QuantumScape Corporation (QS) Earnings Call Transcript & Summary

Good day, and welcome to QuantumScape's discussion of the achievements of their final milestone for 2021. John Saager, QuantumScape's Head of Investor Relations, you may begin your conference.

Thanks, operator. Good afternoon, and thank you to everyone for joining our discussion today. To supplement today's discussion, please go to our IR website at ir.quantumscape.com to view our press release and our Twitter page at QuantumScape to supplement the discussion. Before we begin, I want to call your attention to the safe harbor provision for forward-looking statements that is posted on our website and as part of our quarterly update. Forward-looking statements generally relate to future events or future financial performance or operating performance. Our expectations and beliefs regarding these matters may not materialize. Actual results and financial periods are subject to risks and uncertainties that could cause actual results to differ materially from those projected. The safe harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements for the reasons that we cite in our Form 10-K, recent 10-Q and other SEC filings available on sec.gov, including uncertainties posed by the difficulty in predicting future outcomes. Except as otherwise required by applicable law, the company disclaims any duty to update any forward-looking statements. Joining us today will be QuantumScape's Co-Founder, CEO and Chairman, Jagdeep Singh; and our CFO, Kevin Hettrich. Jagdeep will provide a brief overview of the importance of achieving the goals we laid out at the start of the year, and then we'll kick it over to the analysts for questions. If time allows, we'll ask some questions we've received into our IR inbox. With that, I'd like to call the -- turn the call over to Jagdeep.

Welcome, everyone, and thanks for taking the time to join us today. Almost exactly a year ago, we showed the world the first solid-state lithium metal anode battery that was capable of working under what we refer to as uncompromised test conditions. As manufacturer, the cells use an anode lithium metal architecture designed to deliver energy density of approximately 1,000 watt hours per liter, about 50% higher than the cells used in today's leading e-batteries, which are closer to about 715 watt hours per liter. But what was even more significant about that announcement? This is what we mean by uncompromised test conditions, designed to meet automotive specifications was that it delivered 800 cycles to over 80% energy retention, while running a fast 1-hour rates of charge and discharge at 30 degrees Celsius, with less than 5 atmospheres of pressure in a commercially relevant area of 70 by 85 millimeters. This was a breakthrough announcement because to our knowledge, no other group had ever shown equivalent performance data under these conditions for lithium metal anode cell. And it gave us confidence that we had a fundamental technology with the potential to transform the automotive sector. However, this data was from a single layer cell, and we said at the time that a key remaining task for us to fulfill this potential was the need to scale up the battery by stacking up multiples of these single layers to achieve our commercial targets. To be candid, at the time, there was considerable skepticism regarding our ability to stack these layers up. Some were concerned that by stacking layers, we would somehow adversely impact the performance of the cells. Others were concerned that we would not be able to stack layers mechanically, although volume expansion that occurs in each cycle from the plating and stripping of lithium on the anode will prevent us from stacking. It therefore gives us great pride that this week, we were able to report that we have not only made 10-layer cells, but successfully achieved or exceeded those same performance parameters we reported on a year ago. More specifically, we showed data from a 10-layer cell that is in -- that what is to our knowledge in other industry first, delivered 800 cycles with greater than 80% energy retention, and did so a charge/discharge rate better than 1C-1C or 1-hour charge and discharge at 25 degree Celsius with 100% depth of discharge and modest pressure of 3.4 atmospheres. The important point to note is that all of these parameters were met simultaneously in the same cell. This is key because the common technique used in the battery industry is to compromise on one of these parameters and then run other tests that compromise one of the other parameters, never showing a single cell that meets all the requirements simultaneously as a real-world EV must. There has been a lot of activity in the battery industry lately. Some of the other approaches we have seen are intending to use a liquid electrolyte with a lithium metal anode. The data reported from these approaches convinces us that they still suffer from the same types of problems liquids have had with lithium metal since the 1970s, dendrite formation and impedance growth. The [ parental ] the formation of catastrophic dendrites in the cells flooded with a combustible liquid electrolyte, these approaches have been limited to low rates of charge, for example, [ C of a ] 5 or 5-hour charge, have only been to show a short cycle life insufficient to meet the requirements of the automotive sector. Others have shown cells based on sulfide electrolytes and published data, which is also not shown the ability to run at higher rates of power and room temperature with long cycle life, all essential requirements for an EV battery. Thus, judging from the data we have seen, we believe such approaches have not yet shown they are capable of meeting basic automotive requirements and will need to overcome fundamental challenges at the materials level if they hope to be commercially viable. Some players are even trying to make larger cells with these liquid or sulfide chemistries. However, we believe trying to make larger cells for the chemistry that doesn't meet the basic requirements is not a successful strategy. The fundamental chemistry issues will not fix themselves when larger cells are assembled. With this week's results, we have now met all of the milestones we laid out for ourselves at the beginning of the year. Our announcement this week gives us more confidence and belief than ever that our technology is a clear leader in the next-generation battery space. Going forward, we will continue to build on this lead by further improving our technology, manufacturing capability and customer engagement. This includes increasing layer counts, introducing more automation and refining our manufacturing process and building on the improvements to quality, consistency and throughput that we have made over the past year and continue to make. In 2022, we will focus on delivering prototype cells to our automotive OEM customers as well as tooling up our pre-pilot QS-0 facility to produce cells for test vehicles in 2023. These goals require consistent execution from our team, and 2021 has shown that execution is one of our most important strengths. We're immensely proud of what we've accomplished in the last year, and we're looking forward to sharing more details in the coming months. With that, I'd be happy to open it up for questions. Operator?

[Operator Instructions] Your first question is from the line of Rod Lache with Wolfe Research.

Thanks for hosting this call. Just a couple of things. One is, I know that your target is to achieve the 1,000 watt hours per liter. But can you maybe just talk about where you are now? What's the corresponding energy density? How close are you to that target?

Rod, thanks for the question. So the energy density of the final cell is a function of 2 things. One is the energy density of the active stack. And two, is the weight and volume of the inactive components of the cell, the packaging and other components that don't contribute to energy. The active stack, of course, is determined by the number of layers that you have in the cell. Each unit cell is a one layer active stack. And if you have a single layer cell like we showed last year, the weight and volume of the packaging dominates the cell and the energy density overall is not going to be at the targets -- that we have targeted. So as we make 4 and now 10-layer cells, the overall energy density of the cell gets better. And when we get to our target of multi dozens of layers, that's when we'll get to the 1,000 watt hours per liter. So we haven't really disclosed the energy densities of these intermediate cells lot because they're not really sort of interesting relative to the targets that we have. That will really be achieved when we get to the final form factor, which is going to be, as I said, multiple dozens of layers in the package. So the way to think about it is that if we take the architecture that we have right now for the single layer cells and increase the number of layer counts, that architecture, taking into account all of the packaging and other elements that go into a cell, we believe gets us to on the order of a 1,000 watt hours per liter.

Okay. So just to be clear, the -- it's basically just the packaging at the -- the weight of these inactive materials now that is -- that's just basically simple math. So if you were to extrapolate from what you have right now, you would get to a 1,000 watt hours per liter?

That's largely true. There are other things that we plan on doing for -- that are engineering improvements to the stack itself. But the biggest element that is involved in going forward we are today to the 1,000 watt hours per liter is stacking up those layers into a multi-layer stack and decreasing the fraction of inactive materials to active materials in the cell.

Okay. And then just lastly, can you just give us some color on what your future milestones are from here? What we should be looking for beyond the 10-layer cell? Obviously, as you're going on to multi-dozen layer cells, is it -- is there some kind of time line that you can just talk about as you progress towards your rate sample?

Yes. So I guess the 2 biggest things that are going to happen next year up, a, is in fact this multi-dozen layer cell that we're targeting. That's going to be -- that won't be a big bang kind of a thing where we go from 10 layers to multiple dozens. We'll have incremental layer counts in various releases to be now and the end of next year. We -- once we have those multiple dozens of layers, that will be what we call the customer prototypes that we'll deliver to the customers. In parallel with that, we are going to be building out the QS-0 production facility. So there's a lot of tools that we've ordered. These are those high volume, high group of tools that has long lead times. Those tools are arriving on various schedules over the course of next year. And our plan is to try to get all those tools in the facility qualified, turned out to commission and ready to produce sales in 2023. So in 2023, we start to ramp up actual production in QS-0. Obviously, it won't be from 0 to full production overnight, as the manufacturing facility involves a ramp. But the key requirement that we set for ourselves is to be able to produce cells in that pre pilot facility that address both the quantity of cells that are needed for our automotive customers as well as the sort of debug and test out the whole production concept with the facility. So when you turn up the production facility, as we work with our QS-1 joint venture with Volkswagen, you really don't want to make any mistakes that you can avoid making. So our goal is to make our mistakes, if you will, in this QS-0 pre pilot line facility. So by the time we get to the real production facility, we have a much smoother and more streamlined process.

[Operator Instructions] Your next question is from the line of George Gianarikas with Baird.

So just to focus on next year's milestones, obviously, customer prototype sampling is the big one. And you've mentioned multiple times so far and for that, that requires dozens of layers of cells. So can you kind of help us understand the time that takes? It took you months to get from 4, then to 8 and 10. Is this something that gets easier as you add more layers? Should we expect something maybe around the middle of the year in terms of prototype samples?

Well, we haven't tried to provide sort of more precision on the dates other than to say our goal is to do this next year. I think relative to the difficulty that's involved, yes, we do believe that the most difficult part of the process is to go from 0 to 1 layer because the one layer that will -- that doesn't goes from not having the chemistry that works to having the chemistry that works. Going from 1 to 4 layers, 1 is a big step because the question becomes, okay, can you stack these things? And if you do that, does the volume expansion, the mechanical interactions with the electrical interactions between the layers in any way adversely impact performance? Obviously, we were happy to see earlier this year that that was not the case. And then the question that comes here, can we continue that trend, add more layers and see similarly good behavior? And I think what we're happy about now is that as we expected because there are no chemical interactions between layers, stacking these layers up does not, in any way adversely impact the capacity retention of these cells. We were able to produce cells that delivered -- all of the cell that we showed, in fact as we delivered 800 cycles to over -- well over 80% capacity retention at really high rates of charge, over 1C-1C for faster than 1-hour charge and discharge. And going forward, we need to keep doing more of that. So what does that involve? First and foremost, it requires making more material. We have to produce more separator films, so we can make bigger cells. But obviously, this 10-layer cell means that each cell that we make now uses 10x with less material as with cells that we were making last year, which was single layer cell. If we get to multiple dozens of layers, that's another order of magnitude increase in the capacity of our engineering lines because we don't yet have the pre pilot production line up. We're making all these cells on the engineering lines, which are primarily designed to conduct experiments and improve the overall technology and manufacturing process. But we're now using -- [ it hasn't ] produced dozen of volume. So we're increasing the throughput of both lines as well, [ with ] getting new tools, hiring new people to be able to run those lines. And those are all things that we're looking at now. Outside of getting more throughput, more capacity, there obviously is a mechanical [indiscernible] task involved to stack more layers up. One of the things that we had talked about that as a part of our manufacturing process is the notion of automated stackers that can stack these cells -- these layers up more quickly, more precisely, more efficiently than we stand with R&D tools. And those factors are a key part of our production process. So I think that you have to be -- if you've been around long enough, you have to be a little bit humble in the face of the unknown. You can't just declare that there is a 0 risk going forward. But I think we feel like the risk that's behind us really does demonstrate -- what we have demonstrated already is that it's possible to stack these layers up. Well, and it's possible to make a chemistry that meets what we believe are the core requirements of the automotive sector in terms of rate and cycle life and temperature and so on; and b, it's possible to stack those layers up and not have issues with the expansion and contraction as the layers plate and strip within. And we're going to keep doing that for the rest of the '22. Our belief is we're going to be able to execute. But of course, we'll have to do if -- if we are able to do in '22 what we did in '21 just to meet our goals.

And your next question is from the line of Jose Asumendi with J.P. Morgan.

It's Jose. Congrats on the announcement. Couple of questions, please. I was wondering if you could talk a little bit more around what have we managed to change in the process or so from the technology point of view to get to this 8 to 10-layer in cell? What have you changed on the technology side? And then second, did you get any reaction from Volkswagen in its announcement or that other OEM you seem to be working with? Did you get any reaction from the OEM with regards to this announcement?

Yes. So in terms of what's changed, I mean, I think the 2 things that I would point to. One is we've been able to make more separators. So we have increased the throughput of our process. We are going to continue trying to do that going forward. But secondly, we've improved the quality of the film. So we alluded to this on the July earnings call, the Q2 earnings call, what we said that we've made some significant improvements to the quality and consistency of these films. That plays a critical role in actually being able to successfully make multi-layer cells because as you might imagine, if you have 10-layer cells, every one of those 10 layers now have to work. So if you have films that in a way does give you one bad film, that's going to not allow you to make a 10-layer cell. So quality is very important, and it's a key focus. It has been a key focus of ours this year. It will continue to be a key focus going forward. Relative to VW and others, I think the key point is that for all the customers that we have, and obviously, this VW has also announced the second [indiscernible] automotive OEM, as you know, a few weeks ago. They're -- for all these customers, there's an ongoing set of deliverables that we plan to give them in terms of higher layer counts and more functional cells [indiscernible] now and then we have QS-0 pre pilot collection cells available. But there are no other sort of events that occur relative to things like the $100 million investment that VW made back in Q1 based on testing cells. So this is being just us delivering themselves so they can test them, validate them, continue down the path of joint development, end up with the goal of actually trying to get these cells into real production vehicles.

As I'm showing no further questions over the phone lines, I'll hand the conference over to Mr. John Saager for additional questions from the IR inbox.

So one thing if I can add in terms of things that need to be done. So we published data showing, for example, Rod, to your question earlier if you're still on the call, that the cathode loading that we've shown is on the order of 3 million amp hours per gram. We'll probably increase that cathode loading over time as well to further increase that eventually. For the same reason, that we have the cathode loading is active material. And so the more active material you have in the cell, the better that you achieve the cells going forward. So the layer count increases, it's probably the single biggest factor relative to improving the [indiscernible] cell. But there are some small improvements in other aspects of the stack and the cathode thickness is one example. Let me turn it over to John.

All right. Thanks, Jagdeep, and thanks, everyone, for taking the time to hear our story. Again, we're very proud of the team for hitting this last key milestone for 2021, and we look forward to continuing to execute into 2022 and beyond. For a more technical discussion of our third-party test results that we released on our Q3 call, we have an event tomorrow at 10:00 a.m., and you can find details for that event on our Twitter page and our LinkedIn Pages. Thanks, everyone.

This concludes today's conference call. Thank you for joining. You may now disconnect.