Eos Energy Enterprises, Inc. (EOSE) Earnings Call Transcript & Summary

So thanks, everyone, for coming. We have a really interesting presentation here from Randy and Francis at Eos Energy Enterprises, grid battery storage solutions. And they're going to explain it way better than I am. So I'll just turn it right over to them. Thanks gentlemen.

No. Thanks, Vincent. Good morning, everybody. It's great to be here. I'm Randy Gonzales, the CFO of Eos Energy Enterprises, joined by Francis Richey, our Vice President of Research and Development. He's the brains behind the operation, PhD, chemical engineer. And so any technical questions will definitely go to Francis. It's nice to be back in person at investor conferences. This is my first one post-COVID, so I'm sure it's probably similar for many of you as well. Look, we're in an exciting time in energy transition. And so we see all the headlines about energy security, energy prices, what's going on just generally geopolitically. So I mean, simply stated, the world needs more power. We want to generate that power using sustainable sources, but that objective creates imbalances in our existing energy grid. So managing and mitigating those imbalances will require multiple energy storage technologies to provide safe and reliable power. Until now, most of the energy storage systems have been short duration, meaning they produce power reliably for less than 4 hours. But we believe the future will require longer duration, especially 6 to 12 hour battery energy storage systems that provide the flexibility to match intermittency and congestion in the grid. Eos provides stationary storage solutions to meet this market need that we're talking about, the 6- to 12-hour need primarily of energy storage solutions. And it's a very large addressable market. So in target geographies, and when I say that, I mean U.S., EU, U.K., India, Australia and New Zealand. The total addressable market is going to be 275 gigawatt hours of energy storage, just a stationary energy storage by 2030. And like I said, it's going to be a mix of technologies between short duration and long duration with great secular tailwinds that really match the deployment of renewable technologies. As solar and wind primarily become a bigger component of our energy mix, so goes the need for energy storage. So as solar and renewables replace the coal-fired power plants, the assets that are generating kind of full time, the renewables are intermittent, which means that in order to generate the same capacity utilization, it requires the energy storage to go along with it. So Eos has a proprietary and differentiated technology. Francis will get into kind of the bowels of that in terms of what it is, the chemistry that Eos has and the benefits that it provides. At the end of the day, in terms of the differentiated technology, we built an extensive and robust IP portfolio, which we believe gives us a deep competitive advantage and really a moat to be a player with a strategic advantage. So we've made the transition from really R&D engineering to commercializing the technology to now a full-scale industrial provider of energy storage solutions. And so that's backed up by an accelerating pipeline of commercial activity with blue-chip customers to include names like Pine Gate Renewables in conjunction with Blue Ridge Power, Duke Energy and Ameresco. And then lastly, I talked about it in terms of being a full-scale industrial manufacturer, we're rapidly expanding manufacturing capacity. So we have a manufacturing facility in the Pittsburgh area in Turtle Creek, Pennsylvania, East Pittsburgh. Currently, we have capacity at about 315 megawatt hours and growing. We're undergoing currently capacity expansion to get us to 800 megawatt hours of capacity in the second half of the year. And so lastly, especially compared to lithium-ion manufacturing, we have a low CapEx model, which means that we can deploy about 1 gigawatt hours of capacity for approximately $50 million. That's about 60% below what lithium-ion can do in terms of the investment required. So just to give a quick overview of the market. So it's important to understand in terms of energy storage that multiple technologies will be required. So we often get the question, well, how do you compare lithium-ion. And lithium-ion will always have a place in that short duration market, which means 0 to 3 hours, and that 0 to 3 hours means discharge time. And you can see the applications there. It's best suited for use cases for ancillary services, energy arbitrage, demand charge reduction. Our sweet spot is in what we call that intraday or medium duration, which really the primary use case is renewable energy shifting. And so what that means is the sun's not always shining, the wind is not always blowing. But when they are, typically excess energy is produced, you store that excess energy in the batteries. You shift the discharge of that energy to when those energy sources aren't producing. And so you can see there in the bottom, the green bar is really where Eos plays in terms of the use case and the duration. And then on the right-hand side, what we call the intraday market, which is typically longer duration, 12-plus hours, you can see what the applications are, grid resiliency, seasonal flexibility, et cetera. So now I'll hand it over to Francis so he can talk about the product and the technology itself.

Sure. Thank you, Randy, for the introduction there. And just briefly, Francis Richey, I lead the research and development team at EOS. And I think, spend a few minutes just kind of going through the technology for everyone from kind of a high level and then hand it back over to Randy from there. But I think the unique thing about the Eos battery and the product that we sell is that from day 1, we designed it specifically for utility scale, grid scale energy storage. And that's different from the sort of incumbent technology, lithium-ion in the sense that, that battery was really designed for a different use case altogether. That's -- it was really designed for high-power applications for shorter durations. So we designed the battery from day 1 from the moment we founded the company to have properties that make it specifically useful for grid storage. So in that sense, it needs to be sort of a chemistry that is founded and understood. It needs to be simple and easy to manufacture, and it needs to be able to be manufactured at large scale. And the product itself needs to be safe. And the supply chain and all the raw materials need to be readily available. So when we set out to design the battery, we really kind of knew we wanted to target that 3- to 12-hour duration. That's really where, as Randy mentioned, the solar and wind, that's really the duration you'll need to shift the energy around. And so we looked at a number of technologies at the outset of the business. We settled on what we call a zinc halide battery. Traditionally and historically, zinc halide batteries are flow batteries. A lot of what our IP and technology is around is turning -- taking that chemistry and making it a static battery, similar to what a lithium-ion battery is. So the advantages of a static battery we'll get into this in some of the next slides. But in general, you have lower operating costs, and it's a modular, scalable design. The battery itself, the module is made of a few commodity raw materials. Our electrolyte is zinc halide electrolyte. For the most part, aqueous nonhazardous, nonflammable and the electrode materials are just made of titanium and graphite felt, which are both readily available. And then the plastic enclosure for the module itself is a V0-rated flame retardant material. So all of these things are -- add up together to make it a product that is safe, flexible, simple and durable, and we'll get into that on the next slide here. So these are sort of the properties of the battery that make it sort of world-class for the application that we're targeting, that 4- to 12-hour discharge duration battery for grid scale. Energy storage I'll kind of highlight. I spoke to a few of these, but one of the things we're most proud of is that the manufacturing and supply chain for all the raw materials or a large majority of the raw materials for the battery is based in the U.S. Our manufacturing facility is in Pittsburgh, and the majority of the raw materials for our batteries come from areas not far from the Pittsburgh area, which we're very proud of. The other thing that I'll highlight here is that the battery technology is very flexible and durable. And what I mean by that is that the degradation profile of the battery is minimal. So we expect this battery to last 20 years. We expect to have less than 10% energy degradation over the course of that lifetime. And we expect the battery to last about at least 6,000 cycles from the work that we've done modeling degradation to this point. Like I said, it's a fully recyclable long life span battery. We've proven that out with previous generations of the battery. And we work with a number of recycling companies already. Basically, similar recycling process as to how lead acid batteries are recycled. So I touched on this. This is -- if you think about grid scale energy storage, the term that, from an economic perspective that everyone focuses on is LCOS or levelized cost of storage. And really the advantage of the Eos product here is that the O&M costs are very low. So LCOS is generally made up of CapEx, operating expenditures and then whatever you pay to buy the power to store in the batteries. We have an advantage in the OpEx here because the batteries have no calendar life degradation, and they're able to operate in extreme environments. So there's no -- you don't have to have active cooling like you have with lithium batteries. These batteries operate at a very wide temperature range without active cooling. And they can also sit at low states of charge or 0 volts for extended periods of time without degradation. And that's what I mean by calendar life degradation. So the product is meant to be taken to sort of these remote locations that maybe have extreme environments. It's capable of functioning there for very long periods of time with minimal operations and maintenance.

Ambient temperatures of minus 20 plus 50 degrees Celsius, right, Francis?

Yes. And that's very different from lithium where you generally have to control the whole system in a very tight temperature window. So I'll kind of wrap up sort of the technical side of this here with just a high-level overview of kind of where we are from a deployment perspective. So we've -- and you can see the numbers there. I won't speak to those directly, but a lot of what we're doing with the current product this year is deploying systems in the field. And you can see the discharge energy for our systems in the field is sort of rapidly growing there, and we expect that to continue to grow almost exponentially over the next 6 to 12 months as we install more capacity in the field. And with that, I'll turn it back over to Randy.

Yes. Thanks, Francis. So we just wanted to, again, demonstrate manufacturing capabilities. So these are all pictures you see of our Turtle Creek, Pennsylvania manufacturing facility. So this is a U.S. invented technology produced in the U.S. with primarily domestic supply chain. So pre-COVID, that probably would not have been a compelling strategic advantage. But certainly now with everything that we've seen with COVID and disruptions and localization, et cetera, that we do consider it a strategic advantage. Top left picture there is a picture of our 100th energy block being shipped on April 30. And then there's other pictures of the Turtle Creek facility. You can see of the equipment. Top right is our welder room. Those are infrared welders, which is how we assemble the polymer, so the outside of the battery itself. So we've also hit a recent milestone with 20,000 batteries built. And then we do have a target of 90-plus percent manufacturing yield, which we have recently achieved. And frankly, as we continue to scale production, we see almost daily improvement in our manufacturing operations. When you think about just the scaling of technology, scaling a new technology, we've done a lot of work around evaluating our learning rates and coming down our cost curve relative to other technologies in recent history, including lithium-ion, including hydrogen, including others, and we see learning rates significantly better in our product than in some of those other technologies. One of the big reasons why is because what Francis highlighted is the simplicity of the raw materials themselves. So wanted to demonstrate here what we're seeing, just like everybody else is seeing, is inflationary pressures in some of our core components. You can see on the left-hand side, battery material, energy block and then freight of -- increases we've seen in cost. And we are reducing cost of our product significantly with the scale that we're increasing production through design changes and through sourcing. And sourcing means as we scale, of course, we're going to be able to get volume discounts, tiered pricing with our suppliers. But we're also evaluating, not only alternative suppliers for components that were previously sole-sourced because it was more of a prototype activity to alternative materials as well. And Francis, I'll touch a little bit on that when we get to one of the last slides about next-generation technology that we're working on now. At the same time, if you look in the middle section, so you can see that on the green line in terms of capacity expansion, those numbers, including the 65 for Q1 represents megawatt hours capacity addition. So we are underway capacity expansion now. And we -- as we expand, so we're adding assets. We're actually utilizing those assets through the capacity expansion. And so we expect the ramp up as we progress through the year to get us the incremental capacity in megawatt hours. The 550 represents incremental to where we are now to get us to 800 megawatt hours capacity for the full year on an annualized basis by the end of the year. The left-hand graph where it starts at 100% is the index cost of our product itself. And so the 100% represents the beginning of the year. And so as you can see, we're coming down the cost curve because of a lot of factors, but one of the big ones is we're scaling production, and that's really helped coming down the cost curve. Lastly, on the right, this is just a demonstration that we have locked in material pricing and capacity from our suppliers. So you can see the vast majority of our 2022 material requirements are under PO. And so the team has done an excellent job, and we have a world-class operation supply chain team that Eos has been able to attract. And that's on the heels of kind of the world-class R&D team that's been assembled, as you can see from having Francis at the helm of -- in charge of R&D and at Eos for a long time. Okay. So I wanted to just show everybody in terms of the commercial activity. So we do have a very robust commercial activity. We've seen the commercial activity accelerate in recent months, I would say, over the last couple of months, especially for a multitude of factors, including the recognition of the availability or the lack thereof of lithium-ion as a storage solution for many reasons, including some of the raw material components that go into lithium-ion batteries as well as where those materials are coming from and geopolitical concerns as well as just supply and demand. Most of the lithium-ion capacity and availability is going to mobility applications, not stationary storage applications. So again, if you go back to the total addressable market and stationary storage, what we expect in -- by 2030 of about 275 gigawatt hours, of which the intraday piece of that is going to be about 45%. That growth from where we are today, 2021, we estimate to be about 17 gigawatt hours of storage capacity growing to 275%. Most of that growth is coming from the intraday and intraday -- it's not coming from the shorter-duration lithium-ion. So again, when we talk about the mix of storage, this is not a like zero-sum game. The energy mix is going to require multiple technologies. Our customers realize that they're coming to us, and we continue to see that acceleration every single day. So in terms of our active proposals, we have about $4.2 billion. So that represents about 17 gigawatt hours of capacity. Those are nonbinding quotes. And then as you move to the right, this would be the funnel. So we have about approaching $0.5 billion of LOIs and firm commitments. And then as you go through the funnels, those LOIs turn into actual booked orders through a master supply agreement or purchase orders. That $67 million represents what we actually booked in the first quarter of 2022. This is just a pictorial of what our orders backlog looks like. So currently, we're at about $212 million. That represents 28 projects with 15 customers. It's about 827 megawatt hours of backlog. And $35 million of that $212 million is long-term service agreement. So it's the recurring revenue component, which typically goes into effect after our standard manufacturer warranty, which is between kind of 2 and 5 years. Just wanted to quickly show the mix between front of the meter, behind the meter, the various use cases and project sizes. So you can see the vast majority of what we're doing now is front of the meter. The use cases, use case primarily is solar integration. So this is solar plus storage, but you can also see the gray piece, the 200 megawatt hours is stand-alone, so it's locational capacity to really help with congestion. And then 50 megawatt hours is microgrid. And then lastly, on project size, you can see most of the projects now are getting to be kind of larger projects, greater than 50 megawatt hours. So we're talking really about grid scale utility applications. Okay. I'll let Francis touch on this in terms of product development.

Yes. So I think as we move forward, this is kind of our sort of next-generation product that we've spent a lot of time working on in the past, I would say, 1.5 years. Ultimately, the goal with this product was we want to get to gigawatt hour manufacturing capacity, and we want to get to that scale quickly. And so we kind of took that as our impetus and designed a manufacturing process and a few material substitutions within our battery module to make that happen. For reference here, just for this group, I think the module we're producing now in Pittsburgh is what you see on the bottom left there. That's what we're calling our Gen 2.3 module. It's about the size of a window unit air conditioner. It weighs about 220 pounds. It's a rather large module. And what we're moving towards with the next-generation product will be about 50 pounds. It will be about 1/4 of that size but have significantly higher energy density and lower cost with some material substitutions that we're working through. We're also moving towards a smaller enclosure design, which makes this even more modular. So what we ship right now is a 20-foot shipping container. What we're moving towards with the next-generation product is a non-ISO enclosure that will allow us to actually have a higher footprint density for this product compared to the current product. So that's what you see there in terms of 2.5x the power density for this new product compared to the old one. So we're cycling this product in the lab right now. We're continuing with our testing. We're doing overcharge testing, all of the -- checking all of the boxes along this path. And as we continue to announce further learnings on this product, we'll keep everyone in the loop. So...

All right. With that, do we have any questions? We have time for one -- maybe one.

So your plan to -- once you get to 857 -- $150 million of revenue, is that what we're in?

So the 800 megawatt hours of capacity, yes, should support, I would say, about $150 million to $200 million annualized revenue. Really depends on what the price of the product is, which, by the way, we've seen a significant increase in quotes and prices in general based on what's going on in the market.

And what would gross margin on batteries when you get down like [indiscernible]

So we are projecting to be gross margin positive in about 18 months with the launch of the new product.

How much debt do you have?

So we have one convertible note currently, a little more than $100 million.

All right. Well, we'll call that time. And thanks, gentlemen, for joining us.

Thank you.