Good day. And welcome to Fluence Energy's Third Quarter Earnings Conference Call [Operator Instructions]. As a reminder, this call may be recorded. I'd now like to turn the call over to Lex May, Director of Investor Relations. You may begin.

Thank you, operator. Good morning. And welcome to Fluence Energy's Third Quarter 2022 Earnings Conference Call. A copy of our earnings presentation and press release covering financial results along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures, are posted on the Investor Relations section of our Web site at fluenceenergy.com. Joining me on this morning's call are Manuel Pérez Dubuc, our Chief Executive Officer; Dennis Fehr, our Chief Financial Officer; Rebecca Boll, our Chief Product Officer; and Julian Nebreda, our incoming Chief Executive 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 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 Web site. 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 yourselves to one initial question and one follow up. Thank you very much. I'll now turn the call over to…

Thank you, Manuel. It is an honor and a privilege to be here with you today. Although I do not become CEO until September 1st, I thought I would share with you a bit about my background and my initial thoughts and priorities for Fluence. I'm not new to the Fluence family as I have been involved with the company since its creation and have been on the Fluence Board for the past year. For the past 23 years, I have served around the globe in different leadership roles for AES. Most recently, I was President of AES U.S. and global business lines. I have a kin interest and experience in growing renewable businesses. And I am proud to have led AES Europe when we introduced the first battery and e-storage projects units there. I have a good understanding of the key issues for Fluence from my role as a director. Although I'm still getting up to speed on the details of Fluence day-to-day operations, at this time, I do not foresee any major changes to Fluence strategy. I would like to share with you some high level thoughts on key priorities. My overall objective is to drive increased shareholder value by focusing on achieving profitable growth and ensuring continued strong liquidity. I will do this through three initial areas of focus. First, our supply chains, where I intend to support our efforts to relocate, secure and diversify from whom and where we buy these, to transform this from a challenge currently to a competitive advantage in the future. The recent approval of the Inflation Reduction Act provides additional incentives on this front that we will work very hard to capture. Second, product roadmap. I want to ensure we have a clear strategy that can generate strong margins as it…

Thank you, Manuel. Before I begin, I would like to express my gratitude to Manuel for his leadership and commitment to Fluence. Additionally, I'd like to extend a warm welcome to Julian. Julian and I have known each other since 2018, and I'm excited to continue our working relationship on a deeper level as we together strive to increase value for our shareholders. Now moving to Slide 8 and our financial performance. We had a solid quarter in line with our expectations and previous guidance despite the challenges we faced as a result of COVID lockdowns in China in Q2 and early Q3. We further improved our margins quarter-over-quarter, increasing the GAAP gross profit margin from negative 4% in Q2 to negative 2% in Q3 and turning to positive adjusted gross profit in Q3, thus demonstrating the successful execution of our improvement actions. The margin improvement quarter-over-quarter was driven by the reduction of the adverse margin impact we have discussed on previous calls. We have been successful in reducing these by about half for each quarter with the Q2 level being 43% of Q1 and Q3 48% of Q2. We are focused on ensuring this positive trend continues into the fourth quarter. During the third quarter, we were once again cash flow positive and added nearly $40 million to our cash balance, further bolstering our liquidity to more than $760 million. Finally, we are reaffirming our fiscal year 2022 revenue guidance of approximately $1.1 billion. This is predicated on seeing on-time arrival of products which are currently in transit and timely transfer of products to our customers. Turning to Slide 9. As Manuel mentioned earlier, we had a decent quarter for our energy storage order intake following two exceptionally strong quarters in a row. Even though we increased prices throughout…

Thank you, Manuel. We are about to start the Q&A session. Before we begin, I would like to note that while Julian is participating on our call, he is not yet a member of the management team. And as such, he will not answer any questions today. All questions should be directed to Manuel, Dennis and Rebecca. Operator, we are now ready to begin Q&A.

[Operator Instructions] Our first question comes from Julien Dumoulin-Smith with Bank of America.

Maybe just to start off, first off here with Utah and just expanding a little bit on the relative economics pro forma for the IRA here. Can you elaborate a little bit more? I know in the remarks, you commented about Section 48, et cetera. But can you provide a little bit more meat on this one, if you will, around quantifying some of those benefits and sort of the the NPV, if you will, around IRA there? And then if you can follow that up with some of the commentary about just the scope and acceleration in '24. I know you said it was a little bit of a delayed impact on order book, but just quantify that a little bit more on what you expect in '24 as a consequence. Manuel Pérez Dubuc: First is that, obviously, we need to get -- enter into more of the details of the new act. But certainly, this is great news. I'm very happy that we decided to go regional on the manufacturing a while ago. So we're much -- very, very ahead of many of our competitors. We already have the facility in Utah. It's going to be up and running probably in a month [Technical Difficulty]. We see the benefits not just in the demand, better pricing and opportunity for cross selling, the standalone tax rate for -- standalone energy storage on [TDC] [Technical Difficulty]. There's going to be some [Technical Difficulty] the better economics for our customers, all of those elements are very encouraging.

Got it. And I think the sound quality came through a little bit off the [Technical Difficulty] at least on our side. Just if I can, just quick follow-up here if I can. Just with respect to the commentary on the guidance and predicating on-time arrival of products, and just you commented about needing to improve some of the quality of the items. What are you doing to diversify your suppliers, et cetera, to ensure execution? Manuel Pérez Dubuc: Julien, your voice got caught and…

Julien, we had trouble hearing you on that one. You were cutting in and out. Could you try repeating that?

The diversification strategy or how else do you improve your operations in the back half of the year and ensure full year '22 execution here, if you will.

So Julien, your question is primarily about supplier diversification, correct?

Again, I know there's a few different angles that you could speak to here just with respect to some of the challenges you face, but it seems like many of them are abating already, whether it's shipping or some of the Chinese considerations. But one of the other elements that you alluded to was substandard cars, et cetera. Just what are you doing to mitigate that, how much could we see that impact here or how could that manifest? And then more importantly, how do you mitigate that impact going into '23 here?

I think I'll answer it in three parts. One is supplier diversification of our major components. So as we consider our product roadmap and where we invest some of our R&D resources, it is, in fact, to ensure that we are capable of expanding that supplier diversity. So that's one way to handle it is to make sure that we have more than one choice. We would focus there mainly on batteries and inverters. Both are a target area. That is -- maybe that leads me to the second point about batteries or supplier diversity, which is a major goal for us that we've talked to you about before. And not only overall [Technical Difficulty] but geographic supplier diversity when we consider where we get our batteries. So we haven't made a focus on that. We have had a major sort of session with eight battery OEMs, most of whom we have not worked with before. So we're expanding beyond the OEMs that we currently do business with to additional OEMs. We have down selected based on technical and sort of quality features of those OEMs and we'll be pulling additional OEMs into the mix of our products moving into 2024 and 2025. When we talk about geographic diversity, the story continues to be the same. Of course, most batteries are currently from China. When we look at where we're going with our product roadmap by the end of 2023 or so, 30% or so of our battery supply will be from outside of China, from areas such as Europe and Korea. And then the third part of the answer, Julien, is about specifically quality issues. So let's say, we have several suppliers for inverters and batteries. And we still want to and we have developed the methodology to be able to manage those supplier quality issues better. So I'll point out two things there. One is we just issued a press release about a systems test lab that we're putting in Pennsylvania right outside of Pittsburgh. And a big part of the reason for that lab is to be able to do exactly that, test our products, test their components and test their designs, both before they're launched and then when they're out in the field so we can recreate issues and solve them quickly, so best practices from product companies. That goes hand in hand, I think, with some supplier quality methodologies and processes that we've put in place over the last 12 months. So we have the processes, and we have the facility. So we can tackle these things in an ever more efficient way.

Our next question comes from Maheep Mandloi with Credit Suisse.

Just quickly on the [IRS] aspect, I mean just to dig deeper on that. How much capacity do you have planned in Utah? I mean just calculating on the 75 to 150 [ques] per week -- I calculate around 4 to 8 gigawatts, but how should -- is that correct? And how should we think about on gigawatt hours and does that $10 per kilowatt hour kind of applied to this or is there anything else on the IRA we should expect from this?

So I think we really set ourselves up that, first of all, with the initial stage of the facility size, we can basically capture higher demand, which we have contemplated for calendar year '23. That means that we are really 100% coverage out of that capacity. And we then have really a flexible setup there so that we can further increase the capacity to north of 10 gigawatt hours, maybe all the way with 14 gigawatt hours down the road. And it's actually not that much of an effort to increase the capacity over time. In that regard, really the major step is kind of making that first initiation and that really has been a work of a while. And so we really got a very good timing of being ready to launch that now as the IRA kicks in and really, that's incremental increase of capacity that's really then much easier to achieve. So we are very positive in terms of the capacity coverage we have.

And I appreciate the color there. And just looking more on to Slide 12, the margin upside from the IRA kind of talked about that coming in FY '24. Is that the right way to think about it? Just trying to understand like this facility comes on in September, how much -- when can we expect that margin upside or pricing power from IRA for you guys in '23?

So let's keep in mind, we have two items under the IRA as the 30% ITC standalone storage and then the Section 48C in there. And so in that regard, I think very clearly, we're very positive that the ITC standalone storage will create credit, tax credit there will create additional demand. And with that also creates that margin upside on the pricing side. And that's kind of what we illustrated on the chart, which would then take till fiscal year '24. On the manufacturing side, I think we're really looking at more details in terms of the IRS in terms of guidance and how this will really work will be a question hey, is that actually creating pricing power or is it creating -- which then may be reflected in the gross profit line of the P&L or will we see that benefit somewhere more down in the P&L. In that regard, I would say really much too early to right now make a quantification around the potential positive upside on the manufacturing benefits and waiting for the [IRS] to come out with more details and then we will update you accordingly.

So definitely, it seems like an upside here for '23. All right, that's all from my end. I'll follow up the rest later on.

Our next question comes from David Peters with Wolfe Research.

First question I have is just on the order intake during the quarter, down versus what you guys did the previous quarter and even year-over-year for storage and services. Wondering kind of what drove the softness this quarter particularly on the storage product side? And then just I think you said the services attach rate is kind of a timing issue, but I just wanted to clarify that.

So I think in general, we feel that this year is a little bit different than previous years, what we have seen in terms of like the quarterly progression. I mean, you may remember that typically, we would have seen very strong Q3 and Q4 in terms of contracting as well as both on the revenue side. But with everything that's going on in the market and macroeconomics and supply chain topics, I think this year is really very different in terms of how the different quarters come together. In that regard, I would say we had on the order intake side, two very strong quarters in Q1 and Q2, which we typically wouldn't have expected in that way. And now we are seeing in Q3, which is more like on average quarter. I wouldn't really put too much to it and would say, hey, is there anything kind of going differently except for like, hey, just in general, the whole way, how this year is playing out in terms of the quarter is just very different. So that's the first part. And then to your second part of the question on the services side, so in general, we have two different set of customers. Some customers are really kind of very keen to sign a contract. The LTSA is the service contract at the same time when they also sign for the product. But then there are other customers, they may be also just from the internal organization point of view, when you have a product team -- product procurement team going out to sign their products, and you have an operations team who's more doing the service contracting. And in that regard, we sometimes see that some of the customers really just sign one or two months as they had of -- when the asset is really coming online and being handed over to the operations team that they're entering into the service contract. So that's a little bit what we have seen last year at the same time where we also had like kind of some of the attachment rates in some quarters have been rather low, and then another quarter we saw 90%, almost 100% and so on. And it's really a bit of this timing aspect. So in general, we are not really seeing a signal from our customers that they're not wanting to sign service agreements. And we see it really just as a timing issue and therefore, expect that to catch up in the fourth quarter and in the first quarter of '23.

And then just separately on the announcement of the new Chief of Digital, congrats there. Just wondering if you could share any additional details on that process. And if the vision for Fluence IQ has changed at all versus what was anticipated initially? Is there going to be a focus in one area or an acceleration of new apps or even more M&A potentially? Manuel Pérez Dubuc: First is that we're very happy with Krishna Vanka coming, and he wanted to join the Fluence family. It was a process that we analyzed, and we went through some internal candidates. We went out to the market. We had a very, very good talent that was interested in coming. This is an extremely attractive area. We all know the enormous opportunity that is ahead of us and also the value that we're creating with the Fluence digital. And that has been demonstrated in the Australian market, where we already have 30% market share. So overall, very happy with that. The product -- the team is there. I mean, there's no -- that's good that we have -- we stick -- the team together, they're very, very focused on developing the new products, expand into new markets. We are very encouraged by Mosaic being expanded to the [ERCOT] market. That is going forward. We're in very, very active conversations with one big customer there to do a test pilot. Then we see a lot of experience from Krishna developing software and bringing new products to the next level to really scaling out those products really scaling out those products. He's coming from a company named In-Charge that it's a joint venture with ABB, extremely successful with also background on having very, very talented teams and building the strong teams. So we keep going forward with our product development and expanding to new markets, and the addition of Nispera team in Europe is a great combination. So very, very much happy with Krishna. And as soon as he joins the company probably in a few weeks, he will start hitting the ground running and start working with the team and giving us what is the probability to even accelerate some of our product development.

Our next question comes from James West with Evercore ISI.

Manuel, maybe more of a philosophical question for you as you guys think about, and meaning going forward as you transition out with Fluence, the role of, I guess, revenue growth versus profitability and profitable growth. And given the early stages of the build out of energy storage, what are the priorities, what's most important here for you guys, is it a combination of both, is it a land and expand? How are you thinking about it?

Let me take that with forward-looking statement here. Just want to be very clear is to have a strong focus on profitable growth. So it's really both. It's not just one or the other. At the end, like you're also indicating as an industry, we are really in the early innings. And we are very positive about the long term outlook. And therefore, it's very clearly that it's really about continuing to grow here. But as we also said very clearly in the past years, a lot has been about a bit of a market share gain and positioning the company as like the leader in the space and I think we have clearly achieved that. And therefore, it's not just the growth side it's also the profitable side and really the focus on the bottom line. And in that regard, it's really that combination and to say let's continue to grow at attractive rates, which is just coming by the market growth itself, but at the same time, really keep a very clear focus on achieving the breakeven on adjusted EBITDA and cash flow basis in '24.

And then curious about the opportunities that you guys have highlighted several times the India and the JV sign there. Maybe if you could expand a bit on the opportunity in that market and if it kind of opens up other areas in kind of the Southeast Asia market. Manuel Pérez Dubuc: This is another very, very attractive market. We see around 27 gigawatts of storage being deployed in India by 2030. We have this great first mover advantage. We have a technology team. We established a technology team in Bangalore. So that is also very good for us. The localization of the product in India, it will also help us develop a very competitive product there. We have a great partner, ReNew Power. It's an excellent developer there, very well known in the market, one of the leaders, very strong shareholders. Similar culture, also a public company, public listed in NASDAQ. So very, very common elements that is -- we feel so comfortable working with them. And again, I mean, this is another JV. We started as a JV. We are establishing now Fluence and another JV that we can repeat the tremendous success of Fluence in the India JV. Well, we're expanding ourselves and multiplying and learning from our success and try to repeat those.

Our next question comes from George Gianarikas with Canaccord Genuity.

I'd like to ask first about your gross margin targets. I mean, a lot has changed since your IPO. But I'm wondering we think about the 15, 35, 85 margin target that you laid out several months ago for three segments. Are those still viable at a steady state or has something changed structurally about the business that those can no longer be relied upon?

Absolutely, these are the targets which we are going after. I would say what structurally may have changed now is with the IRA. So that certainly hasn't been baked into any of the previous financial modeling outlook statements in that regard prior to our previous statements around the IRA. A bit early to quantify that margin upside here. But I think on the -- especially on the product side, it's there very clearly. Otherwise, in terms of kind of the more near term margin progression, I think we stay in line with our statements, especially from the last earnings call, where we said, hey, expect to see in '23 somewhere in that low to mid single digit and then fiscal year '24 in high single digits, also here is that addition that's all prior to any IRA upside. So that's the same statement there.

And as a follow-up, just on the competitive dynamic that you're seeing in the marketplace. Have there been any material changes over the last several months in terms of who you're seeing and who's more aggressive, less aggressive and general market share dynamics? Manuel Pérez Dubuc: Well, in general, to be honest, at one point, we were receiving a lot of calls from customers. They didn't have any other option because some of our competitors, they decided to slow down their participation. Now some of them, they're coming back. We have been becoming more selective both in the customers with strategic customers, the markets and the segments we're participating, which also is helping us on the margin side. And the fact that we haven't had any cancellation of projects and we have been able to reprice some of the contracts, it tells us that those customers that we selected are very loyal. They want to keep working with us. They want to keep developing their portfolios with us. And it's a satisfaction to know that we are a name in the market and respected, and we keep attracting new markets. Something that I can also add is that with the ReNew -- the new situation in Europe, the demand in Europe also is becoming extremely strong. And we've seen very good opportunities there and expanding, a lot of repetitive customers in the US. Now we saw that happening with the ITC in solar. Now having the standalone storage ITC and all this push for reshoring infrastructure and manufacturing in the US, all that is -- we will see additional demand. So in general, we feel very comfortable with the prospects around the world. And Asia has still very, very strong market for us.

Our last question come from Craig Shere with Tuohy Brothers.

They're all kind of related. First kind of near term and maybe I didn't catch it in the opening comments. But I'm trying to reconcile the guidance that we could end the force majeure possibly by the first quarter of fiscal '23 with the comment that tight battery and inverter market conditions may extend into next year. And then I certainly understand that in today's remarkably tight energy markets, our customers are certainly happy to pay up for lithium battery storage project inflationary pressure. But looking in the mid decade for an eventual easing of macro inflation and ongoing lithium pressure start to change customer behavior, and then the last part of the question is, do you see tight lithium battery market conditions kind of accelerating interest in alternative technologies? Manuel Pérez Dubuc: It is a very interesting question, and I will answer that in my personal view. I think that -- you remember that we entered into a strategic alliance with QuantumScape. I personally think that the solid state battery is a very, very interesting evolution of the lithium ion is, in fact, 3 times more advanced in terms of energy and so that will significantly reduce the overall cost. By nature in this design and architecture, it use much less material. So it's not just has a lower cost point but it's also more efficient and then very high density. So I think that, that will be a very interesting evolution in the actual technology. If you look at the manufacturing that is being built in Europe and in the US, that is massive and it's massive and it's based in lithium ion. There might be other technologies on maybe longer term storage like hydrogen. Probably the future will be a combination between both, some hybrid models. But the market is massively investing in researching on lithium-ion type of batteries. Rebecca and their team has been looking for other options like sodium. And we see some opportunities also in sodium that obviously has a more [prudent] components and raw materials on that one. But it's still -- there's still some work to be done. We have been extremely innovative by testing new batteries. But again, I mean, it's a matter of economy of scale and the quantity of production because there are other options out there, yes. But if you want to ask them for 2, 3, 5, maybe even 10 gigawatts, they are not capable to do that. So it's not just the technology but it's also the manufacturing capacity in the volumes.

And nearer term, maybe you can help me understand the opportunity to end the force majeure into early next fiscal year, while still expecting tight battery and inverter market conditions. How do you see that all playing out for you in the coming two, three quarters?

I think in general, we see actually that there is still supply and demand imbalance, and that actually is a positive driver in our perspective in regards to the margin upside potentials here. At the same time, of course, what it also does, and we have been talking about that in the last earnings call, it kind of drives a bit of an elongation in the revenue cycle. And that's a bit the other kind of aspect to it. But in general, we feel that we have done the homework, that we have secured all the supply for fiscal year or calendar year '23 already. That means for that time period, we are well setup. And I think we have been making earlier statements also that we are in a very good position in regards to securing the '24, potentially the '25 supply. In that regard, overall, if you like, that things are going into the right direction, and we'll continue to do our homework in these areas. Manuel Pérez Dubuc: I just would like to add, and again, this is a very personal note because my experience in the field and other technologies evolution is that I don't think that the bottleneck will be the batteries in the future. The bottleneck will be the existing infrastructure. We have seen just the effect of the ITC on solar and how many years for interconnection you need to wait in order to get the capacity. So there's a tremendous opportunity for Fluence. We are the leaders and the only company out there that is offering the transmission booster. We know that the transmission is going to be a bottleneck in this new grid, and we already won a very significant contract in Europe. We participated in Germany recently. The regulator approved the transmission booster in Chile. So it's a proof point that, that need, it was a significant market for us. And if that comes to the US in order to really accommodate the additional demand that we will see, so we will see -- we will have additional opportunity to offer some cross selling opportunities with the transmission booster.

There are no further questions. I'd like to turn the call back over to Lex May for any closing remarks.

Thank you, Michelle. And thank you, everyone, for your participation on today's call. If you have further questions, please feel free to contact me. We look forward to talking with you again when we report our fourth quarter results. Have a good day.

This concludes the program. You may now disconnect.