Eos Energy Enterprises Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 15, 2023

There are 7 speakers on the call.

Operator

Good morning, and welcome to EOS Energy Enterprises Second Quarter 2023 Conference Call. As a reminder, today's call is being recorded and your participation implies consent to such recording. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. With that, I would like to turn the call over to Liz Higley, Acting Director of Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you. Good morning, everyone, and thank you for joining us for EOS' financial results and conference Call for the Q2 2023. On the call today, we have EO's CEO, Joe Mastrangelo and CFO, Nathan Kroeker. Before we begin, allow me to provide a disclaimer regarding forward looking statements. This call, including the Q and A portion of the call, and may include forward looking statements, including, but not limited to, current expectations with respect to future results for our company, which are subject to certain risks, for the Q3 of 2020.

Speaker 1

Should any of these risks materialize or should our assumptions prove to be incorrect, our actual results may differ materially from our expectations or those implied by these forward looking statements. The risks and uncertainties that forward looking statements are subject We undertake no obligation to update any forward looking statements made during this call to reflect events or circumstances after today or to reflect new information or the occurrence of unanticipated events except as required by law. This conference call will be available and will be recorded for replay via webcast through EOS' Investor Relations website at investors. Eosc.com. Joe and Nathan will walk you through the company highlights, financial results and business priorities before we proceed to Q and A.

Speaker 1

With that, I'll now turn the call over to EOS CEO, Joe Mastrangelo.

Speaker 2

On behalf of the 300 plus employees at EOS, I want to welcome everyone to our Q2 earnings call. This is a very important moment in time for both EOS and for our industry. As I said before, I've been in the energy industry for nearly 30 years, and EOS has been in existence for 15 years. We're at an important inflection point As you look at what the world needs to power its future. When you look right now in the United States, the Texas, the AerCap market is operating at record highs.

Speaker 2

California is experiencing high temperatures, which is straining their ability to produce on the grid. You see numerous fires on energy storage projects, which has caused A significant concern about how we can deliver and integrate renewables safely into our grid. Nathan is going to go through later on the details around our order pipeline backlog and some specific customer examples. But what I wanted to talk about is what's required to truly grow Our business and ultimately, what's required to help decarbonize our energy grid. What's important here is not just the intent of decarbonization, it's having the policies in place to deliver that.

Speaker 2

At the same time, as you have the policy framework in place, which I believe we do in the United States with the IRA legislation, It's then taking those policies and acting. And where we need to work on as an industry and as a company is acting and moving faster to deliver on that demand. What the world is asking for right now is not a 2 hour energy storage solution, but a flexible energy storage solution that provides the safety and reliability that we all demand from our power grid. We believe that we have that solution over time to deliver into that market, and it's no more evidenced by that number On the lower left hand side of the page, the fact that we've discharged 1.4 gigawatt hours of energy over the lifetime of our product. We still have work to do.

Speaker 2

We still have things that we need to fix, improve and refine, but we have a technology that can deliver upon the need in the marketplace that we See every day and talk about every day. At the same time, we're focused on being able to deliver that product out of a state of the art factory That we like to say it's a technology that was designed with American minds. It's built with American hands using predominantly American materials on American Manufacturing Equipment. That's important to note as we talk about also energy security and our ability to deliver the future growth of our country. If you flip to Page 4, look, a picture tells a 1,000 stories.

Speaker 2

Here's a picture of our semi automated manufacturing line in Turtle Creek, Pennsylvania with our employees manning their stations and building batteries. Now we are in early days of commercial production, but we We feel really good about where we are, and we are very proud of what the team is doing and delivering on a day by day basis. So if we move to Page 5. I just want to hit on 3 core concepts here as to why we feel like we have a product that can to deliver the future needs of our industry and the world. First one is, we've taken a product That has been around for 15 years.

Speaker 2

We've used the basic same core chemistry. And our challenge technologically has always been, How do you do that and seal that battery so that the battery can perform over a 20 year lifespan? How do you do that at a cost Where you can deliver a product and how do you do that at a cycle time that you can scale into a fast growing market. We've learned a lot over the various generations of our technology and in every step of the way, we've incorporated that into this new Z3 design. This new Z3 design that the team has developed, the initial results are very promising.

Speaker 2

But you have to realize like what the technological team was able to do in Edison, Take out the highest cost component in our battery that being titanium and replacing it with conductive polymer. Learning from the ceiling challenges that we had on leaking batteries and taking that and incorporating it into the design of the Z3 battery, which enables us to both reduce cycle time and improve performance. If you move to the center of the page, our initial battery performance is very promising. Now here, I think what we have to do is take an insider's view of what performance means. So I've heard people say and talk about, Well, EOS' round trip efficiency is lower than what else was than lithium ion, and that's true.

Speaker 2

We sacrifice a couple of points of round trip efficiency For the safety and to reduce the fire risk around our technology that you see in lithium ion. But at the same time, if you measure us at 2 hours Of energy delivery against lithium ion, we also need to then take lithium ion and measure them at 4, 6, 8, 10 and 12 hours discharge time. That same performance that an EOS battery can do with that same round trip efficiency Without requiring the HVAC systems to be able to operate, you get that with an EO solution. And that's important when you think about These systems are operating in higher temperature environments. That's why you have the high power demand here this summer.

Speaker 2

So you need something that's going to be safe that doesn't require sophisticated complex cooling systems to allow them to perform. That's the product that the team has been able to develop. And when you look at the performance of 9 modules, so this is a small Subset of technology, but that technology is performing exactly as it was designed in the lab. Now there are going to be challenges as we move forward. I've done numerous new product introductions throughout my 30 year career.

Speaker 2

You don't know what you don't know until you start building and executing on your roadmap. But what we've seen from our initial performance is really promising as we look to deliver in the future. And then on the far right hand side of the page, You don't sell an individual battery cell. You don't even sell an individual battery. You sell a system.

Speaker 2

And inside that system, you got to look at how you make Is that cost effective and how you make that operate? And the team here has done a fantastic job of coming up and simplifying our system. Our whole goal here is Reduce the amount of wires that you have out in the field, reduce the complexity that you have on the field, allow more energy cubes to operate off of the same power electronics to reduce cost, to simplify the system and allow it to perform in a difficult operating environment and deliver what's expected of the industry and of this product. So we take those three fundamentals and then flip to Page 6 and talk about our line launch. Look, I'm proud to say that I work at EOS.

Speaker 2

I'm proud to be part of this team. The team amazes me every day with the work that they do. And if you start off on the left hand side of this page, that's day 1 of commercial Production that happened a few weeks ago. Now we've been very purposeful about turning on commercial production because of the speed that you manufacture. If you have an inherent Problem inside your battery, inside the production process, the compounding cost that it would be to shareholders Cash burn and we've been very, very cautious about how we've launched this product to make sure that we're spending every dollar we have wisely.

Speaker 2

And we've learned every step of the way how to improve how we build the battery. We started off, remember, I've said this before, Gen 2.3 Had a 90 minute cycle time to build a battery. 1st day we built batteries, we're at 4 minutes on the semi automated line, and we believe we have a path to take that down to 2 minutes of cycle time as we move forward. And this initial production comes with less than 1% scrap. And the batteries that are coming off of the line are performing like the ones that we showed on the prior page, meeting specification.

Speaker 2

Now we're going to put these batteries to the test. We're going to get them out in the field and start operating them. But what the team is doing out in Turtle Creek is nothing short Of Amazing in my viewpoint. At the same time, I talked about this before, you don't just sell batteries, you sell an overall system. We call that the EOC 3 cube.

Speaker 2

If you look at that middle picture, that's us starting to run our strings inside of a cube that would go out into the field. Now we're finding out as we spent a lot of time here again in Edison, New Jersey, in our R and D facility and our software facility developing a simpler Battery management system. We do differently than other technologies as we allow our battery to operate across a wide temperature range. We allow it to operate charge and discharge over a wide number of hours, but we do that with a very simple battery management system that allows flexibility for the end users. And what we've been trying to do and the whole trick here is reduce voltage in the system to increase throughput and to increase and decrease output of the system.

Speaker 2

It's not just about what your individual battery does, but how your systems perform. The team has spent a lot of time doing that. At the same time, I get a lot of questions about where are we on the state of the art manufacturing process. Well, the far right, that's the design Of the new line that's going to go into our factory in Turtle Creek. We're in the midst of developing the software and Tools logic around that.

Speaker 2

We've made some purchases of long lead items around robotics. We feel really good about the progress that we're making around this, But this all comes back to, again, how we manage the timing of investment in that line versus the Timing and spend on getting product out in the field. What everybody has to remember here before I turn this over to Nathan to talk about becoming profitable in the commercial pipeline is, This is an industry where you have to prove yourself out in the field. It's not prove yourself in the laboratory. So we've got to get the Z3 out in the field operating on customer sites and at the same time, perfect what we're doing, then automate, then scale, and we're trying to do that in a very compressed cycle time.

Speaker 2

I feel really good about where we are. We'll keep everyone updated on the challenges as we move forward, but I want to turn it over to Nathan, who's going to walk you through some more details around our pipeline, around our path to profitability and then also around the financials for the Q2. Thanks for listening today.

Speaker 3

Thanks, Joe. Good morning, everybody. I want to take a moment to explain how we're thinking about our path to profitability. Not only are we improving our bottom line, but we are also focused on improving our top line. As you know, the first step to profitability is getting to positive gross profit.

Speaker 3

From this point, we can begin to cover our operating expenses, which tend to be more fixed in nature as we achieve economies of scale. Looking at this graph, what you see here is sales prices are currently expected to increase over time. This is a result of increased market demand for long duration storage combined with a shortage of manufacturing capacity in the market. Some of these price increases are already baked into our backlog and are expected to be realized following the delivery of some of the earlier projects, which were sold at lower prices in order to secure a foothold in a lithium dominated marketplace. As we establish our technology And credibility in the market and secure the needed financing to expand our manufacturing capacity, we expect to see our pricing increase over time.

Speaker 3

The IRA's 10% domestic content bonus credit is an added tailwind. With our domestic content levels, We expect customers to see this benefit not only for their storage assets, but potentially in helping their overall projects to qualify for this added 10% credit. Moving on to COGS. While sales prices are increasing, one of the top priorities of the company is to continue focusing on taking cost out of the product. With our planned cost out initiatives in place, we expect to reach gross profit breakeven as we scale our first automated line.

Speaker 3

This would enable higher throughput, allowing us to absorb more of our fixed costs and gain operating leverage. Our cost program for 2023 includes 7 discrete projects that are anticipated to either Lower our supply costs, increase energy density or improve the manufacturability of our product. All three of these goals are essential to getting EOS to profitability. On top of taking cost out, Another benefit available to us is the $45 per kilowatt hour production tax credit. As we produce storage systems, We are able to realize this benefit as an offset to COGS, which we have already begun accounting for in the first half of the year.

Speaker 3

While this $45 tax credit will help to accelerate our path to breakeven, we do not believe it is essential to achieve profitability. We believe this business makes economic sense even without the tax credit, but it certainly acts as an added benefit to us over time. Despite the progress we are making on improving our backlog and driving our costs, we still expect to see negative margins as we come down our cost curve and deliver on early backlog orders. Moving on to Slide 9. I'm now going to walk you through our classic on the pipeline page that I'm sure many of you are familiar with.

Speaker 3

This page is broken out into 3 key buckets: lead generation, current pipeline and backlog. Starting on the left side of the page is lead generation, which at the end of the quarter was $10,900,000,000 representing 59 gigawatt hours of storage, up $1,200,000,000 from the previous quarter. You should think about this stage as customers coming to us with an idea for a project in which they do not yet have a technical use case for us to quote on. We do not count lead generation in our current pipeline And generally, there is a lot of churn here as things drop out or progress into our pipeline. Moving to the right, we get to our pipeline.

Speaker 3

And we define pipeline in 3 segments. 1, does it have a technical use case? 2, have we provided a non binding quote? And 3, do we have a signed letter of intent? We do not call something current pipeline unless we have a technical use case where we can provide a technical proposal to the customer, which then leads us to giving them a non binding quote.

Speaker 3

Our goal from there is to then get customers to sign an LOI with us, which represents a non binding agreement. And if the project materializes, they plan to choose EOS as their technology. Our current pipeline is now at $9,700,000,000 and is up $1,100,000,000 from the prior quarter. We have $1,600,000,000 in signed LOIs, an increase of $93,000,000 versus last quarter, representing over 7 gigawatt hours. From there, the intention is to materialize projects into booked orders, which then get added to our backlog.

Speaker 3

We currently expect roughly 30% to be converted from LOIs into booked orders over time. The backlog Stands at $534,000,000 as of June 30, including some long term service revenue, which represents less than 6% of the total value of our backlog. We expect to grow service revenue as more projects become operational in the field. During Q2, we booked a new industrial order in California and we removed 2 small projects that no longer met our qualifications to be considered in backlog. While we didn't see a large increase in orders during the quarter, we continue to feel our pipeline is strong and we believe Many potential customers may be waiting to see our state of the art factory in operation as well as additional clarity on the IRA tax credits.

Speaker 3

Each quarter, we assess the health of our reported backlog. Doing so requires us to exercise judgment about uncertain factors. We sometimes come to a view that a project that was booked in the past is unlikely to materialize or a change order has been executed, in which case We may adjust our backlog. This assessment has resulted in projects being removed from our backlog in each of the last two quarters. While we've previously shipped products to 12 customers, our current backlog consists of 13 customers representing 2.2 gigawatt hours, which includes a mix of utilities, developers, IPPs And industrial customers.

Speaker 3

Over 50% of our backlog is in the California and ERCOT markets with the remaining 50% spread across other U. S. And international markets. Now let's take a deeper dive on a few of the larger customers that we have in our backlog, Beginning with Bridgelinek, we first signed an MSA with Bridgelinek Commodities LLC back in March of last year. This was a multiyear MSA where Bridgelinek Locked in the price of 2 40 megawatt hours of storage over a 3 year period and then increased the overall size of the MSA to 1 gigawatt hour in June of last Bridgelinek is a developer of solar and storage projects and has informed us that it has over 1,000,000 projects in its pipeline And some of these projects have received interconnects, while others are well into the interconnection queue.

Speaker 3

This is important because an interconnect approval is essential for a project to be able to deliver power to the grid. In today's environment, And interconnect can take years to secure, meaning that these types of projects have a certain amount of intrinsic value, and we believe a number of them will ultimately be built. We were informed by BridgeLink Management that its affiliate has reached a confidential settlement with its lender and the related assets were not sold at auction. Bridgeline recently confirmed that they are actively seeking alternative financing for these projects. Moving on to IEP.

Speaker 3

In 2020, we entered into an agreement to supply 1 gigawatt hour of storage, which was added to the pipeline as a letter of intent. Of this, we have 2 Texas projects totaling 100 megawatt hours in the backlog with the remaining 900 megawatt hours included in LOIs. Control of the 2 Texas projects was transferred to a large North American infrastructure fund and we currently anticipate breaking ground on the first project later this summer with delivery scheduled for Q4 of this year. Carson Hybrid is another significant customer for us. We have a project in California that is co located with an active gas turbine peaker plant that is delivering power to the California grid to meet the high summer demand.

Speaker 3

Construction is expected to begin this fall as soon as we can access the construction site to deliver our products. In addition, we have a 300 Megawatt hour project with Carson that has recently received its interconnection approval and is included in our backlog. We have received a deposit or down payment on both contracts. Next, we have a confidential customer that is a leading Northeast Developer of solar and storage projects that has signed a multiyear MSA with us to lock in the price of our storage systems. The customer is actively pursuing permitting in New York and given the safety of our product relative to other alternatives and the recent fires that have been in the news, We currently expect this market to have significant growth potential.

Speaker 3

We anticipate cash coming in as POs are issued and production schedules are set under this MSA. And finally, we have another confidential customer that is a very large utility and one of the largest operators of energy storage in the U. S. This utility has signed a long term framework agreement for up to 4 gigawatt hours of energy storage volume, which is included in our pipeline in the LOIsfirm commitment category, along with the PO for their first 47 megawatt hour project, which is in our backlog and we expect to deliver later this year. This is an important project for the team as it represents our opportunity to demonstrate capability of Eos' technology to one of the largest utilities in the world.

Speaker 3

The balance of our backlog is a combination of smaller deals, both in front of the meter and behind the meter with developers, IPPs and investment grade utilities. Now moving on to Slide 10. This is a page where we want to walk through the structure of our standard form customer contract as it relates to expected cash flows going forward. In order to offset the high working capital needs of the business, we strive to receive cash early to fund raw material purchases. Generally speaking, our template customer supply contracts are structured so that as we begin to manufacture and deliver storage systems, We expect to receive approximately 60% of cash prior to customer delivery.

Speaker 3

Amounts received are, of course, subject to the final negotiated terms in each individual agreement. Now looking at the page, I want to walk you through the process of what we generally see from a signed letter of intent all the way to commercial operation on the right hand side of the page. As mentioned earlier, a letter of intent represents the last stage in our pipeline before a deal gets into backlog. You should think about this stage as a non binding agreement that aligns our interests with the customers and has us on the same side of the table, especially in the case of a developer as they pursue projects out in the marketplace. If the customer wins, EOS wins.

Speaker 3

To clarify, LOIs never meet our criteria for a booked order. What you see next is that an LOI or any active proposal can be formalized into a Master Supply Agreement or MSA. Alternatively, a customer can skip the MSA and go directly to a definitive supply agreement with the PO, which sometimes happens for smaller, more discrete projects. MSAs and POs can be considered booked orders provided they meet certain internal And each agreement can have different cash milestones, which are detailed in the contract. We typically require each of our customers to pay a Deposit or down payment before they are allocated a slot in our production schedule.

Speaker 3

You should think of an MSA as a multiyear agreement that defines a commitment to a specific amount of storage capacity being purchased over a defined period of time. As time progresses and specific projects are identified, Individual POs would then be executed under those MSAs. We often get a small deposit of up to 5% and or a cancellation fee with our multiyear MSAs. Even if an MSA does not have a specific project identified, It helps us with long term capacity planning. In the case of multiyear MSAs, POs are then issued when individual projects Materialize.

Speaker 3

When we receive a purchase order, we usually expect to receive 10% to 30% of the total contract price as a down payment. We expect such payments to be a significant source of cash to offset increased working capital needs as some portion of our active proposals, Another 20% to 30% of the contract price during the manufacturing stage. During this stage, we're sourcing the raw materials and we ask that our customers pay a cash milestone prior to manufacturing their systems and or additional cash when the product is ready to ship. Revenue recognition does not necessarily follow the cash flows or the manufacturing cycle, but rather is and determined based on our fulfillment of obligations to the customer. A meaningful portion of revenue is recognized when control passes to the customer, again, determined by the specific terms of the applicable agreement.

Speaker 3

Next, we expect to receive another 25% to 30% when systems are fully delivered. At this point, EOS begins site installation and commissioning and the last 5% to 10% would be received after commissioning is and complete and the system is placed in operation. I'd like to point out that an item we have mentioned briefly in the past is the opportunity for long term service revenue. While our contracts generally offer a standard 2 year warranty, we also provide customers with the option to purchase a long term service agreement, which can go out as long as 20 years. As we begin to get more systems in operation, we expect this to be an increasing source of cash and revenue in the future.

Speaker 3

Now let's move into our Q2 financial results. Overall, the Q2 was an important quarter for the team, and I'm very proud of our employees as we continue to keep our heads down and focus on getting the Z3 systems into the market. Each day, we become better than the day before, and we expect our financials to begin to reflect these improvements over time. Revenue for the quarter was $200,000 as we recognized revenue on our last Gen 2.3 systems before beginning the transition of our factory to Z3 production. Cost of goods sold for the quarter was $11,200,000 of which $2,300,000 is a non cash related item, a decrease of $25,600,000 compared to the Q2 of 2022, primarily driven by a decrease in unit volume, partially offset by increases in commissioning costs associated with the Pine Gate project.

Speaker 3

R and D investment was $5,000,000 a slight decrease compared to the Q2 last year, driven by a reduction in 3rd party services, partially offset by ongoing Z3 development. Dollars 300,000 was non cash stock compensation and depreciation. SG and A for the quarter was $13,100,000 including $2,200,000 of non cash items, which is $6,000,000 lower than the Q2 of the prior year, driven primarily by decreases in outside consulting expense as we brought several of these and recorded in the quarter. Interest expense was $19,600,000 for the quarter, of which $4,900,000 was driven by the senior secured term loan and the equipment financing facility with Trinity Capital. The other $14,800,000 was noncash related to the interest expense and amortization from our convertible notes.

Speaker 3

The resulting operating loss was 34 point $6,000,000 with a net loss of $131,600,000 or $28,900,000 excluding non cash items, which is a year over year improvement of 44%. Lastly, I will give you an update on our progress against our full year company objectives. 2nd quarter was very much a transitional quarter, and there's still a lot of work for us to do in order to reach our goals. We increased our opportunity pipeline by $1,100,000,000 in the second quarter. And during the first half of twenty twenty three, We had $86,900,000 in booked orders with 3 customers.

Speaker 3

While 3 customers may not sound like a lot, the largest order was with a repeat customer and another one was for an initial project accompanied by a larger framework agreement of up to 4 gigawatts, Which is included in our pipeline. We also signed 5 new letters of intent for a total of 1.2 gigawatt hours during the first half of twenty twenty three. We believe there is a line of sight to achieving our booked orders objective for 2023 with nearly $10,000,000,000 in our If we receive a positive outcome on our loan application, we expect to see increased customer confidence in our product and our ability to deliver long duration energy storage projects. Next, we remain on track towards our $30,000,000 to $50,000,000 revenue objective. If you recall, we said that the upper end of the range was contingent on getting our automated line up and running in in Q4, while the lower end was if the automated line pushed into next year.

Speaker 3

We are now tracking for the lower end of the range. In the first half of twenty twenty three, we had revenue of $9,100,000 As we think about the rest of the year, We currently expect remaining revenue to be back end weighted in Q4. With the majority of our revenue recognition occurring at the time of delivery As opposed to when product is produced, our revenue objective for the year can be somewhat binary depending on the exact Delivery timing of 1 or 2 large projects. While we believe we will be able to achieve our revenue objective for the year, The specific revenue recognition criteria could potentially push some of this revenue into early 2024. Lastly, the team continues to stay focused on cost out.

Speaker 3

And while we have discussed the key projects for 2023, It should be noted we have line of sight into further cost out initiatives that will come in 2024. Thus far, we have achieved 2 of 7 key projects for our year end cost objective, and we believe we remain on track to hit this metric. With that, I want to thank everybody for their time and for listening today. I would now like to turn it over to the operator for questions. Operator, please open the line for questions.

Operator

Thank Our first question comes from Joseph Osha with Guggenheim. Your line is open.

Speaker 4

Good morning. This is actually Hilary on for Joe. I just wanted to first touch on some of your earlier comments on the transition to the Z3. And if you could just share any more detail on Key learnings thus far and if there's been any kind of key manufacturing challenges that you've come across?

Speaker 2

Hey, Hillary. Good morning. Yes, I mean, look, at every phase of this, there's been learnings. I think what's Accelerated the development of the Z3 and at the same time at a lower cost position was doing the discrete manufacturing processes first. So if you look at where we started on our line and like building our Integrating the bipolar into the tub and then filling the battery.

Speaker 2

We've changed each one of those technologies As we've gone through, so as we learn things, we found other technologies that either gave us a higher process capability Or a better yield coming out of the overall processor at a faster cycle time. So we made a lot of changes there. And then inside of this was a lot of the Design work that the technology team has done. A lot of that work is done here in Edison where we're prototyping product. When you bring it out and do it at production scale, you start learning things when you're trying to transport batteries.

Speaker 2

So there were certain things in the way that we design The tops of the bipolars that were causing a potential slashing, where electrolyte could go between cells and cause an imbalance of the batteries when you're Transporting it on trucker by sea that we wound up having to fix. And then the last one, which is the most important one is as you lay out the material flow In the factory, we start to learn of where do you want people positioned, where do you want the material positioned, how much batch You want to have going into each one of your manufacturing processes to reduce cycle time. So as we've gone through and done this, as I said on the page, Yes, the continuous flow of a battery to the line is 4 minutes. We think we can half that on the semi automated line with some of the things that the team is finding. So it truly is where every shift we start off and end with what did you learn, what do we need to change, what do you need to make your job better, Because this is truly a learning process.

Speaker 2

I mean, we've only been at commercial production here for a little bit over a week when you really think about in earnest. So every day,

Speaker 3

we're going to learn

Speaker 2

the most from the people on the factory floor that are building the batteries, and that's going to make us better.

Speaker 4

Great. And then just as you look to transition to the full year deadline and execute on some of the cost out initiatives, I was just wondering if you could provide some context for how Quickly, we'll see that start to drive positive gross margin.

Speaker 3

So, sure, happy to elaborate on that a little bit. If you look at the different cost out initiatives that we've got identified, really touch on 3 different areas. It's supply chain and some efficiencies in our supply chain. It's improving the energy density of the battery and then also improving the manufacturability. And some of these, We are putting into effect now.

Speaker 3

Like we said, with 2 of these have already been accomplished and specifically it's around volume discounts on our cubes, so that's a supply chain related item. Second one is improving the overall power density of the battery, so that falls into the 2nd category of improving the energy efficiency. These are things that we can do now even on our semi automated line. There are other cost out initiatives that are dependent on getting to a fully automated line. You won't really see us fully achieving cost out into

Speaker 2

next year. But and Hilary, the only other thing I'd add that I always tell the team here at EOS, right? So prior to EOS working At General Electric, right, I was managing product lines that were 100 of years old. And you were getting 4% to 5% Cost out productivity every year on a very mature product. This here as we go through this, we're going to be learning every day and finding ways and updating our cost out pipeline, Looking at cycle time reductions and productivity ideas.

Speaker 2

So this is going to be an iterative process where it's a funnel, right? You bring ideas in and you want to realize ideas out the back end of this. And I think we're starting to see as you actually start building and operating The product, you start to find more and more ideas on how to take costs out. We just got to stay keep our noses to the grindstone and just keep finding ways to Improve the competitiveness of what we put out in the field.

Speaker 3

As I was listening to Joe, I realized I didn't fully address your question. You were asking about gross margin Breakeven, I would say, we won't achieve gross margin breakeven until we get the efficiencies of the fully automated line. So that's how I would think of it in terms of timing and the timing of that is somewhat dependent on capital

Speaker 1

Great. Thank you for taking my questions.

Speaker 2

Thanks, Hillary.

Operator

Thank you. Our next question comes from Christopher Souther with B. Riley Securities. Your line is open.

Speaker 5

Hey, guys. Maybe just following up on that, with the initial B3 ramp, Can you please frame some of the metrics you called out here for the semi automated manufacturing? How do those 4 minute cycle times and less than 1% scrap rates compared to what we saw at this stage with Jags 2.3. And Can you update us on how the BOM cost today compared to Gen 2.3 and what the reduction would be post the 3 cost initiatives you called out for 2023. This is all kind of prior to the full automation that you talked about.

Speaker 2

Right, right. So, hey, Chris. Look, I mean, this is night and day. The team Of people that went through Gen 2.3, there's days where at the end of the day, we're sitting In an office talking and we'll say, do you remember where we were at the same time with Gen 2.3 and it's just 9 day difference. I mean, like when you think about Gen 2.3 at the end of the 1st week of commercial production, our yields were in the 50% range on a good day For the 1st months as we were trying to perfect the infrared welding process.

Speaker 2

When you look at the stacked up, but I think it's important thing that we talk about was You're doing 41 infrared wells, which we were doing this. We were doing those 41 wells. It was the largest surface area That has been done as an infrared weld, and it was also the most continuous well. So doing the size of the battery we're doing for 41 wells, No one else is doing that, but you don't get paid by doing technological marvels. So doing what we're doing now with 1, The cycle time being at 4 minutes, you're probably talking about you're saving 90 more than an hour and a half per battery As you go through and do this with a lot less material handling.

Speaker 2

On the and then I think look, I think we can actually get better From where we are as we go through and look at the scrap rates and the performance, I think the thing that we've done is our new Manufacturing operations leader, he's got visual management boards hour by hour. The entire team is focused on What they have to do with each one of their stations, we've used the time here in the last three months to prepare ourselves to grow the company and it's paying dividends here in the start up. So it is totally different than what we had on Gen 2.3. Now what I would say is We learned a lot on Gen 2.3. I think the biggest thing that we all need to remember on Gen 2.3, From a manufacturing standpoint and a product design standpoint, we learned a lot about sealing technology of sealing the battery And having a good cell to cell, not having cell to cell leakage of electrolyte going from one cell to the other.

Speaker 2

So what we learned on that ceiling Allowed us to come up with the mechanical design on Z3. At the same time, getting Gen 2.3 Containers out in the field and operating, We learned a tremendous amount around software's controls and managing and optimizing performance. And that's very important. Like we spent a lot of time talking about the battery, but what we really provide to the field, as I said, is a And that system with the Z3 is much more efficient. Our software And Technology Leader, Pranesh Raulik, what he and his team have done on the battery management system and how we've been able to introduce this and have it work Coming off of the out of prototype development is nothing short of amazing.

Speaker 2

So we have a lot of work to You don't know we still there's still unknowns we're going to be challenged with as we move forward. But it's very exciting for us to think about Where we started and how we did the development of this product and how it's really going. And when you think about it, Chris, like, we had our first Production prototype battery, if you will. It was less than 12 months ago. And to be in production 12 months later with the way we're doing this With 300 people, that's why I say the team amazes me and that's why I also say I'm proud to work for this company.

Speaker 5

Got it. Just on the bond comp, Yes, maybe versus more meaningful today versus kind of that post the 3 cost initiatives you called out For this year, like what is the reduction you think you can get and where does it stand today?

Speaker 3

Really, I think The picture hasn't changed from what we've said historically, which is this battery or actually this entire system on a kilowatt hour basis was designed at half the cost of of where we started with Gen 2.3. We've got 7 cost out initiatives that we're focused on for this year, 2 of which are completed. When we say completed like in the case of the containers, I mean, we've negotiated the contract and we don't Fully realized those savings coming through our P and L until our call comes up. But so there's those types of things that are going to roll in over time. And then as Joe mentioned, I mean, this is a continuous improvement process.

Speaker 3

We'll have significant efficiencies when we get to full automation. But even after that, we continue Improvements either supply chain design improvements, etcetera, going forward. But specifics on the BOM, I mean, that's as much granularity as we can get into at this point? Yes.

Speaker 5

I mean,

Speaker 2

I think it's fair to say that Your starting point of the launch is significantly lower than where we were at Gen 2.3, just on the Form factor of the battery and the fact that we have no titanium. The 7 projects Nathan is talking about, they get at the core of what we do To build a battery. So like Chris, as you look at these 7, right, this is something else like so a 300 person company Going out, building a pipeline of opportunities, building this battery, bringing a factory online. The third piece of this is building an American supply chain. So there's a tremendous cost out opportunity here with us working with companies like Tetra on Electrolyte and coming up with ways to optimize the formula, to optimize the mixing and delivering of that, to then look at what are we doing from The manufacturing of other components to really reduce the total supply chain costs, both material costs, logistics costs, But going out and saying like here we are, a 300 person entity in an environment where people Can America innovate and can America manufacture?

Speaker 2

And you know what I say? I say, yes, we can, because 300 people are doing it.

Speaker 5

Got it. And maybe just kind of shifting towards the focus on American Made and all that. Everything in your kind of commercial activity slide has grown except for the order backlog. And you called out In fact, people seeing the factory and the like, but can you give us a sense do you guys get a sense of the current Your people in the current pipeline are waiting for the DOE loan order commitments, before kind of moving forward, like What are customers saying as far as kind of the DOE load process?

Speaker 3

Absolutely, Chris. I mean, we've had a number of Conversations anecdotally, they're saying exactly that, right? We want to we like the technology. We've seen it. We've done a bunch of research, But we just want to make sure that you guys are well capitalized and you're going to be here to deliver the product and also be here to deliver on the long term Service agreements on the back end.

Speaker 3

And so I think capital is important. I think just as important is as we get Z3 product out in the field in cycling and customers can go out and see it and test it and look at the data and the successes. I think that's very important. And then the 3rd piece that customers are mentioning is just additional clarity around domestic content, IRA credits. There's still a lot of discussion around that in the folks we're talking to.

Speaker 3

So I think as those 3 as we have clarity on those three things, we should see a significant increase And customers moving through our commercial pipeline.

Speaker 2

And Chris, I'd add, I mean, I think Nathan's kind of give you The technical, how we get their response, like the way I've always thought about this in my 30 year career is that when someone decides to place a purchase order with the company. They're making a bet on you. And when we're talking about these types of projects And like and I'm very passionate about the fact that we've got to start speeding up and doing things faster to meet the demand of this market. But you're looking at projects where someone's making a purchasing decision today. And if they're lucky, they're going to get their grid connection in 2 to 3 years.

Speaker 2

So they're sitting there making this decision and saying, I'm making my bet on this company and these people for something that's going to happen 2 to 3 years from now. So what we need to do is, Nathan said, secure the financing to scale the factory and show them that we're going to be there To deliver that project. And yes, bringing them and showing them the manufacturing of the product and how the product works helps. But we've got to also show them that we're going to stand by the commitments that we make and we're going to deliver on those commitments as we move forward. And that's As important as anything of having the underlying financials, it's both things.

Speaker 2

It's the being able to be there from a financing standpoint And being able to be there from a reliable partner that delivers, and we're doing both.

Speaker 5

Yes, that's really helpful. I'll hop in the queue. Thanks, Gus.

Speaker 3

Thanks. Thanks, Chris.

Operator

Thank you. Our next question comes from Vincent Anderson with Stifel. Your line is open.

Speaker 6

Yes, thanks. Good morning, everyone. So just maybe to get out of the way, it sounds like you've completed everything you needed to on your end of the loan process, which I believe would include the term sheet. If that's the case, did the 30 day clock start on the Treasury OMB approval process? Or does that still wait Until the loan goes through this new, call it, preconditional commitment review?

Speaker 3

Yes. Good morning, Vincent. I would say, yes, we're definitely in that 30 day window. We have been responding to some questions over the last couple of weeks. They're getting fewer and further in between and easier to answer.

Speaker 3

So we've been working through, which makes me feel like we're at the very final There are multiple approvals that have to occur in this process and It's not necessarily clear from the outside looking in exactly what that process is, but we do believe and And we've been informed we're in the very final stages of that. So, we're hopeful that by Labor Day, we've got some great news to talk about. But Like I said, we can't control the exact timing of it.

Speaker 6

Okay. No, that's helpful though. And then actually Nathan, thanks for the deep dive on the pipeline. I was actually hoping we could go back to like a 10,000 foot view of the industry really quick. So As far as your customers go, you have companies like blue chip utility companies that are going to be self funding these projects, but you have a very different structure in a lot of the renewables market in terms of both the structure and the financing.

Speaker 6

So I was hoping maybe you could just kind of talk about how those projects would compare To something like a large scale utility customer. And then just kind of ancillary to that, you hinted a couple of times at the interconnect. They might not want to call them delays, but they feel like delays to me. Is that having any impact on the pace of leads moving through the pipeline or the funding of those projects?

Speaker 2

Yes. So Vincent, I'll take some of these and Nathan can fill in. So on the last part of the question, Look, the news that came out about the new FERC processes is great news for the industry, right? And we've got to get Projects through the pipeline and projects onto the grid performing. Like you look at Texas, It looks like in the last week, it's almost like every other day, they set a record output for their grid.

Speaker 2

California going into a high, like I said earlier, going into A very hot time period here and straining on their reserve margins. So we need these projects and we need to move quickly here to make this Happened to make the new energy future a reality, right? And that process of getting through, it Slows down the project in the sense of you're not breaking ground on the project, you're not installing assets and you're not charging and discharging on the grid while you're waiting for approval. So we got to find a way to be Faster as that. And we is the entire industry, including policy and government approvals and state approvals that need to happen to get the projects through.

Speaker 2

On your question like blue chip customers, what we see more and more of those coming in and putting us Our paces and working through the pipeline and being in both some of the backlog confidential customers that Nathan talked about and also in our LOI pipeline. But on the other part of this market, like and look, you can spend your time and just look in Google or read Any of the trade magazines to see the number of developers out there coming up with storage projects and the way these projects work are in general, You're doing project development. So you're going out and saying, here's where I want to do my project. I'm going to spend some money to do development and get permitting and get things online. Then once I do get all that done, I'm going to finance my project with either debt or equity.

Speaker 2

So you're making a partnership with people that have to go out and work through that process And then get through the permitting and then do their project. When we were a fledgling company, those are the types of people that wanted we had entrepreneurs Who saw an opportunity, a great American story by the way. I see an opportunity to have an idea, let's do this together. And those guys have come back and we've developed and worked through this and are now getting ready to install assets. So you've got to work through that process side by side.

Speaker 5

It's a bumpy road. Look, it's a

Speaker 2

bumpy road, Side by side. It's a bumpy road. Look, it's a bumpy road when you're at EOS, and it was a bumpy road when I was at GE, like where you've got to work Through these, like you look at the big players, that's why there was at the time a GE Energy Financial Services or there's a Financial Services, because people know that to accelerate some of these projects, you got to help and get them through their financing to get them online. We do that more on the technology side and then try to bring in people that we know from our backgrounds, whether that be Nathan's background in the industry, my background in the industry. We've got Jeff Borenstein on our Board, who was the CFO of GE and the CFO of GE Capital, that we have all these contacts.

Speaker 2

And we're trying to put together The deal to take these LOIs and these opportunities, turn them into backlog, and backlog is not a guarantee of sets. Backlog just means we believe we have a project that's firm enough that we're going to start doing capacity planning around it. Then you got to translate that into revenue. And that's where the real hard work starts, but you've got to be a partner all the way through. It goes back to where I started before on Chris' question where Somebody has given you an order.

Speaker 2

They're taking they're betting their career on your ability to deliver and you got to put 100% in to deliver that project and we're going to do that at EOS.

Speaker 6

Very helpful. I appreciate it. I think that's all from me. Thank you.

Speaker 2

Thanks. Thanks, Chris.

Operator

Thank you. There are no further questions.

Speaker 2

I'd like to

Operator

turn the call back over to Joe Mastrangelo for closing remarks.

Speaker 2

Thank you. Thanks everyone for listening today. Exciting time, a lot of work going on, but Extremely energizing, energizing and I say that as a with a dual meaning of what happens every day, Whether that be in Edison or in Turtle Creek or out in the field, but also exciting to think about the future of the company, what we have to build here, and we're going to continue to be focused on the long term value creation for our shareholders by bringing a product to market that the market demands, Making it as competitive as possible and helping to power the new energy future, and we're excited to be able to do that. And again, I'll end the call the same way I started. On behalf of the 300 plus people that come into work every day at EOS to make this great company, thank you for your time today.

Operator

Thank you for your participation. This does conclude the program. You may now disconnect. Everyone, have a great day.

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Key Takeaways

  • EOS has begun Z3 commercial production at its Turtle Creek, PA factory, achieving a 4-minute cycle time and under 1% scrap rate on its semi-automated line, with a path to reduce cycle time to 2 minutes and demonstrated 1.4 GWh of lifetime energy discharge.
  • The company’s path to profitability centers on scaling its first fully automated line, executing seven cost-out initiatives to lower supply costs and boost energy density, and leveraging the IRA’s 10% domestic content bonus plus a $45/kWh production tax credit.
  • EOS reports a robust project pipeline of $9.7 billion (59 GWh in leads), with $1.6 billion in signed LOIs and $534 million of backlog (2.2 GWh), anchored by multiyear commitments from Bridgeline, IEP, Carson and a major U.S. utility.
  • In Q2 2023, EOS recognized $0.2 million in revenue, recorded an operating loss of $34.6 million (net loss $131.6 million), and set a full-year revenue target of $30 million to $50 million, with results hinging on automated line timing.
  • Management anticipates final DOE loan approval within 30 days, which is expected to secure financing for capacity expansion and enhance customer confidence in EOS’s long-duration energy storage solutions.
AI Generated. May Contain Errors.
Earnings Conference Call
Eos Energy Enterprises Q2 2023
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