Eos Energy Enterprises Q3 2021 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2021

There are 8 speakers on the call.

Operator

Greetings. Welcome to the Eos Energy Enterprises Inc. 3rd Quarter 2021 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Operator

Please note this conference is being recorded. I will now turn the conference over to your host, Laura Ellis, VP of Investor Relations. Thank you. You may begin.

Speaker 1

Thank you. Good morning, everyone, and thank you for joining us for EOS' financial results Conference Call for the Q3 ending September 30, 2021.

Operator

On the

Speaker 1

call today, we have EO's CEO, Joe Mastrangelo And CFO, Sagar Khurrada. Before we begin, allow me to provide a disclaimer regarding forward looking statements. This call, including the Q and 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.

Speaker 1

Our remarks during today's discussion should be considered to incorporate this information by reference. Forward looking statements represent our beliefs 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 the 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 In addition, our non GAAP financial measures may not be the same as or comparable to similar non GAAP measures presented by other companies.

Speaker 1

This Conference call will be available for replay via webcast through Eos' Investor Relations website at investors. Eose .com. Joe and Sager will walk you through the company highlights, financial results and business priorities before we proceed to Q and A. With that, I'll now turn the call over to Joe.

Speaker 2

Thanks, Laura, and thanks, everyone, for joining us today for the 3rd quarter operating results of EOS Energy Storage. It's another quarter of great accomplishments for the team starting off with a page we use every quarter. The technology we continue to discharge energy and run operating cycles and prove out not only the robustness, but also the operating flexibility of what we bring to market. We've announced this morning the largest order in the company's history. We're at booked orders of over 0.5 gigawatt With the backlog now at $150,000,000 we're very excited about the project that we've announced with Blue Ridge and Pine Gate.

Speaker 2

It's an exciting for us, but also the follow on order from Duke and the new order from Ameresco. Our opportunity pipeline continues to be robust with over 22 gigawatt hours. What we're seeing as we look in the market is continued growth on the opportunity front. We're navigating a little choppiness and also Some uncertainty on when orders will close, but we continue to see customers coming to us to want to understand how our technology can deliver on their needs. The factory and the team in Turtle Creek had a very strong quarter.

Speaker 2

I'll go through some of the improvements that we've made in the operation. We're standing at $3,500,000 $3,400,000 of sales of shipments year to date and we have $144,000,000 of cash at hand to continue To execute on our operating strategy, overall, a solid performance by the team and continuing to position the company for future growth. So if we move to Slide 4, just overall the environment like many other companies, we are going through the headwinds of what's happening on the supply chain both on the labor, material And logistics side, when you look at where we are and how that's impacting us, we're running our factory at 2 shifts versus 3 shifts. We continue to hire and want to build out over time, but we have been experiencing some labor shortages, but have been able to manage through that. At the same time, One of our biggest items that we manage through is the actual container that we use for our system.

Speaker 2

We've come up and now have 3 sources of supply for that and are managing through the logistical ability to be able to receive those containers in our factories to ship them to customers. We still have the same challenges on the semiconductor side of having availability. But given the ramp and the planning that we've been able to do, we should be able to manage through that as we go through the rest of the year. And on the inflation side, The biggest thing that we're managing through is just on the resin that we use for our battery module itself is just managing that overall equation and how we hit our And then I talked about on the previous page, there's a lot of there's certainty around the growth in the market. Uncertainty around the timing of that.

Speaker 2

And we see that from the upfront opportunity through the sales process all the way through To the start up of our equipment out in the field and the team we continue to manage our way through that and that really when you take these three together, What it really requires as a leadership team is we manage the company tightly as we go through and solve our issues that come up on a day to day basis. On the tailwind side, we continue to see strong demand for storage. The market is going to grow. BNEF continues to forecast over the near term a 23% CAGR. The market as you start to see it now is starting to shift to needing Flexible duration discharge, so moving from a static 2 hour, 4 hour to systems that can do anything from 2 To upwards to 15 hours and our technology fits the bill there.

Speaker 2

And I think you're going to see a new technology mix as we come in and the market grows and And I think another big one for us I talked about on the previous page is that we continue to improve our operational capability. We have a higher output coming out of the factory. We have better yields. And I'll show you some of the data on how we're getting consistent battery And system performance as we ship out into the field. So really a lot of work and a lot of focus from the team on this aspect and results starting to show through Here as we look at what we did in the Q3.

Speaker 2

On the next page, Page 5, here's what we're talking about, for where we are versus our business Priorities for the year, we as I mentioned before, we booked our largest order in company history in October. We are starting to build up a blue chip Portfolio of customers that we're working with, I talked about the names earlier, but we like what we see and we also like the work that we're doing with some major Power developers and utilities as we go through their qualification process and making a lot of progress as we move forward for Future growth for the company as we move forward. On the revenue side, we're on track. We're managing the risks that we talked about to our $5,000,000 revenue target. Our second half revenue is 6 times what we did in the first half of this year and will continue to grow over time as we continue to debottleneck our factory And add capacity.

Speaker 2

And on the capacity adding, we scaled we will scale our manufacturing capacity by year end next year To 800 Megawatt hours on our footprint, in Turtle Creek in Pennsylvania, it's a $35,000,000 planned investment And we saw the announcement of us getting an equipment financing deal to be able to manage our capital, but we like And we'll I'll walk through in more detail later on. We like our asset light CapEx manufacturing model because it will allow us to grow As the market grows, on our next generation technology, we have a working prototype that's been on test. We've got first piece parts coming in And we'll start the manufacturability tests here over the next couple of weeks. And we're planning our first half our first shipments For the product first commercial shipments for the product at the end of next year. It's an exciting time.

Speaker 2

I'll go through some details as we wrap up the presentation around the next gen product. We like the product that we have today and how that's performing. I'll show that as well. So again, I think overall strong performance by the team and I'll turn it over to Sagar now to walk us through the financials And an upfront discussion around the commercial aspects of the business.

Speaker 3

Thanks, Joe. Good morning, everyone. In the next two pages, I will talk you through the Q3 financials. Let's start with the income statement. We delivered $718,000 in revenue from the As you know, motor oil was one of our first commercial orders.

Speaker 3

3rd quarter revenue recognizes the 2nd shipment to Greece. Revenue for the 1st shipment was recognized in the 2nd quarter financial statement. We also successfully delivered On 2 other orders this quarter, River Valley in Massachusetts for 1 megawatt hour and RENEW in India for 0.5 Megawatt hours. Our cost of sales in the quarter were $12,900,000 This included $2,800,000 of expense related to fair market value Adjustments to inventory attributable to future booked orders additionally $3,600,000 in expenses Related to improving our current manufacturing yield, dollars 4,100,000 of costs were incurred as we bring the factory up to capacity and And lastly, dollars 1,200,000 in logistics, freight and other transportation costs. Moving on, our R and D expenses were $1,500,000 higher versus Q2 related to ongoing investment In our Z3 product here in 2022.

Speaker 3

General and administrative expenses We're $2,500,000 lower driven by staff related accruals and outsized service spend. Moving to interest expense, The primary driver of interest expense is related to the accounting for the convertible notes specific to the $100,000,000 in investment from Coke Industries earlier in the year. Lastly, other income includes $9,900,000 for the change in fair value of existing derivatives And 700,000 on fair value for our private warrant, both of which are attributable to EO's share price in the 3rd quarter. Moving on to the next page on our cash balance. As of ninethirty, we have $144,000,000 in cash.

Speaker 3

We finalized a $25,000,000 strategic partnership with Trinity Capital to finance our investment in equipment purchases as we increase our manufacturing capacity here in 2022. An initial tranche of $6,000,000 inflow is as a result of that. We additionally received $4,000,000 in warrants exercised during this quarter. From business operations, we expended $41,000,000 this quarter. 20 of that is directly related to the cost of sales, dollars 6,000,000 in general administrative expenses, $4,000,000 in capital expenditure, dollars 3,000,000 in R and D, dollars 1,000,000 in customer financing and an additional $1,000,000 in commercial operations.

Speaker 3

And lastly, we had $6,000,000 in one time transaction expenses. Let's move on to the next section. We'll review our progress on commercial pipeline and booked orders to deliver on our 2021 and beyond financial commitment. Page 9 is a snapshot of our commercial activity as of October 2021. This is the page you are now familiar with from previous presentation.

Speaker 3

Let's start with lead gen. Lead generation is where we work with our customers to materialize ideas and assess the feasibility, regulations, project plans and economics Related to specific projects, we today have 2,900,000,000 or 18 gigawatt hours in review within this bucket. Our commercial pipeline is 3,700,000,000 or 22 gigawatt hours. This constitutes of 2 key segments, Active proposals for $3,200,000,000 and customers with whom we have a firm commitment of another $500,000,000 Like we have discussed on previous calls, only a project or a customer with a clear mandate on requirements, specifications and only a use case that satisfies EO specification will be included in our pipeline. In this stage, we actively present our commercial and technical proposals to customers.

Speaker 3

Our experience is about 30% of our pipeline over the long run In specific circumstances where we have reached an agreement on commercial terms with select customers and have agreed to terms With a letter of intent supported by clearly defined next steps that require actions on behalf of the customer, we categorize These projects as an LOI are firm committed. Our experience indicates that on average 60% within this category translates into booked orders. And now lastly, we have to the right most of the page, dollars 137,400,000 in booked orders. We consider a project a booked order Where there is an agreement for yields to procure material, manufacture and deliver storage solutions. We see a strong momentum in demand.

Speaker 3

Booked orders have increased $58,000,000 since the Q2 earnings call. On the next page, here's a snapshot of our orders backlog, which is now a reflection of our 2021 year to date booked orders Plus 2020 year end backlog minus of any shipments to meet customer commitments. This backlog comprises of 30 projects with 16 customers and 6 13 Megawatt Hours. As of the Q2 earnings presentation, we reported orders and backlog of $95,600,000 Since then, We have recorded $58,300,000 in new booked orders. We have also successfully shipped $2,100,000 resulting in a total of $151,800,000 in backlog.

Speaker 3

Delivery on these commitments is expected to be in 2021, 22 and beyond. Equipment sales constitute $118,000,000 of our backlog $34,000,000 in long term service revenue. Our backlog has increased in 3rd quarter is 100% driven by cash sales and service revenue. I'll hand the conversation back to Joe now on Page 11.

Speaker 4

Thanks, Sagar. And just want

Speaker 2

to build off of the comments that Sagar talked about on our commercial, how we're managing our pipeline and closing orders and the backlog we have. So just talk about the over $150,000,000 of backlog We have on hand with 16 different customers. Really how that segregates itself out from type of project, we have a lot of Our backlog is on the front of the meter side. We're starting to grow in the size of those projects, and I'll talk about that. But also on the behind the meter, you see that being a smaller segment for us in our backlog today and that really comes down to us experimenting and finding out where the technology works the best in developing a strategy to address that market as we go forward.

Speaker 2

So although you see a high concentration on front of the meter, We believe with the operating aspects of our technology behind the meter will be important to us and now we're working on getting the right partners to be able to address that market. On the use case side, the technology from day 1 was designed for integrating solar into the grid and helping To enable solar to not only power when the sun is shining, but also provide reliable power, when the sun is not shining in the evening hours to manage What is classically called the duck curve, but we've also talked about the fact that we see more and more locational capacity to be able to do Firming of the grid and you could see that that's how our technology splits out and then the microgrid other really ties back to that behind the meter that I talked about earlier. And one of the proof points for us as a company is that the backlog and size of project on the far right is starting to grow. It just shows The credibility that we're having as we bring customers into our facility in Edison and show them one of North America's largest test facilities and how we've been Operating this technology for over a decade and then bring them out to our factory in Turtle Creek and show them product being manufactured and tested and coming off the line and being shipped to customers.

Speaker 2

We are and one of our goals when we went public was to become an operating company. And I think when you look at this page and the things I'm going to talk about here, you see that we have become An operating company that now needs to grow and improve itself as we move forward and we have a team that's ready for that challenge. When you flip forward to page 13 and really start talking about manufacturing capacity and how we're delivering. We have a fantastic team in our factory in Turtle Creek and you could see some of our operators there building equipment on the shop floor. As I talked about earlier, we improved our yields by 10%.

Speaker 2

You See the breakdown of that. On the right hand side of the page, our current production capacity is at 2 50 megawatt hours per year. As I talked earlier and Sagar discussed, we have $3,400,000 of year to date shipments, but we've seen improvement across the board And all 4 of our main quality of our main manufacturing processes with great quality. And I think the biggest one for us when you really look at this is, Yes. We've really started to hone in and improve the process of welding of infrared welding our battery modules together And then getting the throughput on battery assembly and then really getting a higher yield as we ship product out in the field.

Speaker 2

We've done a lot of testing We're starting to see a lot of the hard work that we've been doing on the shop floor pay dividends in how we do output. So now it's not about Getting the quality right, it's about scaling the great quality as we go forward to grow the company in the future. And I think we've laid a good foundation out in Turtle Creek to be able to do that. We move to page 14. What I've just talked about, these graphs show the improvement over time.

Speaker 2

The top three graphs are current coming out of containers on test and the bottom three graphs are voltage coming out of containers at different points in time. And when you see those lines and those variations in lines, that's really variations in how you can operate and how our equipment performs. So we were testing and honing in 12 months ago on how we want to manufacture and bringing our operators up to speed on how to build the equipment. You saw a lot of variation, particularly in that lower left hand chart where you look at the far Right hand side of the lower left chart where you see all those lines diverging, that's not being able to get full power out of a system. So you then look 6 months later, we've made tremendous amount of progress.

Speaker 2

You still see variation in both of the charts, but there's less variation. And then you look at where we are today. Where we are today is when we finish manufacturing and ship, we have a very consistent performance coming out of the container. The batteries In a container or within 2% of one another and how they perform coming off the manufacturing line. This is really getting to What we've talked about as our strategy as we ramped up manufacturing was get the individual processes right and then optimize the overall process, The output that we're seeing coming off the manufacturing line in the first pass yield that we're getting shows that we're getting that process right and now we've got to think about productivity And scaling the business for growth in the future.

Speaker 2

When you move to Page 15, what that consistency allows you to do is bring flexibility operating flexibility to your customers. So this chart is one we've talked about before and I think is critical for us To talk about it again today, this is a battery on consecutive days running 4 very different operating cycles of charge and discharge. So the far right is far left, excuse me, is taking one battery and discharging it over 12.7 hours. The next one is doing that same battery the next day at 6.3, then 4.1 and 2.9. And when you take those kilowatts per container And you do that on a kilowatt per hour basis, you see very consistent performance across a very wide discharge time.

Speaker 2

What that means is when you think about the amount of when we talk about intermittency in renewables and what happens with putting more renewables On the grid, you can't have static storage assets to be able to react to the intermittency and the variability of renewables. And we have a that performs and can really offset on different days and different conditions that intermittency that's being brought into the grid to bring Stabilization, reliable power at a great cost point. And when we do this, unlike other technologies, doing this does not degrade the Product's performance or reduce its product lifecycle. We get higher round trip efficiency Depending on how you want to cycle and how you manage your state of charge and what we're doing now with our technology team around our software and our battery management system It's going to add incremental performance. So what we're finding and you think about the previous page, what we're finding in our technology is that as we become more consistent In our manufacturing process, we get more performance out of the battery through software than we can through making changes on hardware.

Speaker 2

So More to come as we think about this, but I also think it's very important that when you look at our technology, you think about this operating flexibility and consistency that we can bring To the challenge of bringing reliable storage to the grid and to our energy value chain. We move to Page 16. This is a key page for us because one of the things that we talked about When we went public almost a year ago was that we had a very asset light CapEx model to be able to scale manufacturing. And really, We've proven this out as we've invested and operated our facility in Turtle Creek. So you look at the different Phases of our development and where we are now and what we're doing and being able to get on a $16,000,000 investment in 60,000 Square feet, 2 60 Megawatt hours of output out of our factory.

Speaker 2

As we look forward to 2022, we're going to add some square footage to what we have today, But for 110,000 square feet, we will do 800 plus megawatt hours, a total investment Around $50,000,000 So it proves that we have a highly scalable model. We can deploy this in 9 to 12 months, Depending on where we start from a building readiness and we can get to around a gigawatt hour capacity for that 50,000,000 which is what we said When we went public a year ago, we've now proven it with data and actual square footage where we walk people through and show them what's happening on the shop floor. So very exciting for us as we start thinking about what's going to happen as the market grows is being able to expand our capacity relatively quickly and inexpensively for the future. We go to page 17. Do you want to hit on what's next and really show everyone here on the left hand side of this page, Our first piece is coming off of the line with our molders for the Z3 battery.

Speaker 2

If you remember, we talk about our battery today has a form factor like a window air conditioner. We're moving to the size of a computer server. And really, when you think about our form factor going forward, We'll have the same form factor as the lithium ion battery as we move forward with all the safety and operating flexibility that we just talked about. When you look at the middle of this page, we have are improving our manufacturing capabilities. That's our next generation Infrared welders to be able to put those batteries together, we're qualifying both those first pieces and this manufacturing process And targeting to be able to bring a battery that's 1 third of the size of what we have today, so less material input to be able to manufacture.

Speaker 2

We're going to reduce The total system and operating cost because we can manage our thermal footprint a lot easier and come up with Variable system configurations and as we come out of 2021 and go into 2022, it's about optimizing the overall system that We provide to the customers for better performance and improved footprint density and continue to work on the software of how we run this equipment from The customer standpoint to allow them to get better operating flexibility and higher output from the assets that they deploy out in the field. So Very encouraging on the work of what the technology team has done here over the last 4 months with more to come as we go into 2022 and continue to move forward on progress of bringing this new technology to the field. So to wrap up for today, as you think about what we're going to do here for the rest of the 4th Going into 2022, we're going to continue to grow our pipeline with a focus on utility scale projects going back to that mix That both Sagar and I talked about earlier, we have to manage uncertainty around the project timing of when things are going to close.

Speaker 2

And when we look at that timing and think about quarter points, we're saying that we feel very confident on the growth of the company. There is uncertainty on the timing. So what we're saying on our orders range is that we could be at a range of anywhere from $175,000,000 to $300,000,000 of booked orders As the year closes, but as we go into 2022, I think we'll go into it with a much stronger pipeline. Delivering our $5,000,000 of revenue, we've got to continue to manage Supply chain risks, this is every day being in the details and reading and reacting what's happening and overcoming The challenges, I think team has done a great job, so far. And then we really have to continue to work and prepare for shipping that backlog as we work with our And look at the how the shipment profile will be for 20222023.

Speaker 2

On the capacity front, we're going to continue to scale out our facility And Turtle Creek will have an update on that as we come into January. Really again, proud of what the team is doing and proud of where we're going and proud of the output That's coming out of our factory and we'll continue to grow that and refine that as time goes on. And then launching the Z3 Product, we'll do the validation and the builds of the first prototypes here as we go through the end of this year into the beginning of next year. We'll deliver our 1st commercial project as we talked about in the second half of next year. And the big thing for us now with the form factor that we have with the battery is Really strong operating results in an uncertain environment.

Speaker 2

The team continues to be focused on creating the best Stationary energy storage company in the market and we'll continue to work together with our customers to deliver and create shareholder value as we move I want to thank everybody for their time and listening in today and turn it over to the operator for question and answers. Thanks.

Operator

Thank you. At this time, we will be conducting a question and answer Our first question comes from the line of Chris Souther with B. Riley.

Speaker 5

Congrats on the 300 megawatt hour quarter with Blue Ridge and Adding Ameresco and the Duke ball on here. I wanted to talk a little bit about kind of the pipeline here. Seeing kind of the decline in the current pipeline for active proposals and late stage LOIs, Obviously, a portion of that is coming from booked orders, which is great. So I'm curious on the projects that you're taking out, Is it a factor of lithium ion winning a few that you're going after? Is it projects that are getting scrapped for Supply chain costs or interconnection issues, I'm just kind of curious where you're seeing some of those later stage ones that are falling out?

Speaker 2

Hey, Chris, good morning. Thanks. So I think you see there's a natural progression of Active pipeline into LOIs and both of those feeding into orders. So part of that is just moving through The life cycle of projects, I think when you look at the LOIs, a lot a part of that is Projects that haven't moved forward for interconnection, and also, just looking at what the revenue models would be from the customer standpoint. And then on the active pipeline piece, it's a snapshot in time.

Speaker 2

And we do run a pretty strict process of what goes into that number. We took some things out. It was a mix of what you brought up. There are projects that we've lost, large projects. As you We're starting to go after bigger and bigger projects.

Speaker 2

There's one large project, that the customer went with lithium ion as their Preferred choice, it was a shorter duration project, so not unexpected and we were going after it. We went after it to really As a learning process to see where we're going to be. And then in the in kind of the lead generation, you'll see more of that move into active pipeline as we refine the use cases going forward. But for the point in time of where we're at, you're just seeing the different moves between the buckets and regular market activity as far as we see. We feel really good About what we have in there and about seeing the activity in the market coming more and more to longer duration flexible duration storage.

Speaker 5

Got it. Okay. That's very good. That's the wide range of $175,000,000 to $300,000,000 target for Booked orders by year end, how many as projects are getting larger here, how many large potential orders could Swing things from the low end to the high end there. I'm just curious how many similar sites like Blue Ridge We'd be looking at there that could really swing things kind of 1 from booked at the end of this year to potentially booked early next year.

Speaker 5

Yes. What kind of the moving pieces?

Speaker 2

Yes. It's a great question, Chris. So there's 3 or 4 larger Projects ranging up to where Blue Ridge Pine Gate is and a little bit smaller than where they are. We're given that big range because it is lumpy, right? So from the standpoint of Closing at the by the end of the calendar year, we see challenges just as you've been working through Running the process of closing and negotiating and closing out the transactions and just saying that, look, there could be That lumpiness where things are going to happen after a quarter point, but still will move forward and we're just trying to signal everybody that We feel confident on what we have as far as what we're working on, but there could be some timing risk in there.

Speaker 5

Okay. That makes a lot of sense. And looking at the manufacturing capacity, it makes sense you kind of pushed ramp of additional lines up to that 800 megawatt hours in Pittsburgh given the push out in some of the project timing. Could you walk through The cadence of those additional lines coming online between now year end 2022 and You mentioned kind of the scale up to 1.5 gigawatt hour. I'm curious, what are the plans As we stand today and timing expectations that we should look at there.

Speaker 2

Yes. So, Chris, what you'll see is, we'll go into Q1 with a similar run rate of When we come out of 4Q from a production standpoint and then gradually ramp up as we go through the year. And I think We're doing this in phases. So, we're going to add welder capacity as we get to the end of the Q1, bring up That will then bring up the production of battery modules. And then from that standpoint, we'll then go in and add container where you form and test the container before you ship as you get into Q3 to be ramped up into the Q1, to that 800 megawatt hour Annual run rate.

Speaker 2

Now the second part of your question on the 1.5, it's going to be a mix of 2 things, right? So what we've learned As we've gone through here over the last 3, 4 months is that we are starting to get more and more throughput out of our existing assets. And if you remember, what we've always said about how we want to run manufacturing is, we want to get the process of The actual process of manufacturing the part right then go for productivity or automation. So we've getting we're at the point now where we consistently get the process right. You see that in our yields.

Speaker 2

Now it's how do you get better throughput Through the asset base that you have. That being said, when we look at where Turtle Creek is, you're going to run into entitlement of the facility As you get into the end of next year, beginning of the following in the beginning of following year in 2023, so we will be out looking for Where factory number 2 will be located as we get into the middle of next year to get to the target that we have for gigawatt hour production.

Speaker 5

Got it. Okay. No, that's really helpful. And then maybe just last one. Could you talk a little bit about the OpEx trajectory?

Speaker 5

Any additional costs we should be expecting in the Q4 or the first half of next year is we're validating launching Z3, ramping up sales activity, Just kind of the capital plan, as far as CapEx, very helpful, but I'm just curious where we see kind of the operating business Kind of going over the next couple of quarters here in cash burn and money.

Speaker 2

Sakur, you want to start, then I can jump in.

Speaker 6

Yes. Hi, Chris. The OpEx for this for next year will be right in line with where we are for this year, Plus maybe 5% to 10% to mark up for the incremental growth, that's more so specific To your point on research and development and commercial operations as we ramp up both internationally as well as to Joe's

Speaker 2

And Chris, the one thing I would say on your specific question On the Z3 ramp, right? So when you look at what we did on the current product, we were Validating, industrializing and commercializing simultaneously in one facility. What we're doing with the Z3 is We are we will have a production line a partial production line in our facility in Edison, which will allow us To do all the work on the industrialization and validation of the product outside of a production, Where we need to produce product to ship to customers and then feather that into The production capacity that we have in Turtle Creek or in Factory 2 to deliver the 1st commercial units at the end of next year. So It should be a smoother process where we take the lessons that we've learned for the Gen 2.3, apply that to Z3 and do it In our facility here in Edison side by side with the technology team to be able to ramp up that production process and validate the product itself.

Speaker 4

Got

Speaker 5

it. That's helpful. I'll hop in the queue. Thanks guys.

Speaker 2

Thanks. Thanks Chris.

Operator

Our next question comes from the line of Tom Curran with Seaport Research Partners. Please proceed with your question.

Speaker 4

Good morning. Hey, Tom. When it comes to educating both investors and prospective customers, You've done a great job of articulating the advantages of EOS' proprietary aqueasing chemistry over lithium ion alternatives for Long duration storage solutions. But if we shift the frame of comparison from the ZYNTH versus LIVs, lithium ion batteries to The ZYNTH versus other non LID storage technologies, which strengths would you emphasize? Specifically, How would you compare and contrast the ZYNTH with iron air technology and then with liquid metal and molten salt technology?

Speaker 2

Yes, Tom. So I always start off with the framework of The energy value chain is always going to be a mix and no one technology can meet all the use cases of what that mix requires. So the examples that you're talking about, those technologies, those are longer duration Discharge Technologies than the market segment that we would go after. What I would say like when you compare to them side by side, I go back to the CapEx Life model to add capacity to be able to manufacture product. The operating flexibility that we have to go down into we can run cycles down into the short duration and we can run cycles That go beyond 12 hours.

Speaker 2

So we're this bridge technology, which is a very important market segment as You think about firming up the grid as more renewables come in and giving it the flexibility it needs to handle the intermittency. But to compare 1 to 1 on some of the technologies that you brought up, difficult to do just They're going for much longer duration storage, discharge than what we are. What I would say is we have a much simpler system. What holds when we talk about lithium ion holds when you look at those technologies as well. Earth abundant readily available raw materials, a very Simple system design with a competitive upfront investment and very low operating cost to maintain the system and ease of use, which I think when you look at Where we want to apply the technology and how we want to use it, that's a key differentiator for us against either side of the spectrum that you look like that you look at either short or long duration.

Speaker 4

Great. So as the long duration non LAB utility storage Market matures and we do end up seeing room for several technologies rather than gravitate towards any One silver bullet or dominant solution,

Speaker 3

you think

Speaker 4

about that future demand pie consisting of several slices, Which single use criterion is most likely to determine the size of each piece? Should it be duration range?

Speaker 2

Well, so I think it's the total cycle that you're looking at. So how fast do you want to charge? How long do you want to wait between discharge? So get up to whatever your charging is And then how long or short do you want to discharge? So it's that total cycle.

Speaker 2

And I think what the industry needs think about in the way that I think about it, having been in the industry 30 years and worked in different technologies is We talk a generic cycle to make it easy for people to understand. But in the real world, you very rarely run At that generic cycle, right? So when I look at what we do as a technology, there is no generic cycle for us. And We showed it in that one chart that shows the battery on consecutive days running different discharge times. There's a tremendous amount of volume there because the whole purpose Of wanting to bring energy storage into the energy mix is to give the system flexibility.

Speaker 2

So you want assets That can be flexible. And when we operate like that across that flexible range, different power ratings, different discharge and charge times, You don't damage the battery. You don't reduce its useful life. It doesn't degrade faster and it gives you great performance. So it's kind of like, Hey, what is your use case?

Speaker 2

How do you want to use it? And we know and I know after 30 years that no one day is going to be exactly the same as the You need to be able to meet the demands of those days. And that's what we love about our technology in the market.

Speaker 4

That's very helpful. Thanks for that, Joe. Sagar, turning to the initial expectation that you would realize the 45 Of the initial expected $50,000,000 in revenue for 2021 over the first half of twenty twenty two, can you update us on How much of that remaining $45,000,000 you now expect to recognize over the first half? And then turning to the Blue Ridge Power order, how much of the Blue Ridge Power Order revenue should we see recognized over the first half?

Speaker 6

Yes. I'll start and then Joe will jump in. Look, first off, we expect at this point to provide a better perspective on 20 22 when we report our 4th quarter earnings in February, largely driven by some of the near term Headwinds that Joe alluded to when he started out the conversation with the trends in the marketplace. Clearly, all of the backlog is expected to be delivered sometime between 2022 2023 and both based on Customer readiness and our ramp up, which is fragmented to the demand at this point, we'll be taking a look at what the First half looks like, as Joe said, the Q1 will look similar to the Q4 and that's really What our starting point for 2022 will be.

Speaker 2

And Tom, I would just add on timing of when you see Blue Ridge Pine Gate coming into revenue. These are projects, when you think of the project cycle from order to kind of discharge on the grid, They're usually median time frame around a year could be as short as 9 months and as long as 18 months. Now inside, The order that we announced are multiple projects, so this will come in over time. So I think when you look at our revenue coming in the first half Of next year, that revenue is going to be delivering on the existing backlog that we have and then going into the second half of the year to start delivering not only this 300 Megawatt hour order for Pinegate, but the original order that we have with them coming into the quarter. And as Cyrus said, we'll come back with What that plan looks like as we get together with customers and understand where they are from a timing standpoint to lay out What the revenue profile will look like throughout 2022.

Speaker 4

Great. Thank you for taking my questions. Yes. Thanks, Tom.

Operator

Thank you. Our next question comes from the line of Martin Malloy with Johnson. Please proceed with your question.

Speaker 7

Good morning.

Speaker 2

Hey, Martin.

Speaker 7

Hi. The Duke order, It was I think it's great to see a repeat order from a customer like that. Can you maybe talk a little bit more about How they're using the batteries and kind of feedback from them on what they saw that they like?

Speaker 2

Yes. So we ran a pilot project with them over the course of 24 months basically, at their test facility outside Charlotte, North Carolina. And what they really what consistent feedback from the team at Duke has always been, We don't know when the system is running because you don't draw any power to be able to run. So the fact that we don't require HVAC to keep the system within a narrow temperature band. And we also don't know because you don't make any noise.

Speaker 2

It's a very quiet system compared to other technologies. And what they really liked was consistently being able to deliver cycles around 6 hours for the use case that they were looking at, But the flexibility of going down to 2 and above 6 as required and that's what led us to this next follow on order, which is A full commercial order with them and then will hopefully lead to other orders in the future as we deliver and continue to prove out the technology.

Speaker 7

Great. Thank you for that. And I was wondering and I don't know if You're willing to share this, but when we look forward to the 3.0, it looks like what's in your backlog is about $2.44 per Can you maybe help us with pricing for 3.0 and how you expect it to trend over time and also Gross profit margins?

Speaker 2

So what I would say specific, I would go back to The model that we've laid out, when we went public and then what I would say Martin is, what we are trying to do is deliver more Power per container, and to require fewer containers and a smaller footprint to deliver On customer requirements, as the market evolves and grows and accelerates, we will continue to compete On price, but hard to really give a forward forecast just because you just don't know where the market would be. And I think Giving any guidance on that would be difficult for us to hold to it, but we're going to continue with our model that we have today And the growth trajectory that we have to be able to make the company gross margin positive and cash flow positive in the future.

Speaker 7

Okay. And on round trip efficiency for 3.0 in the range, any help you can give us there?

Speaker 2

Yes. Again, depending on the use case And how you use it, we have seen and have run even With our current technology, right, you always have to remember on the round trip efficiency of Martin, this is a really interesting question and I'll try to keep it as I'll try to keep it It's nuanced, but I'll try to keep it as simple as possible. We run our batteries. We charge to 100, we discharge down to 0. So when we say round trip efficiency, it's that full operating cycle of a battery.

Speaker 2

Now the Gen 3 product Should be anywhere from the high 70s to low 80s on wrap total round trip efficiency. Now what we do, do is if we do like What lithium ion does, which lithium ion when they quote their round trip efficiency, they cut the they go from 80 to 20 usually on their operating cycle. So So if we go from 100 charge down to 20% left in the battery, so don't discharge down to 0, Our round trip efficiency then goes up to the mid-80s and we've run cycles in our factory where the current technology Has been in the mid-80s. Now the specifics of being able to give you a more pinpointed number around the next generation product, Give us a little time to get these first production run units on test here towards the end of the year, beginning of next year, We'll come back with more details, but we like what we see out of the prototypes that we're running today.

Speaker 7

Okay. And then What are the raw materials specifically that are both scarce or difficult to come by? Or is it just the logistics Issues that are plaguing everybody, is that what's causing

Speaker 2

issues? Yes. For us, it's logistics and availability. So you have to remember, Earth abundant raw materials going into the battery. So plastic resins being molded into frames, Titanium, carbonized, graphitized felt and zinc bromine electrolyte.

Speaker 2

So materials are available. It's managing the delivery of those materials to when we to our production schedule. And honestly, like the biggest challenge for us as a team has been around shipping containers. This went from a market where they couldn't give you enough of them till you Can't find them and you've got advanced buy and that's what we're doing just to make sure that we have those on hand. But it's like everyone else.

Speaker 2

You're dealing with The port issues and that's the one thing, one of 2 parts that we import that we just have to manage the timing on When they arrive and getting into the factory. But it's a day by day, you need to be in the details. We do production calls on a daily basis to figure out what's happening and then you chase them down And try to get better just to keep the material flowing into the factory.

Speaker 7

Okay. And my last question, on the software side, I Thought I heard in the call that you're seeing some improvements in efficiency as a result of improvements in the software. Could you maybe talk a little bit about the software that you're developing and how that integrates with the Customer software

Speaker 2

for

Speaker 7

controlling storage or solar units and using them in conjunction with each other as an example?

Speaker 2

Yes. Great question, Mark. So when we came out and developed our system, so the entire system is it's on a building block basis. We our DC system, so our software controls the battery modules and the overall container, right? That software is agnostic to the EMS, the energy management system that the customer uses.

Speaker 2

And we did that on purpose, Because we knew coming in as a new entrant to market, we didn't want to go to customers and say, in order to use Our equipment, you have to retrain your workforce on a new software that they interface with. So we have taken our system and integrated it to multiple EMEA Energy Management Systems that customers use today. What we are learning on Our software today, where we're getting performance, if you go back to that, if you think back to that chart where I showed batteries off the line in July of last year batteries off the line in December last year, July of last year and today. Our Battery Management System is managing that variation that we showed to smooth it out. What we're seeing now is that as we improve upon The manufacturing consistency and first pass yield off the line, we're able to get more performance out of the battery because really The way our system works is very simple.

Speaker 2

The lowest common denominator in the container determines the performance of the container. So what we're doing now is seeing that, hey, all the work that our engineers have done and our R and D team have done to improve the battery Gets better performance and now we're adapting the software to give customers those multiple use cases that I talked about so that they can operate the battery any way they want.

Speaker 7

Great. Thank you very much for your time.

Speaker 2

Thanks, Martin.

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to Joe Mastrangelo for closing remarks.

Speaker 2

Thanks, Hans. So thanks everyone for joining today. Extremely exciting time to be part of the company And really very exciting to be either when you go through our labs here in Edison where I am today or on the factory floor in Turtle Creek, this is a dedicated workforce that every day comes in and realizes that we have an opportunity to change the way The world powers itself, making it cleaner and greener as we move forward with a product that can deal with the robustness and the real world demand. So We're going to continue to build a great operating company and look forward to coming back beginning of next year to update you on the Q4. And thanks again for listening in.

Operator

This concludes today's conference and you may disconnect your lines at this

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Earnings Conference Call
Eos Energy Enterprises Q3 2021
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