Fluence Energy, Inc.

Thank you. Good morning, and welcome to Fluence Energy's second quarter 2023 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 on the investor relations section of our website at fluenceenergy.com. Joining me on this morning's call are Julian Nabreda, our President and Chief Executive Officer, Manu Seow, our Chief Financial Officer, and Rebecca Bull, our Chief Products 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 filing for our forward-looking statements and for more information regarding certain risks and uncertainties that could impact our future results. View our caution to not place undue reliance on these forward-looking statements, which speak only as of today. 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 on 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 in today's call. This morning, I will provide a brief update on our business and then review our progress on our strategic objectives. Following my remarks, Manu will discuss our financial performance for the second quarter, as well as our outlook for the rest of the fiscal year. Starting on slide four with the key highlights, I'm pleased to report that in the quarter, we recognized our record $698 million of revenue and $32 million of adjusted gross profit. our demand was strong across all three of our business lines. And new orders were approximately $847 million highlighted by our services business contracting one gigawatt, and our digital business contracted 2.7 gigawatts. Furthermore, our signed contract backlog as of March 31st was $2.8 billion, a quarter-over-quarter increase of approximately $100 million. even after recognizing almost 700 of revenue during the quarter. I will also note that approximately 81% of our backlog is with non-related parties. Lastly, our recurring revenue businesses, which consists of services and digital, experienced a strong growth during the quarter. Our service attachment rate was 263% for the second quarter, driven by the signing of the service agreement with ORSA. Furthermore, our deployed service attachment rate, which is based on our cumulative active service contract relative to our deployed storage, remains above 90%. Looking specifically at our digital business, we had a very strong quarter as we were able to contract 2.7 gigawatts, which is a 200% increase from the previous quarter. These are early signs that our strategic direction is progressing successfully. Furthermore, we added approximately 800 megawatts of digital assets under management. We still have a lot of work to do regarding our digital business, but we are very encouraged by the results thus far. Turning to slide five, I'd like to discuss the five strategic objectives that we highlighted previously and provide you with an update on our progress. First, on delivering profitable growth. I'm pleased to report that we are raising our fiscal year 23 guidance for both revenue and adjusted gross profit. As Manuel will discuss in more detail, we're able to raise our guidance due to better execution, causing some of our projects being ahead of our expected schedule. Additionally, I'm pleased to report that we're pulling forward our profitability timeline. As you may recall, We previously expected to be adjusted EBITDA positive in fiscal year 24. We do not provide quarterly guidance. However, we're expecting to be close to adjusted EBITDA breakeven in the fourth quarter of fiscal year 23. Second, we will continue to develop products and solutions that our customers need. As such, I'm pleased to report that we received a 200 megawatt binding award for our Ulster Strat product. making this our third award of energy storage at transmission. As I noted on our previous calls, we are very bullish on the transmission segment and expect this area to grow as transmission congestion becomes a critical issue around the world. Fluence is well positioned to make a significant impact for our customers and ourselves by addressing this growing problem, as we are one of only a handful of companies in the world that possess the technology, experience, and performance requirements necessary to use energy storage as a transmission asset. Third, we will convert our supply chain into a competitive advantage. I'm pleased to say that we have signed a master supply agreement with ASC, under which we will procure battery cells. This partnership adds another high-quality battery supplier to Fluence portfolio. enhancing our ability to meet the growing demand for any storage solutions. This agreement supports our domestic module manufacturing efforts and strengthens our position as a leader in the energy storage industry. Fourth, we will use Fluent Digital as a competitive differentiator and a margin driver. Looking out at our NISPERA product, starting this month, we will begin including NISPERA in our standard hardware solutions offerings. This is an important step as it will provide us with a path to increasing our IRR as we bundle our offerings and execute on our one-cell channel approach we discussed last December. And finally, our fifth objective is to work better. I'm proud to state that Fluent has published its inaugural sustainability report on our website. In this report, we outline our commitment to a circular economy that includes sustainable end-of-life management for our products, as well as our firm stance against forced labor. To publish a sustainability report this quickly after becoming a public company is a true testament to our values and mission to transform the way we power our world for a more sustainable future and demonstrate our leadership within the sector. Turning to slide six, demand for energy storage continues to accelerate. In fact, our pipeline now sits at $11.2 billion, which is up from $10.3 billion last quarter. We expect we will start to see some projects award in the second half of this calendar year that are directly attributable to the Inflation Reduction Act. We reaffirm consolidated revenue growth of 35% to 40% year-over-year for fiscal year 24, irrespective of the issuance of the final IRA guidance. Our 23 guidance increase and the incrementally higher 24 outlook represents an expected benefit to revenues of nearly $500 million over this two-year period. Relative to our expectations on our Q1 earnings goal, conference three months ago. It is worth noting that we're seeing and having success regardless of the IRA. A few examples of recent successes include the binding award in the transmission segment that I previously mentioned. Two, we were recently awarded a 400 megawatt hour contract in Australia for Shell's energy range back project. And as you may recall, we signed a 1,200-megawatt-hour contract with Orsted in December. And during Q2, we signed a service agreement for this project. All of these were achieved without consideration of the Inflation Reduction Act. Turning to slide 7, we are pleased to see that some of the initial IRA regulations have been released by the U.S. Treasury. However, we are still waiting on the domestic content regulations. but we believe the actions we are taking will enable us to meet the domestic content requirements sought by our customers. In regards to our U.S. module manufacturing, we are on schedule and expect production to start in our Utah facility in the summer of 24. As it relates to Section 45X of the IRA or the production tax credit, we are targeting to be able to record the $10 per kilowatt hour incentive associated with manufacturing U.S. battery modules. Right now, we do not expect that we will capture incremental margin as a result of manufacturing our own modules in the U.S. We do believe it will be a volume driver for us, as many of our U.S. customers have expressed the need for a U.S.-made product. Thus, we expect the $10 incentive will go towards offsetting the cost of reaching economies of scale. From an accounting standpoint, our current expectation is that we will account for the $10 per kilowatt hour incentive on our income statement as a reduction to cost of goods and services. However, this could change based on the final guidelines. Furthermore, we expect to elect the direct pay provision for the first five years of the credit. The exact timing of the cash payment is unclear at this time, as we are still waiting for the clarification from the US Treasury. Currently, we're eagerly waiting for the publication of the IRA guideline for any storage and domestic content, as several of our customers want the final details that it will provide before moving forward with contracts. We encourage our policymakers to act swiftly. However, as I mentioned, Our 24 growth expectations remain unchanged, irrespective of the final regulations being published. Turning to slide eight, as I briefly mentioned, we recently published our inaugural sustainability report, which highlights our vision to implement digital solutions to further optimize the energy storage supply chains and lifecycle. I'm pleased to state that we're committed to promoting social sustainability by fostering diversity and inclusion within the organization. We believe this is essential to develop the innovative organization we need. We aim to increase diversity within the organization by setting targets for diversity hiring. We have established a target for fiscal year 23, which includes that approximately one-third of our employees hired have identified themselves as female. In the report, you will also see that end-of-life management is very important to us, and we have committed to developing a circular economy framework for our products. Additionally, we highlight in the report that we have established a robust supplier code of conduct that is aligned with the International Bill of Human Rights at Work that ensures that our suppliers adhere to ethical and sustainable business practices. We summarize our policy on conflict minerals and ethical sourcing, in which we commit to working towards avoiding the use of minerals within our supply chains from conflict-affected areas. Furthermore, in the report is a signed commitment letter taking a zero tolerance stance regarding forced labor. This is an area that is critical to our values. We also include a roadmap and timeline so our stakeholders can monitor our ESG journey. In the spirit of accountability to transparency, we will provide an update on our sustainability program annually so our stakeholders can track our year-over-year progress. Overall, Fluence Energy's sustainability report demonstrates the company's commitment to sustainable practices and its efforts to drive positive environmental and social impact. to its various initiatives and targets, Fluence Energy is working towards a more sustainable future for all. In conclusion, I'm very pleased with the achievements of the second quarter. Although we're mindful there's still a lot of work to be done, we will look to continue this momentum with progress through the end, the remainder of the year. I will now turn the call over to Manu.

Thank you, Julian. I will begin by reviewing our financial performance for the second quarter. and then discuss our guidance for fiscal year 2023. Please turn to slide 10. Our second quarter revenue reached a record high of $698 million with a record adjusted gross profit of $32 million. Revenues benefited from a pull forward of more than $200 million into the second quarter from the second half of this year, driven by improved project execution on select projects relative to our expectations and aided by the availability of materials. In the second quarter, more than 85% of our revenue, or roughly $600 million, came from legacy contracts. The revenue that we pulled forward into the second quarter was associated with legacy contracts, and we now anticipate that almost all of our low-margin legacy backlog will be turned over by the end of this fiscal year. Since we are working faster through our legacy backlog, we are set up well for significantly higher margin rates in the second half of the year when compared to the first half. With regard to operating expense and adjusted EBITDA, second quarter operating expense excluding stock compensation of $61 million or approximately 9% of revenue, which is down from approximately 17% of revenue in the first quarter. We remain disciplined about holding our operating expense growth to less than 50% of revenue growth and expect this model to create operating leverage in 2023 and beyond. Turning to our cash balance, we ended the quarter with more than $380 million of total cash, including short-term investments and restricted cash. This figure is in line with our comments on our first quarter earnings call. Rounding out the balance sheet discussion, And in line with prior communication, we saw a decrease in inventory of approximately $300 million in the second quarter 23 from the first quarter 23 level. Our decision to focus on battery supply chain assurance and risk management has enhanced our ability to deliver projects ahead of earlier expectations. Given the improvements in the supply chain environment, And as communicated in our last earnings call, we should expect improvement in inventory returns through the end of the current fiscal year. We continue to believe that we do not need to raise any additional capital to meet our needs and have ample liquidity to meet our cash needs for the next 12 months. Please turn to slide 11. As Julian indicated, we have increased our fiscal year 2023 guidance ranges for both revenue an adjusted gross profit, and narrowed the ranges. We now expect our total revenue to be between $1.85 billion and $2 billion, which is up from our previous revenue guidance of $1.6 billion to $1.8 billion. This is an increase of $225 million based on the guidance midpoint. Driven by our overall project timeline acceleration, While we expect that most of our projects will be executed within the 15 to 18 month timeframe that we have previously discussed, we are seeing faster progress on certain projects compared to prior expectations and thus expect this trend to continue in the future, benefiting both the second half of this year as well as fiscal year 2024. This improvement is attributable to better supply chain visibility and improved execution as we leverage lessons learned from prior projects. We are also coming into the third quarter with 100% of our second half 2023 expected revenue in our backlog. Turning to our 2024 revenue outlook, we continue to expect 35 to 40% growth in revenue from 2023 to 2024. Notwithstanding the higher revenue base we now see for 2023, this implies an incremental $300 million of revenue for 2024 relative to our previous outlook. Thus, for the two-year period 2023 and 2024, we now see revenues of more than $500 million higher than what we had conveyed on our Q1 call. We also increased our guidance for adjusted gross profit to be between $110 million and $135 million, which is up from our previous guidance of $85 million to $115 million. It is important to note that this implies an increase in gross margin of approximately 50 basis points to 6.4% based on the guidance midpoint. Before I turn the call back to Julian for final comments, I would like to reiterate that we have high confidence in our ability to be close to adjusted EBITDA breakeven during the fourth quarter. With that, I will turn the call back over to Julian.