Eos Energy Enterprises Q2 2026 Earnings Call Transcript

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Provided by Quartr
August 5, 2026

Key Takeaways

  • Negative Sentiment: Eos lowered its 2026 revenue guidance to $300 million–$350 million, citing a planned consolidation of Line 1 into the Thorn Hill facility that will temporarily reduce production and revenue.
  • Positive Sentiment: Second-quarter revenue reached a record $68.8 million, up 351% year over year, while backlog grew to $807 million and the opportunity pipeline increased 31% year over year to $24.6 billion, or nearly 112 GWh.
  • Positive Sentiment: Management expects Thorn Hill consolidation to reduce conversion costs by an additional 10%–15%, with an estimated nine-month payback, while a unified manufacturing footprint is intended to support volume growth and margin expansion in 2027.
  • Negative Sentiment: Despite seven consecutive quarters of gross-margin improvement, adjusted gross margin remained deeply negative at 62%, and adjusted EBITDA was negative $71.4 million; management is targeting more than 72 percentage points of adjusted gross-margin improvement over the next 12 months.
  • Positive Sentiment: The installed fleet has discharged 6.5 GWh across more than 3.9 million cycles, with average round-trip efficiency of 78% and demonstrated performance above 90% on some cycles, supporting Eos’s claims of improving reliability and bankability.
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Earnings Conference Call
Eos Energy Enterprises Q2 2026
00:00 / 00:00

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Operator

Good morning. Welcome to Eos Energy Enterprises' Q2 2026 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, Head of Investor Relations. Thank you. You may begin.

Liz Higley
Liz Higley
Head of Investor Relations at Eos Energy Enterprises

Good morning. Welcome to Eos' Q2 2026 conference call. Today, I'm joined by Eos CEO, Joe Mastrangelo, COO, John Mahaz, and CFO, Alessandro Lagi. Today's call may include forward-looking statements, including our expectations regarding future results and the outlook for our company. These statements are based on our current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially. For more information on these risks and uncertainties, please refer to our SEC filings. These forward-looking statements speak only as of today, and we undertake no obligation to update them except as required by law. Today's remarks will also include references to non-GAAP financial measures. A reconciliation of these measures to the most directly comparable US GAAP measure is included in our earnings release.

Liz Higley
Liz Higley
Head of Investor Relations at Eos Energy Enterprises

Non-GAAP measures should be considered supplemental to, and not a substitute for, financial information prepared in accordance with GAAP. In addition, these measures may not be comparable to similarly titled measures used by other companies. This conference call will be available for replay via webcast through Eos's investor relations website at investors.eose.com. Joe, John, and Alessandro will walk you through our business outlook and financial results before we proceed to Q&A. With that, I'll now turn the call over to Eos CEO, Joe Mastrangelo.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Thanks, Liz. Good morning. Thanks everyone for joining us. This quarter comes down to three simple things. We shipped more product than we have in any prior quarter, we grew our backlog, and we committed to consolidating our manufacturing footprint. A strategic decision that trades near-term revenue to lower our cost base as we exit 2026. Now, let me walk through all three of these. We're tightening our 2026 revenue outlook range to $300 million-$350 million. This is a business decision, not an operating surprise. Let me address this change directly. We are accelerating the consolidation of operations into our modern Thorn Hill facility because of what it has begun to deliver. Line one will be down during the move and upgraded to the operational improvements we've implemented on line two. The volume it would have produced is the difference in the upper end of our guidance range.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

We're doing this so that 2027 is not only a volume growth year, but also a margin expansion year. John and Alessandro will take you through the operational and financial expression of decision in a few moments. The low end of this range is roughly two and a half times our 2025 revenue and more than 19x to 2024. We delivered just under $126 million in the H1, which already exceeds all of last year's revenue. Let's frame the range itself. While we are still finalizing a detailed schedule, the shape is very clear. The H2 exceeds the H1, the Q4 is higher than the third. The bottom of the range takes roughly $50 million of H2 growth over the H1. That is just maintaining the run rate that we exited June with on revenue already secured through backlog and Frontier Power USA.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

The top end of the range is achievable. It comes down to how quickly we scale Thorn Hill operations in a 24/7 production facility like we have today in Turtle Creek. We're planning for that, and we'll report against it every quarter. Moving to slide five, our Q2 operating highlights. We achieved record backlog, record revenue, record cube shipments, and a significant improvement in adjusted EBITDA margin. We're starting to see the operating leverage we've been talking about. As volume increases, fixed costs are spread across more cubes, and that's what drives margin improvement and closes the profitability gap. John and Alessandro will take you through the details behind those numbers and our path forward. Before they do, I'd like to spend a moment on fleet performance and cash. First, discharge energy.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

The number we're looking at at the page is up nearly a half a gigawatt hour since our last call. The fleet now cumulatively has discharged 6.5 GWh of energy. The Z3 fleet continues to perform, operating at an average round trip efficiency of 78%. Let me be precise about that number, because precision is what matters here. 78% is the average across a 2,120 state of charge window. It includes units running on DawnOS and the units that have not yet been upgraded to DawnOS. The performance of what we've developed, but we're continuing to count that performance of where we still have to improve to show the true number of what customers are experiencing out in the field. It's a fleet average under real duty cycles, not a laboratory result on a single unit. We're starting to scale here.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

We have more work to do. There is a clear path to continue to improve performance. Turning to cash. We ended the quarter with $364 million in total cash. What's important is what sits behind that number. Our operational cash use this quarter closely matched our adjusted EBITDA loss. Cash on cash, there was very little gap between the P&L and cash flow. That burn rate needs to continue to come down and turn positive. The initiatives that John and Alessandro will walk you through are designed to drive that improvement. Now let's move on to slide six. Let's focus on what wins our next order. Reference hours. This page shows the hours the fleet has already delivered and the continued growth ahead with more than 200 additional megawatt hours expected to come online over the next six months based on current customer project schedules.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Let's start on the top left of the page. The fleet has now run over 3.9 million cycles and discharged 6.5 GWh I talked about earlier. On Z3 specifically, over 1.1 million cycles, we are moving towards 1 GWh of discharge energy. Every hour of cycling makes the next project easier to finance, because customers can now evaluate a track record, not a promise. Round trip efficiency tells a more interesting story. Note how the performance range is narrowing. The bottom is rising towards the fleet average. That is variation coming out of the system, and reducing variation is what makes performance bankable. At the same time, the top of the range has crossed above 90%. In manufacturing terms, that is entitlement. It is what this technology delivers when everything runs designed. It is not a ceiling we hope to reach.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

It is a level the fleet has already demonstrated, and now our work is to deliver it consistently across every cycle, every cube in the field runs. The duration tile shows the range our systems are operating in the field. From two and a half hours to 14. One product, one SKU dispatched however the market needs it. The photo on the right is a project that was added into our backlog in November of 2024. I want to use it to show you how a pipeline opportunity becomes an asset operating in the field. The units were built and shipped by November 2025. They went on foundations in May or June of this year, and the project is expected to come online by year-end. Order to operations, roughly two years, and notice where the time went. The product was ready in 12 months.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

The second year was everything else, from site readiness to third-party equipment delivery outside of our scope and the site construction schedule. That is one of the industry's key bottlenecks, and it is exactly why Frontier Power USA was built, to simplify the process and streamline the customer experience. The next page highlights how that strategy is translating into results. On page seven, the U.S. storage market is changing in ways that favors our technology. Load growth from data centers and electrification is pulling capacity needs forward faster than new generation can interconnect. In PJM, the grid operator for 65 million people and the largest power market in the country, prices have hit the ceiling in three consecutive capacity auctions, and the way the market now counts a resource towards capacity favors those that hold outputs to the system, full system need rather than the first two hours of it.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Virginia has written the same logic into law this spring. The statute carves out 4.5 GW for resources that run 10 hours or more inside a total state storage target above 20 GW. At the minimum duration, that carve-out alone is 45 GWh of energy. Buyers are no longer procuring just a storage system; they are procuring hours. Inside of this, we see four customer types. Energy providers and regulated utilities who generate revenue from assets. Energy consumers and assurance buyers who carry them as a cost of operations. The largest energy providers are independent power producers who need to deliver multi-hour and multi-cycles day after day because those capacity payments reward duration and energy margin rewards throughput. Utilities need assets that regulators will allow them to earn a return on over a 20-year life. Think about that for a moment.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

An energy provider, an IPP, uses that discharge window I talked about earlier, when we've always talked about the degradation of our product over time and having a 25-year life helps a utility with its regulator and its rate base. If you move over to the largest energy consumer, that's high-speed computing, where power is just a cost of goods sold. Think of a data center as a factory and think of energy storage or energy coming in as an input for them to produce. Storage is judged on delivered costs, how fast the site can energize, and how reliably it will operate. The assurance segment is made up of defense or critical infrastructure customers, where storage is priced against the cost of failure and the rapidness of being able to perform.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Two book it as revenue, one books it as cost of goods sold, one books it as insurance. All four buy hours, all four screen for supply chain origin. We manufacture in Pennsylvania with a domestic supply chain. That is a commercial advantage today, not a future one that we're planning on. The pipeline on this slide is built from all four of these customer types, the composition is where we are focused. I talked about backlog earlier, what's important to note is that six customers placed orders this quarter, four new and two repeat. Our pipeline of $24.6 billion, nearly 112 GWh, is up 31% year-over-year. 51% of the pipeline is eight hours or longer. That is the duration band where our economics separate from incumbent technologies. 32% is data center related, which two years ago was a de minimis amount.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Three commercial developments frame the H2. After the quarter closed, we were awarded a strategic partnership agreement under Golden Dome for America program with the U.S. Department of War. During the quarter, we signed a 750 MWh master supply agreement with CAPAC covering Germany, Austria, and Switzerland. Frontier Power USA holds a 2 GWh capacity reservation agreement. Under that agreement, we are now seeing purchase orders convert into projects, beginning with the Bimergen project and most recently with the $100 million purchase order we announced this morning for phase one of the Blanquilla project in ERCOT, originally developed by Stella Energy. I'll highlight the obvious. With nearly $25 billion of pipeline against an $807 million backlog, our job is conversion, not origination. Capital availability is one of the critical opportunity conversion factors.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Two slides ago, I mentioned we built something to improve it, that now brings me to Frontier Power on the next slide. Frontier Power USA, it's working as we intended. We have started execution on our first project because our priority is to get more projects into the field, begin generating returns, and begin the operating references that help turn the investment flywheel of Frontier Power and deliver that pipeline conversion I was talking about a moment ago. We saw that strategy begin to play out in the Q2. A preexisting project that will ultimately be part of Frontier Power USA was executed prior to the closing of the joint venture using financing provided by a service affiliate.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

That project accounted for roughly 80% of Q2 revenue and demonstrates how this structure can help us get projects into the field sooner and build the reference hours that support future growth. Adding this project is an asset that we believe will deliver mid-teen returns and accrete the value of the joint venture in which we hold the minority interests. I'm putting that on the table first because I want you to understand it is a strategy rather than just a footnote. Our pipeline has historically experienced delays closing project financing, not technology acceptance. We saw qualified projects with real offtake sitting unbuilt because developers could not close their capital stack. We built the vehicle. Frontier Power USA supplies the capital, Eos supplies the technology, and we hold a minority interest in the entity.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Walk the left side of the page, $263 million of gross proceeds initially raised, supporting an estimate $1 billion in project deployment. The funnel behind it, 16 GWh of opportunity pipeline, 5 GWh acquired, selected, or under active due diligence, and 1.8 GWh under construction are approaching full notice to proceed. First projects under this vehicle are expected to be online by the Q3 of 2027. That is the project journey I showed you two slides ago, running at platform scale with capital waiting for projects instead of projects searching for capital. Now in the middle of the page, because this is a long-term operating asset and it creates value in three ways. Frontier Power USA operates projects for recurring revenue. It can sell projects and recycle the capital into new ones, and at scale, the platform itself becomes highly valuable. Eos participates in all three.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

We are the long-term service agreement counterparty across the installed fleet, with up to 25%-30% of total CapEx over a 20-year life. We hold economic ownership in the platform, so we share in the recurring cash flows, the project sale proceeds, and any future monetization of the platform. In every project Frontier Power USA puts into operations adds reference hours to the installed base and to that chart I showed earlier, which will accelerate the next order and backlog growth and conversion of pipeline into orders into assets operating in the field.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

CAPAC, the U.S. Department of War, and the customers that place orders this quarter growing. Both engines are running. They compound as we execute our strategy and projects become operational. We have a strong demand signal. We're building installed base operating hours. The capital partner that unlocks accelerated growth. Strong execution delivers profitable growth. Let me turn it over to the man responsible for all that, John, for an operations update.

John Mahaz
John Mahaz
COO at Eos Energy Enterprises

Thanks, Joe, and good morning, everyone. Q2 was about focus, disciplined operation, and increased efficiency. Turtle Creek delivered on all three. Cube output increased 20% sequentially, reaching an annualized production rate of approximately 1.5 GWh in June. More importantly, we achieved that while keeping labor costs essentially flat. On materials, we're beginning to see the work we've been doing translate into lower costs. Material costs improved by 10% sequentially with the benefit of tariff-free base rate in prior periods on an imported components. Excluding that, material cost per cube improved 1% sequentially. We expect further improvement in the Q3 as inventory balances our work through production and we realize the benefits of our cost reduction initiatives. More broadly, there is a continuous learning cycle in our business where we take feedback from the field and incorporate those learnings into the design.

John Mahaz
John Mahaz
COO at Eos Energy Enterprises

While that can add cost in the short term, it ultimately drives meaningful cost reductions over time. When we launched NLS in the Q3 of 2025, material costs increased as we noted on our last earnings call. Since then, we have reduced material costs by 12.5% in less than a year. At the same time, we invested in product enhancements throughout 2026 based on the field learnings. Had those enhancements not been incorporated, material costs would have been down 14.5%. We achieved this despite elevated inflation, a volatile geopolitical environment, and a continually evolving product design, which reflects the strength of our continuous improvement process. Labor productivity also improved during the quarter. Direct labor cost per cube declined 20% sequentially while production increased, reflecting better execution and increasing efficiency across the factory. Manufacturing overhead per cube improved 4% sequentially.

John Mahaz
John Mahaz
COO at Eos Energy Enterprises

However, if you look at Turtle Creek on a standalone basis, overhead per cube improved approximately 16%, reflecting the productivity gains delivered by the team at the Turtle Creek plant. The consolidated result was temporarily impacted by the underutilization of Thorn Hill as we brought line two into commercial production. That's exactly what we would expect at this stage of the ramp. As planned, we have been operating on one partial shift while we validate the line's performance. Over the next several months, we'll continue to add shifts and increase utilization. As volumes ramp, we expect utilization to improve, fixed costs to be absorbed across greater production, and the operating leverage built into Thorn Hill to become increasingly evident in our results.

John Mahaz
John Mahaz
COO at Eos Energy Enterprises

While we're pleased with the progress at Turtle Creek, our focus is not simply on incremental improvements. Our focus is on achieving the cost structure we've always envisioned for the business. That's where Thorn Hill comes in. The biggest opportunity ahead of us is not just a continuation of what we've already accomplished, it's the earnings power we unlock as we fully utilize a purpose-built, highly automated manufacturing platform. During the H1 of 2026, we produced 17% more cubes than we did in all of 2025, and we've matched last year's total production volume in just 164 days. What's most important is that scrap dollars on that same volume were down 63%, validating that our manufacturing platform is scaling as planned. With line two contributing only 1% of Q2 production, we have yet to realize the full benefit of Thorn Hill, leaving significant operational upside ahead.

John Mahaz
John Mahaz
COO at Eos Energy Enterprises

Thorn Hill is already delivering the performance we intended. Initial line two battery cycle times are 10% faster, and bipolar cycle times are 11% faster than line one, with additional redundancies built in to improve line availability. That drives a near-term increase in overhead per cube. It improves as we scale production. We will continue to improve performance from here. As we move through the Q3, we're evaluating the timing of consolidating line one into Thorn Hill. There is never a perfect time to make a move like this. You have to balance execution, customer commitments, and operational continuity. That said, after years of operating manufacturing facilities, I've learned that the sooner you pick a path, the sooner you begin realizing the benefits. Waiting rarely creates value.

John Mahaz
John Mahaz
COO at Eos Energy Enterprises

Consolidating the footprint will allow us to upgrade line one to the same single-piece flow design, while at the same time implementing redundancies to remove single points of failure. The focus becomes much clearer. One building, multiple production lines, one overhead structure, and more volume flowing through the same footprint. Based on our current analysis, we believe this initiative alone could deliver an additional 10%-15% reduction in conversion costs on top of the improvements already embedded in our current operating plan. Achieving those savings would require a modest investment to relocate and integrate line one in Thorn Hill. Even after accounting for that investment, we currently estimate a payback period of approximately nine months. This is what positions us to 2027. It is the foundation for the margin improvement Alessandro will walk you through on the next page. Thanks, everyone. With that, I'll turn it over to Alessandro.

Alessandro Lagi
Alessandro Lagi
CFO at Eos Energy Enterprises

Thank you, John. Good morning, everyone. Before I start to discuss the quarter, let me say that it's a privilege to be here. I want to thank the entire Eos team for the company that they have built and the progress that they've made over the last few years. I followed Eos for several years, first as a shareholder. Now for the past two months as a CFO. Over the last 25 years, I've led finance organizations across global energy and industrial businesses. What brought me here was the combination of a unique vision, a differentiated technology, an expanding market, and a business at an operational inflection point. Before I joined, I visited our manufacturing facilities. Having spent most of my career around industrial operations, the level of automation stood out.

Alessandro Lagi
Alessandro Lagi
CFO at Eos Energy Enterprises

Eos designed this platform for the volume the business is growing into rather than the volume it had. That decision is now paying off. I strongly believe that Eos is at a real tipping point. Looking at what the team has built gives me tremendous confidence in the opportunities ahead. I believe I bring an operational mindset that complements the team with a particular focus on execution and margin expansion. I'm excited to be part of the next phase of growth and to help translate the scale we've built into stronger profitability and long-term shareholder value. I want to finally thank Nathan for this partnership through the transition and for the financial foundation he has established. With that, let me turn now to the Q2.

Alessandro Lagi
Alessandro Lagi
CFO at Eos Energy Enterprises

Revenue increased to its highest of $68.8 million, which is up 351% year-over-year and 21% sequentially, with cube deliveries increasing 207% year-over-year and 20% sequentially. Turning to margins. Gross loss totaled $48.8 million. Margin improved 132 points year-over-year and seven points sequentially. Excluding stock-based compensation and depreciation and amortization, adjusted gross loss was $42.9 million and an adjusted gross margin of -62%. This marks our seventh consecutive quarter of gross margin improvement and reflects the operational progress we're making across the business. The Q2 results also reflect the continued scaling of our manufacturing operations, with some expected cost pressure as we invest in supporting that growth. In these regards, two items impacted the quarter. First, Thorn Hill. As you heard from John, a newly commissioned line operates below its long-term utilization targets, which weigh on fixed asset absorption.

Alessandro Lagi
Alessandro Lagi
CFO at Eos Energy Enterprises

As throughput increases and the line matures, absorption improves. Second is field costs. Our installed base expanded, which drove higher deployment and commissioning activity, and we accelerated the DawnOS upgrades across portion of the legacy fleet. The improved field data that Joe discussed earlier is directly related to this work. Both reflect investment in supporting a growing asset base rather than a structural increase in our cost profile. We flagged these pressures last quarter, and we continue to expect them to diminish significantly by the Q4. Operating expenses total $35 million, increasing 6% year-over-year while remaining essentially flat compared to the Q1. While revenue increased 351%, we reduced the SG&A by 4% and increased R&D by 46% to invest strategically in the future software capabilities and product development. This clearly demonstrates the diligence around cost and cash management from the team.

Alessandro Lagi
Alessandro Lagi
CFO at Eos Energy Enterprises

Net loss for the quarter was $276 million, with an adjusted EBITDA loss of $71.4 million, a margin of -104%, which is improving 235 points year-over-year and 16 points sequentially. Reported net loss continues to be driven primarily by non-cash fair value adjustments related to our capital structure. Specifically, changes in our share price result in mark-to-market revaluation of warrants and derivative liabilities. As an example, when our share price increases, the value of certain warrants also increases, which can result in a higher account liability and a corresponding non-cash expense. Those adjustments create volatility in reported earnings and do not reflect an operating performance. Turning to the balance sheet and cash flow, we are encouraged by the continued improvement in how operating cash flow tracked adjusted EBITDA during the quarter, with almost 100% free cash flow conversion from operations.

Alessandro Lagi
Alessandro Lagi
CFO at Eos Energy Enterprises

Working capital did not consume incremental cash, even as revenue grew 21% sequentially, and we continue to invest in the line two build-out at Thorn Hill. As a result, we ended up the quarter with $364 million in cash. We remain focused on disciplined cash management, and we believe we are well-positioned as we continue to improve margin. We are preparing the advance request for the second DOE tranche and expect to close it by quarter end, subject to the conditions outlined in the loan agreement. Let me close today's prepared remarks with the critical drivers to deliver positive adjusted gross margin. When you look at our history, product adjusted gross margin moved from approximately -983% in the Q2 of 2024 to -40% this quarter. That is more than 940 points of improvement in two years.

Alessandro Lagi
Alessandro Lagi
CFO at Eos Energy Enterprises

Two years ago, we carried the cost of building a manufacturing platform well ahead of volume. We invested in automation, expanded the footprint, qualified suppliers, and built an organization for the business we believed we could become. Over the last year, those investments began translating into performance. We increased production, improved yields, reduced manufacturing costs, and benefited from the supplier economics as volume grew. This quarter continued that progress. Some of the manufacturing gains were offset by the project execution investments I described earlier. Those were deliberate. We chose to strengthen our ability to execute as deployment scale, and that choice creates near-term margin pressure. The heavy lifting of building the platform is largely complete, and now the work is leveraging it. That is what the right side of this page shows.

Alessandro Lagi
Alessandro Lagi
CFO at Eos Energy Enterprises

There are four drivers of cost out that we're pushing with detailed plans in place that John just walked us through. First, we anticipate a roughly 25 percentage point reduction in material cost as a percentage of revenue. As backlog conversion becomes more predictable, we move from transactional purchasing to longer-term supply agreements. Additionally, the team is executing against more than 90 active cost reduction initiatives focused on simplifying design, reducing material content, and improving manufacturability. Second is conversion cost. Approximately 20 points of reduction from the framework that John just walked us through. The step change comes from running under one cost structure. Supervision, planning, quality, maintenance, and production support stay relatively constant whether we run one line or four. Materials management is one of our largest labor costs today, and we move product between floors, buildings, and warehouses with labor-intensive processes using temporary labor.

Alessandro Lagi
Alessandro Lagi
CFO at Eos Energy Enterprises

At Thorn Hill, the majority of that movement is automated with conveyance and automated mobile robots. Third is project and field services, contributing another 20 points or so. As we said, we invested in the field this year through DawnOS upgrades while leveraging third-party resources. As that work is completed and we bring execution activities back to internal teams, project productivity improves and our reliance on external support declines. We are applying the same operational discipline we have established inside our manufacturing facilities. We actually view the field as a factory without walls and lean principles apply. As more projects become operational, we expect this cost to increase. However, we view this as an attractive opportunity over time and believe it can become a profitable area of the business as we continue to build and scale our internal capabilities.

Alessandro Lagi
Alessandro Lagi
CFO at Eos Energy Enterprises

Finally, we expect approximately eight points from continued yield improvements in our sub-assembly processes. We have already made solid progress here, and as tooling and equipment upgrades are completed and tighter component tolerances are implemented, we expect to further reduce scrap and improve first-pass yield. Combined, these initiatives provide what we believe is a clear path to over 72 points of adjusted gross margin improvement over the next 12 months, assuming we execute our plan and achieve expected production volumes. We have demonstrated that we can build the capability. The next chapter is converting that capability into earnings, and I believe we have a clear plan to get there.

Alessandro Lagi
Alessandro Lagi
CFO at Eos Energy Enterprises

As we continue the base cost control, we expect adjusted EBITDA to improve with increasing operating leverage, with execution and volume growth determining the pace of our improvement. While there is still work ahead, I'm confident in this team, I'm confident in the roadmap, and excited about the opportunity to drive margin expansion. With that, I'll turn it back to the operator for questions.

Operator

If you'd like to ask a question at this time, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Our first question comes from Christopher Souther with Truist.

Christopher Souther
Christopher Souther
Analyst at Truist

Hey, guys. Thanks for taking my questions here. Just to kind of unpack the updated revenue guidance, and the path here, the low end is essentially one and a half gigawatt hours for the rest of the year at just Thorn Hill. And the high end, are we assuming that line one comes back online at Thorn Hill and is producing as well?

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Hey, Chris. Lower end is basically continue the run rate of June throughout the rest of the year to get to the 300. The higher end of that is to not so much get line one up and running in Thorn Hill, but to get Thorn Hill the full 24/7 operation by the time we get into the end of the Q4.

Christopher Souther
Christopher Souther
Analyst at Truist

Got it. Okay. If Thorn Hill is just 1% of 2Q production, what kind of throughput are we seeing today, and how close are we to kind of ramping that up towards the one and a half gigawatt hour rate we need for the low end there?

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

We'll continue to run line one, and line one is running really well. John's actually got line one to its nameplate performance, and the team continues to bring Thorn Hill up into operations. The Thorn Hill up in operations right now is more the training and staffing of the people to run the line. We'll go one, the way what we've learned when we did Turtle Creek is get one turn up and running, add a second shift, get that up and running, and go from there, versus trying to do it all at once. What John and the team has done with the second line is nothing short of phenomenal when you look at the results he talked about on how the line's been performing initially.

Christopher Souther
Christopher Souther
Analyst at Truist

Got it. Okay. I appreciate all the gross margin walk drivers to get to the 10% gross margins by 2Q of next year. Can you provide a bit more detail on some of the material cost and project drivers? I think the conversion and scrap are pretty clear, but would love to get a better sense on what the cost-out initiatives are and the DawnOS and third-party labor, like what those kind of drivers look like and how those progress over the next year.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Chris, I think, and then John and Alessandro can jump in. I think when you look at what the team is doing, having a clear revenue conversion plan now allows us to go out to suppliers and drive down costs. We're seeing the costs, I think we talked about this in the presentation itself, where 2Q there was a little bit of timing, 3Q we're seeing costs come down as we get into July. John will keep driving that with the team on supplier costs out. I think the second piece of this that you laid out is just part simplification as you move through. It's taking DawnOS, making the way the firmware and how we run the hardware, how we run DawnOS simpler, taking cost out on that, scaling up with suppliers.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Going more from, as we do this, we start off with a supplier that can move quickly to get us through prototype to initial production, and then John, with his relationships and background with Jabil and other contract manufacturers, allows us to scale into a lower cost solution to continue to drive that down. The third piece of it, which you talked about, is as we've gone through and started ramping up and installing more megawatts out in the field, we started off just like we did when we did this in Turtle Creek. If you remember, we were talking about bringing in temp labor as we brought up Eos capability, and then eventually phasing out that temporary labor and having it be all Eos. You see that in the seven quarters of improved margin that we've delivered.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

We're doing the same thing out in the field. We start off with people that work out in the field. You build up your capabilities. We start off with supervision. Now we'll get into labor, and we'll selectively use third party, but drive down to a lower cost point on a labor input basis by using Eos employees to do installation and commissioning.

Christopher Souther
Christopher Souther
Analyst at Truist

Got it. Okay. Thanks for all the color there. I'll hop in the queue.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

All right. Thanks, Chris.

Operator

Our next question comes from Stephen Gengaro with Stifel.

Stephen Gengaro
Stephen Gengaro
Analyst at Stifel

Thank you. Good morning, everybody.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Hey, Stephen. How are you?

Stephen Gengaro
Stephen Gengaro
Analyst at Stifel

Good, thank you. Two for me. The first one is, can you talk about the customer concentration that we see in the 2Q rev in the backlog that you mentioned in the press release, and how we should expect and what you expect to see from sort of a diversification of the customer base going forward?

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Yeah. Look, Stephen, I think when you look at 2Q, we had an opportunity to take a project that had a strong return profile added as an initial asset into Frontier Power, and we capitalized on that working with Cerberus, and it was, I think, a great move for us. When I think about what we're trying to drive with Frontier Power is we're trying to drive returns on the basis of individual project returns, which this does with the project that we're delivering right now. At the same time, we create a pool of assets that can be monetized later on to spin the flywheel. Also, I think owning 36% of an entity, and when you look at comps of other developers like Frontier Power, it gives us the opportunity to be able to build a company and build valuation around that.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

I think inside of this, over time, there's going to be a blend of bringing in both Frontier Power as we execute, also projects that are closing out in the market with third parties, and there'll be a blend of that as we move forward. I think the important thing for us is having surety of a baseline of backlog conversion that allows us to load the factory, that allows us to sign longer term supply agreements because we know what we're going to need to deliver. It just gives also the commercial team the ability to go out and sell slots in the factory to be able to deliver revenue and accrete margin.

Operator

As a reminder, if you'd like to ask a question at this time, please press star one one on your touchtone phone. We have another question from the line of Stephen Gengaro. Your line is open.

Stephen Gengaro
Stephen Gengaro
Analyst at Stifel

Sorry, Joe, I was muted. Just a follow-up to that and another question. The follow-up was, I understand the FP USA side.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Yep

Stephen Gengaro
Stephen Gengaro
Analyst at Stifel

In your pipeline of opportunities and the customers you're talking to, how should we expect that the right now 50% of your backlog is from that single entity? How should we think about that customer diversification evolving? Because that's something that we get a lot of questions on from investors, and I'm just curious the conversations you're having, like if we're sitting here 12 months from now, how should we think about that from a non-affiliated entity in the backlog?

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Yeah. Stephen, if we're adding assets that deliver returns into Frontier Power USA, I think it's great. What I'd like to see is less percentages change and more the size of the pie grow. I think that's what we're focused on. Getting Frontier Power and being able to execute quickly, getting projects referenced out in the field lead to the other half of that pie continuing to grow. We continue to work through that, and we're very selective. We do all the Frontier Power transactions arm's length. We're looking at projects that deliver returns and support long-term asset growth into Frontier Power. At the same time, there's a large pipeline there that needs to convert and convert faster. I feel really good when you look at things like what we announced in Germany, Austria, and Switzerland.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

That's now landing real volume into Europe and allows us to expand in Europe. We feel also good about the recent announcement that we had with the Department of War, because I think we talked about the specific program where we're in a strategic partnership. Microgrids, and when you look at energy consumption, the government is one of the largest energy consumers in the U.S. Being able to come in and show them that we have a solution that is American-made, FAIR compliant, all the things that we've always talked about and can deliver the diversity of cycling and applications is another area that we're going to be able to grow. None of this moves as fast as you would like it to, as we've been experiencing here over the last couple of months.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

When you look at where we are and where we want to go and the performance we're seeing out in the field, it gets stronger and stronger and stronger. Look, having a 50/50 split, I think that would mean that Frontier Power is doing its job and we're growing a company like you see other project developers doing out in the marketplace and having a partner where we can execute through would be great. Keeping that 50% split on the other side and making the pie bigger from the 800 is the goal that the team has.

Stephen Gengaro
Stephen Gengaro
Analyst at Stifel

Great. Thanks. When you think about the mobilization of line one over time and consolidating to Thorn Hill, there's sort of two questions behind that. One is, are you doing it now versus waiting because of just the timing of backlog delivery, your ability to meet delivery obligations and mobile line? Is it because you've seen such higher efficiency out of Thorn Hill and it's critical to driving margin expansion?

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Stephen, look, I think there was a couple factors that came into this is just as you look at how the backlog conversion was laying out, we want to hit January running. When you look at this, we've seen the growth of the company, and I want to emphasize everybody that Turtle Creek is operating to the nameplate. Just between the nameplate, between all the movements and things you have to do, it just becomes complicated. This just simplifies. It's a simplification effort to get to scale next year, and I think doing it this year when we know we can execute both of them together, it just also takes the noise out of 2027 for us and really focuses us on executing around the two lines.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

The other piece of this is John and the team, with what they've done on line two and the redundancies that they built in from the lessons learned in 4Q and other things that we've been able to do, and you see it in the results you put on this page. You see it in how it's performing versus line one. This is not about, oh, Turtle Creek doesn't work. It's a story of Thorn Hill works better. Why did we wind up where we wound up? Stephen, you and I have talked about this before. We moved into Turtle Creek because at the time we were setting up manufacturing, it's what we could afford. We expanded into areas of what we can afford. The line is laid out the way it's laid out in Turtle Creek is we had to fit it into the building that we could afford.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Thorn Hill gives you now the straight shot to be able to do this without forklifts, without pallet movers. It just simplifies the entire operation, which, five years ago, we couldn't afford to do it. We got Turtle Creek running the best that it could run. We knew we would come to this point. It's why we went out and negotiated to move into Thorn Hill and come up with a flagship factory. When you go see it, you sit there and you say, "I see the difference." When you look at it and you think about it, you've been in the factory, Stephen. When you think about the second floor of the building where we're manufacturing bipolars, and you walk that floor and then go to Thorn Hill, you see and feel the difference of the efficiencies that we gain, the material movements, and how fast things can flow.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

The fact that John's got it running at nine seconds is a testament to all the hard work that the team has done, and the fact that, yeah, we may have problems in everybody that scales the manufacturing operations will stub their toe here or there, we don't stub our toe on the same thing twice. That's what the results are showing, and that's why we're doing what we're doing.

Stephen Gengaro
Stephen Gengaro
Analyst at Stifel

Great. Thank you. Maybe one quick one, and I don't know if you're going to be able to address this yet, when we think about FP USA and your ownership position in that business, how do we think about the profitability of FP USA? When does that business become profitable, and then those profits kind of You then obtain a third of those profits?

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Yeah. Stephen, remember, this will be below-the-line profitability. It's not going to be-

Stephen Gengaro
Stephen Gengaro
Analyst at Stifel

Yes.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Operating profit. When you're talking about initial projects coming online in H2 of next year, once those start operating, then you should start seeing the profitability come through and the return on investment occurring as other income.

Stephen Gengaro
Stephen Gengaro
Analyst at Stifel

Great. Thank you for all the detail.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

All right, Stephen. Thank you.

Operator

Our next question comes from Joseph Osha with Guggenheim.

Joseph Osha
Joseph Osha
Analyst at Guggenheim

Hi. Thanks. Good morning. One of the things you talked about last year we haven't heard as much about recently is the data center opportunity, and in particular, some of the advantages that you felt like you have in terms of the ability to cycle, the ability to locate close to the building, and so forth. I'm just wondering if we might be able to get an update there. I'm curious, to the extent you are doing anything, what kind of durations you're seeing your customers ask for. Thank you.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Yeah, Joe. We did talk about data centers. If you go back to the page on the pipeline, 32% of what's in the pipeline is data center related. We've always talked about, and you and I have talked about this in the past, there's two things. There's two segments within data centers. Segment one is co-locating with a data center. Segment two is having a storage asset in a generating area where data centers are going to be installed. We feel really good, I think, on the second part. That's really what the Talen relationship is all about, is getting those projects with Talen that'll be in PJM and in Pennsylvania and having them supporting the demand load from data centers. A lot happening there. Obviously, we're at the timelines of how the PJM auction and backstop auction are going to work.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

We're working through all those things, but feel really good about the work that we're doing with Mac and his team. On the locating directly on the site, continue to work through that. There's qualification work that you need to do. As I talked about, the more and more that I work with high-speed computing, you realize, we like to talk about and think about energy storage as this great technological marvel and things that it can do and everything else. From a data center, it's a cost of goods sold in a factory, and their factory is high-speed computing.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

They want to make sure that they have the reliability and performance that they need. We can perform on inference and do millisecond response times. We could do, as we've said many times, we can do all the things that we talked about before. None of that has changed. It's a matter of working through with the suppliers to get to the point where we're going to be able to announce firm contracts with people citing energy storage alongside a data center.

Joseph Osha
Joseph Osha
Analyst at Guggenheim

Okay, thanks. It sounds like at this point, it's sort of more the grid-level resilience, for the near term at least, than it is necessarily the on-site power quality, although that's evolving. Is that a correct way to think about it?

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

I don't know that I would term it that way, Joe, I'm not going to handicap where we are in either one of those things. We'll announce as we come, they're both moving, I think they're both moving really well, I'm proud of the work that the team's doing and the customers that are talking to us about that. That's not how I would characterize it, though.

Joseph Osha
Joseph Osha
Analyst at Guggenheim

Okay. Just on that other point I made about duration, one of the things we hear a lot is that the data center operators, hyperscalers, colos, whatever, are going to suppliers and saying, "Hey, we want rapid response time and all that, but we want pretty short duration of an hour or two." Someone else told me yesterday they're shipping mostly two hours. Are you seeing requests in that part of the market for shorter duration devices?

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Well, the way I would term it, Joe, is you see multiple cycles in shorter durations that add up to longer duration discharge. I think the reality of that is that plays into a strength of Eos of being able to cycle the battery multiple times in a day and have it be able to perform. Yeah, I don't know that the total amount is two hours because if you're running inference sessions and you have to cycle, with our battery, you don't run the risk of the thermal runaway that you see with other technologies. We feel really good about where that is. I think, and I've said this many times before, this is no different than any other segment in the energy industry. There's going to be a diversity of technologies required for use cases. We have a big segment where our technology can serve a use case.

Joseph Osha
Joseph Osha
Analyst at Guggenheim

Okay. All right. Thanks for the detail. I appreciate it.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

All right. Thanks, Joe.

Operator

That concludes today's question and answer session. I'd like to turn the call back to Joe Mastrangelo for closing remarks.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

Thanks, everyone, for listening today. Look, we continue to make progress. I think one comment that came out, we're very clear on the goal of the company is to become profitable and become EBITDA profitable. Gross margin is a signpost in a journey to becoming profitable and generating free cash flow, and that's what we'll keep everybody updated on as we move forward. It's the focus of John and Alessandro on the team.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

We continue to see strength on the commercial side, and we'll have to keep working through the opportunities in the pipeline, but are really excited about the ability to create and accrete value for our shareholders through Frontier Power USA through multiple avenues of just building up the potential returns of Frontier Power itself, but also Frontier Power giving us the opportunity to do better planning as we come out of the factory to get assets out in the field running faster, to get more references around the 6.5 GWh that we've discharged. Really excited about how DawnOS is evolving and the performance that we've seen. Look, having a technology, we're not a technology that's 50 years old. We're a relatively new technology, and as we cycle, we learn from every cycle.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

We update our software, and we get more performance out of the system. As we talked about, when you think about performance of Eos and its technology, you're starting to see the bottom end of our round-trip efficiency creep up to the median, which means that the overall distribution is now skewing up to the high side. The next thing now is once you reduce variation is you shift the mean higher. Entitlement, you see it. We're running cycles at entitlement of 91%. We can run those cycles, going back to the question that Joe asked.

Joe Mastrangelo
Joe Mastrangelo
CEO at Eos Energy Enterprises

If you look at cycles we run, we've gone down to as little as 2.5 hours, two and a half hours, as high as 11 or 14 hours off of the Z3 technology. It's a flexible technology that can meet multiple use cases. We've got to keep our head down and execute and make the company profitable, and that's what we're focused on as a leadership team, and we'll keep everybody updated on the progress. Thanks for listening today.

Operator

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

Executives
    • Liz Higley
      Liz Higley
      Head of Investor Relations
    • Joe Mastrangelo
      Joe Mastrangelo
      CEO
    • John Mahaz
      John Mahaz
      COO
    • Alessandro Lagi
      Alessandro Lagi
      CFO
Analysts
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