Fluence Energy, Inc.

Hello and welcome to Fluence Energy's second quarter 2025 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 the question during the session you will need to press star 1-1 on your telephone. You would then hear... ...investor relations. Sir, you may begin.

Thank you. Good morning and welcome to Fluence Energy's second quarter 2025 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 Nebreta, our president and chief executive officer, and Ahmed Pasha, our chief financial 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 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. 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 briefly review our Q2 results, but I will concentrate primarily on the current environment and why we remain confident in the long-term growth prospects for energy storage, the competitiveness of our SmartStack platform, and the strength of our U.S. supply chain strategy. Starting with slide four, and our Q2 performance. We deliver approximately $432 million in revenue, as our execution helped us to deliver on project milestones earlier than expected. We also earn double-digit adjusted gross profit margin, and our annual recurring revenue increased to $110 million. We ended the quarter with approximately $4.9 billion of backlog, including $200 million of contracts added during the quarter. Looking ahead in the coming quarters, we are expecting a meaningful improvement in order volume from this past quarter, especially internationally. In particular, and consistent with our prior expectations, we currently anticipate a strong grand pop in order volume in Australia, as we enter the second half of our fiscal year. And finally, we ended the quarter with more than $4.5 billion in liquidity, including $610 million in total cash. This demonstrates our solid, low-level financial condition, and provides us with a strong basis to deliver long-term value to our stakeholders. Please turn to slide five. Since our last call, the market landscape has shifted meaningfully due to the enactment of significant new targets, which with respect to China have increased from roughly 10% to roughly 155% in a matter of a few months. The change in tariffs and trade policy has led to considerable economic uncertainty in global markets. This uncertainty from the number and magnitude of changes has led the company and certain of our customers to mutually agree to pause execution of some of our U.S. contracts and the signing of new U.S. contracts as we wait for clarity on the tariffs and policy embargo. This pause contributed to our decision to revise our fiscal 25 outlook, which Ahmed will discuss shortly. Having said that, we believe that the current high tariff levels on Chinese imports are unlikely to be sustainable. The Trump administration has publicly stated their intention to pursue a new trade deal with China that may result in lower tariff rates. As trade negotiations between the United States and other countries, including China, progress, we believe the markets will stabilize and provide a clear path forward for both our customers and the company, supporting a return to more normalized contracting activity in the U.S. We are currently experiencing to be temporary and reaffirm our approach to a diversified supply chain. Although the current tariff environment certainly impacts our customers in the short term, we remain optimistic about the future of energy storage in general, and particularly for fluids. To that end, I will cover the following three topics. First, the future demand outlook for battery storage in our most relevant markets. Second, how we view energy storage competitiveness against gas as a provider of capacity, especially in the U.S. And finally, I will discuss how Fluence intends to create value for its stakeholders to its innovative smart stack technology and U.S. domestic content strategy. Turning to slide six, demand for energy continues to increase. This is driven by many factors, including economic growth, data center deployment, and the electrification of transportation and other sectors. In the U.S. alone, electricity demand is projected to grow 11% through 2030, signaling that annual energy storage capacity will increase to more than 400 gigawatt hours. Just to put this in context, over the last five years, we have seen only 79 gigawatt hours of additions in the U.S. market. This is a strong indication of the increasing significance of battery storage in the U.S. market. We see similar growth rates in other international markets. For example, in Australia, we expect battery storage to reach 51 gigawatt hours by 2003, up from the 2024 levels of 7 gigawatt hours. In Germany, where we expect battery storage to reach 120 gigawatt hours by 2030, from its 2024 level of 20 gigawatt hours. Turning to slide seven, now I would like to touch on the competitiveness of energy storage. Battery prices have down by approximately 70% since 2022. Making energy storage competitive across several markets. For the U.S., the current higher tariffs on Chinese imports are expected to essentially bring battery costs back to what we saw three years ago. At the same time, capital costs for competing technologies, such as natural gas plants, have increased materially over the past few years and are expected to continue to increase. In the United States, we anticipate 278 gigawatt hours of capacity additions through 2030 to meet growing needs. And we believe that energy storage is well positioned to meet these needs as it benefits from several factors. First, battery storage is one of the most cost-effective solutions for meeting system needs. Energy storage capacity price is currently approximately $9 per kilowatt a month, which is about half the price of a gas fire plant. We believe that this significant price difference makes energy storage the most optimal choice, even with low gas prices. Second, energy storage has the unique ability to take advantage of low off-peak prices. For example, in PJM, current off-peak prices are more than 30% lower than on-peak prices, offering tangible arbitrage benefits to plant owners, particularly when there are several gigawatts of excess capacity available during those off-peak hours. Third, as there has historically been fewer supply change constraints and shorter lead times associated with energy storage compared to other technologies, battery storage systems can typically be deployed within 6 to 9 months versus the typical 36 to 40 months needed for gas combustion facilities. Fourth, battery storage systems can be located in places with advantage interconnection and permitting profiles, avoiding the long queue for development facing many power producers. As the market seeks to rapidly meet growing demand for electricity, battery energy storage is one of the few options to provide firm, dispatchable power at large scale over the next few years. Finally, we believe that battery storage rapid response time and ability to adapt to the power grid topology makes it the ideal technology to support grid stability, as higher electricity demand adds more pressure on electric grids both in the US and globally. In summary, we believe that battery storage technology remains the most optimal choice to meet the increasing demand for electricity. Turning to slide 8, our backlog remains robust at approximately $4.9 billion as of quarter end, including more than $1.9 billion that is scheduled for delivery this fiscal year. While US and international order intake was lower this quarter, primarily due to tariff uncertainty, our pipeline continues to expand, now exceeding $22 billion as of quarter end, with roughly half per market outside the US. We believe this international diversification provides resilience and positions as well for renewed growth as global market dynamics stabilize. Now we would like to discuss how Fluency intends to create value for stakeholders through its innovative SmartStack technology and domestic content strategy. Turning to slide 9, as we discussed on our last call, we have recently launched a breakthrough technology called SmartStack. I am pleased to report that we have received positive feedback from our customers who appreciate the features offered by this -the-art technology. In fact, we have already signed our first contract for SmartStack. We believe SmartStack offers a significant value for our customers, including, first, world-class safety. SmartStack distributes batteries into four distinct units called pods. Each of these pods is designed to prevent fire propagation between pods, which is intended to reduce thermal runaway risk. Second, SmartStack design facilitates the integration of various battery capacity offerings and form factors, enabling a more adaptable supply chain strategy. Third, SmartStack is one of the densest products on the market, enabling lower total cost of energy, which should result in higher customer returns. And fourth, SmartStack offers a more modular and flexible product. By separating the batteries from other equipment, SmartStack is designed to allow for faster service, better inventory management, higher availability, and more efficient augmentation. In summary, SmartStack is expected to be priced much lower than our previous Gristack Pro product, not only because of declining equipment prices, but because of a more efficient product design. This product is designed to deliver efficient and cost-effective solutions to our customers, while at the same time is expected to help us earn our targeted returns. Turning to slide 10, our domestic content strategy, which we began to implement over two years ago, offers a flexible approach to meet the domestic content requirements under the IRA. This strategy benefits our customers through tariff and IRA incentives, including the 45X manufacturing credit and the 10% domestic content bonus. We are confident that future policy updates will continue to support local manufacturing. Our discussions with regulators indicate a consensus for continued incentives for local manufacturing, which has created thousands of jobs to date. Our domestic content strategy is resilient to multiple scenarios, involving different tariff outcomes and levels of policy support for domestic production. As an example, at the time, the rate of sales with imported sales is approximately 10% cheaper than a strategy of using all imported sales from China, even without considering the IRA domestic content bonus. Regarding our progress, all six partner facilities in our US supply chain strategy are now producing or preparing to launch production in the current fiscal quarter, which allows us to offer up to 100% non-Chinese US products. Our Utah module manufacturing site has received its first shipment of US manufactured batteries from ASE. Now, with line one of the Tennessee facility fully operational, we are working with ASE to the second battery production line into operations, which is currently expected to occur next calendar year. With our US cell manufacturing facility in operations, we are able to offer our customers for our domestic content product a range of domestically produced batteries, modules, enclosures, communication systems, and inverters. These options are intended to enable our customers to achieve the domestic content bonus while mitigating the impacts of supply shocks and tariffs. By establishing the capability for up to 100% US-made content, we can also maximize the domestic content volume offering in the US. Once ASE's second line is in production, we anticipate being able to serve 12 gigawatt hours of annual domestic content volume in the US, assuming that US sales represent 50% of those used in projects. We remain very optimistic about our US domestic content offering, and believe it will provide superior value to our customers in the medium and long term. With that, I'll turn the call over to Ahmed for the financial review.

Thank you Julian, and good morning everyone. Today I will review our second quarter financial results and then discuss our liquidity and upgraded outlook for fiscal 2025. Turning to slide 12, in the second quarter we generated 432 million of revenue, which was better than we expected as we were able to achieve project milestones faster than expected across Americas and APEC regions, as we benefited from efficiencies from our supply chain initiatives. This brings our -to-date revenue to approximately 618 million versus roughly 500 million of first-half revenue expectations discussed on our last call. In terms of gross margin, we generated 45 million of adjusted gross profit, representing an adjusted gross profit margin of approximately 10.4%. This quarter makes our seventh consecutive quarter of double-digit adjusted gross profit margins. Year over year, operating expenses increased by 10 million dollars to 84 million due to higher R&D spend and sales and marketing costs. A good portion of this increased spending is focused on delivery of our new SmartStack product line to market. Turning to adjusted EBITDA, we reported negative 30 million dollars for the quarter, mainly due to the more level fixed cost nature of our operating expenses compared to back-end nature of our revenue as we discussed on our last quarter call. Turning to slide 13, I will now discuss our strong liquidity, which allows us to invest in innovative technologies and support our plan. We ended second quarter with more than 610 million of cash, consistent with the strong cash position we had at the end of last quarter. Additionally, we have 532 million available under our revolver and supply of $1.5 billion in facilities, which puts our total liquidity at more than $1.1 billion. Looking ahead, we will be allocating a couple hundred million dollars of our available liquidity to fund working capital needs to deliver our revenue and execute on our domestic content strategy. Bottom line, we continue to see robust liquidity for the remainder of the year and beyond. Turning to slide 14, I will review our revised guidance for 2025, which we have lowered to reflect current market conditions in the U.S., which have impacted our folio revenue and EBITDA expectations. Aside from these tariff headwinds, we are pleased with our performance as we are on track to deliver double-digit adjusted gross margins. We continue to see opportunities in recurring digital and services revenue platform. Accordingly, we are reaffirming our guidance for ARR of $145 million. Turning to slide 15, let me explain our revised revenue expectations further. Recent tariff announcements made it clear that bringing products from China at these rates is uneconomical for our customers and for fluents. This led us to mutually agree with some of our customers to pause certain shipments and entry into pending contracts until we have better visibility. Here, I want to mention two things. First, we do not expect any material cancellations and second, we remain engaged with our customers. We look forward to improved visibility that allows us to price these pending contracts with adequate returns for both fluents and our customers. Accordingly, the deferral of these contracts translates to $700 million of revenue previously expected for this year that has been pushed to the right. As such, the midpoint of our revised guidance is now $2.7 billion. This guidance is largely derisked as we have 100% of the required sales in the U.S. Furthermore, 95% of the midpoint of our guidance is supported by our backlog plus revenue recognized to date. Turning to slide 16, covering adjusted EBITDA, we are lowering our guidance to a midpoint of $10 million, which is $75 million less than our prior midpoint guidance. Our revised guidance includes a combined $100 million of anticipated tariff-related headwinds, which we believe will be partially offset through our proactive actions. To go into this a bit more detail, first, the $700 million lower revenue I just discussed will have an impact of approximately $80 million. Second, we are incorporating a $20 million incremental impact for tariffs that we were not able to avoid or pass through to our customers. These impacts were partially offset by the benefit of approximately $25 million from currently in progress and planned operational efficiency improvements. These include some renegotiations of equipment costs with our suppliers as well as cuts to our budgetary operating expenses. In summary, although current tariff policy has created some near-term challenge, we are pleased with the underlying performance of the business. We remain confident in the long-term prospects of energy storage in general and particularly influence its ability to deliver maximum value to its customers and shareholders. With that, I would like to turn the call back to Julian for his closing remarks.

Thank you, Amin. Turning to slide 17. In closing, I will highlight the key takeaways from this quarter's performance and our outlook moving forward. First, the recently imposed US tariffs have introduced substantial economic uncertainty, which is impacting near-term customer decision-making and project execution. Although this presents some immediate challenges, we are optimistic that they are temporary and manageable. Second, we remain confident in our long-term positioning. We strongly believe that product innovation strategies anchored in our new platform, SmartStack, and our US domestic content capabilities position us to benefit materially over time as the market overcomes the current economic uncertainty and regains its growth trajectory. Third, we are operating from a strength. Our backlog now is approximately $4.9 billion, providing a solid foundation for future growth. We believe our track record of capturing double-digit adjusted growth profit margins provides us with additional visibility on our future financial performance and profitability. And fourth, our liquidity remains robust. With more than a billion dollars in total cash and committed working capital facility, we believe that our solid financial condition will give us the flexibility to continue investing through a period of volatility while executing on our long-term strategic priorities. Together, these factors reinforce our confidence-influenced ability to navigate the current environment and emerge even stronger. With that, I would like to open the call for questions.

Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 1-1 on your telephone, then wait for your name to be announced. To withdraw your question, please press star 1-1 again. We ask that you limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Brian Lee with Goldman Sachs & Company. Your line is open.

Hey, guys. Good morning. Thanks for taking the question.

Good morning, Brian.

Good morning, Lillian. I guess the first question, just on the AESC ramp, appreciate some of the additional disclosure here, but I just wanted to make sure I have the numbers right. I think in the past you had talked about three to four gigawatt hours on line one and then line two with double that. I think I just heard you say by the summer of next year you'd be at an annualized run rate of 12 gigawatt hours of capacity out of AESC in the Tennessee facility. Is there another line being contemplated there or are there some efficiency gains at getting you additional capacity? The 12 gigawatt hour seems a little bit more than we had been anticipating.

Yeah, no. Let me, thanks. Good question. Each of these lines have capacity between three and three and a half gigawatt hours. Our contracts are at a minimum of three, but we can ramp them up to three and a half. What we do with domestic content is that we mix domestically-produced batteries with imported batteries. That's how we convert the six gigawatt hours that we have available with the two lines into 12 by mixing the two. That's where the 12 comes from. This assumes a combination of half and half, half domestic, half locally-manufactured, half internationally-manufactured. Clearly, the decision on how much, how that mix will go will depend on the final tariff levels that we get from China and how all this process goes. That's generally a good assumption to go forward.

The only thing I would add is that we mix because we get the benefit of 40 because what we need is to offer our customers at least 40 percent minimum domestic content. I think that gives us ability to basically sell more volume at the same time, give our customers what they want, which is the domestic content incentive. I think that allows us to meet our growing need. With the six gigawatt hours, we can sell 12 gigawatt hours equivalent volume for domestic content.

That's a helpful clarification. Presumably, if the 150-plus percent tariffs on China remain, the economics on blending and mixing at any ratio wouldn't make sense. Really, it's six to seven gigawatt hours of domestic capacity run rate next year. If I do the math at current ASD levels, I guess it implies a two or three billion dollar revenue capacity that can be supported on pure U.S. domestic sales. One, is that the right range to think about? Two, would that cover all your needs for fiscal 26 given the 700 million that's pushing out from this year's revenue to next year and then what you're projecting for next year on the backlog?

As we said in the call, even with the current tariff levels, even with the current tariff levels, mixing imported and local manufactured tariff, we can go with a price that beats fully imported batteries. It beats it by 10 percent, even not considering the 10 percent bonus just using the 45X. We believe this. Let's say that if the situation were to stay in the current approach, we'll still believe with the current tariff level, we'll still believe a mixing of imported and non-imported tariff. It would be a way to go. So, most of the likely scenarios we see coming forward, we will offer a mix of. When we offer a product, we'll have a combination of imported and non-imported tariff.

Okay. The last question, just since you have run those economics and have that analysis, as you talk to customers, obviously the tariff environment is fluid, but if you, it sounds like no contracts are going to get canceled. They're just going to get renegotiated or potentially just done from a different sourcing strategy. But if you do mixing, have you had customer conversations as to what pricing and then your margins would be? Obviously, you've taken out the revenue impact from tariffs. As that revenue comes back into the picture, whether it's later this year or if it gets embedded in fiscal 26 guidance at some point, what do you think the margin implications would be of bringing that revenue, which is now going to still have some tariff impact if you're blending it and you're having to set a different level of price, I suppose, with customers?

That's right. Let me tell you our approach to this, which I think, I'm answering your question, it's a little bit. First point, the issue we have today is the uncertainty. The fact that we have a tariff level that is subject to a potential negotiation with the Chinese government and there is a likelihood that it will go down. So that's where we are. So it is unclear. Very difficult for me to form a price to my customers that I can tell them this is a price that will work in any tariff condition because the tariff could work in different ways. And it is difficult for my customers to go out to their customers and tell them this is the way you should go because the cost structure is this. So that's the problem we have today. Assuming the problem gets resolved at the current level, at a lower level, whatever it does. We have sufficient optionality to offer our customers a price that competes with alternative offerings very, very well and that allows us to meet our margin objectives. In terms of the point you mentioned, will this still work for the customers? When we go out and look at it generally, and this is a general statement clearly, there are not many alternatives to battery storage to resolve the needs of the US grade. There are not that many. No? They are limited. And we believe, I'm not saying that there is no price elasticity, please, or that at any price it will happen. I'm just saying they are limited. So because they are limited, we believe that most of these countries, if not all of them, will move forward at a potentially higher cost than what we originally thought if tariffs were to stay at this level. So that's the way we think about it. And this is very, very important. We have designed our contracts in a way where the interests of our customers and ourselves are aligned. And we can, we have, we're aligned. We shared some of these risks together. So our interests are aligned to resolve these in a way that our customers meet their profitability objectives and we meet our marks. So we're very confident when we looked at all these elements, all my optionality in supply change, the opportunity that our customers, that their customers have, and where the value that battery storage can provide to the US grade that we will be able to address. Once the uncertainty gets clear, whichever way it gets clear, we will be able to regain our role.

No? All right. Thanks, guys. I appreciate it. I'll pass it on. Thank you, Ryan.

Please stand by for our next question. Our next question comes from the line of George Gironakis with Cannon Court. Your line is open.

Hi, good morning, everyone. Thank you for taking the question.

Good morning, George.

Along the same lines around AESC, can you, maybe you discuss the ownership structure there and any solutions if that has to change due to any political concerns? Thank you.

Thank you. So you are referring in a telegraphic mode to the potential FOC restrictions on under the current regular or if they were to put in place. So today, as we all know, there are no FOC restrictions on the IRA benefits for battery storage. There are for, you know, for our part. But what we have done, as this is a potential risk, we have worked with AESC to ensure and we have a plan that we will put in place to ensure that we will meet any restrictions on ownership that might come up. That's what I can say today. We cannot be more specific than unfortunately. But this is something, a risk that we have identified, that we have worked with AESC to address. And we have a plan that we will put together to ensure that if there are restrictions on ownership that we will adapt to ensure those lines and those investments will still be able to meet potential restrictions that come up. And the interests of AESC and ours are very much aligned in ensuring this goes forward. So that's what I can say. This is not, you know, this is something we clearly have been working on for some time and we feel confident that, you know, when, if, that we will be, it's not that we are, we're working ahead of the problem coming, no? And, you know, as the time goes along, we'll inform more stuff. But that's what I can communicate at this

stage. Thanks. And maybe around competitive concerns, last quarter you had mentioned that you had seen incremental competition from Chinese in the U.S. And I'm curious as to what's happened from a competitive landscape. I know that a lot of deals are paused, but are you seeing incremental steps from Chinese vendors in the U.S. or is that sort of abated over the last several months?

I think the U.S. essentially, due to the uncertainty, the fact that it's very difficult to price solutions with things potentially changing very, very quickly, it's very difficult to see where competition is today, to be very, very clear, because everybody's kind of in a wait mode. I believe that clearly that as we see some of these restrictions happening, it will be very, very difficult for some competitors who have, you know, essentially built everything in China and here to compete in this market. Not that I, you know, I say that we were ready for this level of certainty because it's not, but we were ready for this scenario. We always expected that the U.S. market was going to become a domestically produced market. And that's why we have been working so hard in developing a strategy that allows to build a solution in the U.S. Even with U.S. deals that people say you cannot do it, even with U.S. deals, we're going to deliver, we're going to receive our first enclosure made with U.S. deals that we can put the flak, you know, grain on them and sell to our customers at very competitive prices. So, you know, I'm sure that a lot of people now are trying to do this and put it together. We have a two-year leg up because we were envisioning this world. Globally, which is a little bit different, you know, we see, I will say, you know, the competitive landscape is the same as it was last quarter. You know, very, very intense, but with SmartStack, you know, we had to accelerate our product launches to be competitive, but we are very confident that SmartStack is the way to go. You know, and now, just to give you an example, you see people trying to copy it, very bad copies. People do, you know, what we are doing. It tells you that that's the best compliment that you have that we got it right, that people are trying to figure out how to do something that we can do. So, you know, we're very confident that we can win in the international markets with SmartStack and win over, you know, the Chinese players and all the competitors we have. Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Dylan Nassano with Wolf Research. Your line is open.

Good morning, Dylan. Good morning. How are

you?

Morning.

Doing well. Thanks for taking my question. Can you just talk a little bit about kind of the global alternative cell supply situation that's not China and that's not, I guess, US and AFC?

I mean, limited. There's some production coming out of the world, you know, Korea, Southeast Asia, and some in Japan, but really, I would say, the majority of cell production today comes out of China. So, that's the only thing. We are working with, you know, to diversify, looking at some of it, but the volumes we can capture out of China are limited, no? So, that's what I would say. I think that China, you know, we are working to develop a US supply chain as much as we can, and hopefully, some more players will work on these and we'll have a stronger local supply chain here in the US in the coming years, but today, we're very much dependent on China. This industry is dependent on China's

equipment. Great. Thank you. And then, as my follow-up, so, Ahmed, I think you mentioned Australia in your opening remarks. Can you just talk about, was any of these projects that you signed this quarter related to the stuff that was delayed previously? Like, status on those?

Yeah. Those three core projects that we delayed last quarter, we expect to sign two in this quarter, this third quarter, and one in the fourth. So, they're going well. We're very happy and, you know, they're going well. Great. Thank you.

Please stand by for our next question. Our next question comes from the line of Christine Cho with Barclays. Your line is open. Good morning. Thank you for taking the time. Good morning,

Christine. How are you?

Good. How are you?

Yeah, well, could be better, I guess.

So, I appreciate your comment that, you know, today, your mix of domestic content and non-domestic batteries is 10% cheaper versus 100% imported panels from China. And that could be a fair statement today. But, you know, if we are to assume that capacity is going to build outside China, you know, let's call it next year, and that's going to be much cheaper than what Chinese imports with the current tariffs are. So, how should we think about that scenario and how it would impact your bookings? And, you know, how should we think about, you know, you diversifying your supply outside China, if only for risk mitigation purposes? And if you do decide to do that, how long would that take?

Yeah, I mean, yeah, we clearly have a view of where prices in China could move. And we, you know, we also can reduce our local costs in the US. So, you know, it is, I wouldn't, you know, we know where we are. We know how, what the cost structures of Chinese, and we have a view on pricing for them. So, I'm confident we will continue to be, let's say, you know, this is an area, which is, one is an area. Tariffs, you know, stay very high, but, you know, our domestic, our mixing of domestic content will still be competitive. The other point to take into consideration that is important is we also bring, you know, as I said, it's a mix of locally produced and internally. So, we also will take advantage of the locally produced battery, sorry, of the Chinese prices. So, you know, when we looked at scenarios, this strategy we have gives us a lot of optionality and works well in many of these scenarios, including a scenario where Chinese prices come down significantly. Okay. I don't have a lot of confidence. We're confident that we have this is the right.

Okay. And, you know, you talk about you guys providing the mixing, you know, that you're mixing it with your domestic supply and your imports, but is there an option for your customers to just get the batteries with domestic cells from you and get batteries with non-domestic content cells elsewhere and do the mixing themselves with different manufacturers? No, no,

no. No, no. No reason why

they

would do that. No, the real value is our, you know, the batteries are like gasoline. You don't care where, you know, the real value is our BMS, our ability to integrate our services. That's where we create value. You know, I mean, batteries are important, are an important cost element, but that's not where the value is created. Batteries are a commodity, a commodity, essentially. The value is created in our ability to our logistics, our intelligence, our systems, the ability, you know, our ability to deliver, you know, high availability. That's where the value is, you know, mixing stuff. It's a, you know, this is not, it doesn't work.

Got it. Thank you.

Yeah.

Please stand by for our next question. Our next question comes from the line up of Meet the Car with BMO Capital Markets. Your line is open.

Good morning. Thanks for clicking our questions. Good

morning, Amit.

Good morning. Just on the $700 million of contracts that you've kind of, I guess, are kind of in a state of pause right now, can you give us kind of like the mix between contracts that were under advanced negotiations versus, you know, contracts that were already executed out of that $700 million and then the contracts that were under advanced negotiations, is there anything kind of obligating them to, you know, kind of like, I guess, stay with you, rather than not cancel that project? And I've got one follow-up.

They were roughly half and half. Half of them were contract already in our backlog that were paused in the execution and these were contracts that were very early in execution and we had not been able to deliver to bring in the, you know, to bring into the country the equipment for that. And the other half were contracts that were not signed, you know. And as I said, our approach to the contracts that were signed is an approach of sharing the tariff risk so that aligns our interest in resolving the problem together, no? I somehow, you know, if I can maybe give you a two-second approach. This is completely different than the approach that how the COVID situation was managed. Remember after COVID, we had that major supply crunch. And how do we end it? We ended up with a lot of contracts where we were underwater that we had to deliver on and it took us a year and a half to bring those contracts back to neutrality. Today, you know, we have a completely different risk management. We share the risk with our customers in a way to ensure that we will align in the execution once the situation is clear to ensure that we can get the margins we care about and that they can do have the profitability they want. So that's a completely different approach. We think we're in a much better position to get out of the situation as, you know, once there's clarity that we can get out of it very, very quickly and profitability compared to what we had when we covered when it took, you know, almost a year or a year, more than a year. And we were able to do a chest to bring the contracts to meet neutrality. So I think we're in a good place.

All right. Thanks for all of that color. And just on turning to the cash flow statement, it looks like you guys have kind of burned around $260, $270 million of cash. I think Ahmed kind of indicated to me another couple hundred million dollars of investment in working capital for the second half of the year. A big portion of that was like the $500 million of kind of inventory that I guess kind of pre-bought cells from AESC. They've helped them stand up, I guess, the additional lines

at

their Tennessee plant. When would those spotlights, that kind of those pre-bought kind of domestic cells start coming back to you in terms of cash? So

hey, I'm Ahmed here. So yes, you're right. I think when you said $200 million, I think that is year to date. I think in the quarter, our cash is roughly $40 million negative, I think, pre-cash flow. And that is primarily, I think the key is if you look at, we are building inventory to execute on our revenue plan that we have for the remainder of the year. If you keep in mind, we have roughly $2 billion of revenue that we have to deliver. I think that is what inventory is, which is roughly $700 million of inventory on a balance sheet to deliver our Q3 revenue. And then the remaining, I think, is for we will be using cash, as you mentioned, a couple of our million dollars. Half of that is roughly for our domestic content, and the remaining half is for our Q4 revenue. But I think we will recoup the, we will have receivables at the end of Q4, which we'll be collecting within the next 30 to 60 days after the year ends. So net-net, I think this is all working capital, long way of answering your question.

Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Andrew Prococo with Morgan Stanley and Company. Your line is open.

Great. Thanks so much. Good morning, everyone. Thanks for taking the question. Most of my questions have been asked, but I just wanted to follow up on domestic content strategy here. I guess I'm just curious why, given the uncertainty around tariffs on China, a 100% domestic cell battery from you guys wouldn't be something that customers would be willing to contract today. I totally get that there's uncertainty around what's going to happen to the China tariffs, but it seems like that's an easy workaround for a customer. Is it because they're waiting to see what happens to China and they'd rather mix? Is it because 100% domestic cells is not cost, is cost prohibited? Just trying to get a sense for why that wouldn't be an easy solution for customers right now. Thank you.

Good question. I think that, the main issue today is how to ensure you know, where do you think things are going to be? When is the uncertainty going to be resolved? If you believe that the current tariffs are the solution long term and that there will be no reduction in tariffs going forward in the short term, clearly the solution of a fully domestic offering will be very attractive. However, some are customers and I think generally there's a view that the government is engaging with trade negotiations with China and that there will be a change in the negotiations with China that will convert into lower tariffs in the near future. So it's very difficult to commit to a 20-year contract and resolving a problem if you believe that two weeks from now there will be an announcement saying or a month from now, whatever time frame you think it is, saying, hey, these retaliatory tariffs that we have mentioned are no longer in the... Because remember what we had is that a lot of the tariffs we have today are retaliation because they were not talking. Some people expect that once they start talking the retaliation will come down and we'll have much better views. So that's what it is. I think that if... But you are right. If we have a view that this is a tariff level going forward, a full US offering will be very, very competitive.

Okay. That's helpful context. Appreciate that. And just one follow-up. I guess a little surprise to see the weakness in bookings in the first quarter being that tariffs, the high tariffs really didn't go into effect until April. So just curious if you could talk more to what you saw. Was it competition-driven in the international markets, which I know has been a headwind? Just curious to get more context around why first quarter was such a significant drawdown, whereas maybe we would have expected to see more of that in the second quarter with the China tariffs. Thank you.

Good question. I think that we're expecting a significant amount of US contracts in the second quarter. And I say once it was clear that Liberation Day was coming, that the Trump administration was, I'll say early March, late February, around that time frame, people start saying, hey, you should take the risk or we should take the risk. It started that part and that made it very difficult to... Our approach is let's share the risk. But most of our customers wanted to wait until they have a better view. And that happened a few weeks before Liberation Day. So internationally, we were not expecting that much. Clearly, I don't think it has been affected at all by the US situation today. We were not expecting major contracts. We do expect major contracts this quarter. So that's what I'll tell you. And we don't see any real spillover of the US situation into international markets at this stage.

Great. Thank you.

Please stand by for our next question. Our next question comes from the line of Julian Dumoulin-Smith with Jeffreys. Your line is open.

Hey, good morning. This is Hannah Velazquez on for Julian. Thank you for taking the question and squeezing me in. Good morning. On the note about a couple of 100 million of additional working capital need, can you just confirm that that's specific to 2025 or do you see that extending into 2026? And then as a related point, when or could you speak directionally to when you expect to inflect back to positive free cash flow generation?

Sure. So I think in terms of your question, yes, I think this is mostly for 2025. We will be, as I mentioned to Amit's question, I think we will have a couple of hundred million dollars of receivables at the end of Q4 because we keep in mind as we discussed, we have back-end loaded revenue in our backlog that we will be recognizing in Q4. So I think that revenue we will be collecting those receivables in Q1 next year. So I think that will give us enough cash. So we feel pretty good about our cash position going forward. And your second question is on free cash flow. Yeah, I think we continue to see we don't have any significant capital commitments. This year EBITDA is roughly 10 million dollars, but at next year we will give you guidance on Q4 call. But as Julian mentioned, I think as we continue on the path of what we expect in terms of signing new contracts, we feel pretty good that we will be free cash flow positive next year because we don't have any significant capex and it all boils down to the EBITDA. Our goal is to generate free cash flow next year and maintain our profitability. That is, frankly, the key focus for everybody influence.

Okay, got it. Super clear. Thank you. And then as a follow-up question, the 700 million in pause revenues, is that reflective of the pause projects and delayed signings that you have visibility into as of today? Or have you built in any potential or any extra cushion, I suppose, in case, say, I don't know, the 90-day pause on reciprocal tariffs is not extended? I don't know your level of exposure there, but could that 700 million widen is the premise of the question?

No, I think the 700 million is what we see the reason we don't see any additional downside, even if tariffs were to, let's say that, the end tariffs on Vietnamese or Malaysia or somewhere else were to move. So we're confident where we

are. Yeah, I think the only thing I would add is given we have a confidence that we have, as I mentioned in my comments, we have already brought all required equipment in the country. So we have delisks that the revenue guidance we have given, given there's nothing to be imported in our forecast.

Thank you. Thank you. Our next question comes from the line of Kashi Harrison with Piper Sandler. Your line is open.

Hey, Kashi. Hey, how's it going? Thanks for sliding me in here. You know, Julian, you said your domestic solution is 10% cheaper than the imported content before taking the bonus into consideration. You know, is there a simple way we should think about the breakeven tariff level that would make your costs, you know, exactly in line with imports that, you know, 100% is a 50%? Just trying to think about what gets you to, you know, being in line with imports. Let me, Ahmed.

So yeah, I think, I mean, obviously, I think it's frankly, I mean, we are still, we're in discussions with many customers, so I can't be more specific, but I think in any likely scenario where we think the tariff's going to land, we feel pretty good that our product will be competitive. Obviously, 150 is, I mean, we already said, but I think we continue to see, in any, we ran different scenarios, in any likely scenario, we feel pretty good. I think that, that we can tell you. Okay.

And then, you know, maybe, maybe just a follow-up on the guidance. You know, you indicated that you're 95% covered, but you've also, you know, you're not, you're not, you've paused U.S. bookings. And so, how do we get to the midpoint of guidance if you've paused bookings? Is that just from international or is there something else? Yeah,

I mean, the 5% is essentially the revenue we would recognize out of the contracts we expect to sign from now to year end. As you know, we recognize a small portion of them early on once we deliver the engineer and stuff, so that's what it reflects to. And it's in line with what we are expected to sign in the coming, in the coming months.

Yeah.

Okay.

Thanks. Actually, if I could just sneak one more in. And, and, and, sorry,

sorry, Cash, Andy does not include any, any U.S.

Okay. It doesn't include U.S. Got it. If I could just sneak one more in. You know, what proportion, were any of those projects that you delayed, co-located with solar? If so, you know, oh, I don't know.

It's a combination of both. There's not one single, so I think there are multiple projects that we have. Okay.

All right. Thank you.

Thank you. Ladies and gentlemen, due to the interest of time, our final question will come from the line of Jordan Levy. Mr. Levy, your line is open with Truro Securities.

Thanks. Thanks for introducing me. It's Mo for Jordan. So quick one here. I understand 700 million reduction is mostly due to U.S. projects. Are you seeing any delays in international projects? And can you maybe walk us through the supply chain for international shipments? And then I'll have a

no, no, no real delays in international projects. Things are going well. And, you know, in, in for, we produce for international markets, generally we produce our enclosures in the, in, in Vietnam by batteries from, from China. Most, you know, and we bring the, those, those batteries are integrated into our Vietnam facility and deliver to, to, to sites. And then in terms of we generally bring them from, from Europe to meet more customers and we're developing a new supply change. So for smart stack, essentially that will bring a new supply for, so generally we are, we're doing very, very well.

Great. That's super helpful. I think the last quote you mentioned, 15% of backlog was exposed to tariff risk. I'm just wondering what's that number in your current backlog?

Thank you. Correct. But, but, you know, in, you mean in the case of the U S where do we see the, the way we should think about, about our backlog today and our tariff rates is that because we share the risk, we are aligned with our customers to ensure that once the situation settles, that we will find a path that will ensure that we meet our margins and their need and they meet their objectives. So that's the way it's not, you know, tariff risks is a, is a little bit of a, because the way this is designed is to ensure that we resolve the problem. So, you know, clearly tariff risk and the tariff risk will be, I guess, that the contracts could be delayed or delayed while we negotiate. But, but we are not expecting where the way we have designed this, we will not move forward with contracts that have negative or, or have margins that we do not find attractive. So that's the way to think about

it.

Appreciate the call out. Yeah, Jordan, thank

you. Thank you. Ladies and gentlemen, at this time, I will now, I would now like to turn the call back over to Lexington for closing remarks.

Thank you for participating on today's call. If you have any questions, feel free to reach out to me. We look forward to speaking with you again when we report our third quarter results. Have a good day.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.