Fluence Energy, Inc.

Good day, and thank you for standing by. Welcome to Fluence Energy Incorporated's fourth quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Lexington May, Vice President, Investor Relations. Please go ahead.

Thank you. Good morning and welcome to Fluence Energy's fourth 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, Rebecca Boll, our Chief Products Officer, and Ahmed Pasha, our incoming Chief Financial 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 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. Also note that while Ahmed is participating on today's call, he is not going to be participating in the Q&A session. and thus please direct your questions to the other members of the team. Thank you very much. I'll now turn the call over to Julian.

Thank you, Lex. I would like to send my warm welcome to our investors, analysts, and employees who are participating on today's call. This morning, I will provide a brief update on our business and then review our progress and our strategic objectives. Following my remarks, Manu will discuss our financial performance for the fourth quarter and then I will discuss our outlook for fiscal 24. Before we begin our discussion on the fourth quarter results, I'd like to spend a few moments addressing the announcement we made a few weeks ago. Manu has decided to step down as CFO of Fluence. He has done a remarkable turnaround job here, and as a result, he caught the attention of others. He received an offer he could not refuse, and more importantly, one that we could not match. At such, he will be leaving effective December 31st to become CFO of another company in a different industry. On behalf of the board, I would like to send a sincere thank you to Manu for the value he helped create at Fluence the past 15 months. Additionally, I would like to send a warm welcome to Ahmed Pasha, our incoming CFO. Ahmed will officially assume this role on January 1st, thus ensuring a sufficient transition period. Ahmed comes to us from AES, where he had a 30-year career, most recently serving as the CFO of the Utility Business Unit. I personally have worked with Ahmed for many years, and I am excited to continue that affluence. Now I would like to turn the call over to Ahmed to make a few remarks.

Thank you, Julian, and good morning, everyone. I am excited to be joining Fluence at a time when energy transition is achieving critical momentum, which presents so much opportunity for the company and for energy storage in general. As some of you may know, I have had some experience working with Fluence during my tenure at AES, including during the IPO process and more currently as CFO of the U.S. utilities business, where Fluence is playing a critical role in helping to transform our energy mix. Since the announcement about two weeks ago, I have had the opportunity to meet with some members of Fluent's team, and I'm very impressed with their experience and commitment to enabling the global energy transition. I look forward to working with them and helping Fluent to achieve its ambitious growth and profitability goals, increase shareholders' value, and deliver on its mission to transform the way we power the world. I would like to express my appreciation to Manu for his invaluable contributions to Fluence, particularly the strong foundation he has established to position us for continued success in the future. In the near term, I will be getting up to speed on things, but I expect to meet with many of our investors and analysts in the coming months. I look forward to hearing their views and sharing how we plan to achieve our key financial and strategic objectives. With that, I will turn the call back to Julian.

Thank you, Ahmed. Beginning of slide four with the key highlights, I'm pleased to report that in the quarter we recognize $673 million of revenue. We continue to experience strong demand for our products and services with new orders totaling approximately $737 million, highlighted by a solution business contracting 2.1 gigawatt hours, our services business adding 1.6 gigawatt hours, and our digital business adding 1.8 gigawatts of new contracts. Furthermore, our signed contract backlogs as of September 30th remain at $2.9 billion due to the acceleration of select projects ahead of schedule. Turning to adjusted EBITDA, we delivered approximately $20 million for the quarter. This is a tremendous milestone, as we achieved this level ahead of schedule. As you recall, we expected to be close to adjusted EBITDA breakeven for the fourth quarter. However, we were able to accelerate select projects that resulted in high revenue and margins for the quarter. One of the areas we're concentrating on is organizational speed, especially reducing our project cycle times. We see a lot of value in reducing our cycle times from the roughly 18 months to closer to 12 months. We believe it will take us at least two years to reduce our cycle times down to 12 months. These quarter results are a perfect example of what speed can do to bring increased value to both our customers and our shareholders. Lastly, our services and digital business. which together represent our recurring revenue stream, continue to see traction. Our deployed service attachment rate, which is based on our cumulative active service contracts relative to our deployed storage, remains about 90%. As we have noted previously, we typically see a lag between signing solution contracts and entering into a service contract, which is why we believe that cumulative attachment rate is important to monitor. Turning to our digital business, we had a very strong quadrant as we were able to contract 1.8 gigawatts. More importantly, our digital assets under management increased by more than a gigawatt, and the total number reached 15.5 gigawatts as of September 30th. Turning to slide five, I'd like to highlight some of our accomplishments of the past fiscal year. As you may recall, a year ago, we embarked on the transformation of our business. I'm pleased to report that we delivered on our commitments to the market. We grew our annual revenue by 85% and achieved our first profitable quarter. Importantly, we exceeded our original annual revenue guidance by more than $600 million thanks to improved execution, easing supply chains, and project timeline acceleration. We burned through almost all our legacy lower margin backlog, and we diversified our supply chain, including securing US-made battery cells with ASC. With the rollout of Fluence07, we have integrated Nispera into our hardware solutions on a go-forward basis so that now every new storage solution cell has Nispera bundled into it. We built out our India Technology Center and we published our inaugural sustainability report. A successful year that sets the tone for the years to come. Turning to slide six. I would like to discuss progress on our five strategic objectives. As you recall, at this time last year, we laid out five strategic objectives that will guide our actions and markets that our investors could monitor and measure the company performance against. As we generated our first profitable quarter, I'm pleased to say the first phase of our transformation is complete. The second phase is just getting started, which will continue the theme of profitable growth. now measured through the growth of our nominal adjusted EBITDA and annual recurring revenue, or ARR, alongside the other strategic objectives that will continue to guide us on the second phase of our journey. First, on delivering profitable growth, I'm pleased to report that we exceeded our fiscal year 23 guidance for both revenue and adjusted gross profit. Today, we're initiating guidance for fiscal 24, We expect total revenue for fiscal 24 to be between $2.7 billion and $3.3 billion. In line with our commitment from our last call, we are initiating guidance for adjusted EBITDA for fiscal 24 to be between $50 and $80 million. Second, we will continue to develop products and solutions that our customers need. As such, I'm pleased to report that in October, we launched GreekStack Pro, our larger enclosure provided higher density faster installation, enhanced performance, and industry-leading safety. In conjunction with the launch of Grixar Pro, we also launched Fluence 07, the latest Fluence operating system designed with enhanced capabilities and fully integrated with the new Fluence battery management system, which I will touch on more in a few minutes. Sir, I'm pleased to report that we have secured all our battery needs for fiscal 24 and 25. Fourth, we will use Fluence Digital as a competitive differentiator and a margin driver. I'm pleased to report that we are initiating guidance for our annual recurring revenue from our combined service and digital businesses. We expect to generate around $80 million of ARR by the end of fiscal 24. And finally, our fifth objective, which is to work better. I'm proud to say that just recently we have launched a new $400 million asset-backed lending facility, or ABL. This great facility is secured by your U.S. inventory, and we expect it will provide us increased flexibility. More importantly, we believe that the ABL facility provides us additional tools to manage our working capital as we continue to grow. Turning to slide seven. Demand for any storage continues to accelerate. In fact, our pipeline now sits at $13 billion, which is an increase of approximately $600 from the third quarter, and a 50% increase compared to this time last year. Additionally, as I mentioned, with our backlog remaining consistent at $2.9 billion, even after recognizing almost $675 million during the quarter, Importantly, we had several contracts that were signed to subsequent to quarter end amounting to approximately $400 million, which provides us with strong visibility to achieving our 2024 revenue guidance. This is the eighth consecutive quarter we added more backlog than revenue recognized, further illustrating the growing demand for any storage. Based on the conversations we're having with our customers and potential customers, We are expecting to see top-line year-over-year revenue growth from fiscal 24 to fiscal 25 of approximately 35% to 40%, showcasing the robust market for utility energy storage. Turning to slide 8, as I mentioned earlier, we launched our grid stack pro and OS7 in fiscal year 24. These product launches are something our stakeholders should expect periodically from us. we continue to innovate and identify new ways to serve our customer needs when you look specifically our greek stack pro solution this is a much larger product that integrates six battery racks and is designed for the largest and most complex utility skills projects globally greek stack pro will offer our customers a denser product with leading safety measures faster deployment first-class reliability, and the flexible modular design that defines our product offerings. More importantly for the U.S. market, the Fluence Battery Pack will be available in U.S. manufactured battery cells and modules. This positions GreekStack Pro as one of the first energy storage solutions to qualify for the 10% investment tax credit domestic content bonus under the Inflation Reduction Act. In conjunction with GridStack Pro, we launched OS7, the next generation of our operating system. This iteration is meant to handle bigger and more complex projects, and can reliably control more than one gigawatt hour system, and is fully integrated with the Fluence battery management system. The software also provides a foundation for future enhancements to the architecture, and enables component commoditization just as DC to DC converters. It provides new tools targeted to reduce our commissioning times, which, as I mentioned earlier, is a key area for the company. And importantly, OS 7 comes standard with a NISPERA platform already preloaded. This is an important feature, as we expect to provide all our product deployments with basic NISPERA access for a certain amount of time, after which customers will be required to sign a longer-term contract if they wish to continue using the APN platform for the best facility or wish to upgrade to additional features. Turning to slide 9, I'm pleased to say that earlier this week we secured a new $400 million ABL facility. This provides us with an additional tool to help manage our working capital. The new ABL facility features a lower cost of capital relative to our legacy revolving credit facility by approximately 50 basis points, and is secured by a U.S. inventory balance, and is expected to provide us with more flexibility. As our U.S. inventory balance increases, so does our borrowing capacity. This ABL facility replaces our smaller $200 million revolving credit facility that require cash collateralization. As we enter fiscal year 24, we believe we have a very strong balance and an ample working capital facility necessary to scale our platform and achieve our 24 guidance. Shifting to slide 10, we're introducing guidance for annual recurring revenue, ARR. For our combined digital and business enterprises, our objective is to reach approximately $80 million in ARR by the conclusion of fiscal year 24, implying a notable increase of 40% from the preceding year. This target is well supported by a robust service attachment rate exceeding 90% and a full 100% attachment rate for NISPERA moving forward. Additionally, our strategic efforts are concentrated on advancing our Mosaic offerings. Current operational entry markets, Australia, CAISO, and ERCOT. It is essential to note that we are in the process of refining this platform, with substantial contributions not anticipated before 2025 as previously communicated. In conclusion, I am pleased with the achievements of the fourth quarter. Although we are mindful there is still work to be done, we will look to continue this momentum as we progress into a new fiscal year. I will now turn the call over to Manu.

Thank you, Julian. I will begin by reviewing our financial performance for the fourth quarter, and then I will pass it back to Julian to discuss our guidance for fiscal year 24. Please turn to slide 12. Our fourth quarter revenue was $673 million, an increase of 52% from the prior year same period, and 25% above the third quarter. We continued to execute well as we were able to accelerate some of our legacy backlog previously anticipated for fiscal year 2024, resulting in higher than expected revenue for the fourth quarter. We continue to expect a small portion of our legacy contracts will be recognized in the first quarter of 2024. Looking at our adjusted gross profit for the quarter, we generated approximately $78 million, or approximately 11.6%, in line with that commitment discussed on our third quarter call. and reflects an increase from our third quarter margins of approximately 4.4%. More importantly, this is an increase from the previous fiscal year of 2.8%. I'm pleased to say we have demonstrated cost discipline as our operating expenses, excluding stock comp as a percentage of revenue, continue to decline and ended up around 9% for the quarter. From a year-over-year comparison, Our 2023 OPEX percentage of revenue, excluding stock compensation, came in around 10%, which is below our 2022 results of around 15%, further illustrating our cost discipline. As a result of our strong execution in the fourth quarter, we were able to generate $20 million of adjusted EBITDA. And as Julian mentioned, this signals the first phase of our transformation is complete. As we have now become profitable, our focus will shift to growing our nominal adjusted EBITDA and ARR, which we will discuss further. Turning to our cash balance, I'm pleased to report we ended the fourth quarter with $463 million of total cash, including short-term investments and restricted cash. This represents an increase of more than $45 million from the third quarter. And as Julian mentioned, we secured a new $400 million ABL facility. This facility replaces our existing revolving credit facility and upsizes the amount of available borrow and should enable us to better manage the peak to trough elements of a working capital. When you look at our total cash balance combined with a new ABL facility and supply chain financing, we have ample liquidity putting us in an excellent shape to capitalize on the massive time in front of us. Please turn to slide 13. From a cash standpoint, we increased our total cash position by 11% relative to the third quarter. For 2024, we will continue to invest in technology, resulting in an expected use of cash of approximately $85 million. From a recurring CapEx assumption, a good run rate is between $20 and $25 million as this is the level we expect in a steady state environment without large non-reckoning investment items such as the technology, IT, and systems investments we expect to make in fiscal 2024. As Julian will expand, we expect to generate around $65 million of adjusted EBITDA in fiscal 2024, and we expect to see approximately $65 to $70 million change in operating cash due to increase in working capital requirements and includes our deposits for our U.S. manufactured battery cells from AESC. As we mentioned on our last call, our U.S. battery cell supply agreement with AESC called for a down payment of $150 million to reserve this capacity, which will be paid in installments over fiscal year 24 and fiscal year 25, and will be funded by liquidity and customer deposits for these batteries. The first $35 million will be paid in Q1 of fiscal year 24, and another $35 million will be paid in the second quarter of fiscal year 2024. As Julian and I mentioned earlier, we have a strong balance sheet entering 2024 and have ample cash and facilities to support our 2024 guide and investments that will support multi-year industry growth. We also expect to generate free cash flow in fiscal year 2025. Before I turn the call back to Julian, I would like to express my appreciation to the Fluence board, management team, employees, and shareholders for their trust. Serving as the CFO of Fluence has been one of the highlights of my career. If I were to participate in the energy transition space today, this would be my preferred spot. I take comfort in knowing Fluence is in an excellent position from a balance sheet perspective as I pass the baton to Amat. who will take Fluence into the next chapter. With that, I will turn the call back to Julio.

Thank you, Manu. Turning to slide 14, as we previously discussed, we're initiating guidance of fiscal 24 of revenue between $2.7 billion and $3.3 billion. We expect our fiscal 24 adjusted EBITDA to be between $50 million and $80 million. And we're targeting our ARR to be around $80 million by the end of the fiscal 24. I'd like to point out that our revenue guidance represents an increase of $300 million when compared to our prior fiscal year 23 guidance midpoint plus our implied revenue growth of 35 to 40%. We now expect a fiscal 24 revenue split of 30% in the first half and 70% in the second half, which is an improvement to what we previously communicated to the market. As a result of this, we do expect our first quarter to produce negative adjusted EBITDA due to lower revenue and the execution of the remaining legacy contracts. From a margin perspective, we expect fiscal 24 adjusted gross margins to be between 10 and 12%, which is an improvement from the fiscal 23 adjusted gross margin of nearly seven. From a cash standpoint, we currently expect to use approximately $85 million of cash in fiscal 24, mostly funding non-recurring incremental investments in systems and IT infrastructure necessary to support our continuous growth. When looking out to 2025, we expect 35% to 40% year-over-year top-line revenue growth. Additionally, we expect to begin generating free cash flow in fiscal 2025. Turning to slide 15, we established ourselves as the preferred choice for utility scale storage solution. Our competitive advantage is fortified by being able to offer our customers a full wrap of features, including bankability scale and supply chain management, power electronic engineering, and innovation digital software, services, safety, and cybersecurity. While some of our competitors may focus on only a couple of these elements, we often win because we aim to excel in all. and provide them universally to our customers. This is corroborated by the 2023 S&P Global Battery Energy Storage Systems Integrator Report, which ranked the top 10 integrators globally based on installed and contracted capacity. I'm pleased to say that Fluence was ranked number one both globally and in the U.S. In conclusion, I want to emphasize the key takeaways from this quarter's results. We had a robust financial performance, contributing to a record-breaking annual revenue. Attaining profitability for the first time is a significant milestone, and we aim to capitalize on this achievement in fiscal 24. Second, we proactively secure our future by solidifying our battery supply for fiscal years 24 and 25, thus ensuring our ability to meet our growing demand. Finally, the introduction of our new $400 million AVO facility provides us an additional tool to continue capturing the robust growth of the utility scale. As a reminder, while Ahmed is participating on today's call, he will not be answering any questions. This concludes my prepared remarks. Operator, we're now ready to take questions.

Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone. To withdraw your question, please press star 11 again. Please wait for your name to be announced. Again, we ask that you please limit yourself to one question and one follow-up until all have had a chance to ask a question, after which we will answer any additional questions from you as time permits. Please stand by while we compile the Q&A roster. One moment for our first question, please. Question comes from the line of George Giancarregas With Canaccord Genuity, your line is now open.

Good morning, George. Good morning.

How are you? Doing great. How are you? Thanks for taking my question. So maybe just to start, a lot has been made of the interest rate environment having an impact on project timing in the general renewable space and economics. Your results sort of speak for themselves, but what impact, if any, are you seeing on your business from the change in interest rates? Thank you.

Great. Thanks, George. I mean, as we have talked in the past, we work with the top-tier developers in the U.S., where this happens. And when you look to them, they don't really see any problems raising capital, accessing capital, or putting their projects together. We have not seen any delays due to, you know, cost of capital or access to capital in general. And I will tell you even more in our case, because as you all know, our product costs have come down, you know, with battery prices coming down significantly this year. In a way, when you do the math between what our costs, you know, our lower costs compared with the higher, you know, the 100 basis points generally that prices have gone, that cost of money has gone up during the year. you know, it's essentially, it's a wash or maybe actually it's, you actually can do even better returns than what you do in the past. So we haven't seen any real effect of today. We now customers that we do get the same information you get from other parties who would tend not to work with where they had had some problems, you know, raising money or, or raising money at a competitive rates. Well, you know, but we haven't seen it in our group. You know, we, We segmented with a top-tier group, and that top-tier group essentially has had no problem of accessing capital.

Thanks. Maybe if I can ask one follow-up. Very recently, one of your competitors, Vartila, announced that they're exploring strategic alternatives for their energy storage business. Any thoughts on that and any impact that it could have on your strategy going forward? Thank you.

What I can tell you, I was surprised by it, you know, because the prior quarter, they say that this was going to be the growth engine. In this quarter, they say that it's difficult to know. We've been trying to understand where they come from. I prefer not to speculate, you know, at this stage. But, you know, I was surprised by it. This is a market that is offering tremendous growth. It's a tremendous opportunity to create value for shareholders to, you know, to play in the, you know, new energy space. So why are they revising their view on the market is, you know, I have no idea. But I've been, you know, I've been reading the investors they call and the rationale, at least it wasn't clear to me, but we will continue looking at it, you know. We're on the other side of that spectrum, you know, doubling down on this. This is a once-in-a-life opportunity. It doesn't get any better than what this market offers today. Thank you. Thank you, George.

One moment for our next question, please. Our next question comes from the line of Ryan Lee with Goldman Sachs. Your line is now open.

Hey, George. Good morning. Hi. Good morning. Thanks for taking the questions. I'm well. How are you guys? First off, Manu, congrats and best of luck on your new role. And Ahmed, looking forward to working with you more closely going forward. A couple questions I had was, I guess, you know, appreciate the ARR breakout, $80 million end of this year or end of this fiscal year, 40% growth, it seems like, versus last year's numbers. If I look at your bookings, though, in services and digital, it's growing a lot faster. So can you give us a sense of, I know there's a little bit of a delay, but as we think about, you know, your initial 25 revenue guidance consolidated, like how fast can you grow that ARR balance off of the 80 when I, you know, kind of look at your bookings volume here? you know, growing at a much faster rate across services and digital? And then also, what sort of the margins implied in that ARR balance? I suppose it's, you know, I would presume it's pretty high, but can you give us a sense of what the range is?

I mean, on the growth rate, I do think that our view is that our ARR should grow at a higher rate than our solution business, no? Just the way it works. And the concept is very simple. We will, We have, you know, Nispera and Mosaic and our services business. Our services business, 90% of our growth rate, you know, of our surveys, Nispera roughly around 100, and then Mosaic is on top of that. So not on top of that, but we can add to it. So I do think that we will see that growth being ahead of it. So that's conceptually where we are. And, you know, we're growing 40% compared to what the 35 to 40 that we have said from last year. In terms of margins, the margins differ. I think that for our digital business, they're more around 70%, while our service business is between 20% and 30%, depending on the type of service deal that we agree. So there's not a combined margin, but you just think about it this way. And then in terms of today, I think that the great, you know, or the majority of it is services, but I'll see the, you know, our view is that digital will grow at a higher rate than our services business that you'll see, you know, digital becoming a much more relevant part of our ARR as we move forward. So that's kind of the, you should think about all of this, you know.

That's great. Yeah, no, appreciate that color. That's super helpful. Second question from me, and I'll pass it on, is looking at that kind of preliminary fiscal 25 revenue guidance, 35 to 40, that's quite robust. It puts you in kind of the $4 billion top line range, assuming you kind of get to the midpoint. Can you, it sounded, Julien, like you were mostly doing lots of customer conversations and feedback, but can you give us a sense of, you know, is there some background?

Brian, I lost you. We're losing you a little bit. I don't know. You mentioned that you were talking about the 25 robust growth, and then somehow you got, can you repeat that?

Yeah, maybe that's clear. Sorry, I turned off the Bluetooth.

It's just wondering what beyond customer conversations do you have, you know, any MSAs, contracted backlog, like what else are you able to sort of key off on to get comfortable with the 35 to 40% additional growth into fiscal 25? And then when you talk about batteries being secured for 25, I mean, I would assume that is matching up to that revenue growth potential you're looking at. Is it fixed pricing or is it indexed? Are you subject to any kind of cost volatility on the battery side, just having locked in the volume? Maybe could you remind us where you are on the pricing side of things as well? Thank you.

So on the growth, I think that the best evidence of our growth capabilities comes out of our pipeline. So we looked at our pipeline for this last quarter. We grew our pipeline by 600 a million dollars roughly, on top of converting 735 to backlog. So in reality, we added 1.3 billion into the pipeline this quarter. And that's where, you know, that gives me the honor view. And on top of that, something that we don't disclose, we have leads, you know, projects that we're working on with customers that we do not believe today we can, you know, consider at a, you know, 50% chance of happening within the next two years. when we looked at our leads, when we, you know, when we're talking to our customers, when, what we're doing, you know, gives us a good, you know, we feel very confident that we can do a 35 to 40% for 25. So that's essentially what it is. In terms of, you know, on, on that, this number compared to where prices are, you know, we, we built our planning based on our current view of prices or on costs. So, you know, a, as long as prices stay within what we think, you know, where we are today, generally, which is kind of what we think is going to stay for the foreseeable future, I think we should be fine. But what we have also seen, just to be clear, that, you know, if prices were to continue to come down, you know, I think that generally what we see is that the volumes increase. So we don't feel that necessarily they certified to 40% today. We don't believe that the certified to 40% growth will be affected by, you know, costs coming down or battery costs coming down so much that, that we, you know, we won't be able to meet it because of that, because at the end of the day, what happens a lot of more projects, you know, you know, they say our 50% more of our pipeline projects convert into a reality because they are, you know, they're easier to meet the economics of the, of the, of the customer. So, so I think that's the, the, the, our view on that one, your second point, sorry, I didn't, uh, You had a second point.

Yeah, you covered most of it. I guess my question around cost was whether or not I guess you have margin risk either up or down based on, you know, the security of supply and 25 volume and how long are you in cost?

We continue to be, you know, to be our strategy is not to take battery price cost risks. So we transfer to our customer that, you know, and that And our view has always been, you know, with the RMI. So our view has always been as prices of lithium come down, it goes to our customers. If it were to go up, our customers would pay a higher number. And we don't want to become a commodity. You know, there are much better players. There are much better ways of, you know, betting on the commodity movements than our stock. So we continue with a strategy that hasn't changed. We feel very, very confident on our 10% to 15% margins. So, you know, I don't think that that will be affected in any way.

And Brian, the margins are held up, right? The battery prices are materially different today than they were a year back. And not only have they gone up, they've gone up, right? So from that perspective, I think, you know, we'll be fairly comfortable.

That's right. I think the lower battery prices are an opportunity, not a risk. You know, clearly... you know, we have organized ourselves in a way that it will not be, it does not affect our changes, affects our margins, but they are generally, we see them as an opportunity. Thank you. I appreciate that.

That's what I would figure. Thank you, guys.

Thank you. One moment for our next question, please. Our next question comes from Andrew Placocco with Morgan Stanley. Your line is now open.

Great, thanks for taking the question. Good morning, how are you? Well, thanks for taking the question. I guess just to come back to Brian's question, I just want to make sure I understand this correctly. For the 2025 battery supply question, have you locked in the pricing with your suppliers on that? I'm just kind of curious if battery prices continue to fall and you've locked in your pricing for 2025, is it going to be more difficult to sign a 10-15% gross margin contract if you have a higher priced battery versus where prices go from here?

I think that I'll put it this way. We have contracts with our suppliers that aligns with the current market world in a world where prices are coming down. So, you know, that's generally the view. So we're not committing to significant volumes at fixed prices that will be out of price. That's conceptually one side of the story. No, that's very, very important. Very, very important from our point of view to have very competitive pricing that is, you know, better at market or better. you know, and the ability, the access to volumes. And I think that we have been able to design our contracts in a way that meets those goals. And in terms of margins, as I said, you know, I see this as, you know, I don't think the lower pricing will affect our margins, our 10 to 15 margins going forward. You know, this is more of good news, no more than negative news. And, you know, our 10 to 15, we feel very confident. That's the way we do deals. And, you know, People might argue, hey, your volumes are going to come down because now you're going to come out of a lower price. Well, the reality is that, as I said, a lot of more projects, you know, meet the return criteria for investors, of our customers. So, you know, the volume more than covers any potential price reduction you might see around. So this is a growth. This is, as I said earlier, you cannot dream. If I looked at when I arrived, You know, $180 per megawatt hour prices today. I'm not going to say a price not to let my competitors know, but it's a different world, you know, and it doesn't get any better. Well, maybe I'll be surprised. The next year will be even better.

Understood. That's super helpful context. And then I guess my follow-up would be, As you look at your backlog or even the pipeline, what percentage of it is new renewable energy projects that are adding battery storage versus maybe a retrofit opportunity? Obviously, the IRA presents an interesting opportunity there for retrofits. I'm just kind of curious how that's breaking down as you look at the pipeline and backlog.

Today, I would say if you looked at a pipeline, the ones that have more than a 50% is mostly new projects. know retrofits and things of that sort are more in the leads part you know so that's like mostly in greenfield you know if not essentially all today however we do see as you can see you know a lot of our customers are looking at talking to us about retrofits are replacing you know a some you know co-facilities you know so you know there are some in our in our pipeline or in our control backlog, so that they're building it into a former coal facility, but generally they're greenfield.

Understood.

Thank you.

Thank you. One moment for our next question, please. Our next question comes from the line of Joseph Asha with Guggenheim Partners. Your line is now open.

Hello. Congratulations on the great outcome. I've got a couple of questions. Looking at, you've alluded to the gross margin, but as we look at that FY25 guide, I'm wondering how we might think about operating cost absorption and, you know, what that implies, you know, roughly for the ability of the enterprise to grow EBITDA. I have a couple other questions, but I'll start with Alan.

Good morning, Alan.

So, look, I think consistent with what you said, you know, as you think about 25, you EBITDA profile, gross margins are probably at the midpoint of the 10% to 15% range. And then we've been very disciplined around operating expense, and we expect to grow operating expense at a little bit less than half of our top line growth. And you saw that in 23, and you expect to see that in 24 and 25. Look, we are continuing to invest in the business on the backs of a growing market and $13 billion of pipeline.

Okay. Could we begin to see any material benefit from 45X credits in FY25, given how cell availability in the U.S. is evolving?

Yes.

I'm a shot on to a yes.

But I think from a modeling perspective, I'd still stick within the lanes I just talked about.

Okay. But to be clear, that number you put out there does not build in any 45Xs. Is that correct?

You know, the way we have, you know, our view on the 45X is that they will be within the range, you know, so that we'll see that the 45X will take us outside of the range of the 10 to 15. That's the way we should think about it. You know, remember, we're building a new line. We're putting it together. We're starting, you know, this, it will require some, you know, taking it up to more, you know, if we get, you know, to a very, to get to scale and efficiency, it takes a little while. We believe that the modified X will help us, you know, pay for some of that, you know, learning curve, you know. Sure, sure.

I mean, it's early days. I just wanted to clarify. So it does sound like to the extent that those numbers do flow through the P&L in 25, it would be additive to that range you're discussing. Is that kind of what you're saying?

Well, you know, I'll put it differently. As I said, I do not today where we are. I'm, you know, I believe that the 45 X will help us bringing our line into, you know, it will cover, it will, it will cover the cost of the learning curve. That's our view today. We might, we might be able to do this much better than what, you know, what we expect, but having gone through processes like these, you know, they usually carry some risks and you need to be, so I don't want to over promise.

Okay. And then just the last one for me on, on business mix. I'm wondering what, how you're looking in terms of, uh, storage only, uh, freestanding products versus, uh, you know, wind and solar coupled projects. Thanks. And, and that's, that's it for me. Thank you.

Yeah. We'll see, we'll see, you know, they'll see more and more coming into in the first outside of the U S that's a norm, you know, just be clear in the U S we'll see them come more and more enough, more and more. Uh, we have some, we've signed a few last during the year. We see more coming into our leads and, and, and into our pipeline, and it will be – I cannot give you an exact number because I don't have it on the top of my head, but we do see that over time that will take – in the U.S., the U.S. will start looking more like the rest of the world where battery storage are standalone. It will take a little time. These projects that need to be – people were working on projects that were with renewable assets, It will take a little time until they actually got them permitted in the queue and all that process.

Okay. Thank you.

Thank you. One moment for our next question, please. Our next question comes from the line of Dylan Nassano with Wolf Research. Your line is now open.

Hey, Dylan. Thanks for taking my questions. Welcome, Ahmed, and wishing you the best in your new role, Manu. Just wanted to touch on the domestic content offering. I mean, how are those conversations kind of going with the customers right now? How much volume, I guess, are you seeing it drive within the pipeline? And just on the latest IRS rules that came out, does that kind of give any kind of incremental certainty to move the needle at all?

You know, like we said, I think that our volume growth is based on our view of our domestic content. We do, as we mentioned it also, there might be an opportunity for margin expansion. We said it in the past. It's too early to say today, but we are working with our customers and it's going well, but it's too early to say whether we can expand margins based on it. That's our view. But volumes, the growth we're offering essentially includes our view on where we see our domestic content offering. And, you know, that's generally our view on this. I think that, you know, potentially it could be a margin expansion like we said. And as soon as we have visibility, we'll share that with the market to let you know if it changes. That might be a potential upside. For our 25 margins, just to be sure, I don't think we will see any real significant revenue in 24. It will be a 25 revenue. We'll let you know as the year progresses and we start signing contracts. we'll give you a view of what we can do. And the regulations were a step forward. I think, you know, like all these regulations, they respond a set of questions and they open a new set of questions. But I think that in general, you know, it was good to see it, you know, more coming. We're still waiting for more clarifications, but it was good to see some clarifications. And a lot of the issues that they were addressing were not related to our industry, but the ones that were related to our industry, to the battery storage, were in line with what we expected.

Got it. Thank you. And then just a quick follow-up. Can you just talk a little bit about the geographic breakout of the current backlog and where in the pipeline are you maybe seeing incremental opportunities pop up? Thanks.

Yeah, I mean, yeah, the same. The same as our revenue, two-thirds. The U.S., you know, one-third of the rest We see, in terms of markets, I think we talked about this already, Canada has become now a new market where we've been very active and has been doing very well. But, you know, besides that, I think that generally we see a lot of growth in Australia. Europe has been, you know, Germany. And Germany, I guess, is the other market where we have done the two transmission projects and we are continuing to see growth and movement. But a very, very strong market all around, and the U.S. still leads the pack.

Thank you. That's it for me.

Thank you. One moment for our next question. Our next question comes from the line of Ben Callow with RW Bayard. Your line is now open.

Hi. Good morning. Thank you. Hey, Ben. How are you? Good. Just following up on the last question, how do we think about your cell supply matching up with your geographic opportunities? Just being, you know, U.S. cell supply for domestic content, how you guys think about that in, you know, 25, 26 and beyond with those contracts?

We have, you know, I think we are, besides the U.S. cells, we manage the rest of the world as a global market, so Today, there's no risk from sales not having supply to any of our markets in a specific deal. Our deal for the U.S. supply is a multi-year deal that will cover a few years. I would expect that that solidifies and it will continue for many years. I will tell you something that I think is important. We do see that the US will have both domestic and import content. Also, we'll have a mix at the end of the day. So it's not like the US market will become a fully only domestic content market, at least not at the beginning. For a while, you'll see both imported batteries and the domestic content batteries competing here.

Thank you. In the past, you've made some acquisitions. I'm just wondering about, you know, looking at your slide 21, you know, the different technologies, either on hardware or software, if there's, you know, areas that you see opportunities going forward.

You know, we have said from there that we were not going to do any M&A until we had a, you know, profitability. So that continues to be the case. Clearly, this quarter has been good. I, you know... my view on potential acquisitions is the following. We clearly, we see M&A as an opportunity. It will be maybe one of our value, ways of offering value to our customers. If we were to do any acquisitions, we'll be connected most likely to our, you know, product development, accelerating our product development. But we have no, we're not working on any acquisitions. There's nothing in the works or we're not talking to anybody. So don't be, you know, There's enough work with our current business for us to make it happen. Okay, sounds good. It will be more on the technology side and connected to our product roadmap. Great, thank you.

Thank you. One moment for our next question, please. Our next question comes from the line of Kashi Harrison with Piper Sandler. Your line is now open.

Kashi, good morning. Hey, good morning. Thank you for taking the questions. So maybe just a quick follow-up on gross margins. Fiscal 24 guidance calls for 10% to 12%, but Manu discussed 10% to 15% as we think about fiscal 25. And so just wondering, what are some of the factors that could potentially push you towards the high end of that range, that 15% versus the low end of the range of 10%?

I think that, you know, clearly our execution capabilities, you know, move those higher up. But I think something, as I mentioned, that could be a material driver will be the U.S. content offering if we can capture higher margins on that offering. So that's generally when you looked at it. So it will be a combination of maybe, you know, even better execution so we can, you know, do better than what we expected and the U.S. content offering.

offering which might the domestic content offer which might you know as i said this is something that we might see an opportunity for higher margins that's helpful thank you uh and then just my uh follow-up uh you know manu said this as well and and you know just doing the quick math uh it's it's clear that you guys think you're going to be generating free cash flow uh as we think about fiscal 25 uh i know it's very early but you know, if you actually do successfully, you know, if Fluence actually successfully begins generating free cash flow, you know, how do you think about capital allocation priorities for that free cash flow? Is it, you know, are you going to look to, you know, M&A? Are you going to look to returning capital to shareholders to shore up the balance sheet? Maybe just thoughts on how you want to use free cash flow to create balance for shareholders.

I think my view on it today, I don't know, is supporting our growth. You know, technology, that's what I think that we're... I don't see us distributing, you know, cash flows or distributing dividends or anything of that sort. The growth is so... If the growth continues as we expect it to continue, and I would say in the world, we will need all those resources to, you know, meet our customer needs, to create, you know... And that, I think, will be the... best use of money, and it will create the most value for shareholders. So that's our view. It might change over time, but if you ask me about 25, that's the way I think about it. Got it. Thank you.

Thank you. One moment for our next question, please. Our next question comes from the line of William DeMolin Smith with Bank of America. Your line is now open.

Good morning.

Hey, guys.

It's actually... Hey, Julian, it's Alex Grable on for Julian. Hey, how are you, Alex? I'm well. Congratulations to you guys. Congrats to you, Manu. We'll miss you in your next journey, but great results here. Maybe my first question, just to, you know, you guys obviously a lot of growth guided for next year, and obviously the indication for fiscal 25 robust as well. I'm curious just, you know, we think about the bookings cadence to support that. If I look back in time, it seems like you guys see a pretty big step up in the first quarter. And then things seem to be sort of levelized, you know, one times or a little bit greater book to bill throughout the rest of the year. Is that what we should look for kind of next year? Or is there any kind of gyrations or things we should watch for on cadence around IRA allowing projects to move forward or not that we should think about just as far as getting confidence in 2025? Yeah. You know, it's,

I think what will be kind of the next step up will be the domestic content, going back to it, so that which will happen over the year. It's difficult to have a seasonality on order intake, to be very, very sincere with you. It changes over time. So, you know, I cannot give you a guidance, hey, you choose pack, much bigger first quarter and then everything kind of staying the same, it's difficult to give you a view on that from where we are today. What we can say is that we feel very, very comfortable about our 24 and 25 guidance and when we see how we're converting pipeline into backlog and when we are in discussions with our customers, we feel that we're going to be able to meet very, very comfortably the 24 and 25 volume guidance that we just mentioned. Got it. That's what I can say. First, I don't want to manage this company by quarters. I've told my team, don't get the deals, the right deals. Don't worry about meeting a quarter number because in terms of backlog, it doesn't really matter. As long as we feel confident that we can make it happen, just do it whenever we get it.

Yeah, many of your peers would say you're in the large project business. I know they sort of point to the same. Maybe if I can just ask, you know, obviously a strong environment for storage, obviously sort of a very price elastic product as far as how the returns evolve, but the other thing i want to ask about um is how much of this is just i mean as far as the volume growth that you guys are able to put up how much of this is is sort of new customers or a higher win rate as opposed to the size of the projects you're seeing are just ballooning in size because if we look at the developer side It seems like we've gone from, you know, 200 megawatt hours to two gigawatt hour projects in, you know, a year and a half. And I'm just sort of curious how much of that is really kind of driving the confidence here where it's not just, you know, we have to win a bunch of new customers. It's literally just, hey, it's the same customers. The projects are just five times bigger than they used to be two years ago. You can kind of expand on that.

My view is that, you know, all of the above, you know, clearly our customers are doing bigger projects for great. We're also entering new markets like Canada, which are new customers that we didn't have before, and doing more work in Germany. So, you know, I would say in the U.S. is mostly our projects getting bigger. Outside of the U.S. is, you know, new customers we're working with, and, you know, that's kind of the way I would put it. We have a lot of repeated customers constantly all the time, but we're also looking for customers that meet our profiles. trying to entice them to come and work with us.

I think in general, as the project sizes get bigger across, at least in the US and also outside the US, given the fact that we are one of the select set of providers that can provide multitude of attributes between great safety records, bankability, supply chain, flexibility and attribute management, I think the current customers keep coming back to us and You're starting to see new customers who now want to work with partners who can manage large projects with multiple attributes start to come our way. That's a way to think about how we step up as we grow through the years.

Yeah, it's a very fair point. Well, again, guys, congrats. Again, Manu, we'll miss you, but good luck.

Yeah, thanks.

Thank you. Thank you. One moment for our next question, please. Our next question comes from the line of Chris Ellinghouse with Sievert Williams Schenck. Your line is now open.

Hey, good morning, everybody. Congrats to Manu and Ahmed. Good morning, Chris. The fourth quarter, you know, the adjusted gross margin was 11.6%. You know, is that informative for 2024? relative to the guidance, or, you know, were there some special circumstances there, particularly related to the legacy contracts?

Yeah. I think that, you know, our guidance is a 10 to 12, or, you know, midpoint is 11. In the fourth quarter, there were some change orders that helped. You know, that's what I would say, that helped, you know, bring it up beyond, below, above the, and those are difficult to predict So that's the way I would put it.

Okay. And Julian, you talked a lot about battery costs, but there's a bit of a slowdown in EV sales. Are you expecting that to maybe be a tailwind for battery costs in 24?

I think that today my view is that I don't think prices will continue coming down. That's our current view. They will stay kind of where they are. They won't go up, but I don't see these prices of batteries and lithium and lithium carbonate coming down below where we are. If I knew where they were going to trade, I wouldn't be doing this job. I would be doing something where you make a lot more money, to be very sincere with you. But that's our view. And I think that talking to our suppliers and talking to the markets and our visits to China, That's kind of where things will get comfortable. That's the way to think about it.

Thanks, Julio. I appreciate it.

Thank you. One moment for our next question, please. Our next question comes from the line of Pavel Molchanov with Raymond James. Your line is now open.

Thanks for taking the question. As you look to boost your services and software revenue, Would you be open to the idea of placing some battery assets on your own balance sheet from the perspective of virtual power plants, peak shaving, rate arbitrage, any of these services that Fluence could participate in directly?

Yeah, not really. I mean, my view on this is that it's our customers. You know, it's a customer's job. They should do it. If I started doing what my customers do, it's a recipe for disaster. So, you know. So, no, no, I'm not planning. We're not planning to get into the storage business, you know, or using storage as a service business to serve parties.

Understood. A quick follow-up on M&A. As you look at, you know, potential software acquisitions and, you know, like AMS a couple years ago, is it fair to say that valuation multiples on, you know, in the private company arena have come down quite a bit since AMS, for example?

Yeah, I mean, as I said, we're not actually in the market. I'm not testing prices. So I cannot give you, you know, first evidence of where prices are for potential acquisitions. But generally, I heard what you're telling me. What I hear from the banks is that, you know, when they come and pitch me stuff, that, you know, there's all these great opportunities around. But as I said, we're not chopping around. We're in the process of capturing growth.

All right. Thanks very much.

Thank you.

Thank you. One moment for our next question, please. Our next question comes from the line of Amit Zakhar with BMO Capital Markets. Your line is now open.

Hi, good morning. Thanks for squeezing me in. Hopefully two quick ones here. It looks like we talked a lot about ASPs out in 24, but it looks like in the current quarter for your revenue recognition megawatts, we're kind of flat at 600 megawatts, but pretty big revenue increase. I was just wondering what kind of caused that big kind of step up in ASPs? Was it the change orders you mentioned a little while ago, Julian?

That is correct. I think it's a combination of project mix and change orders.

So we should kind of think of that as a little bit of a kind of a one-off?

Yeah, look, remember, as we run off our legacy projects, some of them were signed way back in early 23. you should expect the ASPs to kind of reflect what's happening with the battery prices. But as we said, our margins continue to be intact and grow through 24 and 25.

Great. Thank you. And then I think in your kind of cash flow guidance, you included the impact of deposits for the AESCS battery US cells. I was wondering if you'd kind of give us a little bit of clarity on what the magnitude of that is and when that cash comes back to you?

Yeah. So what we've said is I think it's, it's 150 million over a two year period. I think it's roughly half and half between 24 and 25. Half of it gets financed through customer deposits and the other half we get financed through our own liquidity sources. And, you know, as you can see, we have ample of them. And then as the product starts coming through, we, we get it, you know, a little bit as AESC ships the product to us. So you should start to see some of that deposit come back to us starting, you know, end of 24, 25, along with the supply of the cells.

Great. Thanks for that, and good luck, Manu. Hey, thanks a lot.

Thank you. One moment for our next question. Our next question comes from the line of Thomas Curran with Seaport Research Partners. Your line is now open.

Thanks for going into overtime here, guys. Manu, kudos on making so many positive contributions in such a short period of time, and best of luck on the private side of the auto parts world. Ahmed, congratulations on stepping into something. Thanks a lot. Yeah, we were quick to pounce on it. And then, Ahmed, congratulations on stepping into some big shoes. Look forward to collaborating with you. A follow-up on how the nature of storage projects have been evolving. It was just touched on about how, you know, the size of them has soared over the last 18 to 24 months. We've also seen an uptrend in the average duration of systems being installed. Would you expect that, you know, ever longer duration trend to continue? And if so, you know, what are some of the specifics of how you're positioning blow-ins to ensure that strategically and technologically and supply chain-wise, you're staying ahead of that trend.

Yeah. Hi, Thomas. It's Rebecca. So what we see right now and what we're developing and delivering from the product roadmap really is still on that two-, four-, and six-hour duration system. So kind of in the next 18 to 24 months, we're going to deliver what we deliver, which is not yet the multi-day or longer duration than that. What we're doing from a product roadmap perspective is we're examining what's out there in the crystal ball of battery chemistries that allow for longer duration solutions. And we're just starting now to engage with those suppliers and put prototyping efforts in place. So when those things become more viable in the market, we will be ready.

Makes sense. Thanks for that, Rebecca. Just looking to dissect the contracted backlog a bit further, I was hoping you could share two percentages with us. First, what's the portion of the current backlog that's non-related parties? And then could you give us a rough estimate for how much of it represents megaprojects and storage of the transmission asset combined?

So on the unrelated part, it's around 75%. As we said, I want to bring it to around 20%. So it will be bumpy. So we'll go up and down as these projects are big. But I think it's been coming down. And around 20% will be a number I feel comfortable with. So today, I think it's around 75%. Kind of in line with what? And if you looked at our revenue for the year, I think it was around 29%. 29 with related parties and 61 with, and it should tend to go towards the 75% revenue and then at some point get to the 80% that I just talked about. And then you were saying on standalone, that was the second part of your question?

Just trying to get a sense, you know, either if you want to break them out, that would be great, but even if you just want to look at them on a combined basis, the percentage of the contracted backlog that's either a megaproject or storage as a transmission asset.

Yeah, I know. It's difficult to prefer not to go into that, you know, so at this stage, but, you know, we have a lot of flavors in that pipeline, that's the way I'll put it.

Yeah, hence my curiosity.

Yeah, I know. But I think that, you know, I think it's, better to keep it with this view and that allows all of us to work better as we move forward.

Fair enough.

Thanks for taking my question. Thanks for the question. I think this is one of our successes, the ability to continue growing with our own unrelated party transactions that's growing at a much higher rate than the 35 to 40, as you can see from where our pipeline stands today and where our

Thank you for your questions. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a wonderful day.