Fluence Energy, Inc.

and thank you for standing by. Welcome to the Fluence Energy fourth quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lexi Tinmaye, Vice President of Investor Relations, please go ahead.

Thank you. Good morning and welcome to Fluent Energy's fourth quarter 2022 earnings conference call. A copy of our earnings presentation, press release, and supplementary metric sheet covering financial results along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures are posted of our website at FluenceEnergy.com. Joining me on this morning's call are Julio Navreda, our President and Chief Executive Officer, Manu Seau, our Chief Financial Officer, and Rebecca Boll, our Chief Product Officer. During the course of this call, Fluence Management may make certain forward-looking statements regarding various matters relating to our business and company that are not historical facts. Such statements are based upon 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. 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 company's 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'll now turn the call over to Julian. Thank you, Lex.

I would like to send a warm welcome to our investors, analysts, and employees who are participating on today's call. Additionally, I would like to welcome a new CEO. our new CFO. Manu joined us in September and has already made a significant impact on the organization in a short period of time. Welcome, Manu. Today, I will provide a brief update on our business and then review our strategic objectives, as well as some examples of the actions we've already taken towards this goal. Following my remarks, Manu will discuss our financial performance, as well as our outlook for fiscal year 2021. I'm pleased to report that our team recognized $442 million of revenue in the quarter. Delivered our highest quarterly revenue in Fluency Eastern and deployed more than 1 gigawatt hour of energy storage solutions. More importantly, we achieved positive growth margins for the quarter, both on an adjusted and gap basis. Our demand was strong across all three of our business lines, and new orders were approximately $560 million. Furthermore, our signed contract backlog as of September 30 was $2.2 billion and year-to-year increase of around 30%. Lastly, our recurring revenue risk, which consists of our services and digital business, experienced strong growth throughout the quarter. Notably, our service attachment rate of 190% for the first quarter was in line with our expectations, illustrating the catch-up in service contracts we anticipated during our previous earnings group. Our digital business added nearly one gig of assets under management since the third quarter, providing us visibility to future revenue. Turning to slide five, over the past 90 days, the senior management team and I have conducted a deep dive potential funding support. We confirmed that Fluent's energy storage solution business has tremendous tailwinds across the globe, including from the Inflation Reduction Act in the United States, often owned and hired, and Europe's growing desire for increased energy security and independence. Although our digital business has strong potential, we have determined that the platform and business model will benefit from simplification and tighter integration with our storage solutions. For example, our Cori Mosaic product is not able to expand into new markets quickly due to its current tech architecture.

This is something that will be addressed.

Going forward, we will concentrate on accelerating the integration of our offerings, including digital services, with our storage systems in order to serve customers when an end-to-end Concentrating on executing and strengthening our risk management capabilities to ensure we monetize our contracted margins is a priority. Additionally, we're simplifying our data platform and retooling our go-to-market strategy in order to increase the scale of both wholesale and experience and to roll out these products more quickly and at lower costs. Furthermore, we will convert our supply chain into a I'll provide more color on each of these initiatives in a few minutes. After meeting with hundreds of our fluent people in the past 90 days, I am confident in our ability to maintain our leadership position in the market, deliver multi-year profitable revenue growth rates of more than 30%, and be adjusted every break-even in fiscal year 2021. I believe our team's sense of passion and resilience

We'll set up, we'll set tools for long-term success, but not significant value for our customers and our shareholders. Coming out of this process, I'm very and even more convinced that our strategy of using our ecosystem to provide energy storage solutions to our customers is the right one. Our ecosystem gives us access to the largest energy infrastructure providers in the world.

And importantly, it provides opportunities to further integrate with our customers at any point of the value chain. Our revised go-to-market approach is simple. We will utilize one cell channel for our entire ecosystem. This is different from our past, where we would use multiple cell channels across our organization. This turned out to be an ineffective strategy when it comes to attaching our service and digital solutions. when any stores integrated cell chat with you cause a better ability to integrate our customers into our ecosystem and we have seen our digital software software is a body value beyond its own P&L contribution as it support hardware and service creating a file drive will affect about additional we will work to integrate our thus increasing the attractiveness to our customers of choosing Bonto solutions. Our ability to offer an integrated energy storage solution is one of the key reasons our customers select us. We are increasingly recognized as one of the premier energy solutions providers in the world by large multinational developers or IPPs, many of which are planning on deploying significant amounts The integration of this offering is a key tool in retaining customers beyond day one's health. We can access them anywhere along the way. We have visibility to multi-year high revenue prospects. We operate with an asset-like business model with high returns on invested capital. We have significant technical debt, which helps us to monetize data and help our customers. We also have a rapidly improving cost structure and high revenue productivity. And ultimately, we believe we have a business model and strategy set up for success. Turning to slide seven, I would like to discuss the five strategic objectives that will provide the framework for the action we'll be taking over the next few years. First, we will deliver profitable growth. Both profitability and growth are essential maximize shareholder value we focus on those market centers that provide continuous growth where our complex solutions allow us to maximize productivity second we will develop the products and solutions that our customers need when the standards are customer challenge challenges it's a driving force behind our continuous technological advancement respect to provide customers with the most proactive solutions in our industry leaders' experience. Third, we will convert our supply chain into a competitive environment. We're establishing a basic supply chain that is centered around diversifying our suppliers, capturing incentives from the inflation we have tonight, and improving the delivery time for our solution, all of which will ultimately increase market We will use Fluent Digital as a competitive differentiator and a market driver. Harnessing the power of artificial intelligence and mature learning in an integrated solution, we can uniquely provide our customers with the ability to vote, maximize their revenue, and lower the overall cost of operation. This will increase visibility to our growing and profitable recurring revenue stream. And finally, our fifth objective is to work better. We start with being disciplined with our capital spending and contract on the right, optimizing the use and our resources efficiently, and a strong corporate risk management capability, controlling our costs and maximizing our financial performance for our shareholders. We have already taken action towards this objective, some of which I would like to highlight tonight. Turning to slide eight, I'm pleased to announce we're launching a new storage solution geared towards the transmission sector. We're calling it the Fluence UltraStack. The transmission segment is a growing market that currently sits at 450 megawatts, which we expect will grow to 70 gigawatts by the year 2000. We expect demand for this product will be driven by a customer's need to reduce transmission congestion resulting from growth in distributed energy resources. The transmission segment is highly complex and requires the best performance and high safety features, thus increasing a barrier to entry to the market, some of which are profitable. More importantly, higher complexity commands a higher premium for our products and services and often results in higher costs. We will continue to lead into the transmission segment as we deliver profitable growth and develop new products and solutions for our customers. Turning to slide 9, I'm pleased to report we've recently signed a contract for more than $500 billion to Orested, under which we will deliver 1.2 gigawatt-hour energy storage facility in the United States, complete with a jet seat, six grid sensors. By further increasing our scale, we'll be able to better capture value from our supply chains. We also note that Orested selected us as they were looking for a prospect partner with strong experience delivering complex solutions.

As a comprehensive solution provider, we continue to outpace our competition due to our scale, industry-leading experience, and our ability to solve highly complex problems, while quickly establishing ourselves as a leader among the mega-projects. Turning to Site 10, including the Orsted contract, which was signed on 5th of March,

fiscal year-end, our backlog now seems at more than $2.5 billion. Besides that, the strong demand we're seeing at the top of our fund has now provided us greater certainty with respect to our multi-year revenue outlook. Looking at the chart, you can see that even before any impacts from the IRA, we have a pipeline that is nearly three times our current backlog. It is also important to note that we're expanding ourselves to non-related parts.

And as a result, the majority of our backlog today is with these customers. Turning now to slide 11. As we mentioned earlier, we're experiencing tremendous tailwind from the inflation.

DLES has estimated that the time for heavy storage increased by more than 100 gigawatt hours, or around 35 billion. as a result of the IRA. That is a significant thing. The expected IPC pulls over reported returns for cost. This benefit is expected to accrue to us through improved pricing or increased bonuses. Furthermore, the production tax spread provides margin of interest for approval from capturing benefits associated with manufacturing our own battery models in the United States. It's also important to note that the IRRA benefits are not necessary for achieving and adjusting EBITDA breaking in terms of fiscal year 2014, and thus represent upside potential.

We already see the IRRA impacted in three areas. The first is the ITC for standard of storage. This benefit accrues to our cost, and we expect it will incentivize more projects to move forward

and to greenlight other projects that were previously not economic for our customers. As a result, we anticipate the U.S. market growth to increase from 30% per year to around 40% to 50% per year. Based on our conversations with customers, we expect to enter into the first of these contracts attributable to the IRA about mid-canada year 2020. We will expect to see the impact on our financial results in the second half The production tax credit of the section 45X of the IRA provides significant opportunities for food. And we're launching our own battery molding manufacturer. As a result, we expect to qualify for the $10 per kilowatt hour incentive from the IRA. It's important to note that this is an old cap incentive and carries a direct pay option. As a reminder, we opened our youth production facility in September. which will have an expected queue of nearly 60 kilowatt hours per year by 2020. We expect to be able to begin battery model production starting in the summer of 2024, thus capturing the $10 per kilowatt hour intent I just mentioned.

And we can see it further supports our meeting growth margin target. Consider Section 48C, provide for the one-time

on-shoring or establishing qualified manufacturing facilities in the U.S. As a result, we're currently looking at the possibility of expanding our operations in the U.S. with an additional facility. Turning to slide 12, I'm pleased to announce that we're launching our own battery module and battery pack manufacturer, our new Utah facility. This gives us greater control over the global supply chain and allows us to capitalize on the incentives of the LRA. One of the key benefits of a fluid battery pack is that it is easier to incorporate new cells and diversify our cell supplier base, creating competition at a cell level. Our battery pack makes it easier to swap packs in and out of your product variants. It also allows us to incorporate our own battery management system technology with more granular data access and systems. and expands fluid battery intelligence capabilities. We expect to see the initial battery model production coming out of our Utah facility during the summer of 2020.

Looking at slide 13, we further illustrate our supply chain and how our battery models and battery packs fit together. Starting on the lifespan side, we will continue to purchase battery cells from multiple battery manufacturers. Battery cells themselves are used to a great extent, a commodity.

We take those battery cells and integrate them into our battery models, complete with our own battery management system for BMS. So we're taking those commoditized battery cells and turning these then into smart batteries capable of performing the tasks that our solutions demand. These battery models will qualify for the $10 per kilowatt incentive under the IRA, as I've mentioned. We then put several battery modules together to make a battery pack that is combined with our DC-CPM, which is the brain of the package. DC-CPM collects battery data for communication with the Fluid Operating System. And it's a point of contact for our cloud-based digital solution, providing value-added integration for our customers. Turning now to Cisco. As I briefly mentioned earlier, we have assessed our TINTA business and have pre-published the model and model market strategy. Now I'd like to discuss what this means for Fluid Digital and where we're going. First, we're sure we're offering an integrated holistic end-to-end model solution to our customers through one sales channel. And as I mentioned, this is a major change from our prior sales channel. We will simplify our suite of digital options by focusing on our existing two applications, Mosaic and NISPR. We plan to roll out Mosaic to four additional U.S. markets over the next three years and improve the ability of NISPR to integrate with battery-based energy storage systems. By taking a more focused approach, we expect to reduce the cost, complexity, and time to market for these applications.

We do not plan to build out any additional applications at this time.

Third, we're accelerating the Dispair of Plants' ability to be deployed onto battery energy storage systems by the end of this year, thus enabling our new bundle solutions to be more integrated with our vendors. What do we expect to achieve as a result of this action? Improve attachment rates for services admitted to our bundle increase annual recurring revenue from our digital services, and a lower rate of customer insurance, though I will note that our short rate is already very, very low. Going forward, starting later in fiscal year 2020, we will report our progress on this initiative by disclosing the relevant KPI. We expect that this retooling will have a relatively small investment of $5 to $10 million. As it relates to the financial outlook for our digital business, we do not expect any more contribution from our digital business in 2023 or 2025. We expect to have positive gross margin in fiscal year 2023 and expect adjusted EBITDA to be at or near break-even in fiscal year 2025. Over to slide 15, we're enhancing our digital India technology center. Increasing utilization to a workforce optimization that will affect roles in India in 2020 to the benefit of our onshore operators. These contributors were operating leverage.

Their operating expenses expected to grow at less than half the rate of revenue growth, which Manuel was playing further. Turning to slide 16 for a summary of recent action. As a management team, we're committed

to deliver and increase general development, and to execute on these five strategic objectives that I discussed at the foundation of our plan. We will provide you with quarterly updates on our progress toward a strategic objective as we transform the way we operate and drive sustainability. Overall, we continue to see strong demand that is expected to be amplified by the current that we'll start adding to our backlog in mid-2023. We are committed to break even on an adjusted EBITDA basis in fiscal year 24 as we enter into higher market contracts. And we're committed to improving our project execution and our overall risk management. I'm pleased with the early results of REC, but there is still a lot of work. As we move forward, we will continue to focus on executing a high-growth, capitalized solution business model expect to make or fluence the optimal best vehicle for nursing. That being said, I will now turn the call over to William. Thank you, William.

Before I begin, I would like to express my gratitude to William and the Fluence Board for their confidence and trust in me. The last couple of months have been a period of rapid learning. I continue to believe that Fluence is positioned well to take advantage of a vast, untapped dam more than $35 billion. My focus is to strengthen the organizational foundation to enable profitable growth, and this includes enhancing our deal underwriting, risk management, and execution capabilities. Let me now review the financial performance of the fourth quarter of 2022. Please turn to slide 18. In the fourth quarter, we delivered our highest-ever quarter representing an increase of 85% from third quarter. This record revenue generation was primarily driven by strong project execution as several projects achieved significant milestones. We also achieved positive gross margins in the fourth quarter, 3% on an adjusted basis and 2% on a gap basis, driven by strong revenue performance and improvement in our ability to pass through to the customer increases in certain input and supply chain costs. This is a significant turning point for us. And while 2022 was a challenging year, we ended the fourth quarter with positive plus profit and believe that the issues we confronted are well understood and now largely behind us. Compared to 2022, we expect new contract margins in 2023 will be positively impacted by improvements in a deal underwriting process of index-based pricing. We've also improved execution on product rollout, including leveraging our lab-to-test and debug solutions before we launch them in the field. Moving from gross profit to operating expense, we improved our operating leverage in the fourth quarter of 2022 by lowering our operating expense as a percentage of revenue compared to prior quarter and prior year. Our operating expense can be divided into two categories. The first is SG&A spend, which is required amount of overhead spent to operate a business, both at corporate and at the regional level. We do not expect that corporate objects would scale the growth of the business. The second area of spend is what we refer to as platform investment. This represents primarily R&D spend, which we view as a type of growth capital. Full year 2022 operating expense spend was 15.5% of revenue, which we expect will be a high annual watermark. Looking at 2023 and beyond, although we expect to continue to grow our operating expense in absolute dollar terms, but we expect it to grow at a rate less than half of the rate of our revenue growth. We expect this operating leverage to be one of the drivers of the improvement in adjusted EBITDA see over the next few years. In the interest of greater transparency, this quarter we have begun providing a supplemental quarterly metric sheet on our investor relations website that is designed to provide analysts and investors with a deeper understanding of our financial and operating performance. Please turn to slide 19. I'm pleased to report that the NDAC are short-term investments and restricted cash, and is in line with what we have guided. As shown on this cash bridge, majority of our cash usage in 2022 was driven by negative adjusted EBITDA. That trend is expected to continue in fiscal year 2023. Let me also provide some color on the other drivers of our 2023 cash out. We expect to incur modest capacity In addition, as we did in 2022, we will use some operating cash in 2023 at a rate roughly 10% of our year-on-year revenue growth. We believe that we have ample liquidity to meet our 2023 cash needs. Please turn to slide 20. In initiating guidance for fiscal year 2023 of total revenue, our adjusted gross profit to be between $60 million and $100 million. We're coming into 2023 with approximately 90% of expected revenue at the midpoint of our fiscal year 2023 guidance already in our backlog. We've also secured additional supply chain commitments for 2023. This gives us confidence in our revenue guidance. On the next slide, I will provide additional color on why we are confident of achieving our 2023 adjusted gross profit guidance. Please note that our guidance does not assume any financial benefit from the Inflation Reduction Act, as we expect to see order growth in 2023 with the benefit to sales occurring mostly in 2024 and beyond. In terms of revenue sustainability, we expect to see a split of approximately 40% in the first half 60% in the second half. Furthermore, we expect operating expense to grow at less than 50% of our revenue growth, providing us significant operating leverage. As Julia mentioned, we will be utilizing our India Technology Center more, enabling us to scale at a much lower cost. Please turn to slide 21, where I'll walk you through key drivers of our 2023 adjusted gross profit guidance when compared to 2022 action. They're confident in our 2023 adjusted gross profit guidance of $60 million to $100 million driven by improved contract underwriting and execution. This reflects a combination of signing new contracts at margins that are at or close to double digits and improvement compared to the past. Our ability to recoup some of the increase in our supply chain costs and improved execution. I would note that we expect our exit 2023 gross margin run rates to be higher than the full year 2022 margin rates, as our legacy contracts and completion and new deals start to have a larger impact on revenue. Before we open the box of questions, I want to reiterate that we have visibility to achieve 2024 break-even adjusted EBITDA, as well as multi-year 30% plus revenue growth. and are positioned to take advantage of the upside from the Inflation Reduction Act. With that, you will open the floor for questions.

Good morning. This is Julian. I wanted to apologize for the way the sound worked. It looked like my voice accent did not mix very well with the mic and the speakers are leaving my room.

So in order to correct this, Lex will be sending, we will be posting our script on the website to ensure that we already have access to it. And Lex will be sending by email to his contacts all of it. And it will be open. If you have any questions on the script later on after this, you will, you know, you will have, you can send a contact Lex direct. Let me tell you this before we start, which I think is important. The quality of the recording was an inverse proportion to the quality of the message. So, unfortunately, it did not come true, but it was in direct proportion, you know, just quite the opposite. So, it's going to the Q&A, and I really, you know, apologize for that. It won't happen again. We're testing a new mic that, as I said, does not mix well with my voice and accent. So, we start. Operator, if you want to open it for questions, please, Q&A.

Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from James West with Evercore ISI. Your line is open.

Hey, good morning, Julian and Manu.

Good morning, James. Good morning, James.

As you've stepped into your leadership role here at Fluence, you're focused much more on profitable growth and profit being, of course, the key word there. Has your bidding strategy changed? Obviously, there's a huge amount of growth in the business itself, but have you adjusted kind of the way the company bids on projects?

if what we have done just to you know this is a question we get all the time james is that we segmented the market into more detail to identify where we which market segments and geographies we could actually aim for our 10 you know our double digit margins you know so every time we engage with a new customer or engaging on a new project we know that you know that that customers, you know, business case will allow the value we're creating, we're allowed for our profit objectives to be reached. So that's how we have it worked. We also put in place a new contract review process internally to ensure not only that, you know, that we reach our double-digit margins, but also that the risk profile of the project we entered into are risks that we will allow us to monetize. the full margin. That's how we have worked. Generally, it means that we have dropped some segments, or at least we're not very active in those segments, but at the end of the day, it has allowed us to keep our volumes and reach our profit objectives as we move forward.

Okay, makes sense. And then another key differentiator with your strategy is more focus on the digital aspects of the business? And could you maybe highlight, is that a lot of internal kind of R&D and, you know, maximizing what you have, or are you looking at, you know, external kind of M&A opportunities as well?

What we want to do now, we're kind of integrating, I think the word that we used to look at is integration you know so what we're doing integrating the sales channel that is that requires training and some investments so that you know some capability you know we are integrating our os and our operating systems with our digital offerings and that's not that they will be one but that they will communicate more effectively and so our customers will have a seamless you know experience where they when they buy our power hardware solutions and they then they are our people as a second and then we're working and that's where the R&D comes in is on improving the platform of mosaic you know a this is normally the fastest but we really we need to invest to ensure that we can actually continue expanding that project at a lower cost point and a lower complexity so we can do this or cheaper and much faster in terms of You know, M&A, we are not planning to do M&A. We're not planning. I'll tell you until when. But for now, what we will do, we will concentrate on our current offerings. We believe these are the two territories that are the most attractive today, where the business cases are very, very clear, and that it coincides with our market sectors, you know? And as we move over, as we are able to reach our break-even point for a digital business in 2025, We will then look at whether we should develop other apps. But I think that at the end of the day, we will look at apps that are based on our commercial capabilities, that are apps that our customers can use and can monitor. Part of the problem with some of the apps we had before is that they were connected with customer segments where we were not that active. So we'll have me put in place a new sales channel and additional fixed costs that we think that's not a good idea at this time.

Okay, got it. Thanks, Julian.

All right, thank you, James. One moment.

We have a question from Brian Lee with Goldman Sachs. Your line is open.

Hey, guys. Good morning. Thanks for taking the questions. I had a couple just... Good morning. I had a couple around the margins. I guess first off, maybe more of a clarifying question. At points in time during the script, I think, Julian, you said adjusted EBITDA break-even target in fiscal 24, but then being at or near break-even for full year fiscal 25. So it I think what you're saying is you'll be adjusted breakeven for the full year in fiscal 24, consolidated, but then at or near breakeven for the full year fiscal 25 just in the digital business. Is that the right characterization?

Exactly. Exactly right. We will be fluid as a whole. We'll be breakeven in 24. We'll aim to be breakeven in 24. And digital itself will be breakeven in 24.

Okay. I guess that kind of prompts the follow-up question, which is a lot of investors we speak to assume that kind of the digital software applications piece of your business model would be more profitable than the hardware-centric side. So why, I guess, is digital taking so long to get to profitability? It seems like some of your peers... you know, in the energy storage vertical, they're well ahead in moving toward profitability and already positive gross margin on kind of the software digital platform segments of the business. So just trying to kind of understand where you guys are coming from and why that's a little bit of a different dynamic for you.

Very good question. I think that, you know, let's look at OSEG, you know, our bidding strategy. The ability to gain economies of scale requires expanding into a new market, moving from Australia, to California, but we realized that it was very, very complicated and expensive to do that research. And that has made it a little bit more difficult to meet our growth. So what we're doing now here is concentrating on replatforming that solution to ensure that we can get into it at higher speed growth. So that's the rationale, that's the reason for the Mosaic being further down the road than what we expected to be at this stage, the bidding app. This pair, our APM, our asset management tool, is going in line with our board book. That's just essentially, we bought them late last year, late last fiscal year. We are integrating into our systems, integrating into our sales channel. And it's going along the, you know, check in line with our port book. So we're, you know, we're very confident. So I think those are the two, you know, I'll say that today, the main driver for our delay has been the need to replatform. And Brian, just one clarification on your last comment is we are positive or we

and in the digital business, that still holds true over the next several years. Julian's comment was much more around the EBITDA. That's all.

Okay, fair enough.

No, that's super helpful. I appreciate the call. I guess the last question for me, and I'll pass it on, is the EBITDA break-even target for fiscal 24. I think in the past... You had said, I think, two quarters ago, there's a path to gross margin sort of in the 10% range in fiscal 24. Is that what's embedded in the view to get to EBITDA break-even in fiscal 24? Just maybe any thoughts around the 24 gross margin trajectory?

So, Brian, you said it right. That is the thought. In fact, if you look at us like 21, we are signing deals that are at double-digit margins. So, we feel very confident about getting adjusted EBITDA break-even for 2024 on the backs of double-digit gross margins. And then from an operating leverage perspective, you know, we believe that 2022 annual was a high watermark as a percentage of revenue, and we expect to, you know, reduce that as a percentage of revenue, given our OPEX will go at less than half of the revenue.

Okay, great. Thanks, guys. I'll pass it on.

Our next question comes from George Gianarchos with Canaccord Genuity. Your line is open.

Hey, good morning, everyone. Thanks for taking my questions. So maybe I could start around your decision to manufacture PACs in the U.S. Can you just talk about the incremental CapEx required to do that, the incremental hires you need to make, whether or not this will be a global decision? move and whether or not this moves you away from an asset-light strategy? Thank you.

Well, it's the same strategy, strategic position we have today. We will use contracted manufacturing, so we will not be owning the manufacturing facility. We had invested in the design and the IP and the software, but not, you know, we will still be a capital-light business. This will be manufactured by our contracted manufacturing provider. This is directed at the U.S. market. So we are, you know, our current approach, the decision is that we will build the FluenceMate for the U.S. market. You know, at this stage, we're not selling from the U.S. to third parties. We might, as we grow in other regions, we might also build it in for Asia and Europe. But as of today, it's only for the U.S. And we believe that our capitalized business model will continue. We're committed to it. We believe this is the right way to do it. One of the things that always surprised me is the quality of the contracted manufacturers that are available in the U.S. and what these people can do for you, how they do it, and how much value they can create out of it. We are very, very happy with our contracted manufacturers.

Thank you. And maybe as a follow-up, could you discuss the cell supply situation and whether or not it's improved incrementally over the last few months? And what, if any, other equipment may be causing bottlenecks still for deployments? Thank you.

Yeah, thanks. You know, the battery situation is improving. We haven't had any delay. I know the market's tight, you know, generally. But, you know, our relationship with our suppliers, our ability to engage with them, and our scale allows us to ensure that we have no issues, you know, on the delivery of batteries on time and on the terms that we agree. You know, I would say that, you know, that's generally clearly a major part of our supply chain. I don't see any other market where, you know, that we're concerned about. Clearly, we are constant. This is one of the reasons why we believe scale is so important. In order to manage our supply chains effectively, our scale and our close relationship with suppliers are huge.

Thanks. Thank you.

Our next question comes from Mahit Mendloy with Credit Suisse. Your line is open.

Hey, good morning, and thanks for taking your questions. Just maybe on the previous question, could you understand the difference between the Fluent Stack and the Fluent Cube? Just trying to understand the core difference here. And part of that is just... to get the domestic content added under the IRA, would the new systems qualify just with the battery pack manufacturing in the U.S., or would you have to procure the batteries from the U.S. market as well?

Thanks. Good. I will, you know, maybe later, Rebecca. Before we start, I think it's important. The regulations of what will be considered a U.S.-made battery module system have not been issued. It is still unclear how down, how upstream they will go, whether they will go only for the assembly, which I think that will be more than that, whether they will require steel to be from the U.S., whether the cells need to be from the U.S., or further down, whether the mining needs to happen. What we're doing is we're building a strategy of not regretting things that we believe that in any event will be included and try to go upstream as much as we can. So to ensure that we can meet the qualification. But the reality is that today, we are in a way flying, you know, it's not clear that the regulations have not come. There's some, you know, there's a buy American type of rules in the U.S. So I need some guidance. What you should use, but there's no, you know, that we today do not have certain. Just to let you know. So we're working on it. And we're working on moving as much value out as we can into the U.S. making decisions that the influence make that are not regret decisions. We believe that no matter what happens, we will have to build our modules in the U.S. in order to make that choice. We're also looking to, we're talking to battery cell manufacturers to buy cells in the U.S. looking to buy steel in the U.S. to try to create as much battery. That's where we are. I'll let Rebecca answer the first part of the question.

Sure, thank you. Hi, Mahid. So to clarify your question back to, it's just that you're looking to understand the difference between the Fluence Cube and what we might call UltraStack or GridStack. So you can think about the way we design products as we build a platform first. In the platform, we have this thing called a cube, which is the enclosure with the batteries inside of it. But our platform also includes inverters, control systems, fire safety systems. And we put all of those pieces together in well-defined units that create our stacks. So GridStacks, for example, is a product on top of that platform that is inclusive of inverters, control systems, cubes, et cetera. And we send out grid stack units. That's what we sell. We announced today UltraStack, which is another version of that product that sits on that same platform. We didn't recreate the platform. It's the platform that's been out in the world and well-tested, et cetera. But the product that we announced today, the UltraStack, where its differentiation really lies is in the configuration. control system so it's a highly redundant system because of the work that it needs to do with the transmission operators it responds to the grid very quickly in 150 milliseconds now that will go down to 100 milliseconds in the future and it does all kinds of cool things like it has a really high reliability feature it has a very high effort on power oscillation damping which helps just the grid become more stable so it's a different product and the real differentiation in that product for that ultra stack compared to grid stack is in the control system. And I would mention, just to connect back to something earlier, that's where we can also start to look at higher margin deals, because when we create such a set of differentiation with our technology, it makes it easier for us to look for that double digit or more margin.

And if you can say anything, you go to the site, they all look the same.

but they do very very different not the way you think is our own thank you see that they'll set you look they look the same for their to it to the grid and to our customers offering them

We have our next question. It looks like it comes from Mark Strauss with JP Morgan. Your line is open.

Excuse me. Good morning. Thanks for taking our questions. I wanted to go back to the IRA. The $10 per kilowatt hour that you're calling out for the module's is there a good rule of thumb that we should be assuming as far as how much of that you keep versus what you share with your contract manufacturer or kind of pass on to your customers?

Yeah, we will, you know, we will keep it. From a point of view, I think that's important. This is part of our whole product design strategy. So you should not look at this as something that will ask, It will be part of our 10% to 15% margin as we go forward. It will be part of our price position or our cost position.

And that's how it comes with our contract manufacturers, but we believe we can keep most of the 10 bucks.

Okay. Thank you. And then just a real quick follow-up, Manu. The pipeline metrics that you're providing, you're taking a bit more conservative view of what was reported previously. Can you give some more color on what's going on there? Is that just kind of the likelihood of that pipeline, kind of the timing of that pipeline? Anything else to call out?

I think the two things I'd say. One, we raised the bar on both the likelihood and the length of profitability, which kind of goes in line with our general theme around foreclosure. kind of a little bit of color on how we thought about pipeline or, you know, here in reporting. I would point out the fact that we have close to $8.5 billion of pipeline, which I would imagine with the higher R and the lens of profitability, I think it also lends itself to a tad bit higher conversion than what we have previously said. So we could have bought not just the backup position we are in, off of the funnel that sits behind the pipeline.

Okay. Very helpful. Thank you. Thank you, Marvin.

Our next question comes from Julian Dumoulin-Smith with Bank of America. Your line is open.

Hey, good morning. Pleasure to chat here. My name's Jake, and my pleasure. Congrats again. If I can, just to come back to the cash conversation quickly here, how are you thinking about 23 here and a little bit on 24? And obviously, adjusted EBITDA pressures are what drove the cash burn here past tense. How are you thinking about prospectively here, if you will, a little bit, on 23 and the totality until you get to a cash positive, EBITDA positive world?

Sure, Julia. Just from a cash perspective, let me start with how we think about it. First of all, our model is asset light and an operating cash efficient model, which means as you bridge from EBITDA down to cash, we have very low capex and operating cash usage that we have dimensioned for 22 and 23 at 10% of credit. With most of the cash usage in 23 being driven by our EBITDA performance with a little bit of cash being used for CapEx and then 10% of our revenue growth kind of taking the bridge all the way to the bottom line. That starts to turn pretty precipitously in 2024 where we believe we'll be close to breakeven for cash, not all the way there. We'll be breakeven EBITDA and then as we get to 2025, we expect to start generating What I'll close with in terms of my comments is, one, there's a little bit of cash timing between first half and second half. And the second thing is we feel very comfortable with the cash in the books plus our unused revolver in terms of our ability to meet our cash needs until the time we get to cash policy.

If you look at the balance sheet here, there was some consumption, some pieces.

Can you talk about that?

Yeah. So, if you're listening to 2022 fourth quarter working capital usage, So if you start with, you put the total year in context, and then I'll bring to close what happened in both quarters. If you put the total year in context, you put a bridge out there as well. The operating cash, which is principally working capital, as well as some money that we collect from our customers as prepayments, which is also part of the expanded definition of working capital, it was about a 10% usage in terms of our revenue increase during the year. So that was our total consumption for the total year. As you pass the quarters, most of the cash usage in the fourth quarter was effectively us making good in terms of buying inventory and paying off our suppliers. That was in execution of our project. That was already funded in the most part at the beginning of the year. from a customer prepayment perspective, which is why you see that phenomenon in the fourth quarter. But as you zoom out and look at the total year, you don't see that as much. That model will continue, which we really like, because it is a very working capitalization model.

Got it. Thank you, guys. Thank you, Yudit.

One moment. Our next question comes from Ben Callow with Baird. Your line is open.

Hey, good day, guys. First, just maybe backing up to the competitive environment. I know you guys have only been there 90 days, but how are you seeing bids change just in terms of the number of competitors and why someone like an Orsted would pick you? How crowded is it in competition terms? And then my second question, just in terms of tight labor supply. How do you guys think about that as the IRA rolls out into next year and there's going to be a boom in projects, we think. So how do you think about labor in that environment? Thank you.

Thank you, Ed. Maybe the rule of thumb is the following. As you go up in the complexity scale, you know competition gets less you know yes you know software so if you go to a simpler solution where you see a lot of these startups you know there's a lot of competition as you go off the scale either because the product the projects are very big or they need specific characteristics or features that we can only deliver then the competition you know kind of you know wrinkles a little bit and it becomes easy not on our side of the valley always need to find and i think that you know why do people pick us which is a little bit why do they select us i guess you know the reasons that we have we talk to our customers our ability to manage complexity both in terms of project or product our safety features you know we have a problem which is very you know it has proven to be very very safe we have gone through burn tests we have done And then, you know, our end-to-end solution, the fact that when people hire, they know they will have a partner for the next 20 years that will deliver. And we have seen it today, you know, with new regulations coming in place in Europe. The U.K. is here. We were out there releasing the apps and helping our customers, ensuring that they will meet these new regulations and take advantage of this opportunity. So I would say those are the three things, you know, complexity, both in product and project. You know, the... safety you know and they are they see us as a partner that will you know offer them you know we'll continue with them and that's the driver thank you one moment for our next question our next question comes from sean mclaughlin with hsbc your line is open

Good morning, gentlemen. Thank you for taking my questions. Firstly, just on the IRA, you've talked about your expectation for the first orders in June 23. I mean, will there be a lag into that? Are customers waiting until they understand the full complexities and details of the IR from the IRS over the next quarter or so? And also then, I mean, how... Should we think about the actual volume of orders? Are we going to see a real explosion in June or is it a kind of a gradual ramp up over the 12 months from June? Any color there would be helpful. The second question, just on UltraStack, your first success has been in Europe. I mean, is this a product targeted at the European market and are the margins in Europe actually better than in the U.S. market? Thank you.

What we have, you know, in our conversation with our customers, they are working on these standalone storage projects. They are, you know, working on the, you know, looking for the sites, identifying the connection points. I think this will be a gradual increase. I don't think they will come as a, you know, all of them started in June will get to the full amount as they go forward. I think they will start coming in the way I've seen these projects develop. The ones we'll see first are the ones that are easier, that are connected closer to transmission lines where they can connect easier. The substation, you know, has some spare capacity. And as we move along, they will continue moving forward. So that's the way we'll see it. It takes a little while for these projects to be, you know, for our customers to be ready to have this In terms of our transmission grid, we see this as a global problem. You know, we started in Europe, we started in Lithuania. You know, that's where we had a 200 megawatt hour process with this grid. Now we're in Germany. Clearly, in Europe, there's a lot of need for this because they're looking to integrate and strengthen. But, you know, the U.S. has a major, major challenge in order to do this, in order to make this work. We are also working in Chile, where we have talked and worked with the regulators there to ensure they understand the value. So we have been successful there, and we hope to see vendors coming out for this type of solution in Chile very soon. And then we're working in the U.S. with our sales team, talking to regulators, to customers, and so we can create a regulatory base for these to join. We are confident that it will happen.

these are global, a global demand. Thank you.

Our next question comes from Pavel Molchanov with Raymond James. Your line is open.

Thanks for taking the question. We talked a lot about the US and Europe. Historically, you've had a strong presence in the Australian market. where there is more and more talk about storage as part of the new Labor Party climate policy. Can we get an update on what's happening in Australian demand?

Yeah, we have a very, very strong pipeline in Australia. We're working with good clients and customers who have a few projects that are coming along. And I think that you will see some projects, some significant projects coming into our backlog for the year. We don't disclose numbers by market, but we're confident this is one of clearly a market that is showing to be, it appears to be very, very promising for 2023 for our fiscal year. Okay. Sounds good.

Given that you're vertically integrating, but you'll still be insourcing battery cells, is there any appetite to look at chemistries beyond lithium ion, so nickel-zinc, vanadium, iron flow, any of these new battery models that are starting to scale up?

I'll let Rebecca answer that one.

Sure. So in the short term, we, of course, look beyond a single type of battery and currently use both LFP and NMC batteries in our solution. We work very closely with our battery OEMs to look beyond that as well. Our platform is designed such that it's agnostic, so we can absorb whatever kind of battery solution is out there that meets the sort of customer ROI requirements. And the next thing I would say that we would look at would be solid-state batteries and sodium, with sodium being the

the one that we see the nearest term right outside of what we're doing currently with LFP and LNC.

Understood. Thank you very much. Thanks. Thanks, Lavelle.

Our next question comes from Ryan Levine with Citi. Your line is open.

Good morning. Everybody? Just to focus on... Okay. With the focus on profitability, has the company slowed its hiring, or can you provide color on your views on the tools to manage the cost structure?

So what we're doing in terms of people, you know, we're looking at our Intel Technology Center. It has been a very, very successful addition. We already have like around, you know, 100 people there, and we have been – we attracted great tasks. We're very happy with the, you know, contributions they have done, you know, they do in our product development and so on. So we are looking at expanding that facility to support some of our other areas, you know, our back office of digital development, continue helping us on product development and supply chain. So that's what I think will be the main driver of our improvements in efficiency. You know, we will, as Manu mentioned, we believe our SG&A will grow at a rate that will be half our revenue growth. So we will continue to become much more efficient in terms of revenue production with our current cost structure as we move forward.

Thanks. And then on that vein, can you provide color on the pace of adjusted gross margin recovery you're seeing for 23 from the 3.4% in the recent quarter towards the double-digit target that you highlighted? by the end of next year.

Yeah, for sure. And I'll also point your attention to slide 21 where we mentioned it. So, you know, two principal drivers of our confidence level in getting to a much higher gross margin compared to 22 when you look at our guidance for 23. One is, I think, you know, a lot of our – well, our execution issues from 2012 were understood in large numbers, right? you saw early signs of that in our fourth quarter performance. That's a big driver, and you've mentioned that on slide 21, in the range of 23 to 33. And then we are signing new deals that add up close to double-digit margins. That is already in our backlog, and that starts to bear fruit in 23, when you think in terms of gross margin delivery. I will point out that we do have let's call it our legacy contract that we'll have to work through the fiscal year 23. So by the time we exit 23, which for us is September 30th, you will start to see the double-digit run rates start to show up in our results and definitely pretty pure play going into 24. That does drive our confidence level in getting to adjusted EBITDA breaking 24, given the operating leverage comments that are

Just want to make sure we're hearing that right. So are you saying that the step up is really going to come towards the last quarter of the year and that we won't see a more radical recovery of the gross margin?

I think you'll see improving gross margins quarter on quarter as the new deals kick in into revenue and we go through the old deals and fourth quarter of as you pretty much worked through most of our legacy.

Appreciate the cover. Thank you.

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

Hi. Thanks for squeezing me in. I appreciate it. Just one topic left for me. I know we've run over, so I'll try to keep it short. About two weeks ago, the California Public Utilities Commission approved PG&E's request to amend four of its midterm reliability contracts for storage. Apparently, all four storage contracts have had their pricing raised, three have had their schedules delayed, and one has had its size cut in half. Could you speak to the implications of these changes, especially the approved increase in pricing, for your current backlog and expected future awards for California?

you know very very seriously I'm not aware of of these issues that you're just raising with me so you know I'll have to get back talk to my sales team I guess there hasn't been an issue material enough that has come up to my attention but we'll take a look at it and you know continue I think in general we are thinking right now I thought I probably not attributed to just one single phenomenon and let's get off

by the question of actual measurement.

Great. I appreciate that. And then could you just give us an idea of what California represents as a percentage of your current backlog?

We're not providing numbers per market because then we'll get into this. But I'll tell you this. California is clearly one of our most attractive markets. And in the U.S., it's a market where we're seeing a lot of demand and where we see a lot of opportunities. That's what I will say.

Maybe what I think about it is, you know, our revenue, you said two-thirds. If you look at our historical revenue, and I think the backlog is representative of that, I think two-thirds of our revenue comes from the Americas. Within the two-thirds that comes from the Americas, California is leading proportionally. Do not break it down by state for the Americas.

That's right.

That's helpful. Very attractive market.

Right. I figured it was worth a try to dig a bit deeper, but I appreciate the help. Thank you.

Thank you. One moment for our next question. Our last question comes from Craig Cherie with Chewy Brothers. Your line is open.

Good morning. Thank you for squeezing me in. I've got a quick near term and then a longer term focus question. Near term, people seem positive about China opening up and the end of zero COVID, but perhaps for some quarters, people might actually be getting COVID and we might have disruptions that won't last forever. But I wanted to inquire about your contingencies and thoughts about those risks into next year on the supply chain. And then longer term, I was truly amazed at the AES Air Products announcement for their Texas Hydrogen JV. And I wonder if you can comment on the degree to which, obviously you work heavily with AES, but the degree to which BEST has a huge opportunity in the nexus of clean supporting dedicated intermittent renewables that then produce steady-state green hydrogen production.

I mean, on the hydrogen, clearly battery storage will play a role in renewable sources for that game it will depend a little bit on there is much more important robot you are producing ammonia which approach because electrolytes are easier to adapt to changes while the the ammonia production systems require more stable so depending on what what how you are organizing your hydrogen production whether you're going on the way down to a producing, operating the electronics.

So that's what I would tell us if we continue to work. And on the 2023 risk, yes.

Well, you know, we continue to be exposed to change. You know, we are a significant portion of our, you know, our batteries come from China, not all of it, but a significant portion of it. And clearly, this is an issue of concern for us. Our concern is something that we care about, and we're looking to work towards diversifying out of China as much as possible. The fluency will allow us to do that. It will allow us to move more and to make it easier to move production. But we continue working with producers in Europe and in other Southeast Asian countries, and we're looking to continue to diversify. still a major supplier. We haven't seen any issues. There are no problems in production in any of our suppliers. There have been no problems in shipping sub and logistics. We have no signs of any disruption at this stage. But clearly, when we look at our risk management capabilities, it's something that we spend time on to ensure that we can manage any potential disruption. Thank you. I want to thank everybody for participating. As I said at the beginning, I could not understand what I was saying when I was reading the script. Clearly, my voice, the mic, and the speakers in my room and my accent did not work very well. We have the script in the IRR website. Please take a look at it. If you have any questions, contact Lex, and we will gladly answer them. We'll assure you that next quarter, this won't happen.

So thank you very, very much for your time, and be awesome.

This concludes today's conference call. Thank you for participating. You may now disconnect.

The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.