Good day, and thank you for standing by, and welcome to Fluence Energy, Inc. Q2 2024 Earnings Conference Call. [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 of Finance and Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to Fluence Energy's Second Quarter 2024 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; Ahmed Pasha, our Chief Financial Officer; and Rebecca Boll, our Chief Products 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 on today's call. I will provide a brief update on our business and then review progress on our strategic objectives. Ahmed will then give more details on our financial results and outlook. Beginning on Slide 4 with the key highlights. I'm pleased to report that in the second quarter, we had a strong financial performance as we recognized $623 million of revenue and increase our gross margin and cash flow generation. We delivered our third consecutive quarter of double-digit gross margin. Our adjusted EBITDA for the second quarter was approximately negative $6 million, significantly improved from the same period last year. We ended the quarter with $541 million of cash, an increase of $65 million from December 31. Additionally, we recognized more than $700 million of new orders. Our solutions business contracted 2.2 gigawatt hours, our services business added 900 megawatts and our digital business added 3.1 gigawatts of new orders. Our signed contract backlog as of March 31 was $3.7 billion, which was in line with our December 31 level, as revenue recognized this quarter and a couple of small adjustments offset the additional order intake. The increasing number of opportunities was reflected in the growth of our pipeline, which increased by $2.9 billion to $16.3 million thus giving us additional confidence in our revenue growth outlook for fiscal year '25 and beyond. We had a strong quarter in our digital business, adding $3.1 contracted gigawatts to our backlog. Our digital assets under management increased by 200 megawatts to 17.2 gigawatts as of March 31. In summary, our combined services and digital annual recurring revenue, or ARR, improved to approximately $68 million as of March 31. Turning to Slide…

Thank you, Julian, and good morning, everyone. Today, I will review our second quarter financial results and then discuss our 2024 guidance. Beginning with our second quarter 2024 results on Slide 11. We generated $623 million in revenue, which puts us at $1 billion or 33% of the midpoint of our full year guidance of $3 billion. I would like to note that year-to-date revenue is approximately $100 million ahead of prior expectations of 30% or $900 million of annual revenue in the first half as we were able to complete certain projects in Americas earlier than the third quarter. In terms of profitability, we generated approximately $66 million adjusted gross margin or 10.6%, representing the third consecutive quarter of generating double-digit gross margin. These results also include a modest expense from settling our pending litigation with Siemens Energy. Our continued execution further demonstrates that our legacy backlog issues are behind us, and we are benefiting from our higher-margin backlog. Our operating expenses were $74 million, representing 11.9% of quarterly revenue which is down from 17% in the first quarter. This continued momentum also reflects in our improving EBITDA. More specifically, this quarter, EBITDA materially improved to negative $6 million versus negative $28 million in Q2 '23 and negative $18 million in Q1 '24. Overall, we believe these results reflect our disciplined approach to grow our top line and improve our bottom line to deliver on our financial commitments. Turning to Slide 4. Before I talk our liquidity, I would like to share that our continued focus on profitability and proactive working capital management has yielded positive results. This reflects in our positive year-to-date free cash flow performance of $88 million. In terms of cash, I am pleased to report that we ended the second quarter with $541 million of…

Thank you, Ahmed. Turning to Slide 14 and in conclusion, I want to emphasize the key takeaways from this quarter's results. First, we had a record set in free cash flow generation of approximately $88 million for the first half of this year. This is a proof point for the success of our business model and the free cash flow it can generate. This cash generation also contributed to our strong liquidity position of nearly $590 million. Second, the outlook for utility scale storage is very robust. And there is a great opportunity for our new products to deliver value to our customers. More importantly, our space is well insulated from the upcoming U.S. elections, and we do not anticipate any significant impacts to demand as a result. So we are on track to begin our U.S. module manufacturing later this year. Together with our customers, we believe we are in a prime position to capture demand for products that qualify for the U.S. domestic content bonus. And finally, this is our third consecutive acquirer of double-digit gross margins, which reflects our continuous commitment to deliver attractive returns to our shareholders. This concludes my prepared remarks. Operator, we're now ready to take questions.

[Operator Instructions] And our first question comes from George Gianarikas from Canaccord Genuities.

I was wondering if you can maybe discuss the data center opportunity and how much traction you've seen there and how your conversations have changed, if at all, recently?

Great. Thank you very much, George. So what's happening with data centers? As we've seen GenAI become more of a commonplace technology and all the technology providers coming up with the GenAI solution, the GenAI or general artificial intelligence technology requires this GPU graphic processing units, which are the chips that allow for parallel computing. And what happens with the chips that they require a lot more energy, 5x what you -- the old technology needed. So what we see is that data centers are scrambling for energy. And they have been looking at -- as you know, most of the solutions they have seen today is that they've been looking for renewal firm, renewal energy, not 24/7 renewal energy that they can source from the grid. And we have been very, very successful to our customers, the IPPs of the world that serve these players Clearway, AES, Ørsted, helping them firm their offering. And that's our normal business. And that has gone very, very well, and we see tremendous demand, and you'll see some of the announcements that this company has put out. We are behind some of these announcements with our technology. But as data centers, and this is where I think is becoming more interesting for us [indiscernible] Europe as data centers are looking other solutions. Not because they are realizing that probably -- especially the time they need to meet their needs through the grid where renewal energy is becoming a little bit more difficult or a little bit strained or they have had some challenges. They are looking for solutions they can outside of the grid, either connecting and you saw the big deal of constellation and there are more things around they're looking for solutions outside the grid. But they still need the additional…

Maybe as a follow-up to that. Are you seeing increased interest for long duration energy storage solutions? Is that something that's on your radar?

Yes, I think that when we looked at this off -- of this off-grid solutions, clearly longer duration is part of it. So what -- the way we think of it, our technology can do more than the 4 hours we do usually -- we usually do. We tend to offer the customer. The reason why 4-hour has been kind of the sweet spot is because the market, there's an economic value for our 4-hour system that kind of disappears once you go to 6, 8, 12, 8, 9. So longer duration will play a role, and we are -- that's one since we're looking at how much can we spend? What we can do to ensure that we can support these solutions? With our technology, doing more than 12 is more difficult because of an economic and how this work. But we believe that there is a switch port that we can meet very, very easily -- or not very easily, but we can meet to support these technologies. Longer duration than the 4 hours will be part of what we need to work on.

And our next question comes from Brian Lee from Goldman Sachs & Company.

Kudos on the solid execution continuing here. I guess the question I had -- I had 2 of them, but one was just on the cadence of revenue. You're talking about the revenue pull forward and then the quite significant weighting into 4Q versus 3Q. So it sounds like you have a high degree of confidence around the timing of these projects. But can you speak to sort of visibility -- I know sometimes the market gets anti about really back-end weighted cadences and that's happening here with the 3Q, 4Q that you're outlining. So what's kind of your confidence level of visibility into those projects turning over in that time frame and not having any potential risk to slipping out? Just any kind of color you can provide there would be helpful.

So first, I think let's talk revenue recognition because I think it's important to get to know. So what are we -- what do we have? We have -- the way we work, the way our revenue recognition formula works, there's some recognition at the beginning when we signed the contract to the engineer and ordered the equipment, then there is a significant -- and this is a bulk of our revenue recognition is when we transfer title of the equipment to the customer and then additional revenue recognition at substantial completion and final completion. The great bulk of it is transferring title of the equipment once it's manufactured to the customer. When you looked at the fourth quarter, which is your question, okay, now you have all this significant fourth quarter revenue what -- can you deliver on this? And when you looked at it, a big portion of it, not to give you exact number, but a significant or a big -- more than the majority of it close to -- it is transferring title of equipment. We need to be a manufacturer, and we need to transfer title to our customers. So we have the supply. We have the slots in the manufacturing. We've been manufacturing stuff very, very well. We see very, very little risk that we will not be able to do that on the time frame. We have our logistics working very well. That -- there is very, very little risk that, that will happen. And that will cover a significant portion of the revenue that we have for the fourth quarter. Then the number say, well, okay, great, wonderful, it is, manufacturing and moving things around you can do that -- you've shown that you are now doing that very, very well that…

A fair question. And I think the only thing I would add to what Julian has just mentioned is if you look at our last 12 months' performance, we have been executing on every project on time and on budget. I think that gives us additional confidence in our ability to deliver particularly when we have all those cubes and equipment and logistics lined up for delivery in Q4.

Okay. I appreciate all that additional color, guys. Maybe one more, if I could squeeze in a gross margin one. You also have the high end of the range, you're talking about of the 10% to 12% gross margins in 4Q. I know you're not big fans of speaking to all the gross margin targets, it's more about EBITDA. But if you've got that sort of momentum exiting the year, you still have this 35% to 40% revenue growth outlook for fiscal '25. Can you give us a sense of Should we be starting off kind of in that range, call it, high end of the 10% to 12% as we look into fiscal '25, just the longer-term margin targets are to the mid-teens? Just wondering if you start to approach those even into fiscal '25 given the year-end momentum plus the revenue growth additional that you're expecting for next year?

So let me -- first on this year, 10% to 12% is a growth -- even though, as you said, I wanted all of you to come with me to adjusted EBITDA. I know you'll still don't like gross margin very much. So we are -- we've been clear on this. For this year, 10% to 12%. So 11% should be the midpoint, we should -- we will get -- we will be there. But when you look this year at the end of the year and you look back, so very confident. On '25, what we had said, even though we have not provided guidance on '25, what I said is the following. For top line growth, 35% to 40% over our this year's midpoint guidance. So out of the $3 billion that we have at the midpoint, 35% to 40%, that kind of puts at $4 billion. Or if you put the middle of that range is $4 billion for top line growth of '24. Then from gross margins that we believe to 10% to 15%. So in the middle of the range is 12.5% and that's where we are today. I don't think I can tell you today that we will get a tailwind that would put us anywhere else for next year. What I'm telling you today is this is said very much by the order intake. But we will clearly if we can offer you something better, we will. But today, our view for '25 is a 10% to 15%, which will put it at 12.5%. And then for adjusted EBITDA, we said our OpEx -- our operating leverage, we believe that we -- our OpEx will not grow at more than 50% of our top line growth. So you -- that will give you kind of what -- of where should we be for '25. And that's kind of where we are today. Clearly, as the year progresses and we see -- and we have more and more of the revenue for '25 in our backlog, we will confirm these numbers and walk you through. And if there's an opportunity to be more -- to do better, we'll let you know. But today our view, it confirms our 10% to 15% gross margin in '25.

And our next question comes from Dylan Nassano from Wolfe Research.

So just wanted to check, there's been a lot of talk recently about solar projects getting delayed, interconnection issues, equipment rages, et cetera. Is this something you guys are exposed to at all? Is there any read-through to your answer to Brian's question about the back-end weighting of the year?

Not really. I mean, what we -- as I said, a lot of our back-ended is delivery of manufactured products to our -- to transferring title to be very clear what drives the transferring title. Usually, very much, it happens at the site in most cases and when the sites are ready. As you know, we have had a rule in our contracts where customers are required to take title in cases where they have some delays, in cases where in our backlog is usually more connected to EPC stuff things that are not built on time, usually weeks rather than months, but -- so when we have seen delays, what we have in our contracts, the customers are required to take title at a specific point in time. So that's generally how it works. What we see for '25 -- sorry, for '24, what we see in the fourth quarter. These are projects that are -- we are still in the civil works. Can you imagine we have to get them ready. So we know exactly where they are. We know we have been working with the customers and we do not foresee any delays in related projects or related elements that could disrupt our delivery projects. And at the end of the day, we have the safeguard that if things get delayed on a certain point, customers are required to take title after that. I will let Ahmed to...

No. I think the only thing I, Dylan, would add is we signed these contracts 12, 18 months ago. And when we sign a contract or start construction, I think, generally, the customers have already all those permits in place, and that's when they issue a notice to proceed. So we feel pretty good about our execution because they have -- there's nothing pending as such that could derail particularly with reference to your question, which is the interconnection issues.

Got it. And then just a quick follow-up. Any recent developments with any of the outstanding litigation expect kind of [indiscernible] anytime soon? Anything you can say there would be helpful.

Great. Thanks, Dylan. So we -- I think Ahmed mentioned during the call, we settled the Siemens Energy litigation. And just to remind everybody who may be listening, Siemens Energy is not Siemens AG or shareholders. Siemens Energy is a customer related to our shareholder, but not our shareholder. We settled that litigation, as we have told you in the past, that was an immaterial litigation, normal course of business litigation, immaterial. We settle it in terms that it's even more immaterial than the litigation and it's a fraction of the claims that the customer had. And as I have said in the past, Siemens Energy is not a customer -- a significant customer. So what we have done very, very little with them. So when we start the litigation, you lose litigations normal course of business. It's part of how you resolve a problem. I think at the end of the day, we resolved in a way that it was satisfactory for both Siemens Energy and ourselves. The other 2, nothing really material to inform you at this stage, to the other one, which is the outlook litigation, nothing really the -- nothing has moved significantly there. And the most landing incident, which is something that was also referred to, we have talked in the past, there's no litigation -- there's no pending litigation on that. And at this stage, there's nothing really material to communicate on. Siemens Energy, as I mentioned, Siemens Energy and we repeat it again, it's not a settle conditions that are that beneficial to both parties. And as I said, the litigation was immaterial, the settlement agreement is also immaterial as well.

And congrats on putting that Siemens issue behind you.

And our next question comes from Mark Strouse from JPMorgan. Mark.

So following up on Dylan there. So I appreciate you're not seeing delays in your backlog projects. But I guess my question would be just when you're looking at your pipeline, is there anything that you're seeing there as far as kind of the -- maybe an elongation of the timing between when you're issuing a quote, to when you're getting a final order? Any kind of qualitative conversations you're having with folks about the next several years, projects potentially getting delayed?

What comes into our pipeline are usually -- not usually -- are projects that are very mature in the interconnection queue because these are projects that we see you can deliver that we can convert into backlog within the next 24 months. So generally, you don't see that delay type of problem there because they are already -- when they come to us, they've been already 3 years in the queue. So they know exactly how they connect, they know what they need to do. It's very, very -- that one and it becomes more an execution more than anything. We have something that we don't disclose that much to all of you, which are leads, which is all the projects we looked at with our customers that are not necessarily ready for pipeline, but that are projects that we believe are -- we will work as we look at the long-term planning of some of our customers. Those are more less mature. And those probably -- I'll tell you that we have a conservative view of them. So already -- so I don't know whether it has been -- has seen any deterioration in terms of timing from what we were seeing a year ago. It is the same. We see a lot more coming into that group and a lot more players. And if you look at the pipeline at the queue in the U.S. is almost a terror of battery storage that is getting into the queue significantly huge. Not all of them will convert. So I will say the color I can give you on that is that, that -- those leads, the things that are early in the queue and are going -- what we have seen an explosion, a lot and a lot more…

Yes. That's great to hear. Julian, a quick follow-up. Congrats on signing your first domestic content contract. Not necessarily looking for specifics on that contract, but I imagine you're having quite a few conversations with other folks there. You've said in the past that the 45x manufacturing tax credits would still kind of put you in your target gross margin range. Just curious now that we're getting closer to more and more of these contracts hitting, if you can provide an update on that commentary about gross margin impact.

As I said, the 45x $10 per module manufacturing in the U.S., we have said that's going to be within our 10% to 15%. It should not move us out. What we have said in the past is that we believe our domestic content because of the first-mover advantage because we have been able to sign the first one. And we are -- the -- we have the most secure way of any customer who wants to domestic content to capture of all the offerings around us. Not only we are a first-mover advantage for our ability to deliver the significantly the risk from what some other players are trying to offer. Because of that, we believe there is an opportunity to potentially expand our margins. We're working on it. I think it's too early still to communicate it. I said I don't want to negotiate against myself and announcing stuff that then comes and eats me. But we believe because of that point, because of it's not only the first mover advantage, which is something that we have mentioned many times in the past, but it's because when we have looked in detail at what the other -- our competitors are offering, we are by far the most secure way, the less risky way to capture that. Our offering is the most robust, the one that will provide higher certainty that customers will be able to capture that. And I think that is also a competitive advantage. So I feel we are staying tuned. We have always said -- just to go back this is an order intake for '24, generally, domestic content, mostly revenue in '25 and '26 and going forward. But it will not -- we will not -- none of our '24 revenue is dependent on domestic content of anyway. This is 'a 25 onward revenue more.

And our next question comes from Justin Clare from ROTH MKM.

So just a follow-up on the domestic content here. It sounds like you're seeing very strong demand for products that will qualify for the domestic content adder. So just wondering, as we head into 2025 and then even into 2026, how much of your total sales in the U.S. do you think will include domestically produced battery cells and battery modules? Could this be a considerable portion of your sales in the U.S. market?

I'll say that over time, this will be the main -- we believe this is going to be table stakes in the U.S. that you will -- U.S. players will demand domestic content as table stake overtime. It will not happen immediately. So '25, there will be a combination and '26 and it will move forward as we get along. It's difficult to -- now to tell you exactly what will be the distribution of revenue in '25, how much will be domestic content? How much will be -- because of the long lead time on some of these projects. But our view than the way we have designed our plan is that over time, this will be the only -- the most -- the domestic content will represent the great majority of the U.S. market.

Got it. Okay. And then just given that, can you just update us on your plans to potentially expand your manufacturing footprint either in the U.S. or internationally? What could the timing potentially be and then the magnitude of potential expansion?

Yes. We continue to work at our facility in Utah in the U.S. We have looked at some plans of moving some -- near the production of the battery cells. But today, we have -- those dates have not been set. So for now, our current plan in the U.S. is staying in Utah. We have seen most of our biggest markets are in the western side of the U.S. still today and that facility has the capability to expand. We can double the expansion quickly. So not any real plans even though we have not any -- we have not set any dates for the potential expansion on the Eastern side of closer to the eastern side of the U.S. In terms of Europe, we continue to look at it. So that continues to be an opportunity that we are evaluating. We haven't set dates yet. We are -- it requires to build an ecosystem. So we are -- that's what we're looking for. And as we build that ecosystem and reach bigger economies of scale, we will set base and commitment. And then for APAC, we build -- we manufacture out of Vietnam, we're looking at India, I would say, in more detail today, not only to serve that India market, but we believe that India will be -- could be a great place to manufacture our products, and there's great manufacturing companies that we can combine -- we can create an ecosystem probably faster than what we can create an ecosystem in Europe. So that -- if I were to where we are today, probably our first -- our -- the next announcements in terms of manufacturing capabilities will probably be in India rather than in the Eastern U.S. or Western Europe.

And one moment for our final question. And our final question comes from Kashy Harrison from Piper Sandler.

Just a clarifying question for you, Julian. Were you saying that even if your customers have issues securing critical equipment that the contracts still require them to take title. And then just outside of force majeure events, is there any scenario in which there could be a delay in them taking title from you?

What I said, if our contracts require our customers to take title if there are significant delays. So there is a safeguard at the end of the process. If by certain day I think the customer doesn't have the site ready or ones who have [indiscernible], they take title of our equipment, usually in a warehouse close to the site. So -- but as a safeguard, I'll say seldom use, doesn't happen all the time, but it's a safeguard that makes me feel more confident that -- which is -- the message I was trying to communicate that our '24 -- fourth quarter revenue is very much secure that even if our customers had a problem putting in the pad locks or doing anything, we will be able to take one customer. But where we are today -- said for the last years, we've been very, very good. Our customers have been very, very good. We have not seen any major delays, maybe a week here or there, a week there, but nothing that's in any way significant. So that's how the contracts do work. And I was -- this is not something that we, as I said, a provisional contract that we do not exercise constantly. But it's something that if the things were complicated, you can always use it. And generally, we do this in a very, very amicable way with our customers, not major issues. Yes, it was more to give -- to provide confidence to all of you because I understand all this revenue in the fourth quarter, hey, I know you can do it. Ahmed mentioned, we've been doing this very, very well for the last year or 1.5 years, great. It is essentially manufacturing and logistics, wonderful, not that many customers, 20 to 25, wonderful. And if things get bad for any reason, we still have the safeguard. So that's the way I will put it out. I think you mentioned it, except for force majeure, something that -- then that's a very different world. But even today with the situation in the Red Sea, we don't have a lot through the Red Sea, as we said, 15%, 1-5 of our volume passes through the Red Sea, very, very low. But even that, that added a couple of weeks more to the transit time of our equipment, we were able to manage it within our time. So even in a situation, let say, a war in the Middle East, we were able to do it. We can manage it very, very well. So it will have to be something really, really disruptive in order to disrupt our capabilities. It could happen unfortunately, but that's where we...

Yes. That's all very, very helpful. As you pointed out, the 80% is a big number. And just maybe for my follow-up question, more so about comments in the slide deck. You highlight demand is growing, specifically in ERCOT, CAISO and MISO. Just wondering if you have a sense of what proportion of your customers have -- are signing PPAs versus just selling merchant and whether in your discussions with your customers, there's any difference in their ability to secure financing depending on which approach they take.

Yes. On the financing, generally, we, in the U.S., have worked with -- and Global say with Tier 1. So financing hasn't been an issue. I don't really have a view in the U.S. how much is PPA versus merchant. But I will tell you, from my conversations, mostly PPAs. But I don't have exactly the number. I cannot tell you 95%, but mostly PPAs. And I know that, how I know about it because of they -- what they are for my -- what they want from the KPIs, they want from me. Our PPA connected to the KPIs, they are committing to their counterparties. So that's how I get a sense. I don't really know the number. We'll get a number. That's a good question to make a point of how much of the -- of what we have of our order intake. It is firm with PPAs versus was merchant. But I'll say the great majority, I just don't know the number from the top of my head.

Thank you. And I would now like to turn the call back over to Lex May for closing comments.

Thank you, Justin, and thank you, everyone, for participating on today's call. If you have any questions, please 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.

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