the prior year due to the timing of projects and percentage of completion accounting. The company announced a new battery storage project in Australia with ACEN during the period, but we expect most of that revenue to be recognized later this year and next, as part of our $264 million revenue backlog. Including our new gravity license in Southern Africa with GESSOL, we expect to recognize later this year, along with one to two new battery storage projects expected to commence construction before year-end. We are reaffirming our full-year revenue guidance of $50 million to $100 million. Our gross margin was 27.8% for the second quarter, up from 9.8% a year ago, reflecting a favorable revenue mix as projects were completed. For the first half, the gross margin is tracking at 27%, above the guided range of 15% to 25% for the full year of 2024. From an adjusted EBITDA perspective, during the second quarter, our adjusted EBITDA was negative $15.8 million, improving 12%, or $2.3 million year-over-year. Adjusted operating expenses declined by 23% in the quarter compared to the prior year to $16.9 million. GAAP results included a $1.7 million restructuring charge related to reorganizational and realignment efforts, as well as other cost-side measures discussed earlier this year and during the company's Investor and Analyst Day on May 9. Along with the $600 million impairment associated with the company's move to a corporate office in Westlake Village, California. As a result, the company expects adjusted operating expenses to be reduced by $3 million to $4 million in the second half, or $6 to $8 million on an annualized basis, to about $15 million per quarter in the second half of 2024. The other key non-cash items added back in Q2 were $9.5 million of stock-based compensation expense and $1.7 million in net interest income. Management continues to expect adjusted EBITDA within the range of negative $45 million to negative $60 million for the full year. From a cash perspective, as of June 30, 2024, the company had $113 million in cash, cash equivalents, and restricted cash, leaving us well-positioned to continue our growth strategy and execute on our projects. Our primary uses of cash are operating expenses and working capital needs related to equipment purchases for our energy storage projects and expenditures for the projects we have chosen to own and operate, which will be largely offset by anticipated project finance and the monetization of tax credits. Restricted cash remains manageable at just $6.1 million, a slight increase from the prior quarter, reflecting cash back letters of credit for new project awards. This is well below the $35.6 million at year-end 2023. As Rob mentioned, we maintain bonding capacity in excess of $1 billion to facilitate additional growth projects as we desire. Management still expects our year-end cash balance to be within the range of $75 million to $125 million. With that, I will hand the call back to Rob.

Great. Thank you, Michael. Just in closing here, as I normally do, I want to start by thanking all of our employees in the company for their dedication to the mission and working through what remains a volatile, dynamic environment, both for energy storage, geopolitically, and with all the many distractions we have, their focus on our customers in the end and delivering for our customers. Also, an official welcome again to Michael Beer for joining our leadership team, as well as Wes Fuller in his global sales role. With that, operator, we will turn it back to you and be ready to answer some questions.

We will now begin the question-and-answer session. The first question comes from Thomas Boyes with TD Cowen. Please go ahead.

Appreciate you taking the questions. First one from me, just given the focus on owning and operating specific projects following the Investor Day, are there specific applications of your technology where you're more likely to own and operate? When looking at the gravity portfolio, you have an EVx system up and running in China. You just had announced the EVx system where you'll also be an owner and operator. You should be expecting more attention for those systems and maybe an EVy than, say, additional EVx projects. How do you think about that split?

Great, thank you, Thomas, good to hear you. Yes, there is no specific technology that is a focus relative to owning and operating. If you look at the first two that we're already developing on our balance sheet, the Calistoga project, which is a combination of green hydrogen and ultra-long duration with lithium-ion, and the second one is a pure battery energy storage project in Texas. We're going to look at that based on the economics of the project and their fit for us. Additionally, project financing becomes important. That remains a robust and attractive vertical in the financial markets. So we look at that and really not specific to the technology, but more to the project attractiveness. To be clear, you can expect combinations of gravity and lithium-ion, like what we just announced for Sardinia, for example, where we plan to own and operate that site. We've already announced the green hydrogen lithium-ion combination and the pure play lithium-ion. Our primary focus will be across our portfolios. We will balance that and have a portfolio that we believe can optimize both our cash returns and longer-term profitability and unit economics.

Appreciate it. That's very helpful. And then for the follow-up, I'm just hoping we get a bit more, maybe a performance update for Rudong and how that EDx is performing—anything you could share as far as just round trip efficiency or maybe other performance metrics to let us know how that system's operating?

Sure. Yes, we're just awaiting the final approval to operate fully on the grid. As we announced before, we're already charging and discharging to the grid, and there's been announcements locally in China that our partner did. The last ones we saw were June 19. They hosted a media day where they demonstrated the project to local media and media from other provinces. We're expecting that, and part of their visit there is also to take the initial performance measurements on a multi-site basis. So we're expecting something shortly, Thomas, and we'll be announcing those performance metrics as we get them from the site.

Excellent. Thanks so much. I'll hop back into the queue.

Thank you.

Please go ahead. The next question is from Stephen Gengaro with Stifel.

Good evening, I guess there. So a couple of things, I think first for me, when we think about your sort of two-year revenue guidance, and I sort of see some of the project announcements you've made in your backlog, but when we try to evaluate that and think about what awards you need, can you just maybe talk a little bit about sort of the pipeline of opportunities and what we should look for to increase confidence in the revenue guidance for the next two-year period?

Sure. I think some milestones to consider over the next four months are specific conversions of projects from our developed pipeline into actual bookings. These will be important. At the Investor Day, we highlighted some large projects without naming them, as we didn't yet have approval to disclose the customers' identities. You should look out for the conversion of some of those to awards and bookings, which would fill in what we've announced over the next two years, which is our $500 million to $700 million target. From our current perspective and given the nature of our larger portfolio, you'll need to see some of these convert in the second half of the year. Additionally, many deals in our developed pipeline are with strategic investors or known partners, meaning they aren't new customers, but rather businesses we've had successful projects with in the past. This gives us a high level of confidence in our projected two-year revenue. I would expect Australia to continue playing a significant role as we've announced the first project underway with ACEN, a major player in Southeast Asia investing in their green energy transition.

Got it, okay, now that's very helpful. And then the other one, just quickly, when you think about build and transfer, own, operate, etc., is that completely customer-driven for some of this stuff that you truly want to own and operate because of the long-term returns and recurring revenue? How do you balance that?

That is indeed a balance, but it's primarily driven by our assessment of the portfolio. As we analyze profit pools in our energy storage ecosystem—from the supply and equipment side through the integrator side of the business to services, software, and independent power ownership—our work has shown where those profit pools lie. As a public company, focusing exclusively on the integrator space creates burdens of lumpiness, particularly evident in our strong early growth quarters. Our strategy aims to diversify our portfolio, which we believe is a strong move for investors in terms of cash and return. We see a unique public portfolio model, including a robust storage IPP offering long-term contracts yielding EBITDA streams exceeding 75% profit. With our experienced team, we leverage our understanding of the construction and servicing aspects to enhance operating delivery over time and optimize costs. Hence, balancing the own and operate model with customer needs often leans towards project economics rather than customer preference.

Great. That's great color. Thank you.

Thank you, Stephen.

The next question is from Noel Parks with Tuohy Brothers. Please go ahead.

Hello. I had a couple of questions. I was wondering if you could give some perspective on the project in Italy, the former mine site, just regarding the implementation timeframe for an EVx system moving from China, where things stood at the point that the project got kicked off, to Schneider, and now to this project in Italy. What might go faster or slower—supply chain or other issues?

Yes. That's a great question, especially concerning the Sardinia project, where we're delivering the full-scale EV0, and for competitive reasons, we've been cautious about sharing much detail. However, this system is modular pumped hydro, and we have IT around an ultra-low-cost way to hold liquid, in this case, water. The all other components for our modular pumped hydro system in Sardinia are using existing infrastructure from conventional pumped hydro, including penstocks and turbines—components used for over a century. Thus, regarding speed, we reference our modular pumped hydro system, which has been in accelerated life testing over the past ten years. This system is poised to move quickly, with applications not only underground. Other developments in our gravity technology are similar; we are beginning above ground with this new system, which, as shown by our recent recognition by ACWA Power, is gaining traction internationally.

Okay, great. And then I was reflecting on the introduction of EVx Energy Vault Solutions and the vision of full energy management system functions integration. It seems that the software layer's importance will grow, and I'm curious if its development is at a point where it can provide standalone value or is it still treated more as a customization for particular projects?

Absolutely, it's productized. We've delivered and are operating over a gigawatt hour through a year of active use, starting with Wellhead and Nevada Energy. Our system has ramped up quickly, and we're on track to expand with the Calistoga project and future projects. In terms of customer feedback, any inquiries about our performance would uniformly speak to our software's quick commissioning and operational efficiency, which are unprecedented. Moreover, as our platform can orchestrate across various duration and generation technologies, not just renewables, we’re positioned to offer asset management capabilities and predictive analytics. Regarding standalone capabilities: yes, the software can be sold independently. We have ongoing discussions with customers interested in leveraging our software solutions, especially those navigating their electrification journey without prior experience managing energy resources.

Just to clarify, if you had a customer who opted to install the platform standalone, would they likely be open to being publicly announced versus larger industrial customers that might want to wait?

Yes, the timing of announcements varies by customer. Some are comfortable with earlier announcements; others prefer waiting until the system operates, and some will only acknowledge that a system is operational. However, as we progress with standalone software sales, I believe you'll see more announcements, and customer interests will vary.

This concludes the question-and-answer session. I would like to turn the conference back over to Robert Piconi for any closing remarks.

Thank you, operator. I want to thank everyone who joined the call and all of our investors for their ongoing support of the company. We look forward to sharing further updates in the future. Thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.