Eos Energy Enterprises Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 5, 2024

There are 9 speakers on the call.

Operator

Good morning, and welcome to EOS Energy Enterprise 4th Quarter and Full Year 2023 Conference Call. As a reminder, today's call is being recorded and your participation implies consent to such recording. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. With that, I would like to turn the call over to Liz Higley, Director of Investor Relations.

Operator

You may begin.

Speaker 1

Good morning, everyone, and thank you for joining us for EOS' financial results and conference call for the Q4 and full year 2023. On the call today, we have EOS' CEO, Joe Mastrangelo and CFO, Nathan Kroeker. 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, including, but not limited to, current expectations with respect to future results and outlook for our company and statements regarding our ability to secure final approval of a loan from the Department of Energy LPO or our anticipated use of proceeds from any loan facility provided by the U. S.

Speaker 1

Department of Energy, 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 expectation 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 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 except as required by law.

Speaker 1

This conference call will be available for replay via webcast through EOS' Investor Relations website at investors. Eosb.com. Joe and Nathan 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 EO's CEO, Joe Mastrangelo.

Speaker 2

Thanks, Liz, and welcome, everybody. Great to have everyone on the call here this morning. Let's jump right to page 3 and go through some highlights from last year. First, I think the first place I'll start off is just the improvement that we've seen on gross margins as we've launched the Z3 product. Year over year, we see a 41% improvement.

Speaker 2

In the Q4 alone, when we really saw production of the Z3 ramp, we had a 66% gross margin improvement versus the prior year period. It just goes to show all the things that we've been saying about the Z3 are starting to show themselves in the financials as we move forward and start putting product out into the field. And when you look at the year in and of itself, it was kind of a bookend year where in Q1 was our last full quarter of Gen 2.3 production and in Q4 was our Q1 of Z3 production. Those were our 2 highest quarters in revenue for the company. I think when you look at how Nathan will talk about the year, I think you're going to see some similar dynamics when you look at 2024 just because as we do the transition to some cost out and also the new state of the art manufacturing line, I think you're going to see a similar quarterly profile as you move forward throughout the year.

Speaker 2

And I think what the Z3 is showing is the ability to generate revenue off of the semi automated line, drive down cost and improve gross margins just show why we've been so positive about getting the Z3 out to customers. Also, I think one of the major accomplishments for the team was being the first non lithium ion battery company to qualify for Title 17 loan with the Department of Energy. Nathan will talk about where we are in that process, but we continue to feel like we're on track to closing that loan as we work through and get the 1st automated line up and running here in the Q2 of 2024. Also, we've designed and are developing that state of the art line up in Wisconsin with our automation partner, Acro Automation. We feel really good about what how the line looks.

Speaker 2

When you go actually see it, I've been up there a couple of times to watch the work being done. It is a well done line with great craftsmanship. And it's actually pretty emotional when you start seeing the robots actually moving and you start to see the vision of how we wanted to build the Z3 take shape. So a lot in 2023 to be proud of, continue to have to work and close that gap on profitability. And that's as we talked about back in December, that's the main focus here as we look at 2024.

Speaker 2

If we go to Page 4, just some quick operating highlights, continue to see growth in our opportunity pipeline, up 77% at $13,000,000,000 I think one of the biggest things in 2023 when you look at where we came in at, we came in lower than our order target. And I'll talk a little bit about the dynamics that we see within the pipeline and why we feel like we're building a stronger pipeline that's going to lead to orders growth as the Z3 gets out in the field. Notwithstanding that, our backlog was still up 15% year over year, which in a normal operating circumstances with that type of orders growth, you'd be pretty proud of it. But looking at the opportunity, the secular shift in the industry, we know that line has to grow faster when the team is focused on bringing in the opportunities and finding as long duration of new storage becomes more critical, finding those opportunities with key customers. And I'll also talk a little bit in the commercial section about planting those seeds for future growth.

Speaker 2

Our discharge energy is up at 1.8 gigawatt hours, 1.4 of those gigawatt hours out in the field. Every cycle that we run is a learning for us. It helps us make the software better. It helps us understand how the customer derives revenue off of our product. It's the best laboratory is actually out in the field, not actually in a laboratory.

Speaker 2

Revenue for 2023, Nathan will walk through the comparisons of this, dollars 16,400,000 down slightly versus prior year, but again, executing the transition to the Z3 while working through the DOE loan, while timing all that with capital raises to effectively get the company through the year is something that I think we feel proud of and feel like it's a foundation we can build off of here in 2024. Cash on hand, we landed with $69,500,000 not including $15,000,000 in restricted cash, which we have for the loan that we have with Atlas. Again, the team is laser focused on making every dollar count. I've always said every employee has stock in the company, so every employee thinks and acts like owners. We are committed to be able to work through and really navigate through this part of going from truly a R and D company into a full fledged profitable operating company as we approach year end 2024.

Speaker 2

Let's move to Page 5. Just quick update on the Z3. I've talked a little bit about it. If we start off on the left hand side of the page, on the commercial dynamics, we have 1.9 gigawatt hours, almost the same size of our backlog, what I would call late stage opportunities. These are opportunities where customers are either getting approval, they're waiting for permits, they're waiting for grants from the Department of Energy that really make us feel good about the selection of the technology and the customers that we're working with.

Speaker 2

The focus here going forward is really converting this great pipeline number into a great orders backlog and orders number. Semi automated manufacturing line, we went from 10 minutes of cycle time at launch to 3 minutes. We hit about 3% scrap when you normalize for run rate. When you look at where we are as we get into Q1 into Q2, there's going to be a little bit lower utilization on the line versus what we saw in Q4, and that's basically about the transition to lower cost raw materials and starting to implement the line here in Turtle Creek. We achieved power on status in all motion systems in the line.

Speaker 2

This was back mid February with the state of the art Line 1. We're gearing up now for the SAT in Milwaukee at ACRO and the SAT coming up in Q2 in Turtle Creek. We feel really good about the plan that we laid out. Having the line in Milwaukee at ACRO allows us to leverage their technical expertise real time and bring people on the floor to troubleshoot and work through the critical elements of debugging and finalizing mechanical completion. It's been a good partnership and we feel really good about where we are right now.

Speaker 2

On our cost road map, I'll talk a little bit about this on the other side of the page, but we achieved 30% of the plan that we laid out on December 12 as far as taking out cost. We see additional cost out benefits coming in Q1 and then continuing as we go through 2024 to culminate in being contribution margin positive at the end of the year. We've shipped Z3 Cubes to 4 customers. Many of those are going to be starting installation here as we're talking now. And then the biggest thing from that is taking those installations, generating the field data to show what we're seeing in every factory acceptance test that we do and every test cycle that we run-in Edison that the product performs and meets the specifications that are out in the field.

Speaker 2

Our container performance, right now, we've always talked about depending on duration, you get different output on a container, and that's for every technology, not just our technology. If you do short duration right now with shipping is a 600 kilowatt hour container. If you do longer duration, it's 6 95 kilowatt hours. That will improve throughout the year to where we'll culminate in Q4 with an 800 kilowatt hour container with a lot of the work that the R and D and engineering teams are doing right now. Finally, on product certifications, we are UL 1970 3 approved.

Speaker 2

And at the same time, we're NDAA compliant, which is very important when you look at the energy storage and the energy industry in the United States, I think it's important to note that our product is already compliant and puts aside not only do you get the non flammability, the flexibility and performance, the recyclability, the safety factor, you also get security around our product. We are sourcing key components from here in the United States. Although on a part basis, it may cost more, at the same time, it gives you the security of knowing that this product can be on the grid and derisks the energy security that we're all worried about. If we go over to the right hand side of the page, I want to start with the upper right. This is an update of the cost out walk that we laid out in our strategic outlook back in December.

Speaker 2

When you look at in the beginning, you see like we started off at 100%. We're now down at 71%, so 30%, 29%, 30% cost out of the product. A lot of that has to do with ramping up the line. It also has to do with the material cost out. The Z3 product is a simple product.

Speaker 2

It's a simple product that really has a good bill of material cost position. We now need to continue to ramp that product. When you look at like the biggest things, so like when you tell people we want to get down to Z3 at scale at 20% of what it was at launch, you have to consider like how our factory works and where this comes in as far as what we need to do. And I want to go down to the bottom of the page and talk about the Q4 2023 cost makeup. So when you look at COGS, you start to take out that 11% of that COGS number was building spares for the Gen 2.3.

Speaker 2

Another 4% was Z3 launch costs. So these are the costs of tuning the line, running material through the line as we start to figure out how to balance, not normal run rate. Now the good news around that 4%, it's lower than what we initially had planned for. And one of the reasons why when we talk about the Z3 launch in the state of the art line, we think the overall program costs will come in below budget because we were able to ramp up the semi automated line, learn from that and apply it to the state of the art line. Then you have a 25% of this is labor and overhead under absorption.

Speaker 2

So why do we say that? Well, think about our factory, right? The factory that we're in or the footprint that we have for manufacturing is essentially three locations of approximately 50,000 square feet. 1 of those locations does containerization, another of those locations houses the semi automated line, and the third one was where the Gen 2.3 line was located and is where the state of the art line will go into when we ship it from ACRO into EOS. That 1 third of that line was basically idle as we went through.

Speaker 2

So when you think about how we're going to take cost out of the product going forward, It's truly getting better labor and overhead utilization on a per unit basis as you ramp manufacturing. This is not invention. This is not complex material science. This is executing on a plan to deliver volume. Now what I feel really good about is as we're going through and looking at the cost out road map, this is going to continue.

Speaker 2

It's not going to stop at this 20% of the launch costs. We are already starting to refresh the cost out pipeline and start looking to what that will look like beyond 2024. So in an early stage product like the Z3, there's significant work that we can still do to continue to take cost out. But the initial progress and performance in the Q1 of really producing the product shows that the thesis that we had around what the product can do will hold. Now it's a matter of scaling and getting the and utilizing our cost profile to better take down unit costs and drive profitability into the organization.

Speaker 2

Transitioning over to commercial opportunity pipeline orders backlog. Let's just go to the classic slide on Page 7 to talk about some of the dynamics that we're seeing. We saw a drop year over year in lead generation. What I'd like everyone to know about is like I'm not concerned about that just in the sense that we saw an increase in what I would call solid projects. So we have less people coming to us with ideas and more people coming to us with solid opportunities.

Speaker 2

So seeing that number go down is not concerning to me, and we always talked about there being breakage of each one of these buckets as you transition, you're hoping to transition probably 30% of it to the next bucket to come up with the numbers that you want to have when you're operating at scale. We saw a significant increase in both the active proposals and the LOI firm commitments. We've got to really work on that LOI firm commitment to transition those opportunities over into active backlog with down payments. The team is working on this. What I would say is no one is satisfied with the performance that we've had on delivering orders here as we went through the last year.

Speaker 2

What I do feel good about are the conversations that we're having with customers, where we're positioning the company to grow for the future and how customers are really saying, we like the Z3 product, we have a project, work through me, work with me to get through closure of these projects to get the technology on the field. And that's that 1.9 gigawatt hour that I talked about earlier. So this is an area where we're focused on it. We need to improve our performance. We will improve our performance over time, but feel really good about the initial interest how customers are approaching the Z3.

Speaker 2

And where they are doing that lays out on Page 8. I want to talk about what I would say are the 4 main areas of growth. I talked earlier in the U. S. Around this national security concerns, shift to more domestic content.

Speaker 2

We're seeing longer duration energy storage opportunities coming through and also starting to see interest from high energy consumption applications like data centers and how our product can match up with either wind or solar or on a standalone basis to help meet those energy needs. When you look at the opportunity, look, the U. S. Government banned the Defense Department from procuring batteries produced by 4 specific Chinese companies. We sit here, and as I said earlier, that's where NDAA compliance comes in.

Speaker 2

And we also sit here and say to the market, here is an alternative that is invented in the U. S, manufactured in the U. S. With U. S.

Speaker 2

Materials on U. S. Manufacturing equipment. It meets that need and allays the concern around national security as you think about our grade. Next one, when you look at Italy, Italy recently got an incentive program approved to fund 9 gigawatts, 71 gigawatt hours of energy storage that will be implemented over the out until 2,030.

Speaker 2

We're very excited. I mean, recently shipped 1 EOS Z3 tube to Sicily to start use case testing with a key customer. That's going to lay the foundation for when the auction happens and we're starting to see this auction also call for 10% of that auction being non lithium ion technology. It doesn't stop at 10%, but it gives it a 4%. And that's why we're excited and focused to get that project up and running consistently.

Speaker 2

And then from there, look at how we expand going forward. Australia, another core market as you see growth. When you look at their market size, it's very big. We, given the size of the company, need to do this in partnership with someone. We're working with a couple of different companies down there.

Speaker 2

We're working to find an initial commercial pilot and commercial pilot meaning multiple megawatt, multiple megawatt hours like you've seen and have seen us talk about with companies like Dominion and Duke here in the United States. But to really be able to do that with a core large natural resource company to be able to figure out how we're going to grow in Australia and grow the right way in Australia because of the distances here. We have to do this right and be thoughtful about it, but great opportunities we look forward. The 4th one being India. India is targeting a 500 gigawatt hour renewable energy target by 2,030.

Speaker 2

The interesting thing around India is they're coming up and bidding projects where they're talking about 24 hour renewables. So that becomes a mix of solar, wind and energy storage. What we're working with 2 large Indian corporations is understanding how having an asset like the Z3 cube in that 24 hour energy mix allows you to better balance when wind isn't there and better balance the solar demand and come up with a more profitable project. It's initial work that we're going through, but we feel really good about where we're headed, and we'll keep everyone updated on this. So when you really think about this, the U.

Speaker 2

S. Is where we're shipping the majority of our product. We have a pilot going to Italy to position ourselves for long term there. We're working with partners for Australia and India to access those markets. And as we move forward, we'll keep everybody posted on the progress here, but we're seeing more and more opportunities where people are starting to see having a flexible, safe, secure.

Speaker 2

And another really thing that we've never really talked about, we've been too quiet about is the fact that the Z3 is also silent. It doesn't make any noise because it doesn't have any HVAC systems. And that's also important when you think about citing these things in urban areas. No one wants to have a lot of noise around it and our product actually doesn't make any noise. In fact, we had a customer once tell us, we don't know when we're using your product because you don't consume any power and you don't make any noise.

Speaker 2

Those are strengths as you start thinking about how the market is going to evolve in the future. Now let's look at operational scale and building capacity for the company. Let's go to Page 10 for an update on the state of the art manufacturing line. We have a highly efficient capital model for building out capacity. And you're starting to see that more and more as we are building out our line compared to what you hear around lithium ion manufacturing.

Speaker 2

We believe it's $30,000,000 CapEx for 1 gigawatt hour compared to $85,000,000 for 1 gigawatt hour of lithium ion, knowing that we can become profitable at that 1 gigawatt hour, whereas much larger factories are required to get the economies of scale to hit profitability with lithium ion. Currently, we're on budget for the plan. As I said, there are some recent pictures from Acro as the line is being tuned. It is one of those moments where you stand and you watch this and you think about where the company has come from in the past 5 years and how this positions us for future growth, having a full line assembled on the ACRO floor, seeing the power on, seeing the robots moving, seeing our raw materials move across the line, it just goes to show the opportunity that we have. And working with ACRO, it's actually helps me sleep well at night because they look at what we're trying to do and they kind of give you a shrug of the shoulders and say, we've been here before.

Speaker 2

This is what our expertise is. We're going to build you a great product. And so far, that's what's been happening. As you look at where we're headed, we are doing the system integration, the final debugging of the line. At the same time, we've also come up with this concept of A and B teams rotating in and out of ACRO on a biweekly basis.

Speaker 2

What that means is that we have people going up to ACRO helping to assemble the line. So the maintenance teams are there helping assemble the line, and then we're also going to start sending operators up, start to get trained on the line so that when it hits the floor in Turtle Creek, we're all familiar with it. We know how this works. We're currently on schedule for the installation and commissioning in Q2, and we'll keep everyone updated on the progress, but it really is something to see when you see it live. Going to Page 11, look, the picture on the left really shows the simplicity of the product.

Speaker 2

We're now positioning that this product to take out the volatility around raw materials. We signed a long term agreement with both TETRA and SABIC, TETRA for our electrolytes, SABIC for our conductive polymers. At the same time, we're doing work to get graphitized felt. What we've done in our supply chain is we moved from China to Asia and now looking at balancing out Asia with a move into the U. S.

Speaker 2

We're starting to build this out. This is a somewhat complex supply chain when you look at it wing to wing. So it's where do you get your PAM fiber from, how do you needle that PAM fiber or actually turn PAM fiber into felt and then how you graphitize that. The good news is, is that we're finding U. S.-based suppliers that are interested in working with us.

Speaker 2

We'll keep everyone updated on that, but we really feel good about the work that we're doing there and the cost position that it's driving for us as we move forward. And then just on core plastic, the tub and the lid for the battery, we buy 100% in the U. S. From multiple suppliers, and we're expanding capacity and introducing redundancy to get protection around the market. But the goal here is to just drive that battery cost down.

Speaker 2

For us, where comparison points get difficult is when people talk about lithium ion cells being at a certain cost point. We don't actually manufacture cells, we build modules. What you look at there is 20 cells that make up a module. And what we see as we look forward going back to that cost walk I talked about earlier is a product that will be very competitive on a per unit basis as we move forward as we continue to drive simplicity and focus and partner with large strategic companies to build our product. If we go to Page 12, just a quick update, really think on 2 programs that were critical and part of the cutover that we're going to be doing here in the Q1.

Speaker 2

On the left hand side, if you look at the details there, what you see on the left hand side is our old 3 bipolar and the new one basically you see is you see less white plastic, more black area. Having more black area means you have more surface area to generate energy out of. That both takes cost out of the product and improves performance. And that's where we start talking about getting the 4th quarter and having an 800 kilowatt hour cube performance. That's where a lot of that performance comes from.

Speaker 2

And at the same time, when you look in the middle here, we've replaced titanium with conductive plastic. That new piece there is significantly less expensive to produce than the old one. When you think about it, 65% lower, and it simplifies our manufacturing process. And that's what drives up our performance to the $695,000,000 and then I mentioned to the $800,000,000 as we get to year end. As I talked about before, we've hit 30% of our plan that we've laid out in twelvetwelve.

Speaker 2

We've got additional cost out improvements coming for late Q1 twenty twenty four. We schedule and get the state of the art line up and running in Q2 and then hit the energy density in Q4 and the company and the product is operating at scale. It's pretty exciting. And when I look back on this, I know some people would say, why did you just go to Z3 in the beginning? If we hadn't done the Gen 2.3, we would have never learned the valuable lessons on how to manufacture that led to the Z3.

Speaker 2

I think when we're looking at the Gen 2.3 and the Z3, there were a lot of unknowns around this concept of doing a tub insertion assembly design. And actually manufacturing the Gen 2.3, we learned a lot that led to where the Z3 now is and the fact that we were able to launch it the way that we did in Q4. So more to come as we move forward. I want to thank everybody for listening. I'll turn it over to Nathan.

Speaker 2

Thank you.

Speaker 3

Thanks, Joe, and thanks everyone for joining us this morning. Let me start with an update on cash. We ended 2023 with 69 point $5,000,000 in cash on the balance sheet. And since year end, we have collected some customer deposits and milestone payments and we have current line of sight to collecting on 3 or 4 significant customer payments in the next couple of months as we continue to work towards getting the first advance on the DOE loan. We are also in the process of finalizing negotiations with the expectation to monetize our 2023 production tax credits in the coming weeks and we also expect to monetize our 2024 credits on a monthly or quarterly basis going forward.

Speaker 3

Consistent with previously announced transactions in the market, we anticipate there to be a 5% to 10% discount on these credits upon monetization with the economics improving as the size of the credits increases over time. With that, let's get to our financial results. Turning to the next few slides, I will walk through the Q4 and full year financial performance along with an outlook for 2024. Now, for the Q4, revenue in the quarter was $6,600,000 up 148% compared to revenue of $2,700,000 in Q4 of 2022 and up 8 66% compared to revenue of $700,000 in Q3 of 'twenty three. The year over year growth in revenue was a result of our transition from Gen 2.3 to the EOS Z3Q, while the sequential quarterly growth was driven by higher production volumes of the semi automated manufacturing line as we ramped up production.

Speaker 3

We shipped our first EOS Z3 Cubes at the end of September to 2 different customers and we are in the process of delivering a much larger project in Orchard, Texas to a key customer owned by a large North American infrastructure fund, which is scheduled to be completed in the next few weeks. Cost of goods sold for the quarter was $30,400,000 a 1% decrease versus prior year despite higher production volumes, resulting in a 66% gross margin improvement year over year, primarily attributable to better unit economics of Z3. During the quarter, we saw a decrease of approximately 30% in costs as a result of improved labor and overhead absorption in addition to bill of material cost reductions. These reductions were partially offset by increased scrap costs from process control changes. 4th quarter operating expenses were $18,500,000 a 10% decrease from the prior year period, primarily attributable to there being no write off of assets this quarter and partially offset by an increase in payroll related expenses such as stock based compensation in the quarter.

Speaker 3

Total operating expenses of $18,500,000 included $4,100,000 of non cash items, including stock based compensation, depreciation and amortization. The resulting operating loss for the quarter was $42,200,000 or $35,800,000 when you exclude non cash items such as stock based compensation, depreciation and amortization, and a net loss of $41,200,000 This compares to an operating loss of $48,600,000 and a net loss of $56,600,000 in the Q4 of 2022 despite 2022 having lower production volumes. So as Joe highlighted earlier, you can see all of our hard work beginning to pay off. Now turning to Slide 15 to review 2023 full year performance. Revenue for the full year 2023 was $16,400,000 a slight decrease compared to revenue of $17,900,000 for full year 2022 as we concluded our Gen 2.3 production in the first half of twenty twenty three and stood up the Z3 manufacturing processes in an effort to launch production at the end of the third quarter.

Speaker 3

Cost of goods sold was $89,800,000 a $63,500,000 decrease compared to the prior year, delivering an improvement of 41% in gross margins year over year, driven by lower input costs combined with improved Z3 manufacturability. During the year, we recognized $3,300,000 in production tax credits, net of the anticipated monetization discount. We are now recognizing both the 45x and the 10% electrode active material credits, and we are working towards monetizing both the 23 and 24 tax credits at a small discount as we discussed earlier. We invested $18,700,000 in research and development in 2023, of which $2,300,000 was related to non cash items such as stock based compensation, depreciation and amortization. This was in line with what we discussed on December 12, and we believe this is a good run rate for R and D on a go forward basis.

Speaker 3

We continue to invest in our Z3 battery technology, optimize our BMS system and identify various initiatives to reduce battery and system costs. SG and A for the year was $53,700,000 a 12% decrease compared to $60,600,000 in 2022 as we worked on tighter cost control and reducing outside services. Full year SG and A included $12,300,000 or approximately 23% of non cash items, including stock compensation, depreciation and amortization. Total operating expense for the year was $79,500,000 a 7% decrease versus prior year, of which $14,700,000 or approximately 20% was non cash related and $7,200,000 was related to asset write offs as we transitioned manufacturing to Z3. Full year operating loss was $152,900,000 with a net loss of $229,500,000 or $145,300,000 excluding non cash items, including the fair value treatment of our derivative liabilities, non cash interest expense, stock based compensation, depreciation and amortization, a 30% year over year improvement.

Speaker 3

Now moving to Slide 16. I want to spend some time looking at our past production and what we should expect going forward as we get into expected financial performance for 2024. As you can see on the left hand side of the page, Q4 revenues increased 866% over Q4 of this year and 148% over Q4 of last year as we significantly increased production volumes off the semi automated line. As discussed earlier, we shipped our first C3 cubes at the end of September and then ramped up production in Q4, while still producing well below capacity on the semi automated manufacturing line. While this resulted in us coming in below our initial 2023 revenue guidance, we made the decision to balance factory output with critical customer commitments.

Speaker 3

We expect to continue making these trade offs as we prioritize working capital conservation ahead of securing our long term financing. We continue to work alongside our customers to understand delivery timelines based on their site readiness and aligning these obligations with our cost out roadmap. As a result, we currently expect production rates for the first half of the year to be similar or slightly above what we saw in Q4 of 2023. Before we conclude, we want to initiate guidance for 2024 on both revenue and profitability. Regarding our revenue estimates for 2024, we expect to be between $60,000,000 $90,000,000 based on our current production schedule and anticipated customer delivery schedules, which includes us running the semi automated line for the 1st part of the year and then transitioning to initial production of batteries on the new state of the art line before the end of the second quarter.

Speaker 3

As we have discussed in the past, we have a list of customer projects scheduled that supports this revenue plan and we are continuously working with customers to finalize the delivery dates based on their site readiness. From a profitability perspective, we expect to achieve positive contribution margin in the 4th quarter. Positive contribution margin is defined as revenue less direct labor and direct materials also taking into account the benefit of the production tax credits. As discussed on December 12, and as Joe detailed earlier, we have a roadmap to reduce material and labor costs while increasing energy density that is expected to result in an 80% reduction in overall product costs on a dollar per kilowatt hour basis from initial launch to scale currently anticipated in early 2025. In calendar 2024, we expect to reduce costs by approximately 76% from initial commercial launch with further cost out to be achieved when we increase our capacity in the beginning of 2025.

Speaker 3

Once we achieve positive contribution margin, we intend to increase our production significantly now that every incremental unit that we produce helps to cover our fixed costs. Since the Z3 launch in mid-twenty 20 3, we have achieved approximately 30% of the total expected cost reductions with additional initiatives to begin cutting in by the end of the Q1. So as we move into 2024, we expect to continue balancing key customer schedules with necessary workforce development, product design enhancements and cost out, up until the critical point at which each individual battery module we build contributes to our bottom line. We believe this disciplined manufacturing approach will allow us to conserve capital as we work on closing the DOE loan and lead to positive contribution margins in Q4 of this year. With that, I want to thank everybody for their time and for listening today.

Speaker 3

I would now like to turn it over to the operator for questions. Operator?

Operator

You. Our first question comes from Christopher Souther with B. Riley. Your line is open.

Speaker 4

Hi, guys. Thanks for taking my questions and congrats on the continued progress here. Maybe just the first one on the guidance of $60,000,000 to $90,000,000 versus the I think you've called out like $75,000,000 to $100,000,000 that you had visibility on between backlog and LOI back in September. Is there a slight delta or is the slight delta there just stuff that was you're only including stuff that's only in the backlog for the guidance? Is there any timing shift on production or customer timing?

Speaker 4

Or is it conservatism on either production or customer timing? Just wanted to get a sense of what's baked into the 60,000,000,000? Thanks.

Speaker 2

Hey, Chris, good morning. So look, it's all the above. So there's a piece of this here where we're looking at the pipeline of opportunities when customers need to execute on projects at the same time the ramp of the line and coming up with a range of revenue that makes sense for us to be able to hit as we execute on ramping the line up in the second half of this year. Along with timing of customers and we'll keep everybody updated on how that evolves throughout the year.

Speaker 4

Got it. Okay. And then maybe just, I appreciate all the details around the cost out progress. Can you clear the two different slide 5 charts there between the 4Q 2023 COGS and the breakdown with the cost out reduction? Should we just back out the Gen 2.3 from COGS to get like a clean sense of what we'd include in the cost reduction to date and for kind of go forward purposes.

Speaker 4

Is that kind of the best way to look at that? Or should we take out any of the other either launch costs or labor, etcetera?

Speaker 2

So Chris, I would look

Speaker 3

at it as a couple of different things going on here. If you look at the top chart on Slide 5, we're walking you through 29% cost out reduction that has been achieved to date. That's what we achieved in the 4th quarter. And it comes from both operations as well as supply chain components to get there. Then we give you the line of sight of where we think we're going to end the year based on continued efforts from both R and D, supply chain operations, really all aspects of our cost out program.

Speaker 3

I think we'll get down 76% of the total 80% that we highlighted back in December. More work to do in the 1st part of 2025, but as you can see on the chart, the lion's share of the cost out that we have line of sight into today, we expect to occur in 2024. On the bottom of the page, we were trying to give you a sense of how far we have left to go in order to get to positive contribution margin. If you take our 30.4% in COGS for the quarter and you back out the stuff that really doesn't have to do with the cost out program at hand, right? So Gen 2.3, that's legacy stuff.

Speaker 3

So take that out. Z3 launch costs, that's again, that occurs once when you launch, but that's not really indicative of the future run rate. Labor and overhead under absorption, as Joe talked about, we have a big factory, big costs associated with that, that are being absorbed by a few units. So if you normalize that for the actual units of production in the quarter, that's about 25% that you can take out. So you're left with 60% of that number, call it $18,000,000 That's the focus when we shift to cost out going forward in both materials and labor, labor being tied to the automation.

Speaker 3

That's the $18,000,000 number that we're starting on in order to drive costs out in 2024. And with the cost out program that you see on the chart above, we think get to positive contribution margin in the 4th quarter.

Speaker 5

Okay. And I think, Chris,

Speaker 4

the

Speaker 2

only thing I would add to Nathan's commentary is this page also not only shows the progress and the underlying positives around the Z3 as a product. It also shows the strategy of how we want to scale and the capital efficiency of the way we've designed the manufacturing process. So So we're we have we've been doing the shift of where Gen 2.3 is being built is where the Z3 line will come in. So on 150,000 square feet, you had 50,000 square feet that wasn't producing. So therefore, as you put more volume through that, you get better absorption.

Speaker 2

What you don't want to do, right, there's people who have asked us like, why don't you do all four lines at once? Well, I think you got to watch like a lot of the lithium companies that are trying to scale up production and the amount of capital it's going to take to do their factory because they are not cost efficient at the lower volumes that like we are. So this when you look at this, we're saying let's get line 1 in place, let's normalize, absorb, drive to profitability, then expands that you don't wind up with a lot of under absorbed costs that you have to deal with that causes you to drain down your capital as you're trying to grow your company.

Speaker 4

Got it. Okay. Yes. So that $18,000,000 or so is what you're using for that kind of top of the chart as well. The other stuff is not included up there, it sounds like, right?

Speaker 3

I'm saying that's the area that we're focused on, which is driving down the labor and the materials costs.

Speaker 6

Yes.

Speaker 2

Okay. Everything except for Gen 2.3 is in the chart above.

Speaker 4

Yes. Okay. Got it.

Speaker 2

Everything in there, including the launch costs and the absorption. And that's why when you look at when you go from 75 down to the end of the year, what we're saying is that 25 eventually goes away on the under absorption because you're putting enough volume in to get your per unit cost down because you're utilizing more of your factory.

Speaker 4

Yes.

Speaker 3

We don't have to do anything other than increase production to achieve those savings.

Speaker 4

Yes. That's great. Thanks for all the time there. I'll hop in the queue.

Speaker 2

Thanks, Chris.

Operator

Thank you. Our next question comes from Chip Moore with ROTH MKM. Your line is open. Chip, if your telephone is muted, please unmute.

Speaker 5

Can you hear me?

Operator

Yes, we can hear you.

Speaker 7

There we go. Hey, thanks for taking the questions. Hey, Joe. Hey, Nathan. Wondering if you can expand a bit on the energy density improvements you've got coming along for Q4.

Speaker 7

Any changes on the automation side you need to take into account? And maybe you can help us put a bit of a finer point on that ramp in that quarter?

Speaker 2

Yes. So Chip, great question around the automation. So we're not the way we've developed an envelope that we don't want to change so that you don't need to go back and change the lines. Everything that we're talking about sits into the existing line. What you may need to do depending on how this develops is we may need to change on a couple of workstations, some end of arm tooling, but not long cycle time and not expensive to do given the benefit that we're going to get.

Speaker 2

We've got a list of projects that get us to that higher performance. We talked about when we did the twelvetwelve strategy call, Francis Ritchie and Pranesh Rao walked through some of the work that we're doing to get there. And it's a mix of things as far as changing materials inside of the battery, which are already in progress, if you look at the picture I showed and on test, while at the same time looking at how we containerize the batteries to get more output out of the container itself or the cube itself. So we've got a list of projects that will that we have risk weighted and we've come up with a number and feel good about where we stand today as far as the work that the teams have been doing that we talked about on twelvetwelve.

Speaker 7

Got it. That's helpful. Appreciate it. And for a follow-up, maybe on the cash side, right, I think you could talk about current cash positions. I think it sounds like you've collected some money since year end and you've got line of sight on some more.

Speaker 7

Just help us there. And then I think you've got another $15,000,000 or so to deploy in the new line. Just give us an update on the financing side.

Speaker 3

Yes, I mean, I don't know that there's a whole lot more to add than what I talked about. We ended the year with $69,500,000 We've had some customer deposits come in. We've got customer milestone payments that are scheduled over the next couple of weeks months. And we also anticipate additional customer deposits on some large orders that we're working on. Our focus really, in addition to those customer payments and customer deposits, is really focusing on meeting the CPs and closing on the DOE loan.

Speaker 3

So that's where our focus is from a capital raise standpoint at this time.

Speaker 7

Perfect. And maybe one more related on the international side. You talked about developing some of those markets. Have you explored any strategic potential there, licensing models or anything like that? Thanks, guys.

Speaker 2

Yes. Chip, we're not going to comment specifically on that. Obviously, beyond what we said, I think when we look at this, the product was designed and this goes back a little bit to what we're explaining on the conversation with Chris. The way we designed this manufacturing model is you can put a line in, You don't need a complex factory. There's no clean rooms.

Speaker 2

With the way we've designed the new product now, you don't even need a crane. So you can localize capacity as markets grow, and that's what we're talking about. And I think we're early innings here to say what that's going to look like, but we'll keep everyone updated as it evolves.

Speaker 7

Understood. Appreciate it. Thanks.

Speaker 2

Thanks, Chip.

Operator

Thank you. Our next question comes from Martin Malloy with Johnson Rice. Your line is open.

Speaker 8

Good morning. Congratulations on all the progress and the cost reductions already achieved to date. I did want to follow-up on the financing and funding. And I appreciate what you said about the customer deposits. So will you need additional funding now given the customer deposit outlook here this year or until you get the DOE loan proceeds coming in?

Speaker 2

So Marty, I wouldn't go beyond what Nathan said on the call today. We're working through a bunch of different things. We're finalizing the agreement to monetize the tax credits. We're starting to see operations where receivables are coming in from customers and we continue to drive the orders booked to bring deposits in to bridge us to the line. I wouldn't say yes.

Speaker 2

I wouldn't say no from where we are today. And as it evolves, we'll give more details as we see them.

Speaker 8

Okay. And then just for a follow-up question, you mentioned that you've had 2 Z3 installations online, I think, since September. Any is there time enough that you've gotten any feedback from customers on how those are operating?

Speaker 2

So Marty, what we said was they're under installation and commissioning right now. We never said they were up and running. There's a little confusion

Speaker 8

on that.

Speaker 2

And that's why when you look at Page 5, when you go halfway down, they're all and again, there's a lot of things that we control. There's some things that we don't control on the customer side. The most important thing now is to get the units that have been shipped out in the field up and running so we get that field data.

Speaker 8

Okay. Thank you very much.

Speaker 2

Thanks, Marty.

Operator

Thank you. Our next question comes from Thomas Boyce with TD Cowen. Your line is open.

Speaker 6

Hey, appreciate you taking the questions. Maybe just a follow on that point. In your mind, for companies that are awaiting field data before they kind of move forward with booked orders. How much data do they require? I mean, I think it's different for every customer, but I'm just wondering what you think would be a sufficient amount of operating data for units in the field before it kind of moves more individuals off the sidelines?

Speaker 6

Is it months? Is it quarters? How should we think about

Speaker 2

that? It depends. I mean, the answer is yes. It depends on the profile of customer that you're talking to, Thomas. Like if you think about what we said previously, if you're dealing with an independent power producer or developer, they'll take risk sooner on Newtek.

Speaker 2

If you're talking to a utility, it takes a little bit longer. We are in various stages with all different kinds of players that have laid out and done different things. We're not going to comment specifically on those conversations, but we have a roadmap of what we need to take people and convert them from opportunities into orders.

Speaker 6

Got it. Understood. And then maybe great to

Speaker 2

see the first cube shipped to Italy.

Speaker 6

I know it's early innings with respect to kind of standing at the manufacturing base still, but what are the kind of the international growth plans for Europe specifically? Are there other countries that you find interesting that have market support mechanisms that make them attractive? And then of the 1.9 gigawatt hour late stage pipeline, is some of that international or is this more of a kind of active proposal bucket?

Speaker 2

So, I think we outlined in the presentation 3 areas that we're focused on. We can't given the size of the company and evolution of the company, you can't go everywhere all at once because you'll stretch yourself too thin and we don't want to do that. So I stick with what we said in the presentation is the 3 geographies that we've worked that we're working with. What I would say is we talk specifically about Italy because of the Terna auction and where we are. There are other countries in Italy in Europe, excuse me, that we're talking to, but those are the 3 right now that we're focused on.

Speaker 2

And on your second question, the majority of what we're talking about in the late stage is domestic, U. S.-based.

Speaker 6

Great. And that's helpful. If I could sneak one more in just on the monetization for the 2023 credits, how are you seeing the kind of transferability market develop? I've seen some reports where you're looking at like $0.90 on the dollar and your commentary was modest. I'm just kind of wondering if that's in shooting distance?

Speaker 3

Yes. Yes. And that's what we said. There's a range that we're seeing kind of $0.90, dollars 0.95 Obviously, you take a bigger discount if you're monetizing a smaller number of credits, you take a lesser discount if you have more credits. We've recorded these at $0.90 We believe that's where the market is for a company of our size.

Speaker 3

And we credits to sell increases.

Speaker 6

Great. Appreciate the color. Hop back in the queue.

Operator

Thank you. Our next question comes from Tom Curran with Seaport Research Partners. Your line is open.

Speaker 6

Good morning. Thanks for taking

Speaker 5

my questions. I believe an earlier commercial version of your Z3 container featured the number I have is a total of 6 72 modules. Would you tell us how many modules are in the current long duration offering at rate energy of 6 95 kilowatt hours? And then what that module count should be with the target or targeted ranges when you get to 800?

Speaker 2

672. So a lot. The product is the product. The cube has the same amount. When we talk about long duration, short duration, you're talking about how you're utilizing that same product.

Speaker 2

And there's different levels of energy you can get in and out of a system depending on how you discharge and at what power you discharge at. And that's true for any battery technology. So when you talk about any battery going a 2 hour to a 4 hour to a 6 hour to an 8 hour, there's going to be the impact on performance. It doesn't stay the same, and we're just being clear on how our technology performs at the different durations. As we move forward, the goal is to keep the module count in the cube the same.

Speaker 6

Got it.

Speaker 7

Makes sense. Yes. A lot of

Speaker 3

the energy density improvements we walked through Francis and Pranesh walked through in December are within the battery module itself.

Speaker 4

Right.

Speaker 5

And that was clear, and

Speaker 6

I assume that. I just

Speaker 5

want to make sure we weren't also missing another variable where the configuration or physical density of the actual modules was increasing as well within the container, but very clear.

Speaker 2

To clarify, right, and that's a great point, right? The clarification is like, you think about our battery module, it's in a box, right? And then you have the internals that then perform. What we're doing is the outer aspect ratio of that battery module box stays the same. The inner performs better.

Speaker 2

So like if you go to that last page that we had on cost out and you look at the left hand side, that left hand side, if you look closely, there's more active surface area inside the battery and that's what's driving the improved performance.

Speaker 5

Crystal clear. Thank you. And then when it comes to the scheduled deliveries that underpin your expected volume scale up over the second half of this year, are there any major external gating items that you're aware of in monitoring? Or for most of those scheduled deliveries, does it really just come down to staying on track for your own SodaOne line ramp at this point?

Speaker 3

Yes. I think it's a combination of staying on track with the line ramp and then coordinating with customers on customer deliveries. And so, yes, I don't think there's any one single big gating item. I think it's just focusing on executing against that plan. Yes.

Speaker 3

And that's why there's a

Speaker 2

part of the reason why there's a range, Tom. So I think the 60% to 90% range is not all line risk that's in there. So that's why we gave the range

Speaker 5

That's sort of what I was alluding to is that when it comes to the swing factors within that range, you're not 100% internal, they're not all variables you would expect it to be have control over?

Speaker 2

Right. And when you look at the industry in general right now and the risk you have around finalizing permits, getting the civil works done in a timely manner. And we're being prudent in how we're forecasting that risk to make sure that we get within the range year. I think that's very important.

Speaker 5

Yes. As you should be, perfectly fair. I appreciate all the transparency and thoughtful detailed presentation.

Speaker 3

Thanks. Thanks, Thomas.

Operator

Thank you. Our next question comes from Joseph Osha with Guggenheim. Your line is open.

Speaker 6

Hey guys, good morning. A couple of questions. First, wondering if you can give us maybe a slightly more detailed walk through the sort of the milestones for the LPO draw to the extent that you can? And then I've got 1 or 2 others.

Speaker 3

Yes. Like we've said in the past, Joe, it's one of the ones that we're focused on is getting the 1st state of the art line up and running and implemented. Beyond that, we really haven't commented on what some of the other ones are, but that's the one that we're focused on. That's the one that's likely to drive the timing.

Speaker 6

But to be clear, because you've got the line, it's coming up in Wisconsin, then you're going to take it apart and to Turtle Creek. You are implying that that line needs to be up and running at some level of scale? Is that what you're saying? Or does it just need to be on the ground so they can look at it?

Speaker 3

It needs to pass a performance test. So we constantly refer to SAT on that line. SAT is expected to occur in the Q2. That's effectively what there is the DOE has their own test, but it's effectively tied to SAT.

Speaker 6

All right. So remind me what that acronym stands for. I'm guessing the T is test. What's this?

Speaker 2

T is test.

Speaker 6

Okay. Thanks. Second question, just looking at your chart on Slide 5 there in the upper right and your scale at

Speaker 2

the end

Speaker 6

of coming out of 2024. At that point, obviously, you'd hope that the margin, the cost continues to go down. But can we think about the levers as you get into 2025 beyond being pretty much straightforward, just scale and cost absorption because your design is going to be nailed down by that point and a lot of the kind of the R and D tweaks are done. So is it pretty much going from there just straightforward fixed cost absorption?

Speaker 2

Look, Joe, my experience has always been even if you have a 200 year old product, you can continue to take cost out of it by improving the way you package it, by improving the way you manufacture it. So I think you'll continue to see an evolution of the product that we have. We think we have a product that we can continue to drive cost out beyond that. A large part of it is scale, but there's other things you can continue to do around software to improve performance, around packaging and how you containerize and also continue to drive like we're doing right now. We'll learn more and continue to learn more about the battery and just improve performance by keeping it inside the same aspect ratio.

Speaker 6

Yes. Okay. And then that kind of leads me to my third question following on some of the other earlier lines of questioning. As your, I'll call it, functional density improves, is there any kind of set of thermal limitations you run up against like where you said, hey, you don't have an HVAC and that's great. But I guess I'll just ask that simply.

Speaker 6

Are there any thermal limitations that you can run up against or those not relevant?

Speaker 2

No. Look, I think, Joe, we've looked at, the theoretical round trip efficiency when you back out thermodynamics and the inherent zinc plating, bromine absorption that happens, the chemical reaction in the battery, the theoretical round trip efficiency that you can achieve is the high 80s, low 90s. There's a lot of things that you need to go in there to be able to do that. But when you look at how the battery performs and the temperature range that we have, we're not going to exceed that temperature range that we have right now. I mean, you're talking about going down to minus 20, up to plus 65 degrees C.

Speaker 2

That's a pretty wide range and we don't see ourselves exceeding that as you continue to work on the product.

Speaker 6

Okay. Thank you.

Speaker 2

Great. Thanks, Joe. Thank you.

Operator

Thank you. There are no further questions at this time. I'd like to turn the call back over to CEO, Joe Mastrangelo, for any closing remarks.

Speaker 2

Thanks, everyone, for listening. We'll keep everyone updated here as we progress through. I know there's a lot of important topics that everyone wants to hear about and learn about as we move forward. The most important thing here for us right now, when you think about this is getting the SAT successfully completed then on to SAT, continuing to scale up production and continuing to work that pipeline from opportunity into order closure. We'll keep everyone updated as we make progress on that.

Speaker 2

But thanks everyone for the time today.

Operator

Thank you for your participation. This does conclude the program and you may now disconnect.

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Earnings Conference Call
Eos Energy Enterprises Q4 2023
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