Eos Energy Enterprises, Inc.

Good day, and thank you for standing by. Welcome to the EOS Energy third quarter 2023 earnings conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone, and you will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lise Higley, Director of Investor Relations. Please go ahead.

Good morning, everyone, and thank you for joining us for EOSIS Financial Results and Conference Call for the Third Quarter 2023. On the call today, we have EO CEO Joe Mastrangelo and CFO Nathan Craker. 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 future results and outlook for our company, as well as statements regarding our ability to secure final approval of a loan from the DOE or our anticipated use of proceeds from any such loan, all of which are subject to certain risks, uncertainties, and assumptions. Should any of these risks materialize or should any of our assumptions prove to be incorrect, our actual results may differ materially from our expectations 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. Expect as required by law. This conference call will be available for replay via webcast through EOS's Investor Relations website at investors.eoc.com. Joe and Nathan will walk you through the company highlights, financial results, and business priorities before we proceed to Q&A. With that, I'll now turn over the call to EO CEO, Joe Mastrangelo.

Thanks, Liz, and welcome everyone to our 3Q earnings call. It's great to be back here with everybody. Let's just move to our first page, which is really a milestone page of our first V3Qs being shipped out to customers. We announced this when it happened back in September, but this to me really is the culmination of a lot of hard work, not just internally to EOs, but also externally with our customers and our supply base. There's so much work that goes into this picture of being able to get parts qualified, suppliers qualified, parts in the factory, product off the lines. I mean, this is just a tremendous achievement when you really think about the timeline that we've been operating on. And we've been very deliberate about the speed at which we do this because the speed at which you're manufacturing determines the speed at which you're spending capital. And we're doing that per customer requirements and then also doing that in our learning curve to optimize the capital that we have on hand. What we've seen when you go through and look at this and move to the next page is our pipeline continues to strengthen and we're building a credible path to strong orders growth that Nathan will walk through here in a moment. But really what I like, what I'd like that the team has been doing is we're seeing more and more customers come with use cases that fit in with the technology. When the company was founded 15 years ago, it was founded on four-hour storage. And what we're going to talk about today is how use cases are moving to longer duration. As they become longer duration, you're going to continue to see this pipeline grow, the booked orders grow, and the backlog grow over time. Down at the bottom, we continue to discharge energy. We're at 1.6 gigawatts. This really shows that the technology performs. There's a lot of hard work going into being able to do that and a lot of lessons learned both internally and with third parties, including energy management system, SCADA system suppliers, AC scope suppliers, and the customers themselves. The same time when you look at our cash on hand, we ended the quarter with $58 million of cash on hand. Again, what I would say here is a capital strategy is not just the capital you raise, but also the capital that you spend. And we're going to talk about both sides of that, building into when we come into December and talking about the strategic outlook and ultimately what is the company's path to profitability over time. So if we go to the following page, as I said on the first page, one of the key aspects of how you grow any company is the partnerships and the people that you work with. We are building strong government support, the Department of Energy with the LPO conditional commitment that we announced In the beginning of September, we were the first Title 17 non-lithium ion battery company. I think that's a testament to the hard work that's been done in the labs, at suppliers, in the factories, out in the field to really get a technology that the government saw as being eligible for a potential loan as we work through the closing conditions. At the same time, we've been working in one of our core markets in California with the California Energy Commission that goes all the way back to 2014. and is now accelerating into many use cases where that region of the country is looking for longer duration, flexible, and safe energy storage technologies. These things don't happen overnight when you really think about it. This has been a nine-year journey to prove out the technology and grow into commercial scale, but we feel like we've got a technology that provides for the use cases that the markets demand. And Nathan will also go through in a moment what we're also doing seeing in ERCOT as that grows. At the same time, our customer base is shifting and continues to grow as we get into more and more U.S. utility customers. You know, that picture that we had earlier is the first units going to Duke. You know, Duke is a customer that we, again, we've been working with Duke since the 2015-2016 timeframe and are now getting where we're putting the Z3 product out into a small commercial facility. project, which I think we're all proud of, and we'll be able to prove out the flexibility and operability of the Z3 technology. We also have a project that we've talked about with a large U.S. utility. You know, that project will start shipping 47 megawatt hours to start shipping in next year, in the latter part of the first half of next year. Also, I've applied, that customers also apply for DOE grants, and underlying these projects that we're executing with them is a very large conditional frame agreement or offtake agreement, which will help us drive future growth as they look at longer duration energy storage. And we've announced an order in last quarter with Dominion Energy. Again, Dominion announcing, when you look at this, you would say 16 megawatt hours and the size of the market that we're in seems relatively small. But Dominion was, again, another journey. And Nathan will talk about what that journey looks like and to be able to get 16 megawatt hours out in commercial operation on a commercial product project then leads you to be able to develop and execute on larger projects with these customers as you move forward. So really starting to put together pipeline growing, building and proving out the technology over time out in the field, and then working with robust customers. And at the same time, you're not gonna scale into this growth without great suppliers and great partners to be able to bring the raw materials and the parts into the manufacturing process. We're really happy, and I'll give a quick update, on the work that we're doing with Acro on our automated line and how we're moving forward on our first state-of-the-art manufacturing line and how that implementation is going. But at the same time, we're really scaling up the supply chain of the company. When you really think about what we've been doing over the past couple of years is truly moving from what is an R&D supply chain on proof of concept to a supply chain with multiple suppliers in global scale at a cost position that allows us to develop and communicate in December our path to profitability. You know, we're working on three core components, resin supply, and to make that resin supply U.S.-based, U.S.-based, U.S.-sourced product. Electrolyte, so electrolyte is around the R&D team simplifying our formula and then finding a large-scale mixer to be able to mix that, to mix that electrolyte at a cost position that allows us to scale. And then graphitized felt, which is a very complex supply chain, And we're working this at multiple angles to be able to take this part, which is one of our last parts in the battery that's not U.S. sourced, and over time develop a U.S. supply chain for this critical component to both increase our ability to grow and scale the company, do that with U.S. manufactured material at a cost point that will keep us competitive in the marketplace. So if we then go through and talk about where we are and how we're positioning the company for the long term, Really, we're at the stage where we're balancing multiple priorities while continuing to meet key customer commitments. First priority is always deliver for the customers and balance your priorities around how you do that. When you think about where we are from a financing standpoint, where we are on orders growth and orders timing has been a little bit slower than what we forecasted. Therefore, from a financing standpoint, we haven't seen deposits come in at the same rate that we originally forecasted. But we've gotten through the DOE process and are now working on the closing requirements from the DOE loan, which will allow us to scale the company. At the same time that you're balancing these factors, you're then balancing the amount of working capital that you're bringing into the company, therefore the amount of product that goes out the door. So as we're launching the Z3 product, we're looking at where the customer is in their project readiness. Where we are in our product cost-out timeline, so if you look at our timeline, one of the decisions that we've made this quarter, which Nathan will walk through in more detail, is to focus on getting a key project delivered in ERCOT over the course of 4Q into the first six weeks of 2024, and then cut in lower-cost products so that everything we ship from the end of February, beginning of March on, ships at a lower cost. you know, rushing to ship things into the field that are not going to be utilized or not going to go online in a time period isn't smart for customers and isn't smart for EOS from the standpoint of the capital that it takes to build and put product out in the field. And while we're doing that, this also allows leadership focus on delivery of the state-of-the-art manufacturing line. So when we say state-of-the-art manufacturing line, I think many people just think about the equipment coming in from Wisconsin from Acro installing the line turning the line on and then you start ramping production. Well, inside of that is not just that manufacturability or that line itself. There's also developing a workforce. We've been doing this over the course of the three plus years that we've been here in Turtle Creek. But really what we're doing now is as we're changing the way that we build the product, we've got to change the skill set of the employees that we have on the shop floor. So overloading production early on is going to detract from our ability to prepare the workforce for the new line coming on and starting to operate. So we want to be able to manage and continue to build and put product out in the field for critical projects while training the workforce for the new way we're going to have to work when our new line comes in and is installed. At the same time, our engineering, R&D, and manufacturing team is looking at every core process of how we build our product and finding ways to simplify that and improve yield and improve quality. The biggest thing that we've learned as we've gone through the semi-automated line, and we'll talk about this and Nathan will also mention this in his section, is that the number one driver of a defect on the semi-automated line is operator error. Operator error meaning the way that we flow material through the line and the manual operations that we have creates variability that goes away when the state-of-the-art line comes in. We've proven out that we can manufacture. We've dialed in, if you will, the technology that we're using to build the batteries. But at the same time, we've got to look at that and say, you know, in most cases, a human versus a state-of-the-art operation, the state-of-the-art operation operates at higher quality as you do material movement and some of the actual manufacturing processes. So we want to make sure that we lower the scrap rates that we have by getting to the automated line faster and producing, if you will, less on the semi-automated line to deliver for key customers. The same time I talked earlier about supply chain development and the partnerships that we're building, inside of that are things like critical part qualification and wanting to make sure that the parts that hit the factory floor are of the specifications that we need and can go into production. So when you take these three factors, put them together, you really look at this and say, Given the capital that we have and the investment that we want to make in expanding the workforce, we've got to take the people that we have and really focus them on those projects that are core and critical for the company, getting a commercial project, a larger-scale commercial project installed in ERCOT, delivering on the utility customer's 47-megawatt-hour project while developing the new line and training the workforce and bringing up suppliers. So we're trying to balance multiple priorities here to scale the company faster in the long term for profitable growth. So rather than focus on individual quarterly metrics as we go into 2024, we're looking at 2024 as a ramp year. And we'll talk about this more in December, but we will ramp into production and ramp into the line and do that in a way that's prudent and effectively uses capital. So let's go into a little bit more detail on operational scale and building capacity for manufacturing. So if we go to page eight, we came up with a strategy that had three phases to it for how we wanted to scale manufacturing. We wanted to first develop discrete manufacturing operations, second, implement a semi-automated line to really learn and see how material flows and understand our bottlenecks, and then and then install and ramp up state-of-the-art manufacturing capacity. When we go through each one of these phases, there's been lessons learned at each phase that's making us better for what we're trying to do in the third phase, which is scale up manufacturing. In discrete operations, this was really moving from hand-built prototype product in our Edison facility that was tested and proven out, to optimizing design and coming up with manufacturing processes that could scale. Where we started on discrete automation, we've changed many of the core manufacturing technologies that we're using in that manufacturing line. So if you look at that picture under number one, that's how we integrate the bipolar single piece stiffeners into the tub or into the frame that we use to build the battery. We changed that technology and went with a lower on the surface technology, but lower cost technology that delivered higher quality. And that's why we wanted to do that because if we would have gone in with a large automated line from day one, you would have automated around a technology that wasn't optimized, wound up spending a lot of money and wound up with a line that couldn't produce the quality that you want. But really what we did in this whole process was we took 50% of the parts out of the design, We found 25% savings on the injection molded parts, and we truly mitigated our automation risk because we really understood how parts flow from the raw materials that come in from suppliers to a battery going into an enclosure and an enclosure going out in the field. On the semi-automated line, the beauty of the way that we're running the semi-automated line is you can stand in our factory and look across the line, and you can see bottlenecks. bottlenecks, not just of material, but also where people are gathering. And when you look and you see these things, you go and try to figure out what's happening. Why do we have more people at this operation? Or why are we seeing material build up at this station on the line? And then you go in and run a lean workout and go through your lean processes and take cycle time out. When you look at what the team has done here, we've taken the initial cycle time down from nine minutes when we started We thought we had a theoretical cycle time of around five to four and a half minutes. The team is now running at three minutes to two and a half minutes of cycle time. All that happens because you can easily move things around. The one thing that happens when you implement an automated line is you lose the flexibility to move equipment around and change material flow. This allowed us to do that. It also allowed us to bring Acro on site with us, our supplier for the state-of-the-art line, to watch how everything was happening, giving us feedback on the discrete processes and the way that we're moving, but then take that learning and incorporate it into how we want to implement the automated line. We were able and are able, as I said earlier, our number one driver of scrap is manual operations. Over time, we've been able to drive that number down below 5%. It moves around a lot because, again, it's highly variable with the people that you have on the line. And from where we were talking about shipping cubes in September, our output off the line has gone up five and a half times in the month of October. So we continue to learn and grow and execute. On the state-of-the-art manufacturing line, let me just move quickly to page nine. So we're in the midst of executing on the state-of-the-art manufacturing line at the Acro facility in Wisconsin. It's critical to note that there's 30 discrete processes that make up our state-of-the-art manufacturing line. That may sound like a lot to some people, but from the standpoint of what we're trying to do from product manufacturing, it is relatively simple, but it requires a lot of precision to make sure that you get quality off the line and achieve the output goals that we have as a company. So we're being very thoughtful about how we work through this. Right now, you see we're in the phase of working towards factory acceptance of the line in the acro facility so we are assembling these lines and the pictures that you see down at the bottom are the actual eos equipment being installed and we're starting to work individual stations and how you pick and manufacture and move equipment to then work through to get to the point where the line runs and we get a factory acceptance test and then the line comes to turtle creek where we install it and then run a site acceptance test and then start manufacturing Question always would be, why not just do the factory acceptance test right in Turtle Creek and skip the step of installing the line in Wisconsin? We've looked at that and we continue to analyze ways to accelerate the schedule, but the thought process behind what we're doing right now is to have access to the full range of technical expertise that Acro has. By doing that on their site, their experts walk out of their offices and go and look and fix and can react quickly to challenges as we're updating the line versus if we were to do it in Turtle Creek, you'd lose travel time and it would cost more from the standpoint of the travel and living to get the people to come and work on the line. So we feel like this is a faster, long-term, lower cost way of bringing the line up into production over time. Now, Nathan will talk about how the size of the line is a little bit lower then the subsequent lines that we'll be able to execute on, and that's just our way of ramping into the growth over time. The good news is that as we look at this right now, we continue to seek ways to both accelerate the schedule and reduce the capital spend, but we're looking at where we are right now and the performance that we're seeing in the semi-automated line and why it was so important to be able to do that semi-automated line, that we believe that it'll require less working capital to bring the line up and running Therefore, the original cost projections, there should be some favorability in that number over time as we work through the process. I feel really strongly about the partnership that we have with Acro and the way that we've been working together and the progress that we're seeing and the work that's been done over the past 12 to 18 months to bringing the Z3 product to a product that can be produced at scale really is starting to show the promise here as we start working through this and a lot of the hard work behind the scenes things that you don't see, we'll start paying dividends as we bring that line into production in 2024. With that, I'll turn the discussion over to Nathan to walk us through a couple core topics here and the Q3 financial results. Thanks for listening and look forward to Q&A.