Fluence Energy, Inc.

Good morning and welcome to the Fluent Energy Inc. second quarter 2022 earnings conference call. My name is Brandon and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session during which you may dial 01 if you have a question. Please note it is 01, not star 1. I will now turn the call over to Lex May and you may begin.

Thank you. Good morning and welcome to Fluent Energy's second quarter 2022 earnings conference call. A copy of our earnings presentation and press release covering financial results, along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures, are posted on the investor relations section of our website at FluenceEnergy.com. Joining me on this morning's call are Manuel Perez-DeBute, our Chief Executive Officer, Dennis Fear, our Chief Financial Officer, and Rebecca Bull, our Chief Product Officer, and Syed Madini, our Chief Digital Officer. During the course of this call, Fluence Management may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts. Such statements are based upon the current expectations and certain assumptions and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward-looking statements and for more information regarding certain risks and uncertainties that could impact our future results. You are cautioned to not place undue reliance on these forward-looking statements which speak only as of today. Also, please note that the company undertakes no duty to update or revise forward-looking statements for new information. This call will also reference non-GAAP measures that we view as important in assessing the performance of our business. A reconciliation of these non-GAAP measures to the most comparable GAAP measure is available in our earnings materials on the Investor Relations website. Following our prepared comments, we will conduct a question and answer session with our team. During this time, to give more participants an opportunity to speak on this call, please limit yourself to one initial question and one follow-up. Thank you very much. I will now turn the call over to Manuel.

Thank you, Alex. I would like to extend a warm welcome to our investors, analysts, and employees who are participating on today's call. Let's begin on slide four on the earnings presentation. Today, I will provide an update of our performance and macro environment. In summary, first, we continue to experience a strong demand for our energy storage products and services. In addition, Fluence is well positioned to capitalize on Europe's growing desire for energy security and independence. Second, we achieved a record quarter for Fluence Digital and acquired NISPRA. Later in the call, our chief digital officer, Seyed Madani, will provide more color on this acquisition. Third, we successfully raised prices on new contracts and roll out the new raw material index or RMI-based pricing to protect against raw material price volatility. Fourth, we have been encountering headwinds in battery production that have resulted in force majeure in some customer contracts. At the same time, we are making progress on diversifying our battery suppliers, which is a key strategic objective for us. And fifth, We also have made progress in rolling out our Gen 6 technology, but still need to tackle further cost improvements. Later in this call, Dennis Fair, our Chief Financial Officer, will address our Q2 financial performance. As he will discuss, we now expect to be at the low end of our fiscal year 2022 revenue guidance range as the result of the headwinds I mentioned it earlier. Turning to slide five, we had an excellent quarter of order intake across the business. We contracted 582 megawatts of energy storage during the second quarter, illustrating the continuous strong and secular demand we are experiencing. We have been working closely with customers to reflect cost increases for batteries and raw materials in new contracts, and demand remained unwavering. In our services business, we contracted 343 megawatts during the second quarter, illustrating an attachment rate of 58% in Q2, below our target of 70%. Many of the energy storage contracts that we executed were with utility companies that tend to sign service contracts several months after contracting the storage equipment. We anticipate follow-on services contracts will be signed with these customers during the second half of this year, similar to our experience in fiscal year 21. And please to note that Fluence IQ delivered a record quarter in terms of revenue and new contracts. During the quarter, we added 2.8 gigawatts of new digital contracts. And as of March 31st, we have deployed or contracted 7.8 gigawatt assets under management. Importantly, this does not include the additional 8 gigawatts under management associated with our NISPERA acquisition. The significant growth in Fluence IQ is ahead of our business plan. I would also like to point out that this quarter we added our first pump-it hydro contract for 1.2 gigawatts. representing a new asset class for Fluence IQ, which opens up new opportunities for Fluence bidding applications. I would also like to make a few comments related to the U.S. Commerce Department's probe into solar anti-circumvention and dumping. Although it is too early for us to speculate what actions could result from this probe, we know that During the first half of this fiscal year, approximately 30% of our overall product oil intake was connected to Greenfield U.S. solar plus storage projects. In regards to our backlog, let me clarify that we are not responsible for procuring solar panels. In the event that these are not available, it is still commercially beneficial to our customers to complete the energy storage installation piece to store any revenue on these assets. We currently have not seen an impact on product pipeline relating to this probe. However, we acknowledge this could change and could impact as much as 10% to 15% of our product pipeline, at least with respect to timing. However, Fluence is a global company with diversified offerings across geographies and segments. For example, we expect to see increased demand from Europe that is not yet reflected in our product pipeline. Turning to slide six, we are excited to continue growing on our business in Europe, especially as the need for energy independence and security becomes paramount. The recent geopolitical events in Europe have exacerbated the need for many European countries to reduce their dependency on foreign oil and natural gas. And one of the key solutions to address this situation will be an increased use of renewables, which will require more energy storage. In fact, in early March, the European Commission launched the RepowerEU initiative that will accelerate the transition to renewables by calling for nearly a doubling of renewable asset additions from approximately 42 gigawatts to 78 gigawatts annually until 2030. As you can imagine, this increase in renewable asset generation will create more grid reliability and stability issues, thus necessitating additional energy storage. We have already seen increased interest from our customers in Europe from energy storage. As the market leader in Europe, Fluence is very well positioned to capitalize on this emergent need, enabling Europe to achieve its energy independence and security goals. Now, turning to slide 7, I would like to update you on the progress we have made in advancing our strategy. Through the planned addition of regional contract manufacturing locations in the U.S. and Europe, we will be protecting ourselves against logistic interruptions and soaring logistics costs. I am pleased to report that we have signed an agreement for a U.S.-based contract manufacturing facility, and we expect to initiate production there toward the end of this calendar year. We are on track for starting our European-based facility in early calendar year 2023 and look forward to providing you with an update on our next goal. As you may recall, from our first quarter call, we announced and a strategic joint venture with Renew Power in India. We expect to have the agreement finalized in the coming weeks, and we'll begin ramping up operations in India accordingly. Additionally, I'm pleased to report that we successfully deployed a 2.75 megawatt CNI product for Google in April to provide them with emission-free battery backup power for their Velyun data center in San Gisland. We are proud to partner with Google for this first-of-its-kind product, as they strive to become carbon-free by 2030. While the CNI segment represents a small portion of our overall mix, we are seeing increased demand for the data center sub-segment. The backup power requirements of this sub-segment are approximately 20 gigawatts. worldwide. This commercial development represents a significant opportunity for Fluence, as other major organizations increasingly replace current fossil fuel power backup systems with emission-free battery backup solutions. Turning to slide 8, I would like to provide a brief update on some of the headwinds that we have been facing and the actions that we are taking to mitigate their impact. First, Supply chain disruptions have affected us in a couple of areas. On the shipping and transportation front, we have seen shipping rates stabilize, providing better visibility on how to price new contracts. We still see global shipping capacity challenges and port congestions, but we are mitigating some of these impacts by shipping earlier where possible. The supply of battery cells is another area that has been affected. As you may also recall, we have contractually secured 20 gigawatt hours of batteries from our suppliers, providing us adequate supply for our 2022-2023 needs. However, the majority of the world's current battery supply comes from China, which again underwent significant lockdowns to enforce their zero-COVID policy. These lockdowns are affecting suppliers' ability to produce and ship battery cells in a timely manner. Therefore, battery suppliers in China have recently declared force majeure to us and others in the industry. Under our contracts, our suppliers' force majeure declaration allows us to declare force majeure to several of our customers, for whom we will not be able to meet contractual timelines. We expect this to protect us from possible timing-related charges under the affected contract. While we do not know how long the current situation will last, we are working closely with our battery manufacturers, both in China and elsewhere. As part of our regionalization strategy, we have already been working to reduce our exposure to Chinese battery manufacturers by diversifying our supply regionally, as well as by the number of suppliers. And please do report that non-China-made batteries will represent about 30% of our supply in 2023, and we expect this percentage to grow in 2024. We also have reduced our supplier concentration by increasing the overall number of battery suppliers. Second, as Dennis will address shortly, our second quarter results reflect good progress on reducing the one-off items that were previously associated with the compounding effects on COVID-19. We expect to continue reducing this impact as we progress through the second half of this year. Third, as I noted earlier, we have been moving to RMI-based pricing for new contracts to protect against the volatility we have seen in the cost of road materials. So far, we have seen a broad acceptance by our partners to engage in finding optimal and creative solutions for all parties. Finally, we have made progress on installing and commissioning our Gen 6 product in the field. As we discussed on our previous call, we have experienced delays and additional costs associated with the rollout of our Gen 6 product over the past six months. During this time, we have documented lessons learned and conducted more training for our crews. Faulting or substandard components from some of our battery and inverter suppliers were one of the reasons for the delays, particularly at large installations. That is why we have assembled a new supplier quality control team. The team is working with our suppliers to ensure components operate as designed, which will reduce the risk of delays and unforeseen costs. As you can see on slide nine, I'm pleased to report that we are now fully caught up on our Gen 6 installation schedule. We have successfully installed 10 Gen 6 systems since the beginning of this year with a combined power of about 420 megawatts. This includes several mega-site installations such as Diablo, and high desert, both in California. Furthermore, many of these feature first-of-its-kind elements, such as the first energy storage co-located with geothermal generation or the first product that guarantees 150 millisecond response time. These are amazing accomplishments and showcase our ability to innovate and push the boundaries of what is possible. I will now turn the call over to Seyed to provide a bit more color on the NISPERA acquisition and its impact on FluenceIQ.