Eos Energy Enterprises, Inc. (EOSE) Q1 2022 Earnings Call Transcript

Good morning. And welcome to the Eos Energy's First Quarter 2022 Earnings Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would like to turn the call over to Joe Crinkley, Eos’s Communications Manager. Please go ahead.

Thank you. Good morning, everyone and thank you for joining us for Eos's financial results conference call for the first quarter of 2022. On the call today, we have Eos CEO, Joe Mastrangelo; and CFO, Randy Gonzales. 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 related to the expected future results for 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 projections or those implied by these forward-looking statements. The risks and uncertainties that forward-looking statements are subject to are described in our earnings release and other SEC filings. Our remarks during today’s discussion should be considered to incorporate this information by reference. 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 statement 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 will 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. This conference call will be available for replay via webcast through Eos's Investor Relations website at investors.eose.com. Joe and Randy will 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 Joe.

Thanks, Joe. Welcome, everybody to the first quarter earnings call for Eos Energy Storage. I am proud to be here with everyone and just want to start off on Page 3 walking through some recent milestones that have occurred since the end of the quarter. First, we recently signed a large letter of intent with a northeast solar developer for 300 megawatt hours of future business to be delivered over the course of 2023. We're going to be working with that customer we've always talked about with our commercial model. We got the LOI signed, are on the same side of the table, and will close out the overall deal. So, we'll be working here over the next 30-60 days to bring that one to a bookable order. At the same time, we talked about the last call about expanding capacity, with a new addition to our facility in Turtle Creek. We've added 65 megawatt hours of that capacity in the first two months that we've been in the facility and are producing product out of that facility in just over 60 days. I’m really proud of what the operating team has been able to do. On the picture to the right, you see we shipped our 100th energy block about a week ago. This is a tremendous milestone by the team, a really great accomplishment, as energy block number 100 is going to be headed to Blue Ridge and Pine Gate Renewables for the Eastover project that we've been executing on here over the past 30-60 days. At the same time, we also announced a financing commitment for up to $200 million with Yorkville Advisors. We're proud to be partnering with Yorkville. Randy will walk through a little bit more of the details around this agreement that we've come to regarding the most effective means to raise additional capital to achieve our growth plans. I think this is one of the first moves that we'll be making here to shore up and be able to deliver on the plan that we laid out in our last call. If we go to Page 4, you see on the operating highlights. I really want to focus on the growth side of the business. We booked $67 million in orders, 241 megawatt hours. Our total order backlog now stands above $200 million and is rapidly approaching a gigawatt hour. I'll walk through the opportunity pipeline, which now stands at $6.2 billion and has increased over a gigawatt hour of opportunities since the last time we were together. Randy will give you the details on the revenue that we delivered in the first quarter, and cash on hand right now stands at $55 million exclusive of the financing arrangement from Yorkville. We're proud of where the company is heading and how the team is executing. You can see quarter-over-quarter, there is continued progress across these core metrics. The team continues to get out in the market. We're seeing an uptick in demand for energy storage, and we're also seeing a shortage of available products. That gives us an opportunity as we bring our capacity expansion online to continue to grow the company. I'll walk through more details on that in the next section. Let's focus now on our commercial pipeline orders backlogs. If we go to Page 6, this is our traditional commercial activity or pipeline page. Always want to start on the left-hand side of this page and talk about lead generation. Lead generation consists of projects where customers are asking us for feasibility studies; they're coming with ideas, looking to develop a project plan, and considering different regulations and revenue stacks to come up with ideas. We see that stands at $5.4 billion or 28 gigawatt hours, up 1.3 billion versus the last time we spoke. We’re seeing more activity from more customers approaching us to learn how our technology can fit their use cases. This has about a 30% hit rate where the lead generation becomes current pipeline. When you look at the current pipeline, which today includes active proposals and letter of intent firm commitments, it stands at $6.2 billion, an increase of almost 50% from the last time that we were together. With some normal churn in and out of projects, the overall core projects have increased around $700 million. At the same time, analyzing our cost position and considering the demand in the marketplace, there has been an increase in the price that we're bringing to market, driving up the dollar value of the current pipeline. We now stand about $100 a kilowatt hour higher on price compared to where we were at the end of last year. We continue to feel that momentum carry forward. The booked orders we discussed earlier—the $67 million that we closed—has us feeling really good about that center section of the page. We’re continuing to convert and drive toward our $400 million order target for 2022. Meanwhile, the uptick in lead generation is crucial since we're seeing more customers reaching out to us earlier in the deal cycle, allowing us to tailor their project specs and help them deliver more value to their end users by using Eos Technology. Overall, we see the commercial pipeline strengthening, which is bolstering our current orders backlog. If you go to Page 7 and look at the breakout we always provide, we booked $62 million, almost $63 million in booked orders. In our order increase, we also had change orders when considering the execution of projects, particularly cost inflation around transportation. Our project team is creating value as they execute our projects. We now stand at $212 million in backlog, really proud of that, representing 827 megawatt hours of backlog from 28 projects with 15 different customers. We are seeing customers purchase more than one project from us, with that pipeline for individual customers increasing. Looking at our backlog deliveries, $177 million is for new equipment deliveries and $35 million is for long-term service revenue. We always aim for a 20% ratio, and we currently stand around 17% of long-term service revenue in our total backlog. That’s a number we will keep driving as we move forward. As it relates to asset leasing, as discussed in the past, no changes have occurred in the portfolio as we shift more towards straightforward product sales in the market with follow-on service agreements. We’re proud to have achieved a number above $200 million here when comparing to where we started upon going public at about $5 million. Just great progress by the commercial team in getting the product out into the marketplace. Shifting gears now to talk about operational excellence. We've made significant progress in this aspect of the business. If you go to Page 9, regarding building operational excellence, you can see the factory's evolution. Each time you visit every two weeks, you'll notice it looks completely different from your last visit. We’ve increased our operational scale—69% more energy blocks were produced in the first quarter. We took a 50% increase in test fill line output. The picture on the upper right shows our new field line layout. The team has implemented Lean and Six Sigma practices to enhance performance and output. Previously, we were touching the battery 27 times to go from a welded battery to a full battery; now it’s down to four with a target of three, tremendously boosting productivity with our existing asset base. Additionally, you can see our current battery welding room in the existing facility and our new machine in the expanded facility shown on the right. This machine enables us to use artificial learning to enhance the performance of welders and the throughput of the machines. A significant change made by the team is having one operator run two welders, creating tremendous productivity across the existing asset base and reducing the need for labor input on our manufacturing. Taking all this into account, we're also reducing the test cycle time. More consistent batteries are coming off the line, taking less time to validate performance before dispatching to our customers in the field. Accordingly, a lot of work has been done to cut product costs—over the last 20 weeks, we achieved a 14% cost decrease on an input basis. You might not see that reduction on a quarter-by-quarter basis yet, but we are starting to see core product costs reduce as we ramp up manufacturing volume. You can see the battery volume shipped in the first quarter is up 56%, with our battery yield increasing to 4%. If you remember, our target is to reach 90%. At the end of the quarter, we based on a weighted average ran at 88%, demonstrating excellent performance from the team. Now I want to discuss the operating environment we are navigating today. This is one of the most challenging supply chain environments I've encountered in my 30-year career. Starting on the left side of the page, we see tremendous inflationary pressures across our overall products. For battery materials, there's been 10% to 20% inflationary pressure. However, we've secured multiple suppliers through long-term agreements to source lower spec and alternative materials to help reduce costs. Regarding the energy block and containerization, we’ve been increasing our U.S. supply chain content. We've opted for non-ISO container designs to decrease overall landed product costs in the second half of this year. Furthermore, freight costs have surged globally. To tackle this, we achieved a non-hazardous rating for our product, enabling us to access lower-cost shipping. Additionally, increasing U.S. content reduces shipping expenses. While the general marketplace trends present challenges, we are successfully reducing costs through our production scale design and sourcing strategies. If you look at these two visuals, the index bill of material costs indicates a significant reduction for our energy block, having taken 14% cost down. The cost curve has shown promising reductions as we target taking nearly 50% costs out of our product by year-end, all while ramping up production in the new facility from an addition of 550 megawatt hours to a total of 800 megawatt hours. You will see a lag in savings on an output basis in the latter half of the year as production scales up. We are well-positioned, as 76% of our 2022 material requirements are under purchase order, with 7% already delivered either to customers or in inventory. Only 17% still needs to be addressed, aligning with our approaches discussed. We're locking in tiered pricing and volume discounts from suppliers through long-term agreements, as seen with the Tetra agreement announced at the beginning of the year. This does require cash commitments, with $11 million in advance payments made to suppliers to secure capacity. Now it’s up to our supply chain and operations teams to mitigate delivery risks tied to material coming into the factory, ensuring timely conversion to finished products and market dispatch. I feel confident in our team as they manage and adapt to these everyday challenges. Challenges continually arise, but the team demonstrates remarkable resilience, allowing us to increase output, enhance yields, and minimize costs over consecutive quarters. So, I'm really proud of the work being accomplished.

Thanks, Joe. And good morning, everyone. We appreciate you joining us this morning. First of all, I wanted to say that what this Eos team has accomplished and continues to achieve daily is nothing short of inspirational. This collective team is collaborating cross-functionally to manage the inevitable challenges and hurdles, including those presented by supply chain disruptions, in a manner that's the best I've observed in my career. There's still much work ahead, but we have a plan, and this is the right team to enact that plan. This team just gets it done. Before we jump into the financial results, I’d like to emphasize that we encourage in-person visits to our facilities due to our role as a domestic supplier of energy storage systems, particularly during this pivotal energy transition when energy security is paramount. We've seen an uptick in visits from clients and potential clients, with overwhelmingly positive reactions when they see batteries being produced and energy blocks being assembled amid our capacity expansion efforts while the energy storage market faces supply constraints. Turning to Slide 12, let’s discuss first-quarter performance. Compared to the last quarter, our revenue increased from $3.1 million to $3.3 million. This includes energy block deliveries to four customers, including some of the initial deliveries for the 80-megawatt hour Pine Gate Renewables Eastover project. We saw a sequential increase in energy block volume of 69% on a revenue recognition basis from the fourth quarter of 2021, which was largely on track. However, several factors contributed to a lower revenue increase compared to volume. Customer mix is one driver; the revenue per DC energy block in the first quarter was lower than in the fourth quarter of 2021 due to fulfilling orders from a backlog with lower pricing dynamics established last year. Since then, we've observed rapid and significant increases in pricing due to various factors, including a tight supply of energy storage assets specifically in the stationary storage market. We anticipate this price realization to solidify in the second half of next year as we start delivering on new orders. Additionally, there has been a shift in DC versus AC scope, which is less favorable quarter-over-quarter. We had more projects recognizing AC scope revenue in the fourth quarter, and we are just beginning to ship the Pine Gate Eastover project, which won’t require AC scope until later in the year. In projects-based businesses like ours, revenue can be volatile on a quarter-to-quarter basis due to multiple performance obligations in customer agreements. Revenue is recognized as contractual performance obligations are fulfilled in line with the revenue recognition standard of ASC-606. Various performance obligations can include the delivery of the standalone DC energy block, installation, commissioning, and training, potentially leading to incremental revenue recognition for energy blocks already shipped and delivered, where part of the revenue was recognized in the previous quarter. Cost of goods sold in the first quarter was $35.6 million, which includes a $1.7 million lower cost or market incremental adjustment relative to the previous quarter. This adjustment results from the growth in work in process inventory from last quarter, prompted by increased production of batteries and energy blocks. The quarter-over-quarter cost of goods sold, excluding the lower of cost or market adjustment, rose 60% against the 69% sequential surge in energy block volume. To summarize, the cost of goods sold is increasing at a decreasing rate, a trend we expect to sustain as we follow our strategic priority of reducing costs in the energy storage system. As Joe mentioned on Slide 10, we've achieved a 14% reduction in bill of material costs this quarter, comparing costs at the beginning and the end of the first quarter. This cost reduction will take time to be fully reflected in the financials as the on-hand inventory with a higher cost basis must be processed through the system. Consequently, average energy block costs net of the lower of cost or market adjustment decreased by 7.4% in the quarter. These cost reductions stem from several factors, including scaling manufacturing efficiency, continuous improvement initiatives, enhanced product and system design, and strategic sourcing initiatives. We invested $5 million in R&D during the quarter to enhance battery performance, reduce product costs and lifetime operating costs, and develop next-generation technologies. SG&A for the quarter was $14.3 million; $5 million of this total is structural, $3 million is non-cash stock compensation, with around $3 million in one-time items, leaving the remainder as discretionary spending linked to scaling the business. Overall, our operating loss for the first quarter stood at $51.7 million. Looking ahead, we anticipate significantly increased sales volumes as our production capacity expands and project product costs to decrease by almost 50% by year-end. Concurrently, we expect positive pricing metrics on shipments for 2023, while we will continue managing our SG&A expenses. As detailed on Slide 13, we had $55 million in cash as of March 31, 2022. As discussed previously, we’re working diligently to secure raw material supplies aligning with our sales strategy. Consequently, first-quarter cash outflows included about $11 million in advance payments to suppliers for volume commitments. This marks a $6 million increase from the last quarter due to rapid scaling, although we expect this level of advance payments to decline moving forward. Additionally, we incurred another $2 million in advance payments to capital equipment OEMs for CapEx associated with our Turtle Creek capacity expansion, mirroring last quarter. As previously mentioned, our current plan necessitates the company to raise additional capital. On April 28, we announced securing a financing commitment of up to $200 million via a standby equity purchase agreement (SEPA). This facility allows Eos to sell up to $200 million of equity to the investor at our discretion, granting Eos significant flexibility to access capital as necessary while concurrently pursuing additional funding options. For instance, we continue actively seeking a loan from the U.S. Department of Energy and anticipate submitting an application from Part 2 of the loan program this quarter. Turning to Slide 14, we wanted to update you on our progress regarding 2022 full-year commitments. The facility expansion is currently underway and on track to boost our total capacity to 800 megawatt hours. In the quarter, we achieved 65 megawatt hours out of a 550-megawatt hour annualized battery manufacturing capacity expansion plan in just two months. We are managing capital equipment deliveries and phasing the commissioning of the necessary assets. We are on pace to meet the full-year CapEx investment between $25 million and $30 million, and see a pathway for additional expansion to complement the accelerated commercial pipeline, subject to additional capital availability. We have secured the backlog to achieve $50 million in revenue for 2022, and we anticipate production volumes to ramp significantly in the latter half of the year as the facility expansion becomes operational. Despite successfully managing supply chain challenges thus far, the current supply chain environment remains volatile and could disrupt future production. We continue to progress toward our target of 90% manufacturing yield, achieving an 88% rate in the first quarter, representing a 4 percentage point increase from the fourth quarter. Concerning backlog growth, we booked $67 million in orders in the first quarter, already around half of the total amount booked in all of 2021. Our goal is to have 20% of our order backlog related to long-term service agreements, and we currently track at 70%, primarily driven by the timing of new order bookings for battery energy storage systems and service contract signings.

We will now begin the question-and-answer session. Our first question comes from Subash Chandra with The Benchmark Company. Please go ahead.

Hi, Joe, hi, guys. So I guess on the $55 million revenue target and if this was in the preamble, I missed it. I think it was a lot of numbers there. So I apologize, but with a good chunk of that in the back half, the run rate would have to be a lot higher than it is. Do you have any color on the second quarter with the second quarter kind of halfway done at this point?

So, Subash, if you look at Page 10, we'll have increased capacity coming online here as we go through the quarter. So I think you'll see the second quarter come in from a revenue standpoint north of where we are in the first quarter, with the majority of the revenue coming in the second half, because that's when the capacity will be operational.

I think that's exactly right.

And then on cost of goods sold, what’s the direction there regarding prefunding raw materials and the capacity expansion?

Yeah, Subash, reference back to Slide 10. The trajectory depicts that index beginning at 100, representing bill of material costs at the year's start. The 86 reflects a 14% reduction at the close of Q1. Our estimates indicate that we'll continue to bring costs down systematically.

Our next question comes from Chris Souther with B. Riley. Please go ahead.

Hello. Thanks for taking my questions. Could you provide insights on the price increases for the pipeline versus the uptick we’ve seen in the competition from lithium-ion? Is there a target benchmark for that competition in terms of price per kilowatt hour?

Hey, Chris. So, first, the current market is facing a shortage of lithium-ion availability for shipment within the next 12 to 18 months. The pricing of that lithium-ion, when available, is higher than a year ago. For our pipeline, we’re observing price increases of $100 per kilowatt hour, which aligns with the inflationary pressures on raw materials over the last 8 to 12 months. Given that we’re an early-cycle technology compared to the mature technology of lithium, there's plenty of potential for us to ramp up volume tiers with our suppliers, find alternative materials, and drive costs out of the product to remain competitive. We're currently in a bidding range in the high-200s to low-300s per kilowatt hour.

Got it. And what’s the visibility on the remaining 70%? Can you provide any updates on the gross margin inflection point in terms of timeline or volume?

The 800 megawatt hours will be the factory's annualized capacity, and we're on track to deliver that output. I believe the team has done excellent work producing from the building in just two months. We plan to start filling batteries here in the next four to six weeks before ramping up production to reach 800 megawatt hours over the second half of the year. Regarding costs, we've already achieved reductions in the first quarter and can visualize an almost 50% cost reduction by the latter half of this year.

Christopher, we've made significant progress over the last six months concerning the strategic plan for cost reductions, and we have confidence moving forward.

Is there a target cash burn rate for the second and third quarters given the high immediate needs? What should we expect in the near term for the advanced payments?

Forecasting cash requirements is always challenging, but as I mentioned, customer down payments will increase as bigger orders are confirmed, which should help balance out cash outflows.

We anticipate seeing a shift towards raw material costs as we ramp up production in the second half of the year. As these customer projects solidify, we can expect down payments to counteract some cash inflows to support our operational needs.

Thank you. That's helpful. That was my only question.

Thanks, Subash.

Our next question comes from Joseph Osha with Guggenheim Securities. Please go ahead.

Good morning, everyone. Thanks. Could you walk us through the expected timing and process regarding the DoE LPO?

Definitely, Joe. We’re finalizing the Part 2 application and will undergo full due diligence with the DoE during the summer. We're focusing on ensuring the application is correct, which will help throughout the due diligence process.

What happens at that stage? Is it a go or no-go decision?

The next phase involves conditional funding based on the loan, followed by executing the investment program, which will facilitate drawing down the loan moving forward.

If this progresses smoothly, when might we expect funding to arrive with Eos from that LPO?

Realistically, we're looking towards the end of the third quarter or early fourth quarter, depending on diligence progress.

Are you seeing any decommitments from lithium-ion players in favor of your technology?

What we’re seeing is a propensity for people to return with tighter delivery timelines, expressing challenges with previous commitments. Many prospective clients have now come back to check out our capability to deliver according to their project timelines, resulting in a significant increase in our pipeline this quarter.

Our next question comes from Tom Curran with Seaport. Please go ahead.

Good morning.

Hey, Tom.

Randy, the model you presented indicates Eos can achieve its first positive gross margin by the second half of next year. What annualized sales or shipments run-rate is required for that transition into positive territory?

The current generation product doesn’t change in terms of cost entitlement as we advance. Achieving a positive gross margin correlates with our next generation product currently under development. Volume assumptions play a role, but our focus is on product design and manufacturability.

At the crossover point, do you expect the average revenue per Znyth system to be higher or lower? Given you've increased pricing but also aim to lower costs for competitiveness.

As we consider current pricing dynamics and what we're quoting, it aligns with the new generation product's timeline. We feel confident that this approach will lead to solid gross margins.

Even amidst this inflationary landscape, our inflation is notably lower than what other sectors are experiencing. We must persist in managing our costs down generally.

Could you elaborate further on projected operating costs at the time gross margins turn positive?

The battery's fundamentals will not change significantly, yet we're aiming for reduced assembly costs. This will translate to substantial cuts in the components cost for the product.

The battery component will remain a significant part of the value, approximately 60% of the total. The approach we are taking involves reducing raw materials and processing costs effectively. Our strategy involves modifying our approach to freight and transportation as well, to keep everything aligned and manageable.

Thanks, that was insightful.

Thanks, Tom.

Our next question will come from Martin Malloy with Johnson Rice. Please go ahead.

Good morning. I wanted to clarify cash burn rates. Your current burn rate is $40 to $50 million, potentially giving you enough cash for another three to five months. Can you help us understand the capital required to reach free cash flow positive, as well as the potential dilution risks linked to the SEPA arrangement?

We won't achieve positive cash flow this year. Our current cash burn reveals a requirement for additional funding, including the SEPA facility. This provides flexibility to draw funds as necessary to bridge our gaps while exploring more funding options.

Thank you.

Sure. Thanks, Martin.

This will conclude our question-and-answer session. I would now like to turn the conference back over to Joe Mastrangelo for any closing remarks.

Thank you all for your time and for listening to our call today. We continue to progress on our journey towards becoming a profitable operating company. I feel great about our market position as we discussed today regarding lithium availability versus our capacity expansion and the accessibility of cost-effective raw materials. We'll continue navigating cash conservation while finding effective avenues for growth, utilizing options like SEPA to manage our capital requirements intelligently and leveraging our relationship with the DoE to expand our capacity. Despite the tough conditions in capital markets, our operating environment feels increasingly favorable as we see mounting demand for more than just four-hour energy storage, which we are well-positioned to provide from our Turtle Creek factory. It's an exciting time to be a part of Eos as we work towards groundbreaking growth, and we're eager to share ongoing developments with you. Thank you for joining us today. Talk to you soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.