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

Good morning. Thank you for joining us for day 2 of Cowen's Second Annual Sustainability and Energy Transition Summit. My name is Thomas Boyes, I'm the Vice President on the Sustainability and Mobility Technology team covered long duration storage and next-generation environmental services. And today, we have the pleasure of EOS Energy CEO, Joe Mastrangelo joining us. Joe, thank you so much.

Thanks, Thomas. Thanks for the invite. Appreciate it.

Before we dive into it, I just want to draw one's attention to the top right-hand corner of the screen, where there is functionality for you to ask questions. I can then ask those questions, honestly, on your behalf. But there is a slight delay, so please don't hold them to the end. So we have a chance to get to them. First, John, maybe it would be very helpful for investors who are not as familiar with EOS to go through just a brief introduction of the company, what problems you're trying to solve?

Yes. Great. Thanks, Thomas. And thanks again for the opportunity to speak. We -- here at EOS, we're a 13-year-old company that's been public since November of 2020. We're focused on a stationary energy storage with an alternate chemistry, to lithium ion. We use a zinc bromine, aqueous, hybrid battery technologies. So think of a self-contained battery about the size today of a window and air conditioner that's used exclusively for stationary storage for either helping on grid congestion or renewables intermittency. The battery in and of itself has been in testing for over 10 years. We have millions of cycles on the technology, and we have installations out in the field, and we're pretty excited about the differentiation that we bring both from cost potential and a performance potential for how the battery performs in market.

Perfect. Maybe we could just focus specifically because a lot -- there's been a lot more interest in energy storage, it's intensified a lot more utilities or kind of have their ears perked up. But could you talk about what the drivers are for that uptick in demand? What the dynamic is creating the need for this type of solution?

Yes. So the shift that you see to more and more renewables coming into the energy mix or into the power sector mix requires the need to manage that intermittency of renewables. Like right now, you can tell my office, the sun is out as it shines in my face, but that will come and go as clouds come over the top of that sun. And when that happens, your rate of power generation from the Sun changes, or if the wind doesn't blow, wind turbines will -- their performance will go down. But also, we know the sun will shine during the day. It will be dark at night. So what we're trying to do is extend the utilization of that asset into the evening hours with energy storage. At the same time, there's a tremendous amount of energy production that occurs and it's called curtailment where you actually take assets offline because there isn't demand for that power being produced, whether that's a traditional fossil fuel power generation or renewable power generation, you need that storage to be able to capture those electrons, store them and deliver them when needed into the marketplace. And as we see this new mix come in, you're requiring different technologies to allow you to smooth out and provide that energy that we all require as the world electrifies.

And then maybe just looking more broadly on a global basis. Certainly, in Europe, Russia's invasion of Ukraine, there's just been a lot more activity there. I think we've seen Germany move forward itself it's decarbonization targets, Ireland. So maybe you could comment on that market specifically.

Yes, I just got back last night from a week in Europe. Yes, you are starting to see a lot of the countries now thinking about like how do we diversify away from the oil and natural gas that come in from Russia. There is -- there are very large and small bases of renewable power. And now you're seeing almost every country start to look at how do they increase the utilization of those assets to reduce the reliance on those fossil fuels coming from Russia. It's an opportunity for us and other providers. But when you really look at this, like you see, Italy looking to reduce their dependence bringing in natural gas into the power sector. Germany, as you said, Thomas, has really started to accelerate here as we've seen in the last 30 to 45 days. So I think you'll see like up until now, the U.S. has really been leading the charge here, if you will, on energy storage. And I think you're going to see Europe be a fast follower now as it starts to want to diversify supply away from those Russian fossil fuels.

Perfect. I also wanted to dig a bit into just the Znyth technology, the design of the increase electrolyte battery that you'll have, what types of capacity fade is their cycle life, the specific temperature requirements? And maybe it would be just helpful for investors to contrast that against lithium-ion, which maybe people are more familiar with, where you excel versus that kind of incumbent shorter-duration technology?

Yes. So start with the fundamentals. Our core chemistry that we use or the chemical reaction that stores and discharges energy is a widely used industrial process of zinc plating and actually, the initial patents on our technology, we're started from ExxonMobil back in the '70s and the '80s in the energy crisis back then, are the inventor of the technology took those patents and came up with a way to use 5 really simple, commonly available raw materials to create a self-contained battery. So our battery in and of itself, very simply, you've got zinc bromine and water that create the electrolyte in the battery, you've got a titanium plate that is carbotized, graphitize felt and think about graphitize felt. There are things that you use for installation and furnaces, and then core common plastics to make the mechanical shell of the battery. Those are all readily available, earth abundant, nontoxic materials, the battery in the system of itself doesn't require costly fire suppression systems. So we're nonflammable, and we've been tested and approved by UL as nonflammable. The life of the battery, we've got batteries running on test here in our facility on today and in our R&D center here in Edison, New Jersey. We've got batteries on test here that have been running for over 8 years. And really what you see, the number one issue that we've had as we've developed as a company, has been mechanical failure around manufacturing defects. And once you get beyond those initial failures in the battery runs, what we found is the battery continues to run very consistently over a long period of time because of the way that the chemistry works, you're actually resetting the chemistry with every cycle that you operate. Unlike lithium ion, whereas every time you operate have to operate in a very narrow temperature range, we can go from and have operated from minus 15 degrees Celsius up to 48-degree ambient temperature Celsius without any problems and without any performance fee. So the battery in and of itself has been designed as very robust. My background, I've spent 30 years in the energy industry in the core energy industry, 15 of those years in oil and gas, and we designed a system that handles those robust environments that I've seen in my career where these technologies need to operate and really created something that can be a workhorse in the industry around energy storage.

And just maybe as a quick follow-on to that is, is there repowering for lithium ion, after 6,000 cycles or 8,000 cycles, depending on how the battery is being used, they have to repower that deployment. And certainly, that's actually a large cost in the Lazard's levelized cost of storage. Is this something that also someone needs to have the electrolytes recharged? Or is this really a self-contained system that operates in perpetuity?

Well, operates up to 15 to 20 years. We believe that 6-year recharge, depending on the operating conditions and the use case of the customer, there are times where we don't need that 6-year kind of upscale the battery, and we can extend that out into further years to reduce total operating cost. So when you look at the system in and of itself on a CapEx basis, because we're using these widely available commodities, we have a tremendous cost curve as we scale the company. And at the same time, we have much lower operating cost because you don't have that service interval around the sixth of the seventh year like you see with lithium ion. And at the same time, we don't require complex fire suppression or HVAC systems, so the total operating cost of the system over its light is much lower than lithium ion. In fact, we've had customers tell us that when our system is actually running, it's hard to see that it's running because it doesn't make any noise because there's no HVAC, and it doesn't consume any power again because there's no HVAC. So it's a quite robust system that offers not only CapEx advantages but OpEx advantage over the life of the utilization by the customer.

And then maybe another point to raise just because we've seen this -- the cost of raw material inputs for lithium ion batteries has continued to increase this year. It looks like it's going to go up again next year, still capacity constrained given supply and then all the targets from auto OEMs pushing towards electrified powertrains, it doesn't seem like that even that [ would be ] longer term, is that something you're seeing from your customers where they're coming to you and saying, I just don't want to be involved in lithium ion, I need a separate solution, and what kind of pricing behavior do you see when you look at zinc, bromine, titanium, graphite, the availability there for those types of inputs for your system?

Yes. So Tom, like everybody, we have seen cost inflation on our raw materials, but nowhere near the level that you see in lithium-ion. We've talked about in our last earnings release, the core battery raw materials up in the 15% to 25% range. The cost of the actual system, the biggest driver has been the cost of the container, the closure that we put the batteries into and then transportation costs for everybody have become excessive. We managed through those first 2 buckets by finding alternate materials, driving down cost and volume leverage and have been able to manage through that. What we see happen that's kind of on our -- how we deliver and our manufacturing availability. What I would say is like in this environment, it requires daily watching your supply chain to make sure that you're keeping track of the material flows because there are these disruptions in your supply chain of getting materials into the factory, but we just have to manage our way through that. At the same time, on the commercial side of the customer end of this, lithium ion is a great solution for EVs. And a lot of the lithium-ion production is going towards EVs. And what we're seeing is more and more customers coming to us as we expand capacity in our facility outside of Pittsburgh, we're seeing more and more customers coming to see us and seeing what we're doing and saying, you guys can deliver in the next 18 to 24 months where the market is constrained for lithium-ion. I have projects that I want to bring online in that time frame, let's work together to bring those projects to the market. And that's where you see like a few months ago, we announced our largest order with Bridgelink, where they were really looking to bring assets online in late 2022 throughout 2023, and we're able to deliver for them. And that's really one of the main drivers of why we got the order along with the fact that we're made in America, technology and the fact that our supply chain is a lot simpler than what you see in other technologies.

I appreciate the color there. What is the -- if you would levelized cost of energy, levelized cost of storage for the system today? And then maybe what expectations do you have looking out into 2030 or something like that? Or -- and what levers could you pull to strip out costs? Is this scale simply scaling up? Or is there something specifically on the technology side that could further be implemented to drive down cost -- the system?

Yes. So it's a great question, Tom. So what I would say is levelized cost of storage is highly dependent on the use case. We see that we are very competitive with lithium ion when you get above 4 hours and extremely competitive with an advantage when you're above 5 hours of energy discharge, and we can do anything from as low as 3 hours to as high as 15 hours. Now the thing that we've been dealing when you think about commercially with customers is showing them how that operating flexibility that our technology provides, how that creates various revenue cases for them. When you talk about -- and again, as you watch the clouds go over the sun in my eyes here, it's a great example, not done on purpose of intermittency. Intermittency is not predictable. So you can't really have a static system, and we bring the flexibility to be able to do that, and that gives us advantages on levelized cost of storage on a project-by-project basis. Now when you look at our product cost and bringing the cost and bringing the cost -- and becoming a cost leader in the marketplace, there are many things that we can do. When you look at where our battery was 4 years ago when I joined the company to where we are today and then where we're going to go, what we've learned is focusing on raw material quality got us a 20% to 30% performance increase versus the generation of the battery we had 4 years ago versus today. What we've learned as we've done that is now, we're shrinking the size of our battery down 40% while increasing the output of the battery by 20%. And changing in materials and simplifying our electrolyte designs. So we are an early cycle technology that has large volume leverage as we start to ramp production and has the ability to continue to simplify its system and take cost out and improve performance as we go forward. So I feel really good around the IT portfolio that the technology team is developing and where this technology will go as we get into 2023, it's pretty exciting when you combine that with the market needs and what people are wanting to do with energy storage. I think we have something here that meets a very large market demand that exists not only today and will grow in the future.

Maybe -- I think a lot of investors maybe are familiar with kind of the Rocky Mountain Institute Pie Graph and all of the -- kind of the stacking of value that goes into making a value proposition for energy storage, but could you just go over maybe some of the applications that have worked -- your technology works best for, can you engage in voltage regulation and then also do peak shaving, just to kind of give a bit more of a perspective there?

Yes. So when you look at the battery and the founding principle of the company was, solar will need energy storage. So when EOS was founded 13 years ago, we wanted to be a 4-hour discharge battery, the classic, how do we help manage the duck curve. What we've learned as we've gone through and use the battery and test the battery and install the battery out in the field is the flexibility of what the system can do. So when you look at primarily today, our use cases are 2 large use cases: one, go back to the core on solar plus storage; two, is stand-alone storage where you're basically locating a storage system near a grid interconnect and allowing a customer or utility to smooth the supply and demand curve as they go throughout the day. We've also started to install commercial and industrial applications alongside industrial processes or we're installing for hospitals out in California to give them the ability to do peak shaving to have backup power in case of power failure. So as we look at what the battery does, what we say to people is like if you're looking for something that -- if your primary use case is 0 to 2, 3 hours, we're not the right technology for you. That's where lithium ion has a superior technology, but we're starting to see the demand asking for this 4-plus up to 8 to 10 hours. That's where I think we excel in what we do because of the flexibility that we provide. And I don't think you'll find us where we would say like, look, beyond 12 hours, we would be superior. I think there are other technologies that as they develop and come to market that will be better than us. And again, like what I've learned in my 30 years is that energy is always going to be a mix. And within each type of energy, you're going to need a mix of technology. So we are going to need for certain use cases -- lithium ion we're going to need for certain use cases, lead acid we are going to need for certain use cases pumped hydro storage, and we are going to need it for a large chunk of the market, a technology like EOS to be able to deliver the sustainability that we want in our energy mix.

And how quickly do you think we get towards the need for 6-plus hours of storage. I'm seeing third-party estimates that kind of show as an average -- global average, getting to about 6 hours by the end of 2030. And certainly, there's pockets of geographies. New York has very -- the long peak demand cycles where the technology is needed today. But just where are you seeing that kind of progression specifically?

So we are seeing -- so Thomas, I think it will happen faster than 2030, and I think it's happening now because we're seeing more and more people come in and understand the value of being able to provide that duration discharge. So more and more of like what I would have said, if we were having this conversation 6 or 8 months ago, we'd still be -- we would be talking about like us trying to convince that there's a need for more than 4 hours where today, I think customers are coming and saying, "I'd really like to be able to do that and also on occasion have use cases that are less than that, and that's where we can provide the solution because when you really look at beyond 6 hours, the inflexibility of other technologies requires a hire -- a much larger system than what we need to do. Like what we can do is provide the same-size system and do 3-, 6-, 9-, 12-hour discharge, and we've done this on consecutive days with our test system here in Edison, New Jersey.

Could we also touch just on maybe the bankability of the solution. I mean you shipped, I believe, over 100 of your -- the kind of the energy blocks now. What kind of validation work was done by your customers? And maybe also to just -- what is the composition of the customers that you're engaging with primarily? Is it utilities mostly? Are you seeing a lot of renewable developers coming in trying to increase the economics of their deployments?

Yes. So like on the customer mix, it is a mix between developers and utilities. When you look at like the order backlog that we have right now, the majority of that is around developers in the California, the ERCOT, Texas, Texas market and then in the southeast of the United States is really where the backlog is going to be delivered and installed, but starting to see much more geographic expansion beyond where we've been on the backlog. The bankability of this is what we do is we bring each customer in here and we walk them through the testing that we've done, the cycles that are on the technology, the fact that we are no longer trying to figure out does the battery works. So this is no longer about invention, it's about optimization and showing them how the optimization works. And really like the -- what our best-selling tool around bankability is either come to Edison or come to Turtle Creek where our factory is located in Pennsylvania. And there's a spot like almost where I want to put a red x on the floor where people walk through and they go right? This is much different than what I thought coming in and you guys are actually producing product. And yes, we've done our 100th Energy block out of Turtle Creek, which was a great milestone, but the team is ramping up to get to the 200th a lot faster than we got to the 100. So the way that we're producing and the way that we can show field data that shows the technology works, and we have a ton of testing data that shows how it works in the different flexibility which gets you over the bankability hurdle.

And I mean we didn't touch upon this or talked about this previously, but I'm wondering just on interconnections, you certainly noted delays in California. Is that something that you're also seeing is just more broadly interconnection delays for the -- about 100 that have been installed, that there's just a little bit of a protracted period of actually getting those grid-connected.

Yes. So yes, there is a backlog. I mean that was also one of the reasons why last year we came off our revenue target. We continue -- and when you think about like as we've evolved as an operating company, with our project management team, the guy that leads our project team, Dave Leligdon, is a 30-year veteran from Black & Veatch. We're now much more in front of where are the customers on their permitting and grid interconnects that we're planning around those things. But it's a challenge and it's a challenge for the industry and more importantly, than I think like our revenue, which is, I think, is important to us every day to be able to get through that. But like when you think about what we're talking about overall sustainability in the shift is that we've really got to accelerate this process so that we can get the assets online and producing and really start to lower the carbon footprint of our energy mix faster than what we're doing, but we just got to all work through that to make that happen.

Great color as well. Maybe we just want to talk about kind of manufacturing capabilities. I think you added 65-megawatt hours of new capacity at Turtle Creek just last quarter. Can you remind us what your total capacity is now? And then if you're targeting in 800 megawatt hours of total manufacture price. How do you get there? What's the cadence? And what's really the CapEx necessary to kind of execute on meeting all of this future demand?

Yes. So -- again, great job by the team out in Turtle Creek. We went from -- again, if you would have come visited us in January, we would walk you through an empty room. If you were to come today, you'd see batteries being manufactured filled and completed in that facility right now between the 2 buildings, right? So there are 2 buildings within the same former Westinghouse Industrial Complex. We're manufacturing buildings in both locations right now. We're going to be cutting over to manufacturing only batteries in the new building and then testing in the old building, and that will happen here in the month of July. What I would say is that we're probably around 350-megawatt hours a year of production. Right now, the goal is to get 800. By the end of the year, the total investment to get there is going to be around $50 million, and that's the way we kind of designed the company. And again, depending on the building that you go into, right? So we need -- in order for us to do a gigawatt hour of production, we need a building about the size of a Home Depot or a [ Lowe's ], 110,000 square feet. We don't need clean rooms. We don't need -- this is not -- this is precise, not complicated manufacturing. And then we can ramp that up fairly quickly. Like if we're in normal times of supply chain, I'd tell you we could do 6 to 9 months and get a factory up and running where we are today, it's probably 9 to 18 months depending on where the machinery supply chain is to get the equipment into action and manufacture, and our whole goal is to be able to do this in building blocks as low as 200-megawatt hours are as high as you want to go depending on what the need is. And the way we've designed our manufacturing process from the beginning was, when you look at where a lot of battery companies have struggled in the past, they've gotten into trouble was they build the capacity in advance of demand. And we designed this so that we expand as the demand comes. Now look, it's hard work. You're always running full speed, but it's a much better use of investor capital to be able to scale the company as we move forward. So we'll grow as fast as the demand grows and the demand is accelerating for us, and that's why you see us out trying to position ourselves to get the capital into the company in various different needs to be able to expand it and capture this growth.

Perfect. Maybe if -- we talked about capital there. Could you just kind of diagram out the funding needs that you think that you're looking at over the next year or so? What are the potential avenues of financing that you could pursue? And maybe to the degree that you can talk about the DoE loan process, can you maybe articulate what that process is and then where you are in that continuum would be helpful for investors to understand.

Yes. So we're in the Phase 2 of the DoE loan. We filed our application -- fully filed our application and are in the due diligence phase, which we'll be working through here over the next the next few months. You've got to go through various different phases of that -- of how they do their due diligence. We're doing those concurrently instead of consecutively. So things like environmental because we're moving into an existing factory, and it's not a greenfield. It allows us to accelerate, and they build through our business model and they look at where we are from a backlog standpoint. So we're going through normal robust due diligence process with them to work to get to a conditional approval in the fall with funding coming towards the end of the year. At the same time, we announced our SEPA with Yorkville that it gives us the flexibility to bring capital in as we need it. And then Randy Gonzales, who's our CFO, and I are out in the market, constantly looking for different needs to be able to fund the company for its growth, and we'll continue to work on those. Nothing really to talk about publicly right now, but there are a lot of things that we're working on to be able to get the capital that we need and the best way for our shareholders to be able to grow the company.

Great. And we did actually have 1 question come in. Just we talked about the kind of -- the backlog there composition on a customer basis, but is there anything you can provide quantitatively on bookings, backlog or even the pipeline, just the size of the -- instead of pipeline you're looking at the discussions that you're having, just to kind of, again, frame the size of the opportunity that you were looking at?

Yes. So I always think it's important, like if you go look at our last earnings announcement like we've been consistent since we went public about how we talk about pipeline, right? So we have a first phase of this, which is called lead generation and lead generation is a potential customer basically comes to us and says, "I have an idea, and I want to do a storage project." We don't call that active pipeline because there's 70% of those that disappear, right, over time because it's just pay, let's see if we can create something and a lot of those fall by the wayside. That in and of itself is $3 billion to $4 billion. And then when you look at our active pipeline and active pipeline has 3 components, it's -- we're -- first off, to get in active pipeline, the customer has to give us a technical use case, that we can provide a technical offer back to them. So we need to see -- here's the use case. We then give a commercial offer, and then we have what we call a letter of intent where we're trying to do as we go through this process is, say to them, look, we understand that you have condition precedents before you get a project going to go back, Thomas, you were saying before, like things like great interconnect financing around bankability, different things like let's sign an agreement where we say, look, if the project goes forward, EOS technology, it's got on the same side of the table, work together to turn that into an order. When you look at where we are today, that's that pipeline, if I remember correctly, it's around 22 gigawatt hours of potential pipeline. It's around $6 billion when you think about the opportunity, and then our backlog today is over $200 million. 1/3 of that is long-term service revenue and the remaining amount are projects that we need to deliver here over the next 12 to 18 months. When you think about our orders target for the year, look, with a $6 billion pipeline, and you're looking to do $400 million of orders, I always tell the sales team in our -- when we do our pipeline reviews, is like we're one of the few instances where we need to be less than 10% successful to be successful. So we just got to keep working through that number and seeing what's happening now. The accelerators for us around the pipeline are things that we've already talked about, like the shortage of lithium ion, the growth in 6-hour-plus storage demand, the fact that we're made in America, and what we're trying to do to continue to have an American supply chain to shift our energy mix to let lower carbon energy sources. I mean when you look at those 3 things together, we just have to keep working this day by day and keep winning and proving the customers of this technology that's reliable and will help them position themselves for the future.

Joe, I very much appreciate the discussion. We're actually up on time, unfortunately, but this was great, and then all the insight. I really appreciate it.

Thanks, Thomas. Thanks, again, for the opportunity. Really appreciate it.