EOSE - NASDAQ

Good morning, and welcome to Eos Energy Enterprises First 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 Laura Ellis, Vice-President of Investor Relations. Thank you. You may begin.

Thank you. Good morning everyone. And thank you for joining us for Eos's financial results in conference call for the first quarter of 2023. On the call today, we have Eos' 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&A portion of the call, may include forward-looking statements, including but not limited to current expectations with respect to the future results of our company, which are subject to certain risks, uncertainties and assumptions. Should any of these risks materialize or should our assumptions prove to be incorrect, our actual results may differ materially from our expectation or those implied by these forward-looking statements. The risks and uncertainties that forward-looking statements are subject to are described in our SEC filings. Forward-looking statements represent our beliefs and assumptions only as of the date such statements are made. 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. Today's remarks may also include references to non-GAAP financial measures. Additional information, including reconciliation between non-GAAP financial information to U.S. GAAP financial information, is provided in the press release. Non-GAAP information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, our non-GAAP financial measures may not be the same as or comparable to similar non-GAAP measures presented by other companies. This conference call will be available for replay via webcast through Eos Investor Relations Website at investors.eose.com. Joe and Nathan will now walk you through the company highlights, financial results and business priorities before we proceed to Q&A. With that, I'll now turn the call over to Eos CEO, Joe Mastrangelo.

Thanks, Ellis. Let's move quickly to page three. I mean, this is a really a capstone page of the progress that the company has made in its 15-year history. And really when I sit back and think about my five years in the company and just being able to sit here and talk about discharging a gigawatt hour of energy on the field, it's very exciting. You think about that gigawatt hour of energy on the field, 700 megawatt hours of that came in 2023. And when you put that in perspective, that's the equivalent of powering 140,000 homes for up to four hours. So this is just a lot of work here done by the entire team throughout the history of the company to get to this moment. And it's just one of those modes where you're going to get the news from the team sit back and reflect how far the companies come but then also realize how much more work we have to do to move forward around the potential of this product that's delivered this gigawatt hour of energy to date. Moving on to page four on the operating highlights, you continue to see good progress commercially. I go through some more details on the pipeline in a future slide. But we continue to see the opportunity pipeline increase. We booked the larger order for $87 million, nearly $87 million and that brought our backlog up to $535 million with a representing 2.2 gigawatt hours of power. Talk about the discharge energy I think another piece of this and Nathan will get into some more detail later as around revenue, delivering $8.8 million of revenue, 168% increase over first quarter of 2022 along with seeing the progress of our cost out in the product where you can see in the numbers, revenue coming up. The gross market, the loss rate gross margin coming down and closing the gap on our losses of operating profit. Cash on hand, we closed the quarter with $16 million that doesn't include the funds that we raised in $2.25 million in Nathan will walk through later on. Our financing strategy, I think we put in place that financing strategy over a year ago, we've been very consistent about how we talked about using the different tools. And we continue to use those tools to allow us to position the company for growth and deliver the results that you're seeing in the progress that you're seeing against the overall strategy of becoming a profitable operating company. Now, let's move forward and talk about the commercial pipeline and orders backlog, go to page 6. Where we go to our classic, our classic page of how we look at pipeline, we keep the page in the same format, so you don't have to figure out the format when you look at it and focus on the numbers. So focusing on the numbers, lead generation once again, these are people coming to us customers coming to us with ideas of projects that stands at $9.5 billion 57 gigawatt hours. There's a lot of it churn in that one billion increase, you have things that drop out, things that move in the current pipeline and things that come in. The team is doing a great job building relationships with potential new customers and really working through and showing the power of the Eos technology and how it can help deliver a longer duration energy storage, which is critical for the energy transition. When you look at our current pipeline, current pipeline is up in Q2 and we signed over $500 million of LOI. Now think again about how we think about the movement through our pipeline. We don't call it 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 financial code, which that stands at $6 billion of itself. Our goal with that combined $7 billion is to then get customers to sign an LOI with us, so we get on the same side of the table with them and close the project out to allow them to generate revenue and allow us to put product out in the field. That stands now at a billion and a half with seven gigawatt hours of potential. We work through those and when you think about the timing of LOI to firm commitment, you're working through various different aspects on commercial terms permitting land rights and interconnections to be able to get to a firm commitment that then goes into our backlog, which as I stated earlier stands at $535 million, up 71 million versus fourth quarter. So starting the system traction on the team closing orders, starting to see opportunities moving to LOI. And I think as we get more clarity around the IRA legislation in the United States, we're going to see more and more orders to work through the pipeline opportunities to work through this pipeline. While at the same time you're starting to see, Europe looking at what they're calling their green new deal, which is going to drive more activity over Europe. And we're starting to see pipeline grow there as well and our focus on that on that on the European continent as far as where we can deliver product as they look to diversify their energy next. Moving on to page seven, this is a page where wanted to take a look back to our original customers when we first went public, nearly two years, over two years ago. We had, three, what I would call emerging customers in IEP and are smart and carcin energy. I mean, when you look at, when you look at what those customers and what we've done, this is really building a relationship back in 2020 creating a letter of intent and booked orders delivering on some of those booked orders, but also working with the customer from letter of intent into a booked order into delivery. And I think this just shows that process that I just talked about in real life with real orders that are going to be shipping here in 2023 and early 2024. We're excited about these relationships and these are the types of customers that when you look at the space you've got to go out and grow with them and find ways for them to grow and find ways for us to deliver profitable solutions for them. The bottom of the page talks about some more established customers, Pine Gate Eastover, that's the project that I showed on the first page. This was a booked order back in 2021. We started delivering it in 2022. That was the focus of ramping up the factory. See that project running cycles around 50 megawatt hours per day is very exciting for the team. And that also will lead us to additional add-on projects under our MSA with Pine Gate as we look to move forward in the future. The California Energy Commission or the CEC, this is something that started back in like 2017, 2018. Running pilot projects, the CEC relationship started with running individual cells, then doing individual pilot projects in California, which then led to a commercial order in 2022 which was the bulk of the revenue that we delivered in first quarter of 2023 with additional shipments to come in the second half of 2023. But an exciting development for us as you think about developing that relationship and proving out your ability for your technology that delivered the operating needs of customers, which then is going to create additional pipeline for us in California remains an important market for us as we look to the future. I talked earlier about Europe and Enhol [Ph] is another, another, another, and [Indiscernible] power is another customer that we've been building a relationship with over time. Going back again to pre public company days to come up with a booked order in 2021 to work through with them to get all the sighting and shipping and logistics around getting that project installed in Europe and operating in 2024 with the delivery in 2023. It's exciting for us when you look at what's going to come in Europe and working with the partner like Enhol adds credibility to what our technology can and will do out in the marketplace. We shift now from the commercial side and go into operating actions. What I want to leave the commercial section on is the concept of your planting seeds to eventually grow trees to eventually create an installed base to eventually create a service, a service annuity for our company. That takes time to do that in an industry that's very thoughtful because all of us are users of our product in that one. We flip the light switch in our home, we expect the light to come on, so you've got a high hurdle to prove out your technology. And that's what the team year at EOS has been working on every day in the five years I've been here and that really takes us to slide nine, so you look at slide nine. Now this is the proof point of Eos being able to rapidly scale production in a very cost effective manner. When you look back at March of 2022, we had an empty building in Turtle Creek with two infrared holders in there. When you think about where we were in April 2023, you wind up with a, well, that is a picture of the production line as we delivered the last new units to the field for Gen 2.3. This, this facility, not only ramp up, but it also achieved cost out, which, which needs, and we'll talk about, we ship 208 energy blocks. We've produced over 334,000 batteries, and as I talked about, we've run what we believe is one of the largest cycles ever done by a non-lithium ion technology in the world. And when you think about documented cycles, as far as we can tell, this might be the largest one, but we've got some more work to make sure that that's true, but we're proud of the fact that this 47 megawatt hour cycle proves out that the technology can scale. What we did in the fact that over the last 12 months proves out our ability to scale our technology and our ability to produce product quality product down to the field. Now, that foundation takes us to page 10, which is the Eos

Thanks Joe, good morning everyone. I want to begin by walking you through the first quarter financial performance, discuss our liquidity position and capital structure and then provide progress against our 2023 company objectives. Overall, a strong performance by the team is we finished the last production of the Gen 2.3 energy blocks that were shipped in the quarter and now we're beginning to transition the factory to

Thank you. [Operator Instructions] Our first question comes from the line of Christopher Suther with B. Riley. Your line is open.

Hey guys, thanks for taking my questions here. Maybe we're starting off on the DoE loan process. Any additional color you can share around timing and the term sheet negotiation process. I think it would be pretty helpful.

Sure, Chris, it's Nathan. It's good to hear your voice. I will tell you, I mean, we can't say a lot more than what we've already said publicly. I'll just let you know that I've spent time in DC several times over the last couple of weeks. I would reiterate we are making good progress. We feel positive about where we're at. Unfortunately, the size of the organization we're dealing with this process is taking longer than we would like. The overall size of the loan hasn't changed from what we've said previously to 50 plus. And we're optimistic that we'll have something to announce in the near future.

Okay. And then maybe just on the cost of goods sold, decline. Can you give us a walk for the first quarter? It's nice to see the reduction along with the big uptick and revenue. It seemed like a good chunk of deployments may have been in and in before it year ends. I just want to get to know what the fixed portion of of cons looked like in the quarter and the cadence of that as we transition into queue and then rank up in the second half. I think you call that long cross being half what they were for 2.3, but maybe you can just provide a little bit more.

Yes, I don't know that I can give you the walk quarter-to-quarter, but, just let, you know, 40% of COGS as materials and freight relate directly related to manufacturing. 15%, 16% is the labor cost associated with building and installing and commissioning batteries. 15% of it is depreciation. And then the other 30% is all the other little stuff.

And Chris, the only thing I would add on your question here is this is flowing through the cost out work that we did all last year into the income statement. We didn't ship out of inventory in 1Q. We built the product and that was the strategy that we laid out last year and 4Q to manufacture product and 1Q to take advantage of the IRA incentives and you see those incentives which were reported that manufacturing generated $780,000 in initial production tax credits under the IRA.

Okay, that’s helpful. I’ll hop in the queue. Thanks guys.

Thank you. Our next question comes from the line of Martin Malloy with Johnson Rice. Your line is now open.

Good morning, congratulations on the transition here, the

So hey Martin, good morning. Yes, they can supply to our demand and they have capacity greater than what we're planning on manufacturing in 2023. From the standpoint of the build materials, when you look out at the ramp that we're going to go through, we're ramping into a new production process as I talked about on the

Okay, and my second question, I just wanted to, from your customer conversation, are customers waiting for clarification on some of the provisions of the IRA before they're placing orders? With you all, there's some pent-up demand, do you think, that's related to waiting for the clarification of some of the key domestic content, etcetera, provisions in the IRA?

Yes, Martin, I think 100% agree with your question. I think that's why you see the buildup in LOIs with customers, where customers are saying, I've got a project, Eos is my technology, I want to lock in the technology and my delivery, but I want to work through and see where the guidance comes out on. What I'm hopeful for, on the domestic content part, which I think is one of the more important provisions that we all need to understand. Everybody gets a 30% investment tax credit for installing storage. Then there's a 10% if you install it in an energy transition zone, so going to places where there were former coal plants that are now being transitioned into renewable energy, you get another 10% for that, and we're seeing a lot of projects that tie into that 10%. Then there's a 10% of made in America, and, what we have been pushing for, what we continue to say is made in America needs to be manufactured in America, not assembled in America using batteries manufactured overseas. So we're hopeful that that will come through, and that will be a big differentiator. What I would say, though, is around those tax credits, I think it's going to be a significant uptick in demand, but we don't plan the business around having to have it. It's something that will help us and incentivize customers to buy from us, but the underlying fundamentals outside of the IRA for demand are still there that fit in with the product. So the made in America, not only is it a tax incentive, but it's a security of supply chain when you think about what's happened over the last two years. The market shifting to longer duration energy storage and our product being able to deliver that variation of flexibility of operation, and then the long life of the product. We've got fundamentals underneath that need a market demand that's only going to be accelerated with the IRA, but I do agree with you that there is a little bit of pent-up demand as people are waiting for guidance.

Great. Thank you. I'll get back in queue.

Thanks, Martin.

Thank you. [Operator Instructions] Our next question comes from the line of Joseph Osha with Guggenheim. Your line is now open.

Hey, good morning. My compliments on the progress. A couple of questions. First, you were talking about the 45X manufacturing credits. Is there a plan to monetize those, other than from just waiting on the IRS? I'm curious what your plan is for those, and then I have a follow-up.

Yes, we're looking at options, Joe, on how we can monetize those and when we can monetize those. We're still working through the details and nothing more definitive that we want to share at this point in time.

Okay. And I assume you are taking direct pay, right?

Yes.

Okay. The second question, just wondering if you can update us a little bit on what you see as you undertake the transition to Gen 3, what some of the key manufacturing challenges are, key attributes of that new assembly process that we as analysts should be focused on.

Yes, thanks, Joe. Good morning. Yes. So inside that slide that we showed on page 10, that phase one of developing discrete manufacturing, we've worked through a lot of the details and bugs that come up when you're starting a manufacturing process. As we move forward, you're basically this is going from the minor leagues into the big leagues into the all-star game, is how I think about it. And the pace of how you're trying to do it accelerates on every step. So we have a process that allows us to build a quality battery that performs today. The next phase of this, as we transition into phase two in semi-automated manufacturing, is stepping up the speed at which we do that. You've got to make sure that that speed still delivers the quality that you've got under phase one. So that is a piece that we look at. And then the third one is how you pull that together as we get into the second half of the year and fourth quarter with the automated line of, again, taking that down to that 90-second target cycle time to be able to deliver product off the line. So to me, when I look at this, I think we have figured out the equipment that we're going to use, the discrete manufacturing process that we're going to use. The next phase of this is, how do you want to lay out your line? How do you want to staff your line? How do you want to increase the throughput? And then getting to automation. Now, the reality is, on the automation side, this is our first automated line. This is our first automated manufacturing line that we've had in years. We believe we've got a great partner that's done this before in the industry and also has done a lot of work in the automotive industry that will help us. But what I've learned in my five years here is you don't know until you actually know. As crazy as that statement sounds. So we just have to manage them one by one. And I think what we've done is we've set up a process where we go through this on a working level every day. And then three times a week, the entire leadership team going through, what are the lessons learned and challenges we have, and just knock them off one by one.

Okay, thank you. And just on the back of that, what can you say about how you see your path to positive gross margin at this point?

Yes, I think, Joe, we're confident that we'll see positive gross margin as soon as we get this fully automated line implemented and running. The exact timing of that, we're not communicating because it is dependent on the DoE funding and additional capital raising. But I'm very confident that we'll be gross margin positive when we get this fully automated line.

All right, so that's very helpful, that that toggle to positive gross margin does depend on getting this fully automated facility up and running.

Yes.

All right. Okay, thank you very much.

Thanks, Joe.

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Joe Mastrangelo for closing remarks.

Thanks. Look, I think the team we continue to make progress here. And it's progress that you can see and measure in the numbers. And I think one thing that I'd like to hit on is I'd like to take, we talk about revenue growth, we talk about gross margin growth, cost out of the product. But what I'd like to take a moment on is just kind of flip this and look at this on how I think about the performance as also an investor in Eos. Our earnings per share, if you look at the EPS numbers year-over-year, we were at $0.85 loss last year. And we were at an $0.82 loss this year. But I think we got to peel back the onion and think about how we run the company. We really run this company on a cash basis. So if you take those same numbers and strip out the non-cash numbers in that EPS loss, you would have been at a $0.90 loss in 1Q last year. If you take out the non-cash items, which were principally driven by the increase in our stock price as it's tied to our convertible notes that we had for capital raise, our loss on an earnings per share basis goes down to $0.44. So it's half of what it was a year ago that shows the journey of where we want to get to and gives me the confidence that we have the team, the plan, and we've got a lot of risk and opportunity that we've got to manage to get there. But you're starting to see in our third year here of being public the roadmap of how we're going to get to profitability. With a lot of risk inside of it and a lot of things we still have to do, but you're starting to see those numbers tying back to the vision that we laid out three years ago. That's also why I really wanted to include in there our commercial page to talk about this is not a sell it, ship it market where it's very easy. It's a winding road where you've got to develop long-term relationships in an industry where the customers want to make sure they get it right the first time. So you've got a high bar to prove yourself. And we're challenging ourselves every day to meet that high bar, both on how we went out in the marketplace and how we deliver the product and drive this company to become profitable over time. And we're continuing to be committed on that, and I want to thank everybody for their time this morning. I look forward to keeping you updated on the journey as we move forward from here.