Let's take, so we have Eric Dresselhuys from ESS, and then we have Tony Rabb, CFO. So, gentlemen, thank you for taking some time to be with us this morning.
No, thank you for having us.
Sure. Sorry, Tony. I know you have a busy morning as well. You have some cold meeting as well. So, over about 15 minutes, where we're going to talk about the solution that you bring in terms of energy storage to the market, and that can be obviously very applicable to solar. But then I think the big question that everyone asks since two days is the new tariff that we're talking about. So I know you have very good connection with Washington as well. So if you want to talk about it, how you view the potential impact on energy storage and the grid battery storage specifically.
Yeah, no, thanks for, thanks for the question. It is the topic of the last few days, and all over the news, and I think for good reason. You know, the pricing activity we've seen from Chinese batteries has been, you know, really aggressive. And so, you know, for grid storage, just so people are aware, there is a specific call out, a specific line item for grid batteries. The tariff previously was 7%. The proposal is to move it to 25%. And so that's an important move. I would call it kind of a down payment against some of the pricing activity that we've seen. But you know, it's, I think, welcome to see it get called out specifically. Like some of the other proposed tariff increases, this one, as it currently stands, doesn't take effect until 2026, and I think that's got some people scratching their heads, why not sooner?
Yeah. I mean, is there a risk that maybe look where the upcoming U.S. election, right? I would assume actually there is not really a risk to see coming differently, right? I mean, I would assume if Trump can come back, they were the ones bringing the tariff at the beginning. So I would expect that it remain, right? Maybe if we have-- Yeah, I just feel like there's actually very little risk that we have a reverse out of this. Is that something that you think as well, or?
No, we agree entirely. I think that, you know, some of the other provisions that the Biden administration have put forth, you know, and of course, there are a lot of them. Some of them, you know, are more controversial and are likely to come under some challenge. In the category of batteries in general, that's been one area where there's been generally bipartisan support even before the tariffs came up. Maybe we'll get into talking about the IRA. The production tax credits and things for building batteries in the U.S. enjoy very broad support. They've gone across blue states and red states.
I think we feel very good about that. On the tariffs specifically, I think that's, I think, very safe. As you pointed out, this move started under the Trump administration. The Biden administration is now kind of, you know, increasing the dollar value, the percentages. I think it would be nearly impossible to imagine that a Trump administration, a Trump two administration, would reverse these.
Yeah. Yeah, yeah, fully agree. Same view here on the IRA, just because of the location of many of those, not just solar, but battery, EVs, in a Republican state, I think it's very unlikely to see. Given it's a solar conference as well, do you want to give a little bit of a view of obviously of maybe like a quick two-minute view on what ESS exactly does? Because some of the people are not fully aware here. And then which solution you can bring here, obviously in terms of energy storage to the, to the solar industry.
Sure. Well, what we do at ESS is what's known as long-duration energy storage. So that's storage that lasts longer than the lithium batteries we're all accustomed to today. Lithium, you know, typically is deployed in 2 or 4 hour durations max. And there are a lot of reasons that, you know, we can get into why it becomes less effective when you get greater than 4 hours. So people have been looking for longer duration. It's one of the Department of Energy's kind of holy grail five Earth shots to make decarbonization work.
What we focus on is what's known as the inner girdle, so kind of, you know, 8-24-hour time durations. And so kind of back to solar, what that allows you to do is taking a battery with that characteristic, pairing it up with solar, whether it's at, you know, mass utility scale or even at a microgrid scale. It allows you to create a 24-hour day, 7-day a week, kind of resilient electricity system using renewables, and so that's the thing we've all been looking for. It's getting a lot of discussion these days. For folks that follow the solar universe closely, you're hearing a ton of call for what are known as green PPAs, right?
You've got the, the big data centers, the Googles and the Microsofts of the world, saying: "I want a green PPA, 24-hour a day, matched electricity, where I know it's actually green and decarbonized." And of course, with the AI impact that everybody expects, that number is just gonna go up. And the way to do that is to pair solar with long-duration storage.
Yep, that totally makes sense. Very interesting that you bring the AI with a different, so different developers with a five Earths hots like, like, 30 minutes ago, I was like kind of bringing up the AI topic because I think it's probably going to be something that could change the way that data center are also going to be developed and just the pace of it, so that's definitely interesting. You guys had your Q1 business update and kind of raised it, like, 2 weeks ago, or 10 days ago, if I remember well. Do you want to talk a little bit about, you know, kind of what's going on more at the company level? You're bringing more automation line as well.
Maybe as well, some of the challenges that that you're facing and kind of how you're going to navigate through them.
Yeah, sure. So, we had a nice Q1, and, you know, we're on a growth trajectory, unlike the very mature businesses like lithium. You know, we're still a high-growth, emerging technology business. The biggest thing we've been focused on, as we're ramping up our production, is driving costs down. You know, we've been a subscale manufacturer to this point, and that's starting to change. And the automation that we're deploying is a big part of that, taking labor costs out, so our direct labor numbers are dropping dramatically, and our capacity increases pretty dramatically along the way. And as we shared on the call, we have a very cost-effective capital model for increasing capacity, so we think that's one of our advantages.
You know, our plan is to continue to ramp up through the end of the year. And then as we get into 2025, really, you know, we're bringing a second line on and more lines to come after that. That's really when we start to hit the inflection point of growth in the business.
So it's, and then maybe Tony, I think, you know, you're trying to be, you know, improving gross margin, obviously, kind of, you know, at some point, breaking or break even, like, EBITDA. So can you talk about the, maybe the timing of these two upfront? So for investor, you know, I think obviously ESS is probably more like a long-term investment, right? You're not, really, you know, playing the quarter or also, I think it's probably more like fundamental investor looking at the name. So kind of if you can give, like, a roadmap of maybe also like maybe some catalysts that investors could be looking out for, you know, for maybe the stock price to move up a little bit.
Yeah, Tony, do you want to take that?
Yeah, sure. In terms of expectations on margins and EBITDA breakeven, I think what we've communicated previously is that with all the progress that we've made on the Energy Warehouse, the cost out initiatives, we made significant progress last year, over 60% cost reductions. And we have a number of projects this year, which will continue to reduce costs through a number of different means, both through value engineering, some strategic supply chain management, and the production on our fully automated stacks production line.
That we anticipate that we'll be at unit cost breakeven by the end of this year. So, so we'll cross over that threshold at the end of this year, and so that's all the direct costs associated with producing the energy warehouse. And so that's the point where we're hitting that inflection point of wanting to produce more units. Because as I produce more units, once I cross over that point, then I can start covering my fixed overheads- and moving towards gross margin and EBITDA profitability.
A lot of those cost out projects and initiatives translate into our Energy Center, which currently we're moving to production in the second half of this year. The Energy Center, we anticipate will reach that crossover point for unit cost profitability after this year, so moving forward into the out years. And then, you know, similar benefits there, that once we reach that crossover point, and we anticipate a lot more volume with the Energy Centers, then we'll be scaling up production and getting to the point where we're able to cross over to EBITDA breakeven- we can cover our fixed costs. So we do anticipate that the scale of volume in the fourth quarter, going into next year, is gonna ramp up considerably, as we meet those cost out targets.
When could we start looking for, like, you know, positive EBITDA?
We anticipate that we'll be able to get to positive EBITDA as soon as we can get our volume up to the point where we're, you know, covering all of the fixed costs within the business. And so, it's something that is not. You know, we're not talking five years out, but it's something that we anticipate that we can get to as we scale up the business in the next couple of years.
Mm-hmm. Okay. That, that, that's definitely cool. In terms of the volume, again, just for more, maybe like for people here on the line that are not as familiar. The ramping up of the volume is more, is more coming from a question of, like, business management, risk and cost management, that are the main potential issue, right? I just want to make sure of that- for people on the line.
Yeah, just when you were asking about catalysts, I was gonna, you know, chime in with. We've been very fortunate. We've announced a number of very large strategic deals with big buyers, big users, utilities here in the States, like the Sacramento Municipal Utility District. We have a really big project in Germany.
Since this is a conference, we have to mention projects in Germany with LEAG, who's the second largest generator in Europe. They're looking at, you know, 2 GW of 10-hour+ duration batteries between now and 2037 to hit the decarbonization goals that the German government set, plus the mandate to shut down coal. They're one of the largest lignite coal generators today, and they're transforming into becoming one of the, what could be the largest green energy hub in all of Europe. So, demand isn't the issue at this point. We've got about somewhere north of $1.5 billion of backlog and signed kind of framework agreements with customers. It's really just about moving through that process judiciously managing our dollars along the way and growing the business through a kind of very measured scaling.
Okay, that makes sense. Maybe we have a minute remaining now. So is there anything else that you want to add that, you know, maybe people miss out on the story, that you feel maybe people should pay more attention, or even us on the sales side, just trying to kind of, you know, move the needle out there?
Well, the one thing, you know, companies like ours that are early days, early growth companies that went through a SPAC process tend to get painted a bit with, you know, kind of a common brush. And what I would tell everybody is, everything about our business in terms of the market demand, the recognition of the need for long-duration storage, the economics of the unit economics of our product, that's all gotten better in the last two years. So there's a little bit of a discontent between kind of how people view, you know, going risk off in the market with really, a number of really amazingly positive kind of tailwinds that have come in, of course, the IRA being one of the big ones.
And so, you know, there's a great opportunity here for long-duration storage, and our belief is, you know, we're kind of ahead of the pack for non-lithium alternatives, and are really working hard to establish ourselves as the, you know, the de facto leader in the non-lithium long-duration storage space.
Yep. Yeah. No, that's, that's a very clear message, and I think, you know, I've heard you guys before, but you know, for anyone that would want to see the facility, I haven't been actually myself, but you guys are in Oregon, and I hear it's very interesting. So yeah, I can make the connection for anyone that wants to come.
Yeah, we're welcome to have you, and if you can't travel to Portland, Oregon, where our facility is, you know, visit our investor relations website. There's some videos. You can see production happening, units getting built, so, hopefully that's valuable for people.
Great. Thank you very much. Thanks, Eric. Thanks, Tony. And, yeah, if anyone has any questions, please, shoot my way, and I will do my best to connect you guys.
Thank you.
All right. Thank you.