Fluence Energy, Inc. (NASDAQ:FLNC) Q1 2024 Earnings Call Transcript

Fluence Energy, Inc. (NASDAQ:FLNC) Q1 2024 Earnings Call Transcript February 8, 2024

Fluence Energy, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to Fluence Energy, Inc. First Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please be advised that today’s call is being recorded. I would now like to turn the call over to you Lexington May, Vice President Finance and Investor Relations. Please go ahead.

Lexington May: Thank you. Good morning, and welcome to Fluence Energy’s first 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, Chief Products 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 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.

Julian Nebreda: Thank you, Lex. I would like to send and welcome to our investors, analysts, and employees 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 performance and outlook. Beginning on Slide 4 with the key highlights. I’m pleased to report that we are off to a good start for fiscal 2024 and continue to benefit from our robust energy storage market. In the first quarter, we recognized $364 million of revenue. Furthermore, we delivered our second consecutive quarter of double-digit gross margin. Our adjusted EBITDA for the first quarter was approximately negative $18 million, in line with our expectations and an improving from negative $26 million in the first Q of 2023.

Additionally, we recognized a record $1.1 billion of new orders. This is broken down by our solution business contracted 2.7 gigawatt hours. Our services business adding 2.3 gigawatt hours and our digital business adding 400 megawatt hours of new contracts. Furthermore, our signed contract backlog as of December 31st increased $800 million to $3.7 billion. The highest level in our history. Additionally, our pipeline increased $400 million to $13.4 billion which gives us confidence to achieve our growth goals in 2024 and beyond. Our service and digital businesses, which together represent our recurring revenue streams continue to gain traction. We ended the quarter with 3.3 gigawatts of service asset under management. Importantly, our deployed service attachment rate, which is based on our communitive active services contracts relative to our deployed storage remains above 90%.

We had a strong quarter in our digital business, adding 400 megawatts to our backlog. More importantly, our digital assets under management increased to 17 gigawatts as of December 31st, from 15.5 gigawatts at September 30th. In summary, our combined services and digital annual recurring revenue or ARR was approximately $64 million as of December 31st and is on track for our guidance of approximately $80 million by the end of fiscal year 2024. Turning to Slide 5, I’d like to discuss our progress on the five strategic objectives that guide our decisions and actions. They are also important markers for investors to monitor and measure our performance. First, on delivering profitable growth. This quarter, we continued to grow our backlog as we added $1.1 billion of projects that we expect to yield double digit gross margins.

Our discipline approach to offer competitive solutions to customers keeps us on track to deliver on our financial objectives. Second, we will continue to develop products and solutions that our customers need. As such, I’m pleased to report that we’re on track for our battery module manufacturing to begin production in the summer of 2024. Gradually ramping up over the subsequent quarters. This battery module manufacturing will enable us to provide a product that meets the U.S. domestic contact requirements for battery and e-storage, which I will touch on more in a moment. Third, to our scale and global outreach, we have established a supply change as one of our key strategic competitive advantage. Our diversity of suppliers is a key component of this and enables us to take advantage of favorable terms and battery price.

Which I will discuss in more detail shortly. Fourth, we will use Fluence Digital as a competitive differentiator and a margin driver. I am pleased to report that we have strong digital customer retention with 21 digital contracts renewed during the quarter and 0 customer attrition. And our fifth objective is to work better. I’m proud to state that in November, Fluence became an official signatory member of the UN Global Compact, ahead of the expected timeline outlined in our 2023 sustainability report. Turning to Slide 6. We continue to see strong growth in demand for utility scale and in storage systems. Over the past 12 months, we’ve seen lithium carbonate prices decline over 80%. This has in turn led to a decrease in battery prices, which has improved customer economics and allowed for more projects to be penciled in.

It has been reflected in the growth of our backlog, which now sits at a record level of $3.7 billion, which is an increase of approximately $800 million from the fourth quarter. This is also the ninth consecutive quarter in which we added more order intake to backlog than revenue that was recognized out of backlog further illustrating the growth in demand. Additionally, this $3.7 billion does not include some of our [Indiscernible] of the quarter, such as our 650-megawatt hour Mortlake project in Australia. More importantly, 100% of our backlog is at fixed battery prices with both suppliers and customers with no commodity price exposure, thus giving us strong visibility into revenue and margin for these projects. Additionally, approximately 80% of our fiscal 2024 revenue guidance midpoint is already covered by our current backlog attributable to fiscal 2024 plus revenue already recognizing the first quarter.

These two data points provide us with high confidence that we will be able to achieve our guidance ranges for revenue and adjusted EBITDA for fiscal 2024. Based on the conversations we’re having with our customers and potential customers, we’re expecting to see continued strong revenue growth in fiscal 2025 of approximately 35 to 40 from fiscal 2024. Our 2025 outlook is supported by our pipeline which sits at approximately $13.4 billion and grew $400 million from the last quarter. As we have communicated in prior calls, our expectations for pipeline conversion is at approximately 50% over the next 24 months. Turning to Slide 7. Over the past couple of years, we have taken major steps to diversify and improve the resilience of our supply change.

Our supply chain strategy centered around 4 key elements. The first is diversity of battery supplies. Currently, we utilize five battery suppliers located in China, South Korea, Sweden, and the United States. This ensures we have multiple geographies to pull from, which support our growth while mitigating disruptions. We will also note that building a stable and reliable U.S. supply chain is critical for the industry and as I will discuss, we are taking significant steps to establish a U.S. based supply change this year. Second, to capitalize on growing demand [Indiscernible], we have secured multiyear guarantee battery capacity from these suppliers. This covers our need for fiscal 2024 and fiscal 2025 and provides flexibility for upside in demand.

These capacity agreements are subject to market price adjustments. Additionally, we also use a price discovery mechanism involving multiple battery suppliers to ensure we are constantly delivering the most competitive prices to our customers. And finally, this capacity agreements come with minimal take or pay obligations. Third, to capture the incentives laid out by the IRA, we will be manufacturing our own battery models in the U.S., which represents two-thirds of our global business. It also enables us to introduce our proprietary battery management system. The software that runs the controls at the battery cell level and the initial point of control in a battery storage system. Additionally, it enables us to further commoditize our supply chain, by facilitating the integration of multiple battery vendors.

We’re currently on schedule for our battery module, manufacturing to begin this summer. In doing so, we expect to qualify for the domestic content tax credit on under section 45X. The fourth element of our strategy is an asset light regional supply chain. This involves using two major contract manufacturers system integration, one in Vietnam and one in Utah. We will look to continue to regionalize our asset light model in other areas such as Europe and India. This strategy provides us with enhanced flexibility and agility, particularly in scaling and positions Fluence for a high return on invested capital as we do not incur the capital costs associated with building or maintaining our own production facilities. When we look around the world, we’re using various shipping routes for our projects.

To that end, I would like to make a few comments in relation to the recent disruptions in the Red Sea. Only approximately 50% of our global shipments were expected to use the Red Sea route. The rerouting of these shipments adds around two weeks to our shipping schedule. That we have been able to accommodate without affecting customer delivery commitment. Finally, the incremental costs we’re experiencing in shipping, we are able to transfer to our customers in their entirety in accordance with our contracts. In any event, our logistics team is working very diligently to reduce as much as possible, this increases in costs. Overall, these four elements are the cornerstone of our supply chain strategy, which provides flexibility, competitiveness, and high certainty for our customers.

We will look to build on this as we continue to strengthen our global supply chain. Turning to Slide 8. We’re well positioned to recognize multiple benefits from the IRA, which is already boosting demand for energy storage. This benefit falls in two categories. Under the first category, our customers have the potential to receive up to a 50% tax credit for their project’s capital costs, which significantly improves project economics and attractiveness. These incentives to our customers include a base ITC or Investment Tax Credit, as well as bonus incentives for deploying in an energy community and using domestic content. The second category of incentives under the IRA includes those provisions that directly benefit Fluence. By producing battery models in the U.S., as I just discussed, we expect to qualify for our production tax credit of $10 per kilowatt hour of battery modules produced under Section 45X.

These two categories of incentives provide for our products to be more competitive and enables us to benefit from increased scale, more volumes and operating leverage. Turning to slide 9. I’m proud to report that in November, Fluence became an official signatory member of the United Nations Global Compact. Being accepted as a signatory member is an important step on our sustainability journey of building a strong ESG program based on a structure framework, data and active engagement. Fluence has joined more than 20,000 companies and organizations around the world that has signed the UN Global Company and are committed to responsible corporate citizenship and sustainability. We’re excited to collaborate with likeminded companies, non-governmental organizations, and other stakeholders to the global company network.

To exchange best practices and drive positive change. Now I would like to make a few remarks regarding the article publish in late December regarding the Diablo Project in California that highlighted a contract claim filed against us by the project owner, alleging that we did not have a valid construction license in California. This contract claim was filed in response to our claim for $37 million in non-pay amounts and related damages. As we have said already, we believe these contract claims are without merit. We intend to get paid on the projects. The legal proceedings are ongoing. In the meantime, I wanted to highlight that the Diablo Project is performing very well and has delivered availability or uptime above its contractual requirement during 2023.

In conclusion, I’m pleased with the achievements of the first quarter. Although we are mindful there’s still a work to be done, we will look to continue this momentum as we progress through 2024. I will now turn the call over to Ahmed.

Ahmed Pasha: Thank you, Julian, and good morning, everyone. Before we dive into the results, I am very pleased to be here at Fluence, and I would like to share my perspective on my first month at Fluence. On a macro level, Fluence is well positioned to capitalize on this once in a lifetime opportunity as energy storage benefit from declining input prices and an ever-increasing focus on grid stability. I have learned much about the company, the people and the culture. I have been impressed by the team’s laser focus on offering competitive solutions to customers, while adhering to a disciplined approach to growing our top and bottom lines. I am looking forward to maintaining this financial discipline and stewardship of our strong balance sheet while delivering attractive returns to our shareholders.

This morning, I will review our first quarter results and 2024 guidance, which we have reaffirmed across all metrics. Beginning with our first quarter 2024 results on Slide 11. We generated $364 million in revenue 70% of which was in the first in the U.S. and largely in line with our expectations. This was an increase of 17% from the first quarter last year. As we discussed on our previous quarterly call, we expect to realize 30% of fiscal 24 revenue in the first half and our first quarter results reflect this mix. Turning to adjusted gross profit. For the quarter, we generated approximately $38 million or an adjusted gross margin of approximately 10.5% versus 4.2% in the first quarter of last year. It also represents a second consecutive quarter in which we posted double digit gross margins.

Our operating expenses were $62 million in line with expectations and consistent with the first quarter of last year. Representing 17% of the quarterly revenue. Adjusted EBITDA for the quarter was negative $18 million, versus negative $26 million in the first quarter of last year. Negative adjusted EBITDA reflects our revenue weighting towards the second half and operating costs that are relatively flat on a quarterly basis, as I just discussed. 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 Slide 12. I am pleased to report that we ended the 1st quarter with $477 million of cash. This represents an increase of $14 million, from the fourth quarter and is the third consecutive quarter that we increased our total cash position.

From a liquidity perspective, we are in excellent position to capitalize on the growing energy storage market. In addition to our cash position, we have access to approximately $130 million in credit facilities. This includes $75 million available under our recently signed $400 million asset backed lending facility or ABL facility. Availability in this ABL facility is dependent on the level of collateral available to secure, which is mostly our U.S. inventory. Thus, as our inventory balance increases, so should our borrowing capacity, which provides us another lever to manage our working capital needs. In summary, we have total liquidity of more than $600 million which is sufficient to meet our current business needs. Moving to Slide 13. As Julian noted, we are reaffirming our guidance for fiscal 2024 of revenue between $2.7 billion and $3.3 billion.

To that end, we have approximately 80% of the midpoint of our annual revenue guidance covered by our backlog plus revenue recognized in the first quarter. This provides us confidence that we are on the path to achieving our fiscal 2024 guidance range. From margin perspective, we continue to anticipate fiscal 2024 adjusted gross margins of between 10% and 12%, which is in line with our first quarter results. Additionally, we are reaffirming adjusted EBITDA guidance of $50 million to $80 million. Furthermore, we are on track to achieving ARR of approximately $80 million by the end of fiscal 2024. I would also remind that we continue to expect fiscal 2024 revenue split of 30% in the first half and 70% in the second half, which implies fiscal Q2 revenue of approximately $530 million.

For Q2, we expect adjusted EBITDA to be negative because annual operating costs have a more even rating by quarter than revenue. Consistent with our full year guidance, we expect second half 2024 adjusted EBITDA to improve significantly relative to the first half as we realized 70% of annual revenue during that time period. Finally, looking ahead to 2025, we continue to believe that we will achieve 35% to 40% year over year top line revenue growth, driven by our robust pipeline and record backlog of signed contracts. With that, let me turn the call back to Julian for his closing remarks.

Julian Nebreda: Thank you, Ahmed. Turning to slide 14 and in conclusion. I want to emphasize the key takeaways from this quarter results. First, we had a record setting order intake and a record backlog of $3.7 billion. We have locked in battery supply at fixed prices for all our projects in our backlog, thus providing us strong visibility to achieving our guidance. Second, we have a sustainable and resilient supply chain that is a key component of our competitiveness. Third, we are on track to begin our module manufacturing this summer. Together with our customers, we believe we are in a prime position to capitalize on various incentives under the IRA. Fourth, the falling battery price environment serves as a tailwind for us and it allows more energy storage projects to be pencil in by our customers.

All of these factors provide us confidence in our ability to successfully deliver on our fiscal 2024 and 2025 objectives. This concludes my prepared remarks, operator, we’re now ready to take questions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question comes from the line of George Gianarikas with Canaccord Genuity. Your line is open. Please go ahead.

Julian Nebreda: Good morning, George. How are you?

George Gianarikas: Good morning. I’m doing great. How about you?

Julian Nebreda: I am doing great.

George Gianarikas: Thanks for taking my question. So maybe just first, I’d like to ask about the orders, the $1.1 billion in orders. Can you help us understand sort of the geographic profile? And also, are those orders consistent with your gross margin profile of mid-teens over the long term?

Julian Nebreda: Yes. The geographic profile is in line with what we have said 2/3rd in the U.S. and one 1/3rd internationally. And they are, you know, at double digit margins for those – for that order intake. So in in line with what we have communicated to the market.

George Gianarikas: Right. And then, just as a follow-up here, as you look at, the M& A landscape, you know, we talked about, Wärtsilä in the past, they’re still undergoing their strategic review. Do you feel compelled at all to change the profile of Fluence you have a nice cash balance and if you look across the landscape, are you looking to potentially expand footprints for your software profile by making acquisitions? Thank you.

Julian Nebreda: No. Yeah. So we have said we we’re very – we’re very happy with our corporate business position, you know, in terms of strong – very, very strong sales channel and, you know, you can see it not only in our backlog, but also in our pipeline. Our technology, we have a very clear road map that is going well, and we’re very happy with and so, generally, I don’t see any need for acquisitions at this stage and we’re not looking at any. We’re clearly in the market to be sure to understand what the – how the environment looks, but there’s no need to any acquisitions in any of you know, to support any of our business structure at this stage.

Operator: Our next question is going to come from the line of Brian Lee with Goldman Sachs. Your line is open. Please go ahead.

Brian Lee: Good morning, everyone. Thanks for taking the questions. I had two, sort of numbers related. First on legacy backlog, I think entering the year, you guys had talked about something like $150 million of still low margin, no margin legacy backlog you needed to work off this year. And I believe most of it was going to get deployed in Q1. So if that’s right, It implies the gross margins on the non-legacy business was mid to the high teens or something in that range since you reported 10.5% for the quarter. So I guess wondering if that’s right, if the backlog of legacy is all gone? And then how do you how should we be thinking about gross margin for the rest of the year given the it higher level for the non-legacy stuff? It seems like the 10% to 12% annual guide for gross margin seems a bit conservative.

Julian Nebreda: All the legacy has, you know, it it’s now gone. You know? For the actual number for the first quarter or the legacy contracts that we had in the or that we recognized revenue in the first quarter closer to $50 million not a $150 million. So I’ll give, you know, I think that we are in line with our 10 to 12, margins that we that we communicated for the year. And this this quarter proves that if you take into account the $50 million of legacy contract, which are essentially roughly breakeven. So but you’re at no more legacy going forward, and the actual number for this quarter was $50 million.

Brian Lee: Okay. That that’s fair. It seems like you’re, you’re sort of, closer to the mid-teens, but, still within that range. Understood and then there’s been a lot of questions Julian about lower battery prices, as we see what’s happening with lithium carbonate. I think you made a comment on slide 12 or 13 that your fiscal 2024 battery supply and prices are locked in. So does that mean I know, you know, there’s the index-based adjustments for your customers. Is there anything in your, I guess, fiscal 2024 backlog to be deployed that can still get adjusted on price, or is that all for future you know, outside of fiscal 2024, backlog that maybe still has some of those index linked adjustments that could take place. I’m just trying to understand how locked and loaded the backlog dollar value is for this year versus, you know, what potentially could maybe move around next year if battery prices keep going lower?

Julian Nebreda: Got good. So let me walk you through where we are. So we use RMI as you know. So as far, that’s an important part of how we manage our risk. The RMI supports our projects from the time we start negotiating with our customers to the point when we issue the purchase or know, when we buy the batteries and we make a down payment to our battery suppliers and get an actual commitment from the battery suppliers. So what do we have in our backlog today? So what we have said, what we have, you know, what we have in our backlog is that we had fixed all our battery prices in in all our backlog, all of it, you know, the $3.8 million. We already fixed it with our suppliers, and with our customers. So our current backlog does not have any commodity risk on either direction.

Any exposure to the suppliers moving up or down or the customer moving up or down. That means that for 2024, as we had said, also 80% of our revenue for 2024 is already in our backlog. So though that 80% is very much already fixed and you know battery prices will not move that 80%., however, we have 20% to hold, 20% that it will be subject to contracts that are in very late stage of negotiation that will be coming in the next couple of months and where the current offers we have outside or what we are negotiating with our customers is based on current price. So, you know, we feel very, very comfortable that, you know, and secured that we will meet our guide, you know, our guidance for the year. And then that gives us 2025, you know, that gives you 2025 in front of us.

And we have roughly a $1.5 billion of revenue of 2025 already in our backlog, that billion is roughly 40% of next year’s, you know, implied guidance which I have given you, that is already in our backlog, and it’s already also fixed. So when you looked at, you know, if you looked at it from a from a, you know, from the upside, 80% already in the backlog fixed, 20% for 2024, 20% subject to no contract, which are already very late stage on negotiations. We feel very confident which reflect current battery prices, and we feel very confident and as I said, It feels very, very confident that we’ll meet our numbers, we’re negotiating the numbers, we’re talking to our customers, we know where we are. Those will support our 2024 revenue guidance. And then for 2025, we’re still nearly working on this, 40% is already in the books.

The 60% to go. When we looked at, and then you can say, why do you feel confident about it? Looked at our pipeline. If you looked at our pipeline, I’m sorry for the long answer, maybe, If you look at our pipeline, we grew our pipeline by $400 million what that means that the $1.1 billion we converted from our pipeline to, to backlog, we also cover So in reality, our pipe we brought in into our pipeline, our current price is $1.5 billion of new contracts. So it gives us you know, very, very clear in one quarter that, you know, the demand we’re seeing in the market, the interest that is coming to this, the how much, you know, investors, customers, regulators feel comfortable with our technology, makes us, you know, very confident that we will meet the, you know, our commitments for 2425.

And I all do understand that it sometimes, you know, the financial markets are concerned about the potential downward pressure on revenue of battery prices. But maybe, this is a tremendous headwind for this industry. The elasticity of the money is tremendous, and that provides for a significant uptick in demand that significantly covers the potential downside of our that, you know, revenue prices. So, you know, very, very confident 2024, 80% on it already fixed. Clear line of sight within, you know, shooting range to use a, army, a concept and for 2024, for the other 20% and 40% in the book, 60% to go, and with tremendous pipeline coming in that will feel that we’ll more than cover all our problems, you know, all challenges.

Brian Lee: Alright. That’s great. I appreciate all that.