Good day and thank you for standing by. Welcome to the Fluence Energy Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Lex May, Vice President, Investor Relations. Please go ahead.

Thank you. Good morning. And welcome to Fluence Energy’s second quarter 2023 earnings conference call. A copy of our earnings presentation, press release, and supplementary metric sheet covering financial results along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures are posted on the Investor Relations section of our website at fluenceenergy.com. Joining me on this morning’s call are Julian Nebreda, our President and Chief Executive Officer; Manu Sial, our Chief Financial Officer; and Rebecca Boll, our Chief Product Officer. During the course of this call, Fluence’s 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 the 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 on our earnings materials on the company’s Investor Relations website. Following our prepared comments, we will conduct a question-and-answer session with our team. During this time to give more participants an opportunity to speak on this call, please limit yourself to one initial question and one follow-up. Thank you very much. I will now turn the call over to Julian.

Thank you, Lex. I would like to send a warm welcome to our investors, analysts, and employees who are participating in today's call. This morning, I will provide a brief update on our business and then review our progress on our strategic objectives. Following my remarks, Manu will discuss our financial performance for the second quarter as well as our outlook for the rest of the fiscal year. Starting on Slide 4 with the key highlights, I'm pleased to report that in the quarter we recognized our record $698 million of revenue and $32 million of adjusted gross profit. Our demand was strong across all three of our business lines and new orders were approximately $847 million highlighted by our services business contracted at 1 gigawatt and our digital business contracted 2.7 gigawatts. Furthermore, our signed contract backlog as of March 31st was $2.8 billion, a quarter-over-quarter increase of approximately 100 million, even after recognizing almost 700 of revenue during the quarter. I will also note that approximately 81% of our backlog is with not related parties. Lastly, our recurrent revenue businesses which consists of services and digital, experienced a strong growth during the quarter. Our service attachment rate was 263% for the second quarter driven by the signing of the service agreement with Austin. Furthermore, our deployed service attachment rate, which is based on our cumulative active service contracts relative to our deployed storage remains above 90%. Looking specifically at our digital business, we had a very strong quarter as we were able to contract 2.7 gigawatts which is at 200% increase from the previous quarter. These are early signs that our strategic direction is progressing successfully. Furthermore, we added approximately 800 megawatts of digital assets under management. We still have a lot of work to do regarding our…

Thank you, Julian. I will begin by reviewing our financial performance for the second quarter and then discuss our guidance for fiscal year 2023. Please turn to Slide 10. Our second quarter revenue reached a record high of $698 million with a record adjusted gross profit of $32 million. Revenues benefited from a pull forward of more than $200 million into the second quarter from the second half of this year, driven by improved project execution on select projects relative to our expectations and aided by the availability of materials. In the second quarter, more than 85% of our revenue or roughly $600 million came from legacy contracts. The revenue that we pulled forward into the second quarter was associated with legacy contracts, and we now anticipate that almost all of our low-margin legacy backlog will be turned over by the end of this fiscal year. Since we are working faster through our legacy backlog, we are set up well for significantly higher margin rates in the second half of the year when compared to the first half. With regard to operating expense and adjusted EBITDA, second quarter operating expense, excluding stock compensation, were $61 million or approximately 9% of revenue, which is down from approximately 17% of revenue in the first quarter. We remain disciplined about holding our operating expense growth to less than 50% of revenue growth and expect this model to create operating leverage in 2023 and beyond. Turning to our cash balance, we ended the quarter with more than $380 million of total cash, including short-term investments and restricted cash. This figure is in line with our comments on our first quarter earnings call. Rounding out the balance sheet discussion and in line with prior communication, we saw a decrease in inventory of approximately $300 million…

Thank you, Manu. In closing, I would like to reiterate what I consider to be the key takeaways from this quarter's results. First, we had a record quarter in terms of our financial performance with our highest revenue and gross margin in Fluence history. Second, we continue to make significant progress on our risk management, most notably in reducing our supply chain risk as reflected in diversifying our battery sales suppliers. Third, we continue to expand our offerings, concentrate our efforts in developing new products and solutions that create value for our customers, as shown in our third transmission segment award. Fourth, we are positioned in Fluence for increased IRR by including Nispera in our standard offer starting this month. And fifth, the financial results and accomplished covering today's call provide us with high confidence to increase our total revenue and adjusted gross profit guidance for fiscal year 2023 and to pull forward our time line to profitability. This concludes my prepared remarks. Operator, we are now ready to take questions.

[Operator Instructions]. Our first question comes from the line of James West with Evercore.

Good morning James. How are you?

Great, good morning guys. Julian, quick question from me about your customer base and kind of how they're thinking about their storage needs right now. I know as we think about last year, it was kind of a mad-dash scramble for assets and for getting equipment and batteries in place. We've obviously had the IRA, and there's been some time line lag on total understanding what the IRA means in the U.S. But are the customers -- are they coming to you now still with, "Okay, what's it going to cost me?" Or is it more of a question of, "When can you get to me? What's the time line?" Because we know you're not just focused on land and expand, but focused on profitability too, which is -- obviously it's clear this quarter, and so congratulations again on this quarter?

Thanks, James. I mean, we do a lot of -- our ability to expand our margins comes -- the main driver has been a real detailed segmentation of the customers we work with. So it might be a long way to answer your question, but so what do we do? We look for customers that value what we offer; that value clearly, products that are -- that we -- that they are sure that they were going to be delivered; that they're going to perform as we tell them that they're going to perform; that will provide services; that will keep this solutions up to date; and that will have them running for them when they need it, that they can ensure it very well and that they can finance it. So the customers who care about that are the customers we work with. Some of them, price is very more important than others. For some of them is ensuring the performance. For some of them means, hey, especially where the regulatory systems are going to change, I need somebody who will know will help me adopt my fees to. Why don't we see this quarter, which I guess is a little -- what do we see in the very front end? Clearly, the reduction in lithium prices and the more liquid market for batteries opens up more optionality. I think that the RMI that we offer our customers, which when prices were going up was something that makes them a little bit uncomfortable. Now it makes them feel better on signing a contract because they know at the end of the day, they will get something that's in line with what the market is or close to where the market is based, so that’s great. So that's globally, you…

Okay, okay. That's very helpful Julian, and thanks for that. And then maybe a quick follow-up from me on margins and maybe for Manu. But getting to EBITDA breakeven by the end of this fiscal year, obviously, a good target and making good progress there. But how should we think about EBITDA margins as we go through fiscal 2024 and getting to a level of profitability and sustainable profitability on EBITDA?

Yes. So what -- consistent with what we have said in our last call, we expect to be EBITDA-positive in the fiscal year 2024. I think you'll see the margins progressively improve as we go through the quarters in the fiscal year 2024 as well. And that's because if you look at our trajectory and look at it from a trailing 12-month kind of revenue average, we continue to grow our revenue. And as we've said, we'll grow our operating expense at less than half the revenue growth rate. And if you couple that -- those two comments with the fact that we are signing new contracts in the 10% to 15% margin rate, you can see the profiling of the EBITDA progressively going through the quarters.

Okay, got it. Thanks guys.

Our next question comes from the line of Brian Lee with Goldman Sachs.

Hey, good morning Brian.

Hey everyone, this is Miguel on for Brian. Maybe just the first question here on the $500 million incremental for fiscal 2023 and 2024. You're talking about attributing that to just better supply chain visibility and obviously the better execution here. Maybe could you just expand a bit on that with some specifics or some examples, is it just a function of getting more visibility on batteries, is it being able to pull in projects faster than expected, just hoping to get a bit more color there on the execution front? Thanks.

Yes. Brian, the way I will -- first, clearly is the fact that our machine is working better. We had the right manufacturing, did a great job this quarter, and we have been able to de-risk our deliveries in our contract with our customers. So I think the effort of a lot of work from everybody from our supply chain, from our sales team, from our manufacturing team, but also at the end that we have been able to de-risk our deliveries in a way that allows us to recognize revenue, even if some of our customers are not fully ready to install the equipment. That's the way to think about it. And the combination of the three, I cannot tell you now is that, one, each one is very essential for this. If the supply chain had not worked, we won't to be here. If the manufacturers have not been able to pick up production, he wouldn't be here. If we had not de-risked on our implementation, people have not done the work they're doing, we wouldn't be here. So it's the machine working better. And we have identified the projects that we -- where we believe we can do this, and those are the basis for our $500 million better revenue over the next -- between this year and next year.

Got it. I appreciate that. And then the follow-up question here is -- kudos on the update to the guidance, obviously. But outside of that, just we're hearing about marginal constraints in the U.S. in general still hampering a bit the solar projects. Could you maybe give an update on what you've seen specifically for projects in your backlog for solar plus storage projects? And maybe to what degree you've seen those kinds of projects push out because of these module constraints? Thanks.

Yes. I mean, my understanding -- we haven't heard anything specific from our customers. As you know, we sell to customers who are probably on the bigger side and have the capability to manage that better. But I will tell you, that's clearly one of the reason we took into consideration when we looked at our enterprise risk management. And one of the things we changed in our contracts was that if our solutions are ready for delivery, we -- the customer needs to take them irrespective of where they are in their solar part, if they disconnected the solar part or irrespective of where they are with some other elements. So that's what I will tell you. But we -- our customers today haven't heard anybody coming up to us and telling us, "hey, I'm not going to be -- more of the questions on being a little bit cautious are connected to the IRA, that where they can get modules or not in the U.S., clearly.

Okay, got it. Thanks everyone. I will pass it on.

Our next question comes from the line of Maheep Mandloi with Credit Suisse.

Hey Maheep, how are you?

Hey, good morning. Thanks for taking the questions here. Sorry, I was hopping between calls here, so I might have missed this. The $500 million over the two-year period, is that higher revenues versus the prior run rate or is that just looking at FY 2024 versus FY 2023?

Yes. Hey Maheep, so the way to think about the $0.5 billion is as follows: we've increased the guidance for 2023 and at the midpoint, it's $225 million. And then we've kept the same run rate. So you have a higher 2024 implied outlook or outlook based on a higher 2023. So if you take that math to 2024, that's incremental $300 million for 2024. So you add the $225 million with the $300 million, you get to over $0.5 billion of revenue. And that's on the backs of great project execution, and that's in the second quarter, and that has a read-through for remaining 2023 and 2024 as well. And I would be remiss if I don't reiterate the fact that we have very strong demand signals with over a $1 billion increase in our pipeline.

Got it. I appreciate that clarification. And then could you kind of talk about which regions are driving that and is this customers accelerating the projects or more benefits from manufacturing or procurement on your end? Thanks.

Yes. So what I would say, in terms of the demand signals and if you look at our order book for the second quarter, and as Julian mentioned, we are winning globally. And we are winning both in solutions and in services. So that's kind of color and context for your question on the top line or the demand signals. Obviously, the Americas is two thirds of our overall business, and that's going to be the larger dollar driver of it, but we are winning globally. In terms of what's driving the revenue upside in the second quarter is we typically will see -- execute our projects between the 15 to 18 months. But because of better execution, as well as how we are writing our contracts now, we have the ability to pull forward some select contracts in the lower end of the 15 to 18-month range. And that carries through in the back half of this year and next year as well.

Appreciate it, thanks. I will take the rest offline. Thank you.

Our next question comes from Tom Curran with Seaport Research Partners.

Hey Tom, good morning.

Good morning. For the growth you've had in services assets under management for fiscal 2023 year-to-date, could you share with us for the contracts you've added, the split between those with augmentation and those without?

Let Manu take that one.

Yes, I don't think we give that split, but the way to think about it is a significant portion of our contracts have the ability to augment the site, if the customer so chooses.

Yes, gives them an option.

Gives them an option. So that's the way to think about it. So most of our customers do have the option in their contract, if they so choose to augment.

So years ago or before, it was not an option for customers. They had to take our augmentation proposal. Now the way these service agreements are, they do have an option, and they can decide to take or not take our augmentation proposal. We believe that we're all going to take it, well, because but that's how it works.

And so you are seeing evidence to support the expectation of a trend towards ever more augmentation opt-in?

Yes. The issue is that it is an option that the customer can take, we cannot put it as a backlog value. You know what I mean? So it's an option that they have. But I think that when we have looked at this, we believe in most cases, it will -- I mean, it will depend a little bit on where the customer needs are on his side or his contract and his offtake or top bar [ph]. But if there's a need for augmentation, they will do it with us. And we have work -- from a product perspective, we have made some changes to our offering to ensure that we can provide our augmentation offering is a lot wider. So we can offer our augmentations with different technologies. So that, I think, will also make us a lot more competitive when the time comes. And I think it will -- I don't think anybody will be able to get into that territory, but I don't want to brag about something that hasn't happened yet.

I appreciate that, Julian. And then for the consolidated pipeline, can you give us a sense of how much visibility you had on the portions of that, that are mega projects or storage as transmission awards that could be doled out over the next 12 to 18 months? And then for storages transmission, would you expect your next award to most likely come from the U.S., Australia, Germany or Chile?

Yes, I mean I prefer not to go into the details about our pipeline. I think it's -- so that will be my preference, not to go and to start giving details on the pipeline. We'll make our life -- all of our life more difficult. On the transmission as a -- storage as a transmission, we're working both in Europe, in Chile and the U.S., like you mentioned. I will say that most likely we will be again in Europe. That's my opinion. But -- and I can say this and I will say it, the Chile regulation for transmission do not work, do not work. That system like it's they design it, it's not going to work. They came up with this 15-minute storage. That's not going to be good. They're not going to get. It's not going to work. So I think unlikely. I don't know if it will be or not, well, probably, it will be. But I think that's going to be a successful project. We continue to see the transmission regulators in Europe, much more clearly understanding how this works and how to make the work. The U.S., we're just starting. So -- and I said this in the regulator, I'm sure they don't listen to these calls, but it will be good for them to go back, look at it because they -- we have -- we have told them, this is not going to work. But I think they have a different view of how they -- what they want to do.

Got it, thanks for taking my questions.

Our next question comes from Julien Dumoulin-Smith with Bank of America

Hey Julien.

Hey, good morning guys. Hey Julian, glad you are a namesake. Thank you very much for the time. Appreciate it. So listen, I just wanted to first come back to the $0.5 billion revenue commentary that Manu provided. Can you elaborate a little bit on what this says about getting to kind of the target gross margins, especially as you think about what that says for next year here, obviously, you have that improvement through the course of this year, but what does that say on the incremental margin that you're getting for next year now that you're really accelerating the revenue side of this?

Yes, so -- thanks for the question, Julien. So just the way to think about our gross margin, and you can see that come through our guidance updates. Like, we are signing the new contract in the 10% to 15% margin rates. And more importantly, the new contracts we are signing, we're keeping those margin rates. And as you look at the increase in the guidance from the last call, the current call, you can see the increase from a gross margin perspective or a gross margin rate perspective of 50 basis points. And the new contracts being signed at in the 10% to 15% margin rate units. As you roll forward into 2024, that's a good assumption from a gross margin perspective. And as you translate the gross margin into EBITDA, it gets even better and it increases our confidence from an EBITDA positive outlook for 2024, is because we are getting operating leverage, and we are very disciplined about our overhead expense. And our model of spending overhead at less than 50% of our top line growth. So if you model out 2023 going to 2024, top line growing at 35% to 40% over a higher revenue base in 2023. Our gross margin contracts being -- signing in the 10% to 15% rate. Remember, one of the advantages of better execution in 2023 is we are able to pull forward our legacy backlog earlier in the -- in our life cycle, and therefore, there's very little legacy backlog to be executed in the fiscal year 2024. So the gross margins on the new contracts are coming through, and then that translates into a very healthy EBITDA.

Excellent. Alright. Great. And then just going back to the commentary on the call on Nispera, where you talked about this new strategy this month about including it as standard in your hardware offerings. What does that say vis-a-vis Fluence Q outlook and the revenue contribution and its level of meaningfulness, I think earlier you guys had said it wasn't really that meaningful until 2025, now that you're including it as sort of "standard", does that change that expectation?

No. Julien, this was always part of the plan. Remember, we had one -- when we looked at this, one of the changes that we did was integrating the sales channel and our view on when this business will be material or when we will get to -- has not changed. So this was part of what we wanted to do when we announced our plan -- our new plan in December of last year, this was a part of -- it's going as planned as we expect. Remember, we talked about a single channel and then replatforming our Mosaic business, and replatform is going very well. And the single channel, which is essentially for Nispera, which will give us a very good both upsells and cross-sells, we were able to pull it out. So we are starting -- as figured has been done is we're already offering to our customers as part of our standard offer.

Excellent, okay, perfect. We will leave it there. Thank you guys very much. Excellent.

Right, thank you Julien.

Our next question comes from Ben Kallo with Baird.

Hey, good morning Ben.

Hey guys, good results and good progress. Thank you for taking my questions. I just wanted to follow-up just on margin. I'm sorry to keep going on this question. But I just wanted to think about the different levers and cost improvements versus legacy contracts. I think Julien asked something similar to this. But as we go into attachment rates of other services software as we go into 2024 and beyond and how you guys think about that? And then just my follow-up is kind of housekeeping, but just the IRA benefits and profitability. And I'm sorry, Manu, if you said this, but have you baked any of that into your profitability change going forward, so the production tax credits or anything like that? Thank you.

Yes, sure. So Ben, if I can -- there are lots to unpack there. So let me take it as how I understood the question. So if you bridge gross margins from our legacy contracts to some of the new deals we are signing in the 10% to 15% margin range, right, and we put a bridge in the back of a deck as well. But the drivers of our margins between the legacy contracts and the newer contracts we are signing is better execution, better pricing and then, I would say, better risk management. So those are the big drivers. We have also increased our margin expectations to be 10% to 15% from a much lower single-digit expectations we've had in the past. And as a result, when we are executing our legacy contracts, we are usually executing them at very low single-digit margins, almost close to breakeven. And as compared to the newer projects that we are executing in the 10% to 15% margin rate, depending on size and complexity in the region, you can see that trend come through in the gross margin guidance. If you take our first half actuals gross margin rate and compare that to the guidance for the full year and calculated implied second half, you can get to high single-digits gross margin rate for the second half of the year. And that's important is because it gives you a good read through of gross margins going into 2024 and EBITDA going to 2024, which is what we are pulling forward our EBITDA expectations to be close to adjusted EBITDA breakeven in the fourth quarter. So that's kind of contextualizing the margins of the legacy business compared to what we are signing from a new contract perspective. In terms of the IRA PTC…

Great, thank you very much.

That concludes today's question-and-answer session. I'd like to turn the call back to Julian Nebreda for closing remarks.

Great. Well, I want to thank everybody for participating and joining us and your questions. And what -- we are really, really proud of the work of the team here, and the success is clearly working better than what we were expecting, so that's great news. And this only will, I think, in a way, it reaffirms our commitment to continue working hard because really makes a difference at the end of the day. So really happy, and thank you again for participating. And we'll talk to all of you during the quarter and hopefully, see you soon. Bye-bye.

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